Construction Loans

Although construction lending has regressed over the last 2 years there are signs of improvement. Most construction lending is accomplished through SBA or USDA guaranteed loans in today’s economic environment. These loans provide the bank a government guarantee in the event of default which minimizes the risk for the lender. This encourages lenders to make a loan they otherwise would not consider.

Construction presents many risks to the lender. There are many contingencies that often occur on a given project. The budgets are almost always wiggling around and usually the money needed to complete the project increases (this is a major risk). Make sure you present a 5%-10% contingency line item in your budget when you give it to the banker. This will demonstrate your acknowledgment of the risk involved and instill confidence in your lender.

The commercial lenders take an extra precaution to monitor the projects progress. Money is usually released as certain portions of the project are completed. If you have cost overruns, they will be paid out of your contingency line item. An additional fee will also coincide with a construction loan. This fee could be up to 1% of the loan amount.

The financial institutions like construction loans when they can mitigate the risks. These loans are secured by real estate and are typically larger loans that get good attention from any banker. Currently the Hoffman Consulting Group is managing two new construction start up loans in Utah. These two projects have presented the most lender feared risks in the market; construction and start up.

The risks of construction lending can be difficult to manage when preparing your loan proposal to the bank. Let us help you get the best look at your request.

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