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What are Construction and Development Loans?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 December 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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Construction and development loans are loan options that are made available to businesses when there is a need to construct a commercial property, but there will not be any income generated until after the property is completed and capable of production or retail activity that will generate revenue. It is possible to apply for loans of this type from many banks and other lending institutions. The duration of the loan may range anywhere from a few months to several years, depending on amount of time required to complete the construction and allow the business to begin selling goods and services as a source of income.

The use of a C&D, or construction and development, loans is often an excellent choice for newly formed business ventures. The delay in beginning the process of repaying the loan allows the business a chance to establish a physical presence and begin the process of offering goods and services for sale. Many construction and development loans contain a clause that allows the debtor to have a short grace period after the anticipated completion date of the physical facility. This grace period can help account for any short delays in the construction process, as well as allow the debtor to open the facility and have time to begin accumulating sales that in turn create revenue that can be used to pay off the loan.

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Not only new businesses can make use of construction and development loans. Well-established companies often use this model as a means of opening new facilities in new locations, or to renovate or expand existing facilities. The structure of the loan is ideal, since it makes it possible to delay repayment until the facility is able to generate money on its own. This means that the business does not have to rely on income from its other facilities to carry the cost of the loan until construction is completed, and the new or refurbished facility is capable of engaging in productive efforts.

Because the facility under construction cannot reasonably be used as collateral for construction and development loans, banks and other lenders may approve the loan on some other basis. If the company owns other properties, these may be pledged as collateral. However, sometimes all that is required is a solid credit rating and a past history that assures the lender that the loan will be paid off according to terms.

A bank may offer what is know as a bridge loan, which is simply a construction and development loan of relatively short duration. The bridge loan may carry terms of several months, as in the case of expanding or adapting an existing property, or be written for three or so years when the construction involves the creation of a brand new building or series of buildings. As with all types of loans, any individual or business applying for one or more construction and development loans will need to comply with applicable national banking regulations and also meet the standards set by the individual lending institution.

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