At our most recent networking events, we had the opportunity to learn more about financing renovation projects with bank financing. Tyler Mcfarland from First National Bank was our guest speaker and he was able to provide a lot of valuable insight on how to streamline this process and maximize returns.
A Line of Commitment (also known as a Construction Line) can be a powerful solution. This all-in-one financing option is designed to fund both the purchase and construction phases under one loan, providing significant advantages that can help maximize the deal’s value and support the growth of your business.
Key Benefits of a Line of Commitment
- Simplified Closing: With a single set of closing costs, you’ll save on fees and reduce the time needed to secure financing.
- Permanently Financed: The Line of Commitment provides long-term financing, removing the need to re-apply for loans after construction.
- Favorable Terms: These lines often come with terms that benefit the borrower, helping the deal’s financial performance.
- Strengthening Your Relationship with the Bank: Building history with your lender can support future projects, giving your business credibility.
- Construction Management and Consulting: Banks and third-party construction managers offer valuable oversight, adding reassurance around valuations, income projections, and budget expectations.
The Process in a Nutshell
Here’s a simplified look at the typical steps involved in securing a Line of Commitment:
- Submit Initial Documents: The bank will need key paperwork—such as the purchase and sale agreement, project budget, cash flow projections, and city approvals.
- Bank-Ordered Due Diligence: Appraisals, title updates, environmental screening, and other necessary reports are ordered.
- Funding Structure: The bank will finance 75-80% of the purchase at closing, then cover up to 100% of the approved improvements.
Presenting your Deal to the Bank
To secure favorable terms, it’s essential to demonstrate the strength of your deal:
- Collateral: The property serves as collateral and it must be backed by a sufficient loan-to-value ratio (LTV). It is important to clearly communicate cap rates, comparable properties, budget, and sketches or plans if available.
- Cash Injection: Borrowers typically need to have a 10% cash investment, showing personal commitment to the deal. Document all contributions, including soft costs, to show your financial stake in the project.
- Cash Flow: Banks evaluate both individual project cash flow and overall cash flow of your portfolio. Base income projections on reliable sources, such as previous tax returns, market comps, and HUD data. Anticipate vacancy and capital expenditures as part of cash flow projections. Strengthen the case by including the financial health of your entire portfolio.
- Experience: Prior experience with similar projects can strengthen the borrower’s case. Share narratives on your business history and experience with similar projects, which can reassure lenders of your familiarity with the project type. Including a resume can be helpful.
- Construction Management: Quality general contractors, designs, and city approvals will also all play into bank considerations.
In short, a Line of Commitment is more than just financing—it’s a strategy that offers simplicity, long-term financial support, and credibility. By showcasing the strengths of your deal and business, you can work effectively with the bank and set your project up for success.
-Nick Laverriere