Deciding to build your first official company building (or add another one) is the exciting part. Now, it’s time to dive into the numbers and figure out how you will budget for this multi-million dollar structure.
There are quite a few commercial construction loan options available in Colorado to help you cover the upfront costs of your build.
Here’s everything you need to know about Colorado commercial construction loans, from what types of projects they cover to where to get one.
The quick answer is “virtually anything that’s not residential.”
Whereas home-builders can get a residential construction loan to build their dream home, business owners can get commercial loans to build their dream business property.
Commercial loans fund all kinds of construction projects:
In Colorado, commercial construction loan terms can stretch from six months to five years and range from $10,000 to $100 million. Interest rates, fee structures, and the draw schedule depend on the lender.
Exactly what a commercial construction loan covers is based on the terms, amount, interest rate, and other factors the lender approves for the loan.
Generally, businesses use this new line of credit to accomplish one or more of these tasks:
Commercial construction loans can also take on several forms depending on the scope of the project:
We’ll be the first to admit that all this financing lingo can be a bit confusing.
Unlike a simple mortgage loan, a commercial loan could cover an entire construction project — from buying land to breaking ground to the ribbon-cutting ceremony — or only specific parts of the building process.
Here’s an overview of the different types of construction financing available in Colorado for commercial buildings:
Bank loans are the most traditional loan option with the most flexibility. Most commercial construction loans secured through banking institutions require a 10–30% down payment and offer a 25-year repayment period.
Since there are dozens (if not hundreds) of lenders in the Colorado area, bank loans offer you more opportunities to negotiate interest rates and loan conditions, like draw schedules.
A&D loans are the best commercial loan product for companies and developers prepping for ground-up construction.
With an Acquisition & Development loan, a lender finances the purchase and improvement of undeveloped land or properties with outdated infrastructures — like sewer, water, and power lines.
Those in need of A&D loans are generally dubbed “risky” borrowers. Therefore, expect a hefty 25–30% cash down payment.
Mezzanine loans factor in the loan-to-cost ratio and benefit the lender if you — the borrower — default. Failing to pay back the debt would give the lending institution equity and partial ownership of your company.
These jumbo-sized loans strike a balance between debt (the loan, often with double-digit interest rates) and equity (a share of your business you risk losing for defaulting).
Mezzanine loans are a preferred option for large companies.
Also called “hard-money” loans, private loans are a last-ditch option for businesses unable to secure funding elsewhere. Hard-money loans have higher interest rates than financial institution loans.
Similar to mezzanine loans, companies also have a lot to lose by defaulting on these loans. Failure to pay off the debt could risk your company’s ownership of the property or project.
While mini-perm loans aren’t technically construction loans, they are a popular choice for renovations or income property purchases.
Mini-perm loans deliver short-term financing to investors and developers purchasing investment properties, like multi-family homes or commercial spaces.
These less-traditional “bridge” or “takeout” loans are the go-between for commercial projects that have yet to secure permanent financing.
Lenders are reluctant to finance loans for properties that have yet to prove revenue potential. Investors use mini-perm loans for temporary cash flow between purchasing the property and rolling into a mortgage.
The Colorado government also hosts a handful of construction grant programs as an alternative financing route.
Unlike loans, these grants don’t require repayment.
Check out these three examples:
If you run a local government unit or a non-profit organization, you may be eligible for Colorado’s Community Development Block Grant — or CDBG.
Each year, the U.S. Department of Housing and Urban Development (HUD) sets aside funding to build public-use facilities like health clinics, housing, and community centers in low or moderate-income neighborhoods.
Colorado distributes its share of these funds to local governments (or non-profits) that apply to improve infrastructure and rehab struggling areas.
Colorado’s BEST — or “Building Excellent Schools Today” — program offers millions in grants for public and charter schools in the Centennial State.
BEST supplies funding for 21st-century renovations, additional wings, new roofs, and brand-new modern schools.
Grants are also available on the county level. For example, Jefferson County has a HOME Investment Partnership Program to fund affordable housing and a Community Services Block Grant Program (CSBG) for projects that lessen poverty or aid low-income Coloradans.
Check your county’s official website to learn more about commercial construction grant opportunities.
If your upcoming build doesn’t qualify for any of Colorado’s construction grants, the next step is finding a lender, credit union, or bank that can open up a line of credit to fund the project.
Here’s a quick look at some of Colorado’s top commercial construction lenders:
Every lending institution is different, and some are more willing to negotiate or take risks than others. We’d recommend weighing several options before deciding, given the financial and time commitments of these loans.
The Small Business Administration (SBA) offers federally funded commercial construction loans, as well:
The SBA’s fixed-rate 504 loans are designed to drive small business growth and create jobs, with grants as high as $5 million available to businesses.
Here’s what these 10 or 20-year loans cover:
But — yes, there’s a but — your business must have a net worth below $15 million, earn less than $5 million after taxes, and be a for-profit company.
The always-popular 7(a) loan program is another SBA-sponsored option.
Approved lenders release up to $5 million in funding on a set schedule (instead of a lump sum) for small businesses constructing ground-up buildings or renovating outdated structures.
Both fixed-rate and variable rate loans are available for more flexibility.
Before you gather the head honchos for a round-table discussion on financing options, learn how to prepare for a commercial loan.
Any time a financial institution agrees to lend out money, it’s taking a risk. Banks and credit unions, in particular, want to make sure your company doesn’t default on the loan.
You’ll need to prove that you (or your company) are a reliable borrower to gain approval.
Most lenders require a 700 or above credit score. However, they’ll also consider your business’s credit score, debt-to-income ratio (ideally below 40%), and financial reports proving your company’s growth.
But that’s just the beginning.
Expect to provide some additional documents:
You can probably guess why lenders aren’t offering hundreds of thousands (or even millions) in an upfront lump-sum payment. Consistent funding is possible with what’s called a “draw schedule.”
At set milestones throughout the construction process, your company will receive portions of the total loan amount. This staggered pattern impacts the interest payments owed, requiring payments based on what you’ve received thus far and not the total loan amount.
This pay structure continues until the lender pays out the full loan amount.
When it comes time to pay the loan back, you’ll pay off the interest first, then the principal. Your business has the option to pay it off in full or roll it into a commercial mortgage.
Before the lender releases the “draws,” they’ll verify that the project is progressing as expected. This process often includes inspections to confirm that the construction is on pace and meets the predetermined milestone.
With such a monumental investment on the line, it’s your duty as a business owner or entrepreneur to ensure that you weigh all your options.
You have to make some choices:
Hard-money lenders may ask for a lower down payment and approve loans that banks otherwise wouldn’t.
These roundabout loans also come with higher interest rates, though. Banks are generally the safer option, with much lower 4–12% interest rates.
The SBA’s loan options typically have longer repayment periods and lower down payments. Yet, with a cap of $5 million, they also require outside funding for larger-scale commercial construction projects.
After paying off the interest for the commercial loan, you can either pay off the principal in a lump payment or shift to a commercial mortgage.
Otherwise, you’ll use a permanent mortgage to pay off what remains from the original construction loan and pick up monthly payments.
You have tons of loan options when building commercially in Colorado. Each option has its own pros, cons, and loan process.
Much like securing a home loan to build a new home, securing a commercial loan requires much thought and strategy.
Start by considering your loan options, company funding, and risks. Then, research local Colorado lenders offering commercial construction loans that meet your company’s needs.
When you’re ready to build in the Denver area, FMP Construction is ready for the job.