Baratto Brothers Commercial Financing Tips

Getting commercial financing for your business venture may seem a bit daunting to those who’ve never tread those waters before. In fact, just knowing when to start can be a bit of a question. Do you start early when you’re company is still in startup phase? Wait until your business is established? Do you apply before you need the funds? Or wait until there’s a pressing need?

In truth, finding a lender for your business really comes down to what you need the financing for. For some, this may mean startup costs and getting a location. For others, it could mean adding additional supplies, staff, and equipment; or even expanding into a new building.

Regardless of your reasons, we’ve got a few tips we’d like to offer based on our years of experience working with lenders for our clients.

  • Start local. Getting good financing can ultimately come down to relationships. When you’re on the hunt for commercial financing, check out all of the specials and deals with your local banks and credit unions. Often times, they’ll understand your need better than a larger bank. Be sure to find a lender who has an understanding of your industry, too. They’re knowledge will ultimately be beneficial in structuring your financial solution and maximizing the credit available to you.
  • Build a report early. Once you’ve found the perfect lender, start talking to them as early as possible. Ideally, months (or even years) before you need their assistance. As we said, having a relationship with your lender will not only help you get better deals, but you’ll also have a much better overall picture of the process.
  • Get clarity. This is also known as Business Planning time. In order to get financing for your commercial project, you’re going to need to get clear about your business plan and goals. You’ll need to get very detailed and have a clear vision of how your business is going to succeed and how the loan will help impact that success.
  • Know your objectives. You’ll want to write out an objective for your lender to gain financing from them. This helps them gain a better understanding of how you plan to execute your overall business purpose and impact your target market. This usually includes a details about how you plan to run your business, how many people you need to make your plans happen (and whether you need to hire more or not), and how you intend to generate cash flow to pay back the loan
  • Economic Cash Flow Assessment. Completing an economic cash flow assessment is crucial to gaining commercial financing. This basically shows your lender why you believe your future business will positively impact the community it’s going to affect. It also shows how you intend to manage money and how you’ll handle things if something was to go wrong.
  • Submit a resume. This one may sound a little strange at first, but it makes sense. Giving your lender a history of your employment will help them to better understand how your experiences have brought you to this point and why you’re a good fit for financing the specific business your proposing. By telling your personal work story, you’ll be able to give more perspective to your lending agent.
  • Personal finances. When applying for commercial financing, you’ll still need to be prepared to have your personal financial records looked over. You’ll be submitting last year’s taxes, as well as a number of bank statements determined by your commercial lender. Be prepared to have your personal credit score reviewed when applying. If your credit score is less than appealing, consider taking steps to improve your score before applying for your business loan. There are a number of ways to acquire your credit score for free. Your best bet is with AnnualCreditReport.com, which is federally authorized.
  • Have a co-signer. If your credit score could use a bump, but you don’t want to wait – consider taking on a business partner to co-sign your commercial loan. Choose wisely, as their credit score needs to be in tip-top shape, too.
  • Collateral. When applying, you’ll need to think like a lender. Do you have anything in your name that could be used as collateral for your new loan? This is basically anything that gives your lender assurance you’ll pay back the money. It could be something as simple as jewelry, to a car title, home equity, or even property. But remember, don’t gamble with your collateral unless you’re willing to let it go.
  • Apply. Once you have all of the other steps in order, it’s time to officially apply with your bank or credit union. Get in touch with your lender and have them start the process. Because of the all the advanced leg-work you’ve done, applying should be a breeze and the relationship you’ve cultivated could mean a fantastic financing arrangement for you and your business.

Here at Baratto Brothers, we’ve worked with lenders of all shapes and sizes; local and not-so-local. If you’re looking to finance a commercial construction project, feel free to give us a call at 218-692-1070 and we’d be happy to give you suggestions and recommendations. We know how daunting financing a commercial project can be, especially if it’s new to you – but we’re here to help you every step of the way. It’s just one of the ways Baratto Brothers Construction works hard at becoming your Commercial Builder for Life.

Land Acquisition: How Does It Work?

Land acquisition (buying land) is different from buying a pre-existing home or business. For obvious reasons, before you buy land you want to be clear on what the purchase is going to be used for. Your decision will impact whether or not a certain piece of land can be bought and used for its intended purpose. It would be a shame to buy your perfect property for the intention of building a house, only to find out it’s zoned a different way. There are a lot of special considerations to think about when buying land, and we want you to be well informed before making any decisions.

For our purpose as contractors, we’re going to assume you want to build something. There are seven basic steps to take as you find yourself on your land acquisition journey. In many cases, these steps will apply for both commercial and residential construction.

