Property Development Loans

Financing of development projects such as shopping centers, office buildings and golf courses is generally done through special commercial and "hard money" loans. Since the amounts borrowed are usually much larger than the average loan, lenders look at different factors when determining what kind of loan is right for the project. Interest rates and other terms depend upon an assessment of the risk involved.

Property Development & Commercial Loans

Lenders put together a commercial loan package for property development based on an evaluation of the debt-to-income ratio of the borrower. A DCR (debt coverage ratio) formula will tell the lender what loan amount will keep the borrower from getting into a negative cash flow situation. Generally, lenders will never go below a 1:1 ratio of income to debt.

A lender may also require a 20 percent down payment on commercial property purchases, a reflection of the cautious approach that lenders take to these types of loans. Any company that has been in business for less than three years may be evaluated on the personal credit of its principals, and good credit will likely bring better terms for the borrower. Of course, another factor in property development loans is a valuation of the property being purchased.

In certain areas, particularly in places where urban renewal is being encouraged, a borrower may be able to get government assistance with his or her project. It is an avenue worth looking into when seeking a development loan, as many programs have terms that may be more advantageous than a conventional loan package. A mortgage company or broker that participates in Federally-insured loan programs is a good source of information.