WHAT IS Floor Loan
A floor loan is a term used in real estate construction. The floor loan is the minimum loan that a lender agrees to advance in order to enable the builder to commence construction and development of a project.
BREAKING DOWN Floor Loan
A floor loan is a specific kind of loan designed specifically for real estate construction projects. Floor loans apply to buildings that will be occupied by tenants.
A floor loan does not function like a traditional loan, where the borrower receives the entirety of the loan as in the case of a traditional mortgage. Instead, the floor loan refers to a partial amount of a larger loan that a builder receives. The amount that the borrower and builder receive in order to begin the construction project is the floor loan. The rest of the loan is paid after the builder reaches certain points in the project that are decided upon by the lender. For example, a bank may agree to advance 70 percent of the total project cost, with the balance of 30 percent to be released upon the project achieving certain milestones. These milestones typically include a successful sale or lease of the majority of the project's units, obtaining an occupancy permit, etc.
Floor Loans and Their Relationship to Construction Loans
The floor loan is often the first stage of a larger construction loan or mortgage. A construction loan is a short-term loan used to finance the real estate project. The builder takes out a construction loan to cover the costs of the project before obtaining long-term funding. Because they are considered fairly risky, construction loans usually have higher interest rates than traditional mortgage loans.
Construction loans can be taken out by home buyers who custom-build their own home, in which case a floor loan would not be part of the process. Floor loans are only a part of construction loans for building tenant-occupied buildings, not owner-occupied ones. In the case of an individual homeowner building their own home, the construction loan can be refinanced into a permanent mortgage or the home builder can get a new loan to pay off the construction loan.
In the case of a real estate project that plans to be tenant-occupied, if it is a commercial piece of property as opposed to a multi-unit residential property the builder can fund the project with a construction loan and then take out a commercial real estate loan to pay off the rest of the constructions loan. A commercial real estate loan is a specific kind of mortgage loan secured by a lien on commercial, rather than residential, property and is therefore unavailable to individual home builders.