Normally, there are two loans required to finance a real estate development project, although sometimes these two loans also be combined into one:
Short Term Financing
This stage of financing funds the construction and lease up phase of the project.
Long Term Permanent Financing
After a project achieves “stabilization” and leases up to the market level of occupancy, the construction loan is “taken out” by longer term financing.
Some of the most common types of construction loans are:
LAND DEVELOPMENT LOAN
When raw or undeveloped land needs to be made construction-ready a land development loan can be obtained. The raw land may be subdivided and sold as a number of parcels for commercial or residential use. It may also include the installation of sewer, water or power lines to the site.
ACQUISITION AND DEVELOPMENT LOAN
An A&D loan is appropriate if raw land is ready to be developed, or is already developed but needs improvements to its infrastructure or existing buildings. The A&D loan usually covers both the purchase of this land and the cost of any improvements needed before the development can be completed.
Provides short term financing and normally acts as a type of bridge loan prior to taking out a long term fixed rate mortgage. This is a temporary loan typically used to settle an outstanding construction or commercial property loan on a project that, once completed, would produce income. After three to five years of generating income the mini perm loan is replaced with long-term financing.
A takeout loan can provide permanent financing on projects where a temporary loan, such as a short-term construction loan, currently exists. Many lenders require their developers to secure a takeout loan before a short-term loan can be granted.
INTERIM CONSTRUCTION LOAN
This pays for the labor and materials used to construct a project. An interim construction loan is usually valid for 18 to 36 months, and is settled once a long-term mortgage is in place.
Lendmark Mortgage Brokerage arranges construction and permanent loans. Contact us to request a loan package.