If you cannot find the right building to purchase or if you want to design your own, constructing a new facility is an alternative.  Construction projects usually take more than a year from planning to completion.  If you have the time, designing and building brings a wonderful reward.  You have a choice of two paths that will lead you to the same goal.

We also refer to this process as buying a "turn-key" building.  You close escrow when the building is completely finished and you are ready to 'turn the key' in the lock and move in.

For you, the process is very similar to buying an existing property on the market, with a couple differences.  Besides getting to design the building, you will probably also be putting more money down - and farther in advance.  These larger deposits cover the developer's risk that you will cancel the transaction.  Many developers today require buyers to sign a long term lease with an option to purchase the building.  That way, if you don't buy the building, the developer at least has a tenant.  The option allows you to buy it when it is completed.

1.  Find the land.  With the help of your real estate broker, you might find land in a new commercial subdivision or in an "in-fill" location.  In-fill refers to sites within older, existing commercial areas, perhaps requiring you to demolish an existing structure.  The land component is the largest cost variable in the entire process.  Developers say, "The profit is in the land."  Since construction costs will be similar wherever you build, getting the best deal on the land is the best way to save on the project.

2.  Get a construction loan.  Your lender will be your best friend throughout this process.  They provide the funds, and then they take very good care of you and their money till the project is done.  A lender will require you to put all your funds in at the beginning of the project.  Then they finance 100% of the balance of the costs.  Because loans can differ greatly and because some lenders are better at construction than others, you are strongly advised to use Rozelle Financial's assistance in finding the right loan.  The money saved and the heartache spared will be invaluable.

Besides providing funds, lenders perform two other very important functions on your behalf.  They evaluate your project up front to make sure it is properly designed and correctly bid by the contractor.  The bank's construction department is either staffed with construction experts or they send your project to a professional construction review company.  The bank will not fund their loan until they are convinced that you have a good contractor, a complete and fair bid, and all the needed city permits. 

Secondly, the bank will monitor the construction process.  They will send a professional inspector to the site monthly to make sure the work is being performed correctly and on time.  If everything is OK, they authorize the monthly payment to the contractor.  Most lenders hold back 10% of the contractor's profit until you agree everything is done right.

If you are building an income property, you will need two separate loans.  First you get the construction loan, then a "permanent" or "take-out" loan after you have it leased up.  When you construct a building for your own business, construction loans follow a smooth, one step process.  You get one loan that slowly disburses through construction, and then it automatically turns into a permanent loan.

3. Design your building.  Your architect plays an important role of converting your ideas into detailed building plans that conform to all building codes.  Your real estate broker or contractor may be able to give you references in your selection process.

4. Select a contractor.  The importance of a good contractor cannot be over estimated.  You want a company with experience, integrity, available time and manpower and adequate financial resources.  You want a company that is either bonded or bondable.  Make sure the contractor has done commercial projects as large as yours before.  The lender will check out the contractor's financials to make sure they can front the money for wages and materials before they get reimbursed.   They will also check out the contractor's credit and history of lawsuits. 

Your broker and architect may be able to recommend contractors for you to consider. After completion of the architects drawings, most people have several contractors present bids on the project.  After you select your builder, have them prepare a contract, but do not sign it.  Wait until the lender has approved them first.

Which Option is Cheaper?

It seems logical to assume you would save money by doing the construction project yourself and saving on the developer's fee.  However, by his experience and contacts, a developer will usually get better pricing on the work and complete the project faster, which saves on interest.  The time you will have to invest and the distraction from your business should also be considered a cost.  Your real estate broker may be able to help you compare the two from his or her experience. You may also choose to bid the project out both ways before making your decision.

Time Line

Each step of a construction project seems to take longer than you think.  Make sure you allow plenty of time before your lease expires.  18 months is not too soon to begin the process.  Also, make sure your escrow period gives you plenty of time to accomplish all the tasks below.

Every transaction has its own timeline.  The list below gives you a basic outline of some of the important things that usually happen in each stage and a very rough approximation of the time involved.  Some of these steps can be done concurrently, while others must be done consecutively.   We advise you to set up your own critical path with your consultants as you manage your project. 

If you are unable to negotiate an escrow of the length called for below, you may need to get a short term bridge loan so you can close on the land while you finish your project design, review and approval..