LOS ANGELES—Lenders have become more conservative on construction financing, and the pull back is leaving some developers scrambling to find financing packages at pricing they expected 12 months ago. In the worst situation, it may also mean that some development deals won't pencil with the increase in debt costs. Brian Eisendrath, vice chairman of CBRE capital markets, and Brandon Smith, VP at CBRE capital markets, have been getting calls from developers looking for construction financing. The duo focuses on multifamily, but says this could be happening in other product types as well. To find out more about this dilemma, what they are telling developers and why construction financing is so difficult, we sat down with Eisendrath and Smith for an exclusive interview.

GlobeSt.com: How is the pull back in construction lending affecting developers?

Brian Eisendrath: We have been fielding a call a week from people that are seeking construction financing and aren't able to get terms that make their deals work. A lot of developers have gone into deals initially without realistic expectations of what the debt is going to look like, and they are scrambling half way through the process to find a structure that can make the deal work for them. We are seeing more and more of that. People either go out to market themselves or they go out to market with another broker. We find a lot of time that this business for us is managing expectations and being realistic about what people can expect.

GlobeSt.com: What developers are being affected the most by this?

Brandon Smith: You aren't talking about your typical merchant builder. We are talking about your big nationwide developer and institutional capital. These are major players that are running into these problems and that is 12 to 18 months ago.

GlobeSt.com: So, will some of these deals not be able to pencil?

Eisendrath: Some of these deals will not pencil. It depends on how the developer structured the deal, but you will see deals where the developer bought land and have a construction cost of 'x' and now it is 'y' and they thought that they could get construction financing at 65% leverage and now it is 55% leverage, and they deal doesn't work. Those developers will have to figure out what to do as a result of that.

GlobeSt.com: What is driving this pull back of construction loans?

Smith: When we talk about the regulatory challenges of the market, it is because the banks received a letter from the regulators saying that there is an overcapitalization of multifamily development. Especially for smaller regional banks, most of their book was construction loans, and so some of them are going to have to wait until some of those loans roll off their books. It will be interesting to see the ramifications in terms of what that does to rents and new supply. You have a lot of planned projects in the pipeline, and it looks like a bog number, but how many of those are truly feasible in the lending market?

GlobeSt.com: Is this an effect of the HVCRE rules?

Smith: That is part of it. There are different capital requirements for construction loans in general, but there is also an additional warning from the regulators to watch the allocation. That is outside of those HVCRE and Basel III rules. There was a pretty robust market for multifamily construction, given where rents are.

GlobeSt.com: What is your advice to developers running into this problem?

Smith: We are trying to be realistic. We are telling people that the debt you are looking for may be out there, but it depends on the sponsor and the track record, the market, the property they are building and the turnaround on cost. You really have to dig into the business plan, and you still may be disappointed if you are expecting 65% with minimal recourse.

Eisendrath: It is really about digging in up front and really understanding the opportunity and understanding the supply in the market, and understanding how that correlates to what the bank interest level is going to be on the debt.

LOS ANGELES—Lenders have become more conservative on construction financing, and the pull back is leaving some developers scrambling to find financing packages at pricing they expected 12 months ago. In the worst situation, it may also mean that some development deals won't pencil with the increase in debt costs. Brian Eisendrath, vice chairman of CBRE capital markets, and Brandon Smith, VP at CBRE capital markets, have been getting calls from developers looking for construction financing. The duo focuses on multifamily, but says this could be happening in other product types as well. To find out more about this dilemma, what they are telling developers and why construction financing is so difficult, we sat down with Eisendrath and Smith for an exclusive interview.

GlobeSt.com: How is the pull back in construction lending affecting developers?

Brian Eisendrath: We have been fielding a call a week from people that are seeking construction financing and aren't able to get terms that make their deals work. A lot of developers have gone into deals initially without realistic expectations of what the debt is going to look like, and they are scrambling half way through the process to find a structure that can make the deal work for them. We are seeing more and more of that. People either go out to market themselves or they go out to market with another broker. We find a lot of time that this business for us is managing expectations and being realistic about what people can expect.

GlobeSt.com: What developers are being affected the most by this?

Brandon Smith: You aren't talking about your typical merchant builder. We are talking about your big nationwide developer and institutional capital. These are major players that are running into these problems and that is 12 to 18 months ago.

GlobeSt.com: So, will some of these deals not be able to pencil?

Eisendrath: Some of these deals will not pencil. It depends on how the developer structured the deal, but you will see deals where the developer bought land and have a construction cost of 'x' and now it is 'y' and they thought that they could get construction financing at 65% leverage and now it is 55% leverage, and they deal doesn't work. Those developers will have to figure out what to do as a result of that.

GlobeSt.com: What is driving this pull back of construction loans?

Smith: When we talk about the regulatory challenges of the market, it is because the banks received a letter from the regulators saying that there is an overcapitalization of multifamily development. Especially for smaller regional banks, most of their book was construction loans, and so some of them are going to have to wait until some of those loans roll off their books. It will be interesting to see the ramifications in terms of what that does to rents and new supply. You have a lot of planned projects in the pipeline, and it looks like a bog number, but how many of those are truly feasible in the lending market?

GlobeSt.com: Is this an effect of the HVCRE rules?

Smith: That is part of it. There are different capital requirements for construction loans in general, but there is also an additional warning from the regulators to watch the allocation. That is outside of those HVCRE and Basel III rules. There was a pretty robust market for multifamily construction, given where rents are.

GlobeSt.com: What is your advice to developers running into this problem?

Smith: We are trying to be realistic. We are telling people that the debt you are looking for may be out there, but it depends on the sponsor and the track record, the market, the property they are building and the turnaround on cost. You really have to dig into the business plan, and you still may be disappointed if you are expecting 65% with minimal recourse.

Eisendrath: It is really about digging in up front and really understanding the opportunity and understanding the supply in the market, and understanding how that correlates to what the bank interest level is going to be on the debt.