What to expect when seeking financing for a commercial construction project

The process of securing a commercial construction loan can often seem difficult or complex. Although there are many variables when embarking on a commercial construction project, it doesn’t have to be overwhelming. Overall, the more knowledge you have upfront, the more likely you are to navigate the process successfully.
Let’s say your plan is to construct a new building for your current business — what bankers refer to as “owner-occupied.” You would be seeking a commercial construction loan to fund the costs associated with your project, which may include both horizontal and vertical costs. Horizontal costs deal with the cost of the land, as well as other improvements, such as access roads and utilities. Vertical costs are your building materials like steel and lumber, as well as any additional furniture, fixtures or equipment.
Commercial construction is almost always financed by community or regional banks, due to their knowledge of local real estate and business market conditions. Every lender is different, but at Zions Bank our loan process is generally comprised of four phases.
Phase one is the introduction. Often referred to as the “open discovery” or “general discovery” phase of the commercial construction loan process. This is where information is gathered and a lender reviews the general details of the project, such as size and cost.
• First, a lender will examine your business and its ability to repay the loan. You’ll be asked to provide financial documents that support the solvency and longevity of your business for the purpose of credit approval.
• Next, a lender looks at your contractor and identifies what’s called “execution risk.” The ideal builder would be one who is well-known, has a solid track record and is financially secure. The objective is that they deliver your project on time and on budget, along with a certificate of occupancy.
• Finally, the lender reviews the transaction. This may include loan and credit analysis, market analysis, etc. This can vary based on the type of financing you are requesting (e.g. short-term or long-term financing).
Phase two is the go or no-go phase. At this point in the lending process, your lender is running the numbers. You likely have a wish list of items you want included in your loan. At this stage, a bank’s internal credit partners are engaged and collaborate to try to make those happen.
Next, your lender will provide a term sheet. A term sheet is a nonbinding agreement that outlines the proposed terms and conditions of the loan. This stage often involves some negotiation, as you ask for certain terms or changes. Finally, you and the lender will agree to the proposed terms and the loan moves onto the next phase.
Phase three is full underwriting. During underwriting, the final details of the project are fully vetted. This is the ratification stage, when the official agreement is completed. Often, this phase is the most time-consuming, because it demands the most effort, resources and consideration. Once underwriting is complete, it’s time to sign your final loan documents.
Phase four is funding. Once the loan is recorded, your project is funded and construction can begin.
Although securing funding for a commercial construction project does involve time and effort, arming yourself with knowledge about the process is critical to making informed financial decisions and realizing your goals. It’s also important to speak directly with a lending professional and discuss your individual needs.

Allan Woolley is vice president and commercial real estate officer for Zions Bank in Eastern Idaho. To contact Allan, call (208) 522-3720 or email