The Brewton-Hight Insurance Building, built by FPH Construction in Silverdale was financed with an SBA loan through Kitsap Bank.

   You’ve got a piece of land that would be perfect for a store, condo complex, mixed use development, or office building. All you need now is someone to loan you the money for the project. Where do you start?
   “I have people come in and ask, ‘what do I need?’” said Molly Hall Fairchild, vice president of commercial lending for American Marine Bank. “That’s a difficult question to answer.”
   It’s difficult to nail down the specifics for obtaining this kind of funding primarily because “commercial development” is an extremely broad term used to describe a range of projects.
   “There are many types of commercial properties,” said Carmella Houston, commercial and construction loan specialist at CFA Northwest Mortgage Professionals. “Underwriting parameters depend on what type of property it is, and the use, i.e., multifamily, industrial, warehouse, retail, land development, office, mixed use, or speculative construction.”
   The one thing that all forms of commercial development financing have in common is that these types of loans are generally seen as a higher risk than consumer loans, such as home mortgages and auto loans. This is significant in several ways.

An addition to the Powder Hill Professional Complex is being built by Drury Construction and financed by Westsound Bank.

   First, the loan to value ratio will be lower. While there is no standard formula that lenders use to gauge the loan amount by, commercial construction loans will often have a 60 to 75 percent loan to value ratio, varying by lender.
   Lenders also want to make sure that the developer shares the risk, so developers have to be willing, and able, to invest their own equity in the project – from a lender’s standpoint, the more the better.
   Third, developers should be able to provide the lender with extremely detailed information on the marketability and income potential of the project.
   “Lenders want to know that the market hasn’t been saturated, they want to know that there’s a demand for the project,” said Fairchild.
   This means putting together a comprehensive business plan, completing a marketability study, conducting environmental and SEPA studies, if necessary, and being able to present pretty specific financial data on how the loan will be repaid once the project is completed.
   “Commercial lenders primarily underwrite the loan based on the ability of business occupying the space,” said Hudson. “(such as) net rental income or business income to repay the loan. Thus, the income from the property or business to support the end mortgage payment typically drives the loan to value.”
   “Lenders want to see the value sheet looking flush,” said Keith Baggerly, branch manager and assistant vice president at Timberland Bank’s Silverdale branch. This often includes available funds on the part of the developer to make the loan payments, to “soften the landing,” before the property is leased out or sold.
   In addition, loans made in the name of a partnership or corporation frequently need to be personally guaranteed by someone within the organization who has more than a 25 percent ownership interest.
   When it comes to the developer or business looking for the financing, “experience counts,” said Fairchild.
   Developers who have a proven history of completing successful projects are generally seen as a lower financial risk than a developer with few or no projects under their belt. Because of this, it is particularly important for new developers to be able to provide lenders with detailed business plans, project specifications, financial plans, and so on.
   “It can be difficult for first-time developers,” said Fairchild. “We’d look to the business plan, the marketability study…we’d be looking to the strength of the project to qualify for the loan.”
   “Someone new getting into commercial properties should have at least a $500,000 net worth, minimum 650 credit score, and ample liquid (not leveraged) assets, say 6 to 12 months worth of payments,” said Houston. “They need to have a good track record in developing commercial properties with experience commensurate to the project they are undertaking or partner with someone else who does. They must be willing to put both time and money at risk on appraisals, environmental studies and other reports, knowing that at any time the project may not go through.”
   One of the most common mistakes that people make when applying for a commercial loan is assuming that the loan process for a commercial loan is the same as for a consumer loan.
   “It’s a lot more involved than people think,” said Baggerly.
   For example, while it is fairly common for people to purchase a home with a 10 percent down payment it is “highly unlikely” that you could get into a commercial property with that amount, said Houston.
   Another common mistake that people make is neglecting to do the research involved to make sure that the project will be seen as feasible by the lender.
   “People have to remember that others have to be sold on the project,” said Fairchild. “And whatever the project is, don’t make it so specialized that it can’t be converted to another usage. It’s safer to have multiple uses in mind.”
   One often overlooked source of development financing is the Small Business Administration (SBA).
   “With an SBA loan, you can finance 90 percent or more to either purchase or construct a building,” explained Scott Harvey, senior vice president and manager of Kitsap Bank’s SBA department. “The SBA will loan 90 percent of not only the hard costs, but the soft costs as well, including 90 percent of the fees.”
   “Hard costs” means the cost of construction. “...grading, lumber, the actual cost of building the building,” Harvey said, are considered hard costs. He added that “soft costs” means things like permits, architectural work, loan fees, engineering, etc. In other words, the cost items that don’t contribute to the actual construction itself.
   Harvey. also explained that the SBA doesn’t make real estate loans, it makes business loans to purchase or construct real estate. Therefore, it is the business — not the individual or project — that qualifies for the loan.
   One of the difficulties many small business people perceive in dealing with the SBA is the time factor involved and the mounds of paperwork. Harvey states flat out that those are myths. He cautions however, that if you’re dealing with a bank not experienced with SBA lending, that time can be a consideration. He strongly recommends if you’re considering SBA financing, working with a bank that has a dedicated SBA department. “They’ll know the process,” he says.
   So what exactly does the SBA require to get started? Basically, the same things as every other bank — the last three years or tax returns for the business, complete with all schedules. In addition, you’ll need three years of personal returns and all schedules.
   Like a commercial bank, you’ll have to provide a personal financial statement, and financial information for business that’s not over 60 days old, as well as a breakdown of the project costs.
   Harvey says the typical approval time works like this: Once the completed loan package — and completing the package is critical to meeting the time commitment — is submitted to the SBA, it will provide an expression of interest in less than a week, with approval in less than two weeks, and actual funding in six to eight weeks. He warns that the most time-consuming portion of the process is the getting the commercial real estate appraisal, which takes six to eight weeks itself. “The SBA process isn’t nearly as daunting as people perceive it to be,” he laughed. “It’s simple.”