Why is Rabbet building integrations with every major accounting software? Development management and accounting are distinct and important activities for any real estate developer. Like drywall and paint, both are... Read More
The Construction Process from the Lender’s Point of View
The business of lending is built on one part trust, one part faith and a whole lot of underwriting. Lenders have a commodity most developers desperately need to get their projects off the ground: money.
These funds – in the form of SBA (Small Business Administration) construction loans, mini-perm (miniature-permanent) financing and other sources – can carry a project from land acquisition through construction completion. At this time, the developer will either sell the building and repay the loan, hold the asset and refinance or obtain more permanent financing. Whatever the case, the developer is looking to maximize their profit and reap the rewards from all that hard work. Turning nothing (raw land) into something (a commercial building ready for occupancy) isn’t easy, after all!
Lenders work alongside developers as they carry their projects to fruition. Like developers, lenders are also looking to turn a profit on these construction endeavors. This comes in the form of interest attached to the loan. Lenders who specialize in construction financing typically have higher margins than traditional lenders because most of the project’s risk takes place during construction. Lenders who are willing to fund this phase are thereby rewarded with higher returns.
Lending with Confidence
Lenders need to know construction borrowers have the means and ability to not only complete the proposed project, but make their interest payments and repay their loan once construction is complete. This starts by analyzing the borrower’s credit history and financial health. Lenders will need to examine current financial statements, tax returns, limited partnership agreements, and tax and insurance deposits.
They will also need proof that the developer can fund its equity stake in the project. Lenders are all about risk mitigation, so borrowers need to have some skin in the game to make them feel at ease.
Up next is analyzing the actual project. By this time, developers have typically selected their site, obtained a development appraisal and completed their initial due diligence. Lenders will need to review all this documentation, in addition to a detailed project description that includes floor plans, costs, construction timeline and profit projections.
As you can probably sense, developers have a great deal of paperwork to organize and send to lenders, while lenders have their work cut out for them as they analyze this data and calculate their risk. This process can be made easier for both parties by using an automated construction management software solution. These tools allow developers to upload their documents with one tap or click. Machine learning will then organize this information into easy-to-read formats that allow lenders to complete the underwriting process faster.
Automation has the added benefit of removing human errors from these documents, as well as flagging any missing data or inconsistencies. These advantages can make the construction loan application process as smooth as possible, and we know every second – and dollar – counts on these projects!
Investing in the Relationship
Funding a loan for one construction project is great, but lenders’ bread and butter is repeat business. Like much of commercial real estate, this means lenders are in the relationship business. Any seasoned lender knows commercial construction is rarely smooth sailing, which is why good communication and transparency are critical to developing a long-lasting partnership between lenders and developers.
Though the underwriting process may be complete, lenders still have to place their trust and faith in developers and their teams to finish the project on time and on budget. An intelligent software solution like Rabbet can help these teams achieve that goal. The secure system not only uploads, organizes and analyzes documents, but it can record and send notes that are essential to a project’s progress.
Miscommunications and/or omissions can send a project into a tailspin, resulting in costly change orders and delays. The easiest way to prevent this from happening is for all parties to document any details that aren’t outlined in the initial contract as they come up. Inclement weather, construction errors, design omissions and evolving developer tastes can all be dealt with if the issue has been clearly documented and addressed before it snowballs out of control.
This leads us to a pivotal part of the construction process: draw requests! Lenders need to review change orders, in addition to invoices, receipts, lien waivers and a schedule of values before they can order a project inspection and, ultimately, approve the draw request. The fewer surprises a draw request entails, the faster a lender can disburse the funds and get everyone paid for their hard work.
Automation can help with this as well. Developers can request – and contractors and subcontractors can upload – all of these items via smart software like Rabbet. This makes it easy for developers to compile, organize and review the draw request before sending it over to the lender in a digestible form.
The final draw request also requires everyone’s patience and participation. Developers and contractors are busy putting the final touches on the project, which will ultimately result in a Certificate of Occupancy. This allows the developer to move forward with whatever plans they have for the building, and confirms to the lender that the project meets all regulatory requirements and has been deemed habitable. Lenders can then approve the final draw request, but their work may not end there.
As previously stated, commercial construction is built on relationships. Depending on the company and its specialties, the lender may try to work with the developer to secure a permanent loan or refinancing. Establishing a healthy working relationship is important even if the developer is selling the asset, as that developer may have other projects in the pipeline. A good experience on one project often leads to additional work throughout a developer’s portfolio. This sentiment is true for all project vendors, including contractors, subcontractors, architects and engineers, in addition to lenders.
Construction projects will always have their fair share of challenges. It’s how the team comes together to overcome those challenges that determines whether an owner will want to work with them again. Having a lender that is available, easy to work with and fast moving can be a boon to developers, but they should realize that lenders have their own needs as well. With priorities like complete and accurate documentation and open communication and transparency, a smart construction management software solution like Rabbet can make the lender’s job a lot easier…which makes everyone’s job a lot easier.
Schedule a demo today to discover how developers and lenders can leverage Rabbet to foster a mutually beneficial relationship that can take them through multiple projects.