When someone begins thinking about commercial construction loan requirements, the path is very different for an owner-occupied space versus a build for investing purposes. It wasn’t an impulsive decision to build, or a desire to spend months—even years—managing the construction process. It’s often led by a need for something not otherwise available.
“This space isn’t working for my business any longer. It’s in the wrong location, needs too many renovations and doesn’t have room to grow.”
” I need to expand. I’ll keep my existing lease but expand into a new custom building that accommodates future needs.”
“I don’t see any pre-existing buildings that fit what I’m searching for.”
These are just a few reasons someone might decide to move forward. It’s not a decision taken lightly. The average owner of a small-to-medium business may only build a commercial space for their business once or twice in a lifetime. It’s a big undertaking with quite a learning curve, but with the right partners, the process is much easier. Their experience becomes yours.
Move faster with architectural plans and contractor bids in hand
It’s important to know what types of financial paperwork should be in your hands when you walk into the door of a bank to seek financing. Banks are delighted to see an architectural plan, specifications for the project and cost projections outlined by a contractor because it gives them specific numbers to work with.
With plans, pricing and budget in mind, the banker can immediately start an underwriting process by working with an appraiser to obtain as-completed value for the project.
Three years of tax returns are required
Any financial institution will require three years of tax returns for the borrower. If a business has other owners with more than twenty percent equity in the business, the same paperwork is needed for them, too. They’ll be included as guarantors for the loan.
A current profit and loss statement
Sometime called an operating or income statement, a profit and loss (P&L) sheet is a key piece of paperwork required to obtain a commercial construction loan. It reflects the revenues and expenses for a business over time, which helps the bank determine how much of a loan payment can be supported by the business.
It totals all sources of revenue for the business, all expenses required to earn the revenue, and the difference between the two. Is the business profitable? Operating at a loss? Does it have the ability to repay the loan? Is the dollar amount required to build the project more than the business can afford without impacting operations negatively? The P&L must support the business can handle expenses for the project to move forward.
The business balance sheet
The balance sheet for a business is very different than the profit and loss statement. It reflects assets, liabilities and net worth of a business. When combined with the P&L, the lender has a better understanding of the business’s profitability and liquidity.
Miscellaneous other documentation
What other commercial construction loan paperwork is required? This list might not be exhaustive, but it’s pretty comprehensive. You’ll need to provide:
- A debt schedule of other loan obligations,
- A credit application for the specific lender,
- A business plan or detailed company history,
- CVs or resumes for each stakeholder in the business,
- Personal financial statements,
- Legal entity paperwork (articles of incorporation, bylaws, operating agreements, etc.)
- An environmental questionnaire (the lender typically provides a form) reflecting due diligence has already been completed for any specific parcel of land used for the project.
- The bank will also be interested in the general contractor’s/builder’s experience and financial capacity to ensure they’re qualified for the project. Most banks have a contractor questionnaire and require financial information on the builder. When interviewing potential contractors, ask if they’ve been previously approved by the bank, or if they’re willing to provide the paperwork necessary for the bank to approve them.
This is a nice blanket list to kickstart the process, but specific circumstances might apply. Working with an experienced lender ensures the right paperwork is added to any paperwork that a borrower might bring to the table.
As the project heads into the underwriting process, the next step is often working with the lender to create a pro-forma document. Stay tuned for our next blog post, where we’ll detail the next steps!
If you have questions about how to obtain a commercial construction loan, the paperwork or the process, please contact us today, or come into one of our Arizona locations. We’re happy to provide a no-obligation consultation to help you move forward.
Horizon Community Bank is an SBA- and USDA-approved lender.