Ground Up Construction Financing — What Are Developers Seeing in Today’s Market?

Question

I’ve been noticing an increase in investors and developers revisiting ground up construction opportunities as value-add acquisitions continue getting more competitive in certain markets.

Curious what others are seeing right now regarding:

• leverage expectations
• construction reserve requirements
• lender overlays
• liquidity standards
• stabilization concerns
• entitlement and permit delays

We’ve recently been structuring financing scenarios involving:

• infill development
• spec construction
• small multifamily
• SFR ground up projects
• fix & flip to new construction transitions

It seems many lenders are becoming more selective on execution strength and project viability versus relying solely on borrower credit profile.

What are developers finding to be the biggest financing challenge in the current environment?

Henry Clark · Answer

Just met with our new Bank Officer and walked him around one of our properties.  Starting a Deal Analysis on extra ground at the same site to do Ground up.  We do Self Storage.

For us Speed/Speed will be the issue.

1.  Speed thru project approval/entitlements.

2.  Speed to order and start to construct. Although it is May, to me I see Winter coming already being in Iowa and what construction we might get done.

3.  Speed before interest rates change.  We will have about a 1-year development and a 1-year interest Only period as we start up occupancy.  Will rates change significantly before we moved to Fixed financing.

4.  Speed before full on Inflation kicks in.

5.  Inflation????- haven't run numbers for 2 years.  Will be interesting to see where Cost figures come in.

Lenders- This will be tied to an existing SBA loan property.  I don't see an issue from the SBA side.  But the local lender we use:

1.  We don't shop rates, so we have a good relationship with them.,

2.  They have said they have tightened lending to new customers.,

3.  We do Personal Guarantees, so our bank has a little more leeway with us.

4.  Lender Loan Portfolio mix.  We are in Agriculture country, so having more Commercial business loans is good for them, from a diversification standpoint.  Looks like you're in Washington State in the Seattle and Tacoma market.  Your Lender Loan profile might be different there.  If you get a chance, post some pictures from the Leavenworth Oktoberfest this year.  Went two years ago and it was great.  Actually, as fun as in Munich.

In Commercial/Industrial it will be more about your track record as a developer, how much you're already extended, project Stand up time frame, existing Lender Portfolio Strength.

Steve Garthe · Answer

Henry, I think you're spot on regarding speed. We're seeing many lenders place as much emphasis on execution risk as they do on borrower strength right now.

A few trends we've noticed from the capital side:

• Liquidity requirements have tightened, particularly for spec construction and projects without significant pre-sales or lease commitments.

• Construction reserve scrutiny has increased, with many lenders stress-testing budgets against potential labor and material cost overruns.

• Sponsor experience is carrying more weight than credit score alone, especially when timelines extend beyond 12 months.

• Some debt funds remain aggressive on leverage, but they're offsetting that with stronger guarantor, liquidity, and contingency requirements.

The biggest challenge we're hearing from developers is finding reliable capital partners that can move quickly enough to keep pace with entitlement, acquisition, and construction timelines. A strong project can still lose momentum if financing can't keep up with execution.

It will be interesting to see whether the second half of the year brings more competition among lenders or if selectivity continues. We work with a number of construction and bridge capital sources nationwide, and the differences in underwriting appetite today are substantial.

Appreciate you sharing your perspective from the developer side.

Steve Garthe · Answer

Jay, that's been very consistent with what we're seeing as well. Many investors focus on rates and leverage, but community banks often seem far more focused on relationship strength, local market knowledge, liquidity, and sponsor experience.

One trend we've noticed is that borrowers with strong projects can still struggle if they're approaching a bank without an established relationship or sufficient operating history in that market.

Have you found community banks becoming more conservative on development exposure recently, or are they still actively pursuing experienced sponsors with strong banking relationships?

Ground Up Construction Financing — What Are Developers Seeing in Today’s Market?

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