In today's world, what used to be a civilized search for a construction or permanent lender has turned into a frantic nightmare of trying to figure out who's got the money and how to get your project financed.
Owners of good projects with solid sponsors must come to grips with the new reality of underwriting: Lenders no longer underwrite high-leverage loan-to-value or loan-to-cost transactions. The new rule of the day is greater equity, better sponsorship and a lot more skin in the game.
To request financing today, borrowers must be better prepared than ever before. If you’re seeking new construction financing, you’re well advised to hire a professional company to provide you with a feasibility study for your project. Lenders are not only interested in the existing product in the market place, but the potential for other players who may come into the market and have an adverse impact on your proposed site.
Economic Climate and the Federal Reserve
One of the major issues we’re facing in the current economic climate is the capital ratios being required of lenders by regulators. The FDIC wants all lenders to boost their ratios, and there’s a direct correlation between increasing ratios and reducing assets (loans). Banks are being told to raise capital. This will be achieved by selling new shares of stock or selling loans in the open market.
When you look at assistance from the federal government, consider the position of the Federal Reserve Board and its actions. We have the Troubled Asset Relief Program (TARP), through which we have seen hundreds of billions of dollars handed out to Wall Street and the major U.S. banks, ostensibly for the purpose of stabilizing the banks’ financial footing. The banks that have received TARP capital have written off billions of dollars of loans and stabilized balance sheets, but have not funded the loan request for borrowers on Main Street.
In addition, we have the Term Asset-Backed Securities Loan Facility (TALF), which was intended to spur lending to small businesses and consumers at lower rates. To date, there has been very little use of TALF. The program has a capacity of $1 trillion, and was extended until June 30, 2010, to support newly issued commercial mortgage-backed securities (CMBS) lending. The Federal Reserve believes TALF will have a positive impact on the lending market. However, due to the time it takes to assemble a CMBS package, this will only work for large players with portfolios that can be refinanced through major banks or on Wall Street.
Who Has the Money?
So, who has the money, and how do you get your project financed? Banks have severely cut back on their new construction lending because of problems with their residential-loan portfolios. Banks that were heavily involved in residential lending will probably be out of the real estate construction-lending market until 2010 or 2011. These lenders will need to rebuild their balance sheets before they can take on new loans.