Finance Ground Up Construction
Often business owners will want to acquire raw land and build or improve an existing commercial building to suit their unique business model and company culture.
The SBA 504 and 7a Loan Programs are designed perfectly to meet this purpose.
If you are currently contemplating whether to buy raw land to build or improve an existing building you’ll want to pay close attention to the rest of this podcast.
First, as the project sponsor you’ll need to identify the acquisition cost of either the raw land or existing building and then determine the costs associated with construction or tenant improvements. For those of you who are new to this, tenant improvements are tangible improvements done to an existing building excluding equipment, furniture and fixtures.
Next, you’ll need to engage architects, municipal permitting agencies, any and all appropriate third party vendors and stakeholders and a minimum of two – three contractors who will submit bids with the required budget to perform the improvements.
Once you’ve engaged these agencies and received formal contractor bids outlining the projects scope and budget you’re ready to seek financing. It’s important that you work with a finance professional who has experience financing ground up construction and tenant improvements.
Once you’ve engaged a lender, the next step is to request a Real Estate Appraisal and Phase 1 Environmental Study. The appraisal will provide an as-is value and as-completed value.
The as-is value is the value of the subject property in its current state and the as-completed value is the value after all improvements have been completed. The final loan amount will be based on the as-completed value up to 90% of the total cost of acquisition and construction per SBA guidelines.
The Phase 1 will determine whether the subject property has been contaminated with foreign chemicals that would devalue the property or prohibit future improvements.
A few things to note; construction is chock full of risk, additional cost and legal hurdles. Do not enter into this process lightly and without first considering your ability to dedicate the necessary time and financial resources to successfully complete this process.
My SBA Loan Pro
The My SBA Loan Pro Podcast is hosted by Your SBA Loan Pro, Ryan Smith. In each episode Ryan provides valuable information and best practices regarding the SBA loan program.
Each episode is approximately one minute in length and addresses topics related specifically to SBA 7(a) and 504 loan programs to purchase real estate, acquire a business or franchise and obtain working capital.
You’re encouraged to listen and subscribe to ensure you’re notified each time a new episode is available. Ryan publishes a new episode weekly on Tuesday mornings, unless he’s kidnapped to a deserted island of course.