Construction Lending Market Re-Emerges

By Executive Managing Director and Co-Head of Real Estate Investment Banking Tim Fish and Executive Vice President James Tramuto, Jones Lang LaSalle

Tom Fish

James Tramuto

One of the surprising trends that emerged in the second and third quarters of 2010 is the reemergence of the construction lending market. Banks are slowly but surely shoring up their balance sheets, and in need of good earning assets, are lending on commercial real estate again.

With the shakeup that occurred during the recession, many names and faces have changed in this sector; however, there is money available for the right deals, and development loans are getting closed. Make no mistake, the loan terms are wildly different from the “good old days” which commonly consisted of 80 – 90 percent loan-to-cost loans on a non-recourse basis. The new deal terms for a ground-up construction loan are typically 50 – 65 percent loan-to-cost, completion guarantee’s required, with full recourse that burns off to some lesser amount depending on the fundamentals of the deal and the strength of the borrower.

We are seeing some “outlier” deals out there; non-recourse construction loans, or 70-plus percent loan to cost scenarios. These are usually reserved for high barrier to entry markets or special borrower relationships, etc. The favored asset class for this new breed of construction loans is multi-family, as this sector is widely believed to be the first to recover from the overall market downturn.

As a global statement, when combining the lack of new supply brought on line over the past 3 years with the fact that now is likely the most profitable time in history to make construction loans, we expect this construction lending trend to continue. Additionally, we anticipate the fairways to widen for construction lending across the board.

Typical loan structures proposed are summarized below:

Eligible Assets: All Asset Types w/ Multi-family Predominant Asset Class
Loan size: $5 million and up
Max LTV: up to 65 percent
Term: Typically 24 month initial term, with one or two 12-month extensions
Amortization: Interest Only
Type: Floating rate
Pricing: LIBOR + 300 – 500 with no floor
MSA/Markets: Primarily major markets nationwide, but bi-coastal markets preferred
Completion Guarantee: Required
Recourse: Typically full recourse that burns off upon completion or some DSCR hurdle
Fees: Typically 0.50 percent – 1.00 percent