7 Steps to Buying Land

  1. Determine its use: As stated earlier, before you start hunting for your land, figure out why you’re in the market. For the most part, this is the easiest of the steps. Some examples include: Building a house, building a commercial property, farmland, diversifying your portfolio, and even speculation.
  2. Budget: Having a budget in place for purchasing your land is very important. Because buying raw land can include several steps most other property purchases do not require, it’s best to do your due diligence and research before you buy. Down payments tend to be higher for raw land purchases, ranging from 20-50% of the property price. You’ll also need to consider all of the conversion costs (this includes anything you have to convert on your property for its intended use). Talking with your construction team and getting an estimate for these costs will help you determine your budget, if you’re unsure.
  3. Hunt for land: This can be done a variety of ways: searching through property listings online, classified ads in newspapers, or by utilizing the help of a Real Estate Agent. If you’d like some help finding real estate professionals, surveyors, or other professionals contact us. We can also come out with you to preview the land before you purchase to ensure the style and size will fit your dream home. We do a lot of pre-purchase lot viewing with and for our clients. Regardless of how you land hunt, the choice depends on you and what you’re most comfortable with. If you live in a different location, often times a real estate agent is helpful because they can scope out properties on your behalf, letting you know which ones they believe work best for your intended use, and filling you in on the neighborhood, and even zoning issues.
  4. Considerations for Due Diligence: There are a number of things to consider when choosing your raw land to build on. If you are using a real estate agent and a team of contractors to, they can answer a lot of these questions for you. However, it’s never a bad thing to do your own due diligence. Here are some questions to consider.
    • Sewer/Septic – Does the property have access to city septic? Or is the property capable of handling a septic system?
    • Wells – Will the land have access to city water (along with sewer), or will a well need to be installed? If so, what type of well needs to be considered, as there are different types. Will your loan allow you to purchase the property with the kind of well you’ll need to use?
    • Road Access & Easements – Does the property have easy access to a road? Can you get in and out of the property? If not, are you willing and able to build a road to the land? Give careful considerations to easements as it can affect how you use the land.
    • Utility companies – Are the utility companies willing to bring electricity, Internet, and telephone out to your location? Do you have to pay a fee to have this accomplished? How does this affect your budget?
    • Environmental restrictions – Pay particular attention to this, as knowing what environmental restrictions your land may have can impact its use. This can be from zoning down to whether or not wetlands can be altered, or if toxic chemicals have been left behind by previous owner’s usage. In the Brainerd Lakes, for example, owners searching for waterfront properties have to be especially careful, as these lands have a variety of strict guidelines about use and building, which can limit what you can do.
    • Check the plat – When you get serious about a piece of land, consider checking the plat for its legal description and survey to be sure it matches what you’re being sold.
    • Hire a Surveyor – Even if the sellers include a survey of the property you’re about to buy, it’s really best to hire one of your own to determine the soil, topography, and where you should build. This will help you and your construction team avoid certain pitfalls when beginning construction.
  5. Make an offer: Generally speaking, land will appreciate as it’s developed. Because of this, the rule of thumb is to start low and negotiate as you go along. Most raw land properties sell for 85% of the original asking price.
  6. Financing: If you can’t buy the land outright – and remember, down payments are higher at 20-50% – you can consider a more traditional lender to finance the purchase. This may include higher interest rates than a standard home mortgage, and your lender could require a detailed timeline for development. A final option is owner financing, or purchasing the land through the seller. This can be beneficial in certain circumstances, but it’s best to discuss your options with your real estate attorney.
  7. Close: If all of your hard work and research has paid off and both you and the land owner want to finalize your purchase, you’ll finalize everything at the closing of the property. In this meeting, you’ll be signing your land contract, the deed for the land will be transferred, and you’ll receive a closing statement. Congratulations! The land is now yours!

If you’re in the market to build a new custom home, develop a commercial construction project, start a renovation, or if you’re just curious about what we offer at Baratto Brothers, contact us today by filling out our contact form, stopping in to say hello, or by giving us a call at (218) 692-1070. We’re here to help you sift through your options, and make building as easy as possible for you. We’ll do everything we can to become your Builder for Life.

Which Construction Contract Is Right For You?

Building a new home, or getting your new business location under construction is an exciting time. There’s a never-ending list of things to consider, and here at Baratto Brothers, we want to make all those considerations as easy as possible. One of the items you’ll want to pay attention to is the type of construction contract you have or are deciding to go with.

A construction contract is the agreement between you and your contractor that outlines how your project will be executed and the financial agreement the two of you make. While it may be easy to assume all contracts are made equal, this is not the case, as there are a number of different contracts used in the construction industry. Most construction contract types are defined by the way the disbursement will be made to the contractor and it also specifies the terms most people are interested in like quality and duration.

