HOW ARE CONSTRUCTION LOANS STRUCTURED?

A construction loan facility is structured as a percentage of the expected completed value of the project. On average, a construction loan facility totals approximately 60%-75% of the expected end value.

A construction loan facility is structured as a percentage of the expected completed value of the project. This value is derived from an “upon completion” appraisal, which takes into consideration what is being built (project plans, finishes etc.) and comes up with a value based on similar recent comparable sales in the local marketplace. On average, a construction loan facility totals approximately 60%-75% of the expected end value (net of HST if it’s new build construction, instead of a renovation or addition). 

For example – Builder XYZ is looking to purchase a property for $900k and then build a new 2,500 sq. ft. single-family home. The expected hard cost budget for the project is $800k. This property is expected to be worth $2.5M once completed.

A construction loan would be structured as follows:

  • Total Loan = $1.56M (equal to 70% of the expected end value, net of HST)

The facility would be broken down into the following components:

  • Acquisition = $675k (75% of the purchase price)
  • Construction Costs = $800k (100% of project hard costs, not including HST)
  • Interest Reserve = $85k (estimate of interest costs over the term of the loan – interest is only charged on the advanced funds, which are advanced as construction progresses throughout the term of the loan)

If a shortfall exists between the required project funds and the total facility, it would be the borrowers responsibility to inject more equity into the project before construction begins. For example, in the above scenario, if the construction budget is $850k and the construction facility is $800k, then the borrower would need to come up with the shortfall of $50,000 (this scenario will be further discussed in a future post).

For more information on Foremost or if you would like to discuss a specific project – give us a call at 416-488-5300!

Max Miller, Agent
Associate Vice President ext. 240
Email max@foremost-financial.com

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