Seeking Construction Financing in the US? These 4 Trends Could Have an Effect

In 2015 in the USA, it was still easier to obtain a construction loan than back in 2011. Here are four trends that outline how lenders are beginning to be more cautious this year.

  1. Bank underwriting is tightening. Debt lenders run debt-coverage-ratio tests or  debt-yield tests to restrict proceeds for apartments. The for-sale market hasn’t seen quite the same stringency for condos, subdivisions, and townhomes; lenders are simply being more cautious in these markets.
  2. Banks have exhausted their construction allocations. Some lenders have a certain allocation for construction and have recently exhausted or nearly exhausted it. They need time to recover the funds from previous construction loans in order to move forward with new ones. Of course, no lender wants to advertise that they don’t have the money, because borrowers will simply go to the competition.
  3. There are new regulations. One such regulation is the High Volatility Commercial Real Estate (HVCRE) requiring lenders to prove that a borrower has 15% equity in a project at stabilization. Even when a project is a success, it is a difficult proposition because the as-stabilized value may exceed 15% cash equity in the deal. This means the bank will be out of compliance, which in turn means they will need to reserve more against the loan. The inability to put that money out costs the bank, a cost which they will eventually find a way to pass on to the borrower.
  4. Banks are increasingly concerned about submarkets. Open secret: some banks won’t lend in certain submarkets until the products are in the process of stabilizing at their pro-forma rents. The same lenders have no issue funding deals in the overall markets.

Knowing these issues and understanding the deal going in is critical for approval success. Read the case at