Construction Dollars Are Vanishing in Today’s Commercial Lending Landscape

Construction Dollars Are Vanishing in Today’s Commercial Lending Landscape

Regulators, including The Federal Reserve, have put pressure on commercial banks to reduce the amount of construction loan dollars available to commercial real estate developers.  Yet the demand for new construction lending remains strong.  Developers want to see their visions come to fruition, thus alternative solutions are essential in order to fill this void left by banks.

In the past, it was fairly easy to borrow up to 85% Loan-To-Cost, while in today’s market 65% is considered liberal.  For a $20 million project, that could mean an additional $4 million in equity required to get a project out of the ground.  Sourcing an extra $4 million could mean the difference in moving forward or reaching a dead-end.  Perhaps building in phases is an option, but it is more expensive and takes much longer to reach completion and profitability.  Being sidelined completely for any period of time can create additional costs and be detrimental to ever reaching completion.

Fortunately, there are creative lending options available to borrowers to avoid the costly use of equity as the only other alternative.  Not only does outside equity come at a relatively high cost, but it also results in less ownership and control over the new development.

Some examples of alternative lenders entering the marketplace include banks that are not as heavily regulated, and private lenders offering non-recourse ground-up construction.  HUD’s 221(d)(4) program is also non-recourse and presents a 40-year term, with a low fixed rate for the entire 40 years.

These lenders, and those who have restructured their construction lending platforms, stand ready to provide reasonable Loan-To-Cost for developers to build new properties and see their visions come to life.

Capstone Capital is on the leading edge of alternative financing sources to help clients navigate the changing lending environment.  We have created an extensive database of lenders and utilize all the newest and latest options when assisting borrowers with their financing needs.  Most importantly, we will make multiple groups of lenders compete for a deal, which results in the best pricing and terms available.

This article was written by Scott Yerkes, Vice President, Capstone Capital (www.cscap.us). Scott can be reached at (615) 866-2897 and scott@cscap.us.