Opinion: Preparation, insight are the keys to successful competition for a construction loan | Opinion


The past 18 months have been… eventful. As the effects of COVID continue to linger, it’s clear that few industries have been affected, and commercial real estate development has been no exception. During the pandemic, most lenders took a break from construction loans and focused on asset management and granting PPP loans. Projects already under construction have had to contend with skyrocketing material costs, shipping delays and cumbersome COVID protocols.

Finally, the dust begins to settle. Many of us have received a COVID-19 vaccine, costs are leveling off, and lenders are starting to deploy capital again.

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Now lenders are inundated with loan requests and developers are faced with a new challenge: “How do I make my project stand out amid a sea of ​​competing loan requests?” Sure, seasoned developers and brokers know how to leverage relationships and create compelling loan presentations, but if you’re going it alone, here are a few tips to keep in mind.

As the Boy Scouts say, “Be prepared. When you start planning, contact a bank or broker and discuss your project at a high level. Ask them what a typical construction loan would look like for your project and if they see any issues from a financing perspective. When budgeting, allow 5% contingency for fixed costs and 3% for incidental costs. Use conservative estimates in your budget and pro forma whenever possible (you can bet your lender will do the same).

Draw your timeline. Typically, the process of “shopping” for quotes can take about a month and closing a loan takes about 75 days; both depend on your organization and your responsiveness. Ideally, a construction loan usually ends by the time you’re ready to pave the way, so you’ll want to start calling lenders about four months before that date.

There is a wide variety of construction lenders, each with their own set of loan programs. For loans under $ 25 million, banks and credit unions are a common source of capital. Typically, these institutional lenders will provide up to 75% loan-to-cost ratio (LTC), have full recourse, and want their borrower to have minimum equity equal to the loan amount. If any of them are problematic, alternative platforms like debt funds, REITs, and some banks offer non-recourse terms, higher leverage, or other flexible terms. Be warned: as your leverage increases, your rate will also increase (the same goes for switching to non-recourse structures).

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You now have a quote and are ready to put your negotiating skills to work. It’s okay to ask a lender to sharpen his pencil and lower the fees or the rate, but understanding a lender’s capabilities is crucial. For example, asking for a construction loan from a lender that does not have a construction program is like walking into a Ford dealership and trying to buy a boat… no negotiation will get what you need.

Don’t be the borrower waiting for a bowl of hot water filled with ice cubes that won’t melt. If you want a maximum leveraged, non-recourse construction loan, don’t be surprised when your rate and fees reflect the risk perceived by the lender. As lucrative as the development of commercial real estate is, understand that the “best case scenario” for a lender is simply to pay back its principal with interest.

You’ve finally run a term sheet and can already smell concrete and wood. All that remains is to close your loan. Prepare for a long closing checklist and schedule a launch call with your lender as soon as possible. You’ll want to discuss timeline items, order third-party reports, and initiate title and escrow. This is where your organizational skills and responsiveness pay off, as the speed of a close depends greatly on how quickly you can respond to requests. It’s a good idea to establish a weekly checklist with your lender and title company to make sure things are going as they should.

The right lender can turn a good project into a great one. With the proper planning, organization, and persistence, you can secure a competitive loan while building relationships that will pay off throughout your developmental career.

Matthew Fisher is the Director of Debt and Equity at JS Coats Capital, a commercial investment banking firm in Kirkland. It secures capital for a range of commercial real estate transactions, including base construction, ongoing financing and stock syndication. Outside of the office, he enjoys spending time with his family and practicing woodworking at his home near Tiger Mountain.


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