Equity loans are basically financial investments for share ownership in the business.
This refers to a subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.
Mezzanine capital is often a more expensive financing source for a company than secured debt or senior debt. The higher cost of capital associated with mezzanine financing is the result of its location as an unsecured, subordinated (or junior) obligation in a company's capital structure (i.e., in the event of default, the mezzanine financing is less likely to be repaid in full after all senior obligations have been satisfied). Additionally, mezzanine financing, which are usually private placements, are often used by smaller companies and may involve greater overall leverage levels than issuers in the high-yield market; as such, they involve additional risk. In compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or other more senior lenders.
Private or professional looking to finance commercial developments to all-in-one construction, BPF Solutions can arrange the loan to suit your needs. Our lenders pride themselves in understanding all phases of the lending and building process. And every relationship regardless of size, receives the same holistic approach.
Builder financing can take the form of straight debt or lease. It can also be a one step or two step lending process with several variations depending on the builder’s financial position and project type.
One of the main builder financing scenarios for a small to medium sized business is the development from ground up and for the business’s partial and total use.
Under this scenario, the business would secure debt financing by way of a mortgage on land and the proposed building. The business or individual needs to own the underlying real estate and it needs to be zoned in accordance with the intended use, have an approved building permit, engineer drawings, detailed cost estimate, a contract with a reputable construction company, and be in compliance with any other lender requirements such as an acceptable third party Phase I environmental audit report.
The strength of the business from a profitability, credit, and net worth perspective will determine if the debt financing is a one step or two step process.
A one step process is when a lender is prepared to finance the actual construction process and roll all the costs into a long term commercial property mortgage.
A two step process is when one lender will finance the construction process and a second lender will pay (take out) out the first mortgage lender once the project is complete and take out a long term commercial mortgage against the completed building and land. The two step process is normally required in situations where the borrower does not qualify for a one step financing. For this reason, construction financing by itself tends to be higher risk and higher rate financing.
Builder financing as a whole, is viewed to be higher risk due to the inherit risks that come with a construction project. Will the project be completed? Will it be done on time? Will it be done to budget? In order to address this issue, institutional lenders that finance completed projects, but not construction, will team up with private lender groups that provide the actual construction financing. At the completion of the project, the institutional lender will pay out the private lender group and place the total funds utilized into a long term mortgage to complete the two step builder financing process. By creating this two step package, the two lender groups eliminate the need for the borrower to find and coordinate the two different lending sources.
However, in cases, where they are unable to secure one step financing, they should first seek out a construction only source and then find a longer term lender to come in after completion. The challenge for the borrower is to find these collaborative lenders as they tend to work through networks more so than invest in retail advertising and promotion efforts to make these programs known.
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In cases where a business wants a new building for its own purposes, but does not want to outlay the capital to finance the construction or take on the related debt, the builder will work with an investment group that will provide builder financing to create an investment property.
In many cases, the builder is strictly building for immediate resale. In these situations, the builder is the short term owner of the property and has acquired all the necessary permits and compliance certificates to complete the project. Again, the financing can be one step or two steps, depending on the financial strength of the builder and the length of time expected before resale.
In situations where the project is effectively pre-sold, subject to the completion of the construction project, the builder may have more financing options, depending on the financial strength of the buyer involved. Similar to any business financing application, the more variables at work in the risk model, the more specialized the lender and the higher the lending rates. Regardless of the specific builder financing application, the borrower will need to have an equity stake in the project for it to be viable to a lender.