Garry Barnes is a director of PW Partners Consultancy. He’s
a former bank CEO and president who currently serves on
the board of directors of Holladay Bank & Trust in Salt Lake
City. He taught at the university level, is a writer and lecturer
on banking and real estate matters, served on the U.S. Small
Business Administration’s National Advisory Council and was
an in-country consultant to the Central Bank of Russia. Reach
Barnes at (619) 791-9403 or firstname.lastname@example.org.
Paper Shuffle of Financing
Managing the construction-loan approval process
requires staying on top of the details
By Garry Barnes
it then becomes the responsibility of the loan admin-
istrator (or closing department) to document the loan
consistent with the lender’s approval standards, which
is a paper-intensive process and involves documents
required by state and federal laws, as well as contrac-
tual bank documents that require the participation of
many outside sources.
The following information is an abridged version of
the documents and steps required to close a typical
construction loan. It may not be a complete list because of different lender policies and procedures, as
well as variations in state real estate and banking laws.
The information, however, can serve as a good initial
template for the construction-financing process for
those interested in exploring the niche.
The United States is considered one of the largest construction markets in the world, with the construction industry serving as a major contributor to the nation’s economy. It
is estimated there are more than 650,000 construction
companies and more than 6 million employees building
approximately $1 trillion worth of facilities annually.
Given this volume of new construction, it seems
obvious to have a strong demand for construction
financing. This creates great opportunity for the commercial mortgage broker who has experience with and
knowledge of the construction-lending process.
Of course, the financial objective of developing a
property is to produce enhanced value beyond the
cost of development. Put differently, the full value of
the project is dependent on what the predictable
value of the project will be once complete.
It should be remembered that construction projects
are high-stakes propositions. Regardless of project
size, investors assume a lot of risk, which includes time,
money and human capital.
Construction lending requires a comprehensive understanding of the fundamental processes associated
with this type of credit transaction. A construction
lender will experience higher risks not generally found
in long-term financing of an existing property. There
are many ways, however, to mitigate these risks.
Commercial mortgage brokers normally will not
be involved in all of the collection and analysis of the
various documentation involved in the construction-financing process. Still, it is imperative for the broker
to understand the importance and rationale of each
document in order to explain the relevance of each
step in the process and advise the borrower correctly.
The full value of the construction project is not
realized until the facility is complete and ready for
occupancy. During the construction period, which
may last a year or two — or perhaps longer on larger
projects — many changes can occur that may negatively impact the as-completed appraised value.
Such disruptive events could include new competition, a decrease in rents, waning market appeal for the
project, overspending or the wrong location. These
are just a few value disruptors that can have long-lasting
effects on a project.
Mortgage underwriting is a systematic process used
by the lender to determine if the challenges associated
with the loan request are generally acceptable and fall
within the lender’s defined risk parameters. Most of the
risks, terms and conditions considered fall under the five
C’s — credit, character, capacity, collateral and conditions.
Once the loan request is underwritten and approved, Continued on Page 54 >>