How to Manage—and Thrive—in Today’s Construction Lending Market

As loan structure remains strong and lenders preserve their underwriting discipline, real estate developers are starting more construction projects. Developers who survived the downturn are stronger today and seem to be getting as many, if not more, concessions as they did prior to the crisis.

During RMA’s most recent Credit Risk Management Audio Conference, Bill Tryon, principal and director of Strategic Development at Partner Engineering and Science, Inc. and Daniel R. Ouellette, director, Real Estate Credit Risk at Santander Bank, discussed how a bank can make its credit structure and construction administration function ready to manage today’s new realities and expectations.

While there can be many causes for construction loan failure ranging from lack of planning and critical review to a misdirection of funds and resources, Tryon and Ouellette offered tools to effectively minimize obstacles that may occur. Before the loan is made, there should be a critical review of construction documents as well as developer and contractor teams, careful documentation of funding requirements, and setup of a completion bond or construction commitment. After the loan, the bank should ensure independent loan administration and disbursement controls, critical assessment of progress and pay applications, and title date downs/lien status.

Through the construction loan process, there are four important roles that need to be filled by experienced professionals: construction monitoring handled by an architect or an engineer; loan administration handled by a paralegal; disbursement controls handled by a professional with construction and accounting experience; and a credit professional to manage any risks that arise during the construction process.

Some significant changes are occurring within HVCRE, namely the risk weighting shifting to 130% from 150%. Despite the lesser weighting, most banks will still likely see their HVCRE portfolios increase over the long term. Because of this change, more loans will likely be classified as HVCRE.

Tryon and Ouellette advised banks to be especially careful when sponsors expand into new geographies or product types. Banks should keep loan origination and the control function separate and create scopes of work and processes that reflect their risk tolerance. Consulting with peers and listening to in-house experts were also recommended best practices.

Join us for the next installment of the Credit Risk Management Audio Conference Series on February 13, Community Bank Credit Officer Panel.

Washington – The Week Ahead, August 13–17, 2018

Read More

Risky Business: The Risk and Legal Issues in Providing Financial Services and Products to the Marijuana Industry

Read More

Broker-Dealer and Bank Counterparties in the New Bank Regulatory Landscape

Read More

comments powered by Disqus