When planning health club construction, it is important to know that construction loans are story loans. That means that the lender has to know the story behind the planned construction before they’re willing to loan you money. Because it’s a story loan, it’s not going to be standardized like mortgage loans. That said, there are some common features to a construction loan. Construction loans typically require interest-only payments during construction and become due upon completion. Completion for new buildings or renovations above 20% has to have a certificate of occupancy.
Construction loans are usually variable-rate loans priced at a spread to the prime rate or some other short-term interest rate. You (the owner), Gro and the lender will establish a draw schedule based on stages of construction and the interest is charged on the amount of money disbursed to date.
Another major variable in the construction loan process is project cost and projected income based on the renovation, addition or new building as well as your abilily to support the start up cost.
Many business owners use construction-to-permanent financing programs where the construction loan is converted to a mortgage loan after the certificate of occupancy is issued. The advantage is that you only have to have one application and one closing.
Depending on your view of interest rate trends, you could also purchase a rate-lock agreement valid through the expected construction completion date. Just make sure you allow for the inevitable construction delays.
A construction loan, unlike a mortgage, isn’t meant to be around for a long time. If you’re taking out a $200,000 construction loan for six months and you pay an extra 0.5 percent on the loan, it costs you an additional $250 (assumes an average $100,000 loan balance over a six-month construction period).