Commercial construction loans have taken probably the hardest “beating” in the current credit crisis. Bottom line, banks usually do not want too or can’t take on the additional risks that are included with construction loans.
Further, we now have seen many commercial construction loans get canceled. And we are referring to loans which have closed on the land acquisition component, than the funding bank backing out off the rest of the project. This is something we have never seen before. This puts borrowers in particularly difficult positions, because they have debt payments on unfinished projects and puts a stain on the offer for other potential lenders. As they will all begin with the assumption that the borrower had done something wrong.
It also puts the funding bank in a very bad position as well, as they have a lot of liability to manage and stand a very good possibility of being sued for damages by the borrower. They’ve not honored their commitment. Also, by not completing the project they further hurt themselves, due to the fact that the good portion of these borrowers may not be able to find financing and will default on their loan.
Commercial Construction Loans
For instance , we recently worked on a project that we could not close. The project was an automotive repair type construction project, ground up. The borrower purchased/closed on the acquisition of the land at $600, 000 and had financed $450, 000. The other $150, 000 was supposed to be the total down stroke of the entire project (not just the land) which had an additional $400, 000 construction component to it (it was an SBA loan, 85% financing). That was basically all of the cash the borrower had. The financial institution pulled out and now the borrower has a $4, 500 a month interest only payment and very little options on the best way to entice another bank to come along and complete the offer.
As far a potential solution on the above transaction (and other similar ones), is for the borrower to bring on a partner. Though not ideal for the borrower, it is probably the only way to get the above commercial construction loan closed also to avoid a complete financial disaster. On the above transaction, all of our sources wanted to see cash reserves, post close, of at least 5% of the $1, 000, 000 project cost and also to come into the deal with yet another 10% injection. He was at 85% financing and needs to be at a lot more like 75%.
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