Part of my job is to take incoming cold calls. We advertise in a commercial lending industry magazine that generates a good deal of call traffic.
On a regular basis I get requests for “construction” loans. After asking some questions to determine the nature of the loan, I usually find out that the broker/borrower is actually searching for what I would call a “development” loan.
What’s the Difference, Who Cares?
Why does it matter if you call it a construction loan rather than a development loan?
First, it reflects on the broker/borrower. If a lender has to educate the person requesting money, it sets a bad tone for the deal.
Second, some lenders offer construction financing but don’t offer development financing. Asking the right question allows you to get a correct response and save you time.
Finally, loan to value and equity requirements may vary depending on whether the loan is for development or for construction; I know ours do. This information helps the lender determine if the loan is within their parameters.
Construction vs. Development
Construction by definition has the connotation of putting things together. In my mind, moving dirt for roads or infrastructure does not meet this definition (no offense to those in the fields of civil construction).
The definition of the word develop includes the idea of being made usable. This is perfectly suited for the installation of roads, pads, and infrastructure; as the land has now been made usable for a building.
Defining Loans
Consequently, I would recommend that if you are asking lenders for a construction loan, a building should be in place when construction is complete.
Loans to improve land should be titled as development loans.
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