Financing Options For Development Projects

Can Someone Finance A Commercial Or Industrial Development Project In Pennsylvania?

In Pennsylvania, a party that purchases and owns commercial or industrial property is usually a single-purpose Limited Liability Company (LLC) entity type. That company is typically who acquires and is the deed owner of the property. They can then contract with another company to develop it. But usually, these LLCs try to keep their liability limited to the project at hand.

For example, say there’s a builder who created a company that buys a subdivision they’re going to build out, and there are 10 empty lots in that subdivision. Say they get started building the first house. In the middle of building the first house, they made a huge mistake. The buyer found it and is suing them, and the buyer wants recourse.

What if the builder can’t fix the problem? Understandingly, the buyer wants their money back from the entity that owns the subdivision. In this case, the buyer is in a great position. Usually, any interest the seller has in the subdivision is something that they could obtain or attach to the contract with the builder to make sure they get repaid for the builder’s mistake.

In contrast, say you bought 10 lots with 10 single-purpose LLCs, one LLC each owning one lot. A mistake is made on one lot. The only lot that is at issue is the lot where the mistake was made. It doesn’t totally absolve your risk and loss because that one lot is at stake, leaving the other nine that are not at risk. Risk is similar but different in the commercial and industrial world because you’re not selling homes per se, but you may have other things that may jeopardize the land or create an issue.

If the property is near a Superfund site, or a contaminated site due to hazardous waste being dumped, left out in the open, or otherwise improperly managed, and you have a building project, but there’s contaminated water on site. Superfund sites are a risk that goes back and forth between the property owner, the property operator, or whatever is constructed on the property. Your best bet is to try to insulate your risk and keep it as small as possible.

Are There Different Types Of Home Loans I Should Consider?

There are several different types of home loans that potential buyers should consider. For instance, say you’re looking at an older home and want to make a purchase. You want to use either an FHA loan or a VA loan considering they usually have better terms regarding interest rate, length of the loan, amount of the loan, and deposit requirements.

In turn, the VA or FHA sees this older home you want to purchase. These lenders want to help people buy a good home that will be safe for them to live in from day one. In most instances, the lenders investing in this property are probably more so than the buyer, so they want to ensure the investment is also suitable for them. So the FHA or VA will want to do inspections, but they are not like the typical Pennsylvania home inspections.

The types of inspections done by FHA and VA are not necessarily invasive but much more stringent. The home inspection could say, “Maybe the HVAC system is 20 years old and past its useful life by statistics, but that doesn’t mean it doesn’t work.” It’s just putting the buyer on notice that you’re buying a 20-year-old furnace.

As another example, the FHA or VA inspector may grab a baluster on a staircase and feel it wiggle. The inspector might call that out and tell the buyer that there is movement in the balusters on the staircase. The FHA or VA will probably make it a term of the loan, saying that the seller must fix it before you can purchase the home. Then, the seller is required to fix it and then provide proof to FHA or VA and the buyer before the loan closes.

Another way the more stringent inspections are a bonus for the buyer is that they’re getting a more thoroughly vetted property for what they’re buying and possibly feel more secure about what they’re purchasing. But because these inspections are more stringent, it’s likely to cost the seller money to fix the property so it can sell. These would not be loans that the seller is happy to see.

When sellers look at an Agreement of Sale with a mortgage contingency included, they see that it’s an FHA or a VA loan, but they also have another offer that has traditional financing, like through a bank or mortgage company. Which offer do you think the owner will accept? They will likely take the one that is probably non-FHA or VA, even if all the other terms are the same. Why? Because of the out-of-pocket expenses that can arise from the type of inspections required by FHA and VA.

What is probably more prevalent is the way the market has been so competitive in recent years. As a buyer applying for a loan, be aware and consider which type of home loan you want to pursue. This doesn’t mean that FHA or VA loans are bad and conventional loans are good. It doesn’t mean anything will change, but the risk or potential for things to happen during the loan, the contract offer stage, and even going forward is there. The buyer may look at it and determine if the buyer has an FHA loan that the FHA can require certain changes.

The seller may say that they’re not paying for any improvements. In response, the buyer may want to tell FHA that they will just take the home as-is. But, FHA will not provide a loan to the buyer with the house as-is.

As a buyer, you need to understand the dynamic of FHA or VA loans versus other home mortgage options before getting involved in purchasing a home. You may have the FHA loan ready to go up until that issue arises, then have to turn around and start all over and try to get a loan that is not FHA or VA.

There are obviously pros and cons with mortgage loans. If you can only secure an FHA or VA loan because they are your only viable option today, then you’re subjected to whatever their inspection requirements are, regardless of what you want. Keeping this in mind will save you from having obstacles when it comes time to close on a home.

For more information on Financing Options For Development Projects, an initial consultation is your next best step. Get the information and legal answers you seek by calling (717) 990-7178 today.