Commercial Investors: Are You Finding Construction Financing Tougher Lately?

[Drago Stanimirovic]

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]

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.