There are four construction contract types most commonly used in the industry:

  1. Fixed Price/Lump Sum – This contract is just as it sounds and used often. By utilizing this contract, your contractor agrees to handle the project as described in your agreement for a fixed price. This type of contract is best used where the scope of the construction project and its schedule are clearly defined, making estimating the project easier for the contractor.
  2. Cost Plus – With this type of contract, you’ll find it involves payment of the actual costs, purchases, or other expenses due to the construction of your project. These contracts must be very specific about pre-negotiated amounts for labor and material costs. Each cost must be identified as direct or indirect costs. This type of contract is favored when the scope of the project is extremely uncertain, or when any of the materials, equipment, or amount of labor is called into question. There can also be multiple variations of this type of contact. The most common are:
    • Cost Plus Fixed Percentage
    • Cost Plus Fixed Fee
    • Cost Plus with Guaranteed Maximum Price
    • Cost Plus with Guaranteed Maximum Price and Bonus
  3. Materials & Time – If a scope of a project isn’t clear, or hasn’t been clearly defined, this type of contract is often preferred. You and your contractor work together to establish an hourly or daily rate, and as well as determine how to handle additional expenses as they arise. All costs need to be specified as direct, indirect, mark-up, and overhead. In this type of contract, you may want to establish a cap or specific duration for the project. This is typically referred to as a “Cost Not To Exceed” contract or clause.
  4. Incentives – Incentive contracts feature compensation for the contractor based on their performance in relationship to your agreed upon schedule and timeline, quality, and overall budget. These contracts work particularly well when you have a tight deadline to adhere to. Incentive contracts can fall into two types of categories: Cost Reimbursement Incentive Contracts and Fixed Price Incentive Contracts.

Regardless of the contract you and your contractor choose to go with, be sure it’s one you can all live with. At Baratto Brothers, we pride ourselves on being able to deliver quality work on time and on budget with all of our construction projects, regardless of the contract binding us. For more information, call our office today at (218) 692-1070 and find out how we can deliver the superior craftsmanship you’ve been searching for.

Construction Lending 101

A quick reference guide to assuring a smooth start to your construction project

- Written By Bart Taylor; RiverWood Bank - Crosslake

 

So you’re thinking about finally building that dream retirement home at the lake, you have your plans picked out (down to the accent tile color), the building contract has been executed and your contractor , Bob the Builder, just needs the go ahead from you to fire up the track hoe that is already parked at the job site…

Construction LendingHere’s what you’re thinking “Maybe now is the time we should start working on getting a construction loan? Naw, why rush into things, we are still sitting on a decent amount of cash we have saved (enough to get us a good start) and the equity from the home we are selling in the cities most likely will be available prior to completion. No sense paying any more interest to the bank than we need to- right?”

Wrong!  

You need to choose your banker and get your financing strategy in place long before the construction contract is signed and the builder is ready to break ground (You notice I highlighted strategy didn’t you? It’s not just a loan). The reason is title insurance and Minnesota  lien law…I won’t bore you with the details but suffice to say you will create a mountain of additional paperwork, and unnecessary stress for you and your builder trying to schedule your project by not having the construction financing in place prior to the start of construction. Oh…and even if you have a good amount of cash to get started you risk delaying your project and move in date by not taking my advice.

You should make contact lenders (why not talk to a few?- find one that makes you comfortable) to develop a strategy for the financing of your project around 75 days prior to your anticipated start date. It takes in a perfect scenario about 45 days in this day and age to get title work, sworn construction statements, appraisals, insurance and ultimately the financing in place prior to start. Again, it’s imperative to have the mortgage signed and recorded prior to any work on the project being started.

Construction Lending

What will the lender need?

Expect to be asked for:

  • Copies of Driver’s licenses
  • A loan application (one will be provided for you – it’s free, like a court appointed lawyer)
  • Verification of income
    • 2 years most recent income taxes (the whole shebang not just the first two pages)
    • 30 days’ worth of your most recent pay stubs
    • Business taxes for 2 years if self-employed (include the K-1’s also)
      • Many times it is easiest to contact your CPA and have them communicate directly with the banker – they speak the same language and can more efficiently trade sensitive documents – all they need is your permission
  • A builders risk insurance policy (your homeowners insurance agent will help you with this one- if you don’t have a local agent ask your builder or lender for a few names)
  • Plans, specifications, a sworn construction statement and an executed contract from your builder (if the contract hasn’t been executed yet, get the first three to your lender as early in the project as you can the contract can follow…I by the way, f your builder turns up his/her nose or looks puzzled when you ask for these 4 documents – immediately call your lender, you may want to find a more reputable builder, they will give you names of quality builders in the neighborhood that “do it right”.) These items are necessary for the appraisal to be completed accurately and should be as detailed as you can get them- it’s no fun to find out at the end of the project that the “bar napkin bid” you got didn’t include a kitchen.
  • 2 months most recent bank statements
  • Most recent brokerage and retirement statements
  • Title insurance, or abstract on your lot if previously owned
  • Property tax and insurance information on all properties that you own (this is new stuff that the banks are required to have on file to demonstrate that they calculated your “ability to repay” the loan prior to consummation

I know, it seems like a lot of stuff to have to gather up. Compare that to the disappointment and anguish that would occur if you have not been properly pre-qualified (by a reputable lender) that knows what it takes to meet the exhaustive secondary market lending standards. Having that dream home already built could become a real nightmare. Do your construction borrowing homework ahead of time and don’t allow those high tension moments to dominate the choice of tile accents.

RiverWood Bank