Commercial Construction Loans and Land Costs

When underwriting a commercial construction loan, the commercial property developer will often say something like, "I only paid $400,000 for the land but it is actually worth $1,000,000."

As a general rule, a commercial property is only worth what the seller could get for the property.  If the property really was worth $1 million, the seller never would have sold the commercial property for just $400,000.  As a result, the wise commercial construction loan underwriter will only use the actual purchase price.

But there are exceptions.  Suppose the commercial property developer bought the land while it was still zoned agricultural and successfully convinced the city or county to rezone the land for office or multi-family (apartments) use.  In this case, the commercial property developer has added value to the land.  In this case, even the conservative underwriter would be justified in using the new value of the land due to the successful zoning change.

Another exception would be if the commercial property developer purchased the land a number of years earlier or if the developer had the land under an option contract for several years and the value of real estate in the area appreciated sharply in the meantime.

Generally commercial construction lenders want the commercial property developer to bring the land to the deal free and clear of any liens.  If there is a mortgage on the land, the commercial construction lender will usually ask the commercial property developer to contribute enough additional cash to the deal so that the commercial property developer is covering at least 20% of the total cost of the commercial construction project.

You can find hundreds of commercial construction lenders and mezzanine lenders on C-Loans.com.