A New Model for Commercial Construction Loan Administration
Berger, Stacey, Mortgage Banking
Through the recent real estate downturn, construction lending has seen a significant decline in volume. As the commercial real estate industry begins to recover, a new model for construction lending is developing. Non-traditional construction lenders such as life insurance companies, specialty finance companies and real estate investment trusts (REITs) are funding new construction projects through the use of third-party construction loan administrators. This new construction lending activity provides opportunities for mortgage bankers and other intermediaries.
Construction lending has historically been the province of commercial banks. Construction loans are the cornerstone of bank real estate lending activities. Community and regional banks extend construction loans to local developers; national banks lend on larger projects and use syndication as a vehicle to finance the largest developments. Banks provide the short-term, floating-rate financing and associated construction loan administration through completion of the project, lease-up and stabilization. Upon project completion and stabilization, portfolio lenders or issuers of commercial mortgage-backed securities (CMBS) provide the permanent fixed-rate financing.
Construction activity is beginning to re-emerge from its recent decline. Total construction start activity peaked in 2007 at $730 billion in volume. By May 201 1, construction start volume had declined 53 percent from its peak to $385 billion. Volume recently increased to $469 billion in October 2011, according to McGraw-Hill Construction Research and Analytics, New York. As commercial construction activity declined, banks have reduced their construction loan administration staffs proportionately.
During the recent downturn, portfolio lenders have been opportunistic in providing permanent loans on high quality assets. Life insurance companies have been aggressive in bidding for well-located, institutional-grade properties with strong tenants and sponsors. Portfolio lenders have been very competitive on permanent loans secured by properties net leased to high-quality tenants including the federal government, health-care and academic institutions. Loans on institutional-quality multifamily properties and investment-grade-rated tenants are also in high demand.
To secure these permanent loans, life insurance companies and specialty finance companies are offering combined construction/permanent loans, and using thirdparty construction loan administrators to support this activity. Developers find these construction/permanent loans an attractive alternative to finance their properties. Borrowers can take advantage of today's low-interest-rate environment by locking in attractive financing and realizing the efficiencies of a single negotiation and loan closing. They also limit their risks associated with having to secure permanent financing in an uncertain future market environment. Mortgage bankers are finding opportunities to represent borrowers and place these types of construction/permanent loans with their portfolio lending relationships.
Third-party construction loan administrators provide an efficient and effective means for lenders that do not have the in-house resources and capabilities to offer construction loans. This provides the lender with the expertise and resources to manage construction lending risks related to contractual, budget, design and scheduling matters. On behalf of the lender, the construction loan administrator is responsible for monitoring the project budget, including all designated sources and uses, and will coordinate with the inspecting engineer, manage any reserves that are provided to cover insufficiencies, perform funds administration services (including inspections and title updates), review disbursement documentation and provide detailed client reporting on the status of the project and fundings.
Third-party construction loan …
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Publication information: Article title: A New Model for Commercial Construction Loan Administration. Contributors: Berger, Stacey - Author. Magazine title: Mortgage Banking. Volume: 72. Issue: 4 Publication date: January 2012. Page number: 103+. © 2009 Mortgage Bankers Association of America. Provided by ProQuest LLC. All Rights Reserved.
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