Private and Public Financing Basics for Commercial Building Construction

Despite the challenges of the past year, commercial construction starts are projected to grow by 6% in 2021 and another 10% in 2022. Some targeted commercial sectors, such as warehouse construction, actually grew during the pandemic and are expected to continue climbing. Seeing the highest growth is data center construction, which is forecast to leap 40% this year and rise again in 2022. Not surprisingly, healthcare construction is also one of the few sectors that saw growth during the pandemic.

In addition to private sector businesses, government services, including courthouses, and jails, face the dilemmas of aging buildings, strained capacity, or evolving inmate classifications. Likewise, many school districts see the need for improved educational environments to meet the needs of students.

As various stakeholders consider new construction or renovation of their commercial facilities, they’ll need to conduct a feasibility study. A qualified construction manager will help conduct a facility assessment to determine their needs and estimated budget.

Another important step in commercial building construction is ensuring that project owners can secure funding to pay for the project. Business owners and municipalities have several options. 

Private Financing — Business Construction Loans

Privately owned businesses, both big and small, will need to foot the bill for constructing a new facility or adding on to their existing one. Most, however, do not have the available capital to fully fund such an endeavor up front, meaning they will need to secure financing. 

Business owners will need to work with a reputable bank or lender to secure a construction business loan, which can also be used to pay for the purchase and development of land where the structure will be built. 

Construction projects are inherently more risky for a lender to finance since money is being granted on the promise to fulfill a contract rather than the purchase of an existing structure that can be appraised and given a fair market value. As such, lenders will require detailed information up front, including a construction timeline, floorplans, suppliers, contractors, and more. 

The lender will also insist that the general contractor is a reputable, licensed builder who is in good standing with past clients and has a strong financial standing. In essence, the lender needs to be assured that the contractors will deliver the project according to the agreed upon specifications, timeline, and budget, and that they will not default on any of their agreements with vendors or subcontractors. This stresses how critical it is to work with experienced and reputable contractors.

Because a commercial construction building loan carries more inherent risks, the interest rate is generally slightly higher than a standard mortgage loan. These rates will vary based on the business owner’s credit rating, project scope, amount, and other factors. Unlike a conventional loan, money from a construction loan is typically paid out in phases as the project progresses. Construction lenders will send representatives to the job site to confirm that things are progressing as planned prior to issuing funds for subsequent phases.

Unique to commercial business construction loans is that borrowers only pay interest on money they’ve received. So, if a business owner is approved for a $500,000 construction loan but only spends $100,000 in the first phase, they will only be charged interest on the amount that’s been released.

Public Financing — Municipal Bonds and Taxpayer Revenue

Funding for public projects like schools, courthouses, and county jails is very different from those for the private-sector, and it can vary across states and districts. Some states, for example, require referendums where the community votes to approve whether to construct a new facility. 

Such efforts require robust pre-referendum planning and services provided by an experienced construction manager so that taxpayers fully understand the need, proposed solution, and the impact on their community.

Financing for public projects is often secured through municipal bond markets or through private bank loans. One of the benefits of municipal bonds is that the interest is usually tax-exempt and interest rates can be locked in. Funds from municipal bonds do not come from a financial institution; instead, government entities, such as other counties and cities, issue the loans.

The Role of a Construction Manager in Securing Funding

Regardless of whether a project is privately or publicly owned, it’s critical to engage a qualified construction manager who can help develop a budget and navigate the complexities of securing funding. Ensure they have experience working with various lenders and fully understand the process. 

Likewise, a construction manager who has experience building public projects will know how to work with county board representatives and community members to help them fully understand the scope and breadth of a proposed project. You’ll want to ensure they are familiar with the municipal bond funding process and provide robust pre-construction services so that everything and everyone is aligned long before construction begins.

Contact the commercial construction experts at The Samuels Group to discuss your needs and whether now is the right time to build or renovate. Also download our guide below outlining the factors to consider when deciding whether now is the time to begin your building project: 


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