having made a
lending, are to
no small extent
Michael Persall is founder and managing member of ABP
Capital and its affiliates, industry-leading companies specializing in real estate investment, banking, private equity and
lending ( www.abpcapital.com). Persall also is chairman of
the board of First National Bank of Southern California
( www.fnbsocal.com). Reach Persall at firstname.lastname@example.org.
Choosing the Path
to Construction Financing
When pursuing a transaction, you have to balance the
pros and cons of private vs. bank capital
By Michael Persall
As we approach the end of 2017, one thing is clear. It has been a solid year for new construction, with total activity over the past 12 months outpacing the previous
high-water mark set in 2006, according to U.S. Census
Bureau data. Despite fundamental market strength and
strong demand for construction financing, however, construction lenders remain highly selective in deciding to
whom they will provide funding — and how much.
Banks, while having made a resurgence in commercial
lending, are to no small extent hamstrung by the regu-
latory pendulum that by today’s measure, according to
many observers, has overcorrected for the last downturn,
irrespective of its severity. Private construction lenders,
conversely, fill the gap in loan demand that banks can’t
or won’t meet — loans that are fundamentally sound yet
bear characteristics that don’t fit neatly within bank un-
In the currently evolving lending landscape, as com-
petition continues between banks and private lenders,
borrowers — and the mortgage brokers assisting
them — have good prospects for finding commercial
construction-financing solutions, even for complex
projects that require strategic thinking and flexibility.
Those solutions, however, are increasingly found with
Every deal is different — location, size, development
team, market — and the days of one-size-fits-all loan
underwriting have passed. Lenders are charged with
delivering creative solutions, flexibility and speed,
key factors driving brokers and borrowers as they sift
through the marketplace of banks and private lenders.
While both types of lenders must adhere to government regulations and prudent underwriting, banks are
more strictly governed throughout the entire lending and
servicing process than are their private-lending counterparts. As a result, banks have historically carried layers of
bureaucracy to comply with regulatory mandates.
Private lenders are typically more streamlined organizations, enabling senior-level expertise and involvement
at the project level. This access creates opportunities for
shared insights and guidance that larger organizations
are often unable to provide.
Construction is a fluid process requiring timely action
and flexibility. Offering commercial construction-loan
borrowers an equally strong expertise in the construction
process proves invaluable in timely decisionmaking and
advancing capital for a project.
A borrower might need funds to pay a general contractor one week, then additional capital the following week for unforeseen conditions. Subcontractors may
need to be replaced during construction, or plans altered.
Banks commonly advance no more than 50 percent
to 60 percent loan-to-cost leverage on a construction
loan, however, often leaving borrowers to invest more
of their own equity or seek out third-party mezzanine
debt to compete the capital structure — increasing
both deal complexity and the cost of capital.
Private lenders, on the other hand, generally offer
terms that give borrowers the ability to use a single
debt-capital source. It’s common for lenders backed
by private capital to offer construction-loan leverage
up to 75 percent of cost, eliminating the equity gap
created by lower-leveraged bank loans, given similar
Private lenders also facilitate a more competitive
overall cost of capital. By offering higher loan-to-cost
structures, borrowers can replace higher-cost equity
with lower-priced construction debt. Private lenders
funding an extra 10 percent to 20 percent of the capital
stack beyond that of banks ultimately enhance project
yield, even though their interest rates are normally
above that of a commercial bank.
Commercial mortgage brokers and their construction-loan borrowers, in the current financing environment,
are in a unique position to capitalize on a competitive
marketplace between banks and private lenders. The
current regulatory environment favors private lenders,
allowing them to deliver construction loans with speed
and efficiency — and from the perspective of a lending
partner with expertise in construction as opposed to just
a capital provider.
Favorable overall capital structures complete the
value-add advantage offered by private lenders, with
well-prepared commercial mortgage brokers making
a significant difference in successful construction
financing. Separately, however, banks that are experienced in all aspects of construction and nimble in size
can present an equally sound choice for construction
financing. In the end, the choice comes down to
what works best for the borrower and the deal in
front of them. n
While both lending sources — banks and private lenders
— operate under sensible guidelines, experienced private
lenders are more apt to consider exceptional circumstances and arrive at a favorable solution to keep a project
moving for ward.
Lenders steeped in construction also understand
the value of time and how small setbacks affect the
path of a project. Private lenders that can arrive at
quicker decisions can provide capital — and solutions
— much faster, however, saving time and preventing
The broker equation
Historically low construction returns and a challenging
regulatory environment make it difficult for borrowers to
source optimal construction debt. Now that borrowers
are taking a much closer look at the lending landscape,
what does this mean for commercial mortgage brokers?
More than ever, brokers are required to have a
strong working knowledge of the construction process
and the unique needs of each project. It’s crucial that
mortgage brokers be well-versed on client projects upfront, enabling any deal complexities to be successfully
addressed during the underwriting and approval process.
Plenty of instances exist in which commercial banks can
provide the ideal loan structure for a particular project or
borrower. Developers or builders that are accustomed to
the typical structure for a bank construction loan are well-served by commercial mortgage brokers who seek out
a bank with similar favorable characteristics to that of
Banks that operate with a high level of construction expertise, relatively flat operating structures with
good access to senior management and a keen eye
toward the time sensitivity of construction make for
valuable lending partners.