Commercial Property Development Finance: 6 Ways To Secure The Right Capital

Commercial property development finance may not be the most exciting part of being a CRE developer, but it’s probably the most important.

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Every year, scores of real estate entrepreneurs struggle with this issue because they:

• Don’t realize the different types of business loans available to them
• Don’t choose the right business financing for their project
• Can’t find the right funding to cover less common shortfalls, like down payments.

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If you want to avoid being one of them, then it pays to get fully clued up before plunging into financing a CRE development project. 

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The good news is that there are more types of commercial property development finance than you might think. 

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From mezzanine financing to Duckfund’s innovative new Sign Now, Pay Later model for earnest money deposits, find out how you can secure the backing to get your development venture off the ground.

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Has your commercial property venture hit a funding brick wall? Join Duckfund’s 4000+ happy customers who have quickly secured deals with our innovative lending model.

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What qualifies as commercial development finance?

Commercial development finance is funding designed to support the purchase and development of business property. This is a broad spectrum, but we can break it down into three stages.  

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1. Purchase or refinance capital

The one we’re all most familiar with. 

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Typically a commercial mortgage or other commercial real estate loans, these cover the cost of buying or refinancing business premises. Lenders base the loan amount on factors like your credit score, track record, and the loan-to-value (LTV) they can offer for your real estate. 

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2. Development finance

Loans like construction or renovation financing are used to fund the building or refurbishment of office buildings, mixed-use properties, or residential developments. 

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Short-term finance like bridging loans can provide immediate cash flow during the development phase, but there are long-term options also available. 

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The amount of development finance you borrow can depend on the projected Gross Development Value (GDV) of the property once all work is done, instead of the LTV. This may allow you to secure more funding and reduce upfront costs, but it will also require a detailed and accurate business plan.

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3. Earnest money deposit (EMD) finance

Securing a mortgage or property development loan won’t help if you miss out on a prime commercial deal because you lack the funds for an earnest money deposit.

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This is where earnest money or soft deposit financing comes in. Earnest money lenders know how easy it is to miss out on a deal because of funding hold-ups, so they often focus on speed and efficiency.

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Duckfund’s Sign Now, Pay Later model is built on this concept. We’ve helped over 4,000 customers lock down their property in 48 hours, and our new developer-focused service works with you to make sure the deal flows smoothly toward completion. 

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So, now we’ve refreshed our memories about the three stages of financing, let’s take a look at the best funding options for each stage.

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How to finance commercial property development: 5 best ways

Purchase or refinancing capital

1. Traditional bank loans

For many commercial property buyers, traditional mortgages have been a go-to financing option for decades. These loans can make owning commercial real estate more affordable and manageable with their low interest rates and affordable terms. But is this tried-and-true approach still the best fit for today's borrowers?

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Well, their long-term nature helps keep monthly payments down, but they’re typically held within rigid repayment schedules, which may not suit riskier or unconventional business ventures. 

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Lenders are typically reputable with the likes of the Small Business Administration being a well-known option in the United States. SBA loans, however, often come with a structured and regulated approval process, similar to bank loans. This can be very difficult to pass, not to mention time-consuming. Slow approvals have even been known to crash CRE deals after impatient sellers pull out of the sale.

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2. Private property loans

Private commercial lenders are an increasingly popular choice for business owners seeking capital away from the constraints of banks. 

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These loans often come with flexible terms and quicker access to funds and can be customized to specific projects. 

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A private equity loan, for example, can provide substantial capital for the buyer. In exchange, investors receive an equity stake in the project, sharing in both its risks and rewards. 

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Instead of regular interest payments, private equity loans often include profit-sharing arrangements or a preferred return structure, linking repayment to the project's performance. 

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Risks include the development project falling through, which may leave you open to legal action from the borrower, but if you are confident of a successful venture, then a private equity loan could be a smart option.

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Commercial property development finance

3. Construction loan

Construction loans are like financial building blocks tailored for building projects. 

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They're designed to be released in stages, so you only pay as your project progresses. This means less upfront cost and a lighter financial burden during the build. Plus, these are usually short-term loans, covering the construction period (think 12 to 36 months). 

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And here's the best part: during construction, you typically only pay interest, not the principal. So, you can focus on building without breaking the bank.

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However, drawbacks include higher interest rates (due to the higher risk of building delays and cost overruns) and extra fees, like origination and appraisal charges. 

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4. Mezzanine financing

Mezzanine financing is a unique hybrid of debt and equity, providing developers with a powerful tool to fund their projects. 

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It works by providing a lump sum that must be repaid with interest over time (the debt). The interest rate is often higher than normal here thanks to the increased risk of the investment.

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In addition, a mezzanine lender will also provide equity funding, which gives them a portion of the project’s future value. 

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If you secure mezzanine funding, you’ll like the larger amount of capital you get access to. You may not like, however, the added pressure of making the project a success so that the lender gets their agreed equity.

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Mezzanine loans do tend to come with lesser collateral demands, and developers find they can take on bigger projects than normal due to the higher cash reserve.

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Earnest money financing

5. Bridging loans

Commercial bridging loans are a short-term CRE financing option that can be useful for “bridging” the gap between available capital and the earnest money deposit. 

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Faster and more flexible than traditional loans, you typically repay this amount in full when the property goes through. 

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However, bridge loans often come with high interest rates due to their short-term nature and high risk. You’ll probably have to prove your creditworthiness and financial stability to get one, too.

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Also, if the deal collapses, then you’ll normally lose your EM deposit and still have to pay the bridge lender back – not a great situation to be in.

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6. Duckfund’s flexible EMD financing for developers 

Buying a property always comes with danger attached, but there are ways of managing that risk.

Duckfund’s Sign Now Pay Later model is one way of doing this. By breaking down the process into two phases and offering flexible terms, we empower developers to secure properties with more certainty and less risk.

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You won’t need to dip into your cash reserves. With just a small set-up fee, you can lay down the deposit needed to secure the deal within 48 hours. If you decide to pull out for any reason, then that’s fine: the deposit is fully refundable so you won’t be liable for any costs. 

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You’ll then receive guidance across the purchasing process. 

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Here’s how our two-phase approach works:

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Phase 1

We begin by securing the refundable soft deposit, giving you a low-risk entry into the deal. You’ll pay a low interest rate of 2 to 3% of the deposit amount per month, on top of the set-up fee.

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Duckfund carries out a thorough initial title due diligence, which includes services like title search and title insurance. 

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Phase 2

In this phase, we conduct more detailed studies, including rezoning reviews, environmental assessments, and financial analysis. 

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You’ll benefit from a discounted EMD financing rate of 1.75-2% per month, helping to further manage development costs as the project moves forward.

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Completion

You’ll join our ranks of over 4,000 happy customers who swiftly and securely landed their development projects ahead of their rivals. Congratulations!

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Ready to grow your business with Duckfund’s Sign Now Pay Later model? Contact us today to see how you can secure a new development property with no capital or upfront costs.