Commercial Investors: Are You Finding Construction Financing Tougher Lately?

Question

Banks seem to have tightened up on ground-up and major renovation loans. Are you still seeing appetite from private lenders, or has your pipeline slowed down?

Stuart Udis · Answer

Construction lenders are still lending. The bigger issue in today’s market is that many real estate deals simply don’t pencil which makes it easy for the lender to simply say no. The cost of new construction and heavy rehab has risen to a point where the numbers don't make sense in most scenarios. For rental projects in particular, lenders are have to understand the exit. With higher interest rates and elevated operating expenses, they’re reducing leverage because they need to be confident the loan can be refinanced once construction is complete, or that a construction-to-perm loan will perform at stabilization.

Henry makes an important point about the value of strong construction lender relationships. Construction loans are different from financing rentals where the lender’s involvement is often limited to collecting annual financials, tax returns, leases, and insurance renewals. With construction, there are far more variables from cost overruns, scope changes, interest reserves being depleted by unexpected Fed rate hikes, and countless other issues that can surface over the life of a project.

Relationship lenders are the ones who step in to work with the borrower and keep projects moving, whether that means increasing the loan amount, reallocating budget line items, or simply being fair and reasonable during the draw process. A lender offering WSJ Prime + 0.5% may appear cheaper than one charging Prime + 1%, but if the “cheaper” lender makes construction administration too rigid, that loan will ultimately cost far more over the duration of the project. A good construction lender is the cheapest form of capital you will find & it's important to invest time into building those relationships.

Chris Seveney · Answer

Smaller commercial loans the banks have absolutely tightened up but a few institutional funds we work with are still originating a good number of bridge loans as well as longer term commercial loans. If it does not meet freddie or fannie many banks nowadays have seen they do not want it on their balance sheet

Paul Sofia · Answer

Plenty of toxic paper out there. Bank exposures are very unhealthy right now. Seeing a bunch over here in the Charlotte MSA. Tract builders continue their building......wonder why? They have a ton of Wall St cash that's being gambled as in 401Ks

Henry Clark · Answer

OP. As Easy as ever. Our lenders are part of our team. We keep them updated on our progress and status even when not in the middle of finance deals. They just need a Deal analysis and our past history working with them. Recommend investor build a team. Don't go shopping for 1/4 point interest with a different lender. Plus, it is a lot easier dealing with the same lenders keeping them up to date with tax returns, projections, insurance, etc annually. Do make sure their Federal Lending Cap is big enough for your growth and Scaling plans. Or they can do SBA loans if you plan to use that.

Drago Stanimirovic · Answer

Thanks for the insights, Chris, you’re spot on. We've definitely seen the pullback on the smaller side from traditional banks, especially for ground-up and reposition plays that don’t check the agency boxes. That said, the institutional bridge space has stayed active, particularly for experienced operators with strong pro formas and clear exit strategies. The key lately is solid underwriting and a tight story.

Commercial Investors: Are You Finding Construction Financing Tougher Lately?

Commercial Investors: Are You Finding Construction Financing Tougher Lately?

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