Downpayment on new commercial constructions

[Timothy Munger]

I apologize I'm screwing myself in my head right now on the math or how the bank views it.

Say if you have a vacant lot (you own) that already has design and basically is shovel ready (has permits)

Total project is $2 million

Land and equity you already own is $500k

Construction costs is $1.5 million.

So in this scenario all you need is a $1.5 million dollar loan for construction.

Since the bank is using equity at 25% does that now mean that the $500k will be subtracted from the $1.5 million since that is all you need?

Or is it from the total budget so it in total costs $2 million and the $500,000 will be used as equity to loan the full $1.5 million...so my loan amount is not subtracted at all?

Thanks

[Evan Polaski]

@Timothy Munger, as Michael notes, lenders will look at 75% of total cost, including land, or in your example $2mm: 500k land, 1.5mm construction.  

The only thing I am adding is if you own the land outright it can be the equity collateral on the loan, satisfying the 25% equity.  But if you have a loan on the land already, you will need to either pay off the loan on the land first, or bring more equity into the deal. 

And maybe you know this, but having 25% down, doesn't mean you don't need cash to available.  There are operating costs that need to be paid out of pocket, and all construction loans I have seen are based on draws, and many times those draws can take a fair amount of time.  Therefore depending on your contractors payment schedules, it is common to have to pay the contractor out of pocket, then apply for the draw to reimburse yourself.