Real Estate Term of the Day – Floor Loan
A Floor Loan is a type of loan that is designed specifically for real estate, and it refers to the minimum loan that a lenders agrees to advance in order for the builder to be able to commence construction and development of a project. This does not function like a normal loan, in which the borrower receives the entirety of the loan. Instead, the floor loan is the partial amount that the builder receives to begin the project, and the rest is dolled out in increments according to the progress of the project, and these increments are decided by the lender. These milestones often include sales agreements, like preselling the building’s units or obtaining an occupancy permit.
A floor loan is often the first step towards a larger construction loan, in cases where a construction loan is a short term loan used to fund a real estate project. Because construction loans are considered risky, they often have higher interest rates than traditional loans. While construction loans can be taken out by the average homeowner who is doing construction on their house, a floor loan is specific to projects that are building tenant-occupied buildings, not owner-occupied ones. This is because, in the case of an owner-occupied construction loan, the owner can always refinance the loan into a permanent mortgage for the property.
It also matters for the loan whether the tenant-occupied new property will be commercial or residential. If it is commercial, the builder can take out a commercial real estate loan to complement and help pay off the construction loan. A commercial real estate loan is a specific mortgage loan secured by a lien on commercial, rather than residential, property and is not available to individual homeowners or those building residential properties.