Reverse Engineering Construction Financing

“Larger Construction Financing Requirements Require You To Work Backwards From The Lender Requirements”

For smaller stand alone projects such as a single family dwelling or a commercial building, a construction financing source can quickly assess the existing market for similar projects and decide whether or not they want to proceed with a construction loan request quite readily.

In these situations, the lender needs to be comfortable with the builder or developer’s ability and rights to complete the project as well as the marketability of the end product.

And the larger the existing market is for similar or related structures, the easier it will be to secure construction financing.

But when the project size becomes larger, more complex, and is completed over a longer period of time, the builder, property owner, or developer needs to start the project with a good idea of what it needs to look like to acquire proper financing or risk either not being able to find a construction loan when required, or having to give away too much of the project’s projected profits.

An example of this would be a large residential development that is going to be completed over a number of years in small to medium sized market.

Judging the market’s ability to absorb the inventory over a number of years where economic cycles are going to be hard to predict can be quite difficult from a lender’s point of view.

So the exit strategy to repay the loan has to be stronger on average than mere market studies from high priced third party consultants.

And the more risk that is associated with a project, the more sales in advance the builder, property owner, or developer is going to need to come up with and the terms of these commitments are going to have to mean something to a construction financing source as well in terms of how binding they really are.

For larger projects, its going to be important to understand a head of time what the regional construction financing sources are prepared to consider in terms of project size, timelines, and exit strategy.

After some basic research, you may find that the proposed project is either too long or will take too long to complete or have some other detrimental aspect that will lower your probability of being able to acquire and utilize an appropriate source of financing.

Working backwards from the construction financing market, you may decide to change the scope of the project, bring on more partners, sell off certain phases to other developers, and so on.

This tends to be a much better approach as compared to going through years of work moving the project plan along only to discover at the point where money is required that either none is available for the project as presented, or those interested want too much of both the control and the take.

If you have a project you are working on or are in the middle of, I suggest that you give me a call so that we can discuss your construction financing requirements as well as the different options and lender requirements you should be considering.

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