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What Is a Floor Loan?

Jim B.
Jim B.

A floor loan is a loan used in the real estate world to fund the initial stages of a construction project. This funding gets the project started and usually constitutes a majority of the total amount of the loan, but the remainder of the funds are initially withheld by the lender. Only when the construction reaches certain milestones are the rest of the funds released to the borrowers. The most common usage of a floor loan occurs in commercial real estate, as the lenders usually release the funds once some tenants are secured for the property in question.

Banks and other institutional lenders make their money from providing loans to various entities who borrow funds with the promise of eventually repaying them along with interest. Those individuals or companies undertaking a real estate project often need a loan to get started, since the capital required for a large-scale project can be substantial. There are occasions when loans are made from banks or lenders to real estate entrepreneurs in stages. One such loan is a floor loan.

Man climbing a rope
Man climbing a rope

When a floor loan is proffered, the borrower will generally receive a significant portion of the loan amount up front. This amount is generally in the area of 70 to 75 percent of the total amount of the loan. For example, a loan of $1,000,000 US Dollars (USD) to a construction company might begin with a $700,000 USD loan to get construction underway. The remaining $300,000 USD is held onto by the lender after the borrower meets certain obligations.

Since these loans usually come in the context of the world of commercial real estate, the stipulations on a floor loan that are attached to the borrowers usually have to do with some sort of tenant agreements. For example, borrowers attempting to build an office complex might have to show the lenders that they have secured tenant businesses willing to fill up office space. By contrast, a builder of condominiums might have to get commitments from several buyers before the remainder of the loan is forthcoming.

If for some reason the stipulations on a floor loan aren't met, the remaining amount of the loan is never remitted to the borrowers. They would still be obligated to repay the lender the money that was initially forwarded. In this way, the lender has some protection if the borrowers don't fulfill their promises. This type of loan is also known as a progressive or bridge loan.

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