The jury is still out on when construction will truly make a comeback, but construction loans are still being made. My firm for one has seen an increase in the number of lenders approving construction loans. As a construction risk management consultant working in the industry for over 20 years, it seems to me that lenders are heeding the lessons learned this time around by paying closer attention to the details.
With the level of uncertainty and caution in the market, now more than ever doing up front due diligence on construction loans is a must. A significant part of this process is the Construction Document and Cost Review.
Having gone through the recent recession and the layoffs the industry experienced, lenders are finding themselves understaffed. That combining with all the requirements in play to close and manage a construction loan, most lenders don’t have the time or the experienced staff to affectively and accurately gather and analyze the load of information and documents created for a construction project, large or small.
The list of documents required and reviewed when performing an analysis can be extensive.
- Architectural Plans & Specs
- Structural Plans & Specs
- Land Development Plans & Specs
- Geotechnical Report
- Construction Cost Breakdown
- Construction Production Schedule
- ALTA Survey
- Construction Contracts
- Utility Will Serve Letters
- Architect & Engineer Contracts
- Title Report
The best direction for lenders is the same as it has been in the past: third-party consultants. A good construction risk management consultant can help the lender in several ways, including:
- Identifying the overall scope of the construction/renovation work;
- Reviewing the completeness and adequacy of construction documents;
- Opining on the budget to complete provided by the borrower;
- Confirming that the cost breakdown submitted by the borrower (developer/contractor) is balanced and usable as the standard for future loan disbursements;
- Providing an opinion as to the reasonableness of the borrower’s schedule;
- Reviewing and verifying the adequacy of the submitted plans and contract/scope for the remaining work.
Not all third-party due diligence firms are equipped to provide construction risk management services. Construction reviews require rather different experience than, say, environmental professionals – including experience in construction, commercial building inspections and/or general contracting.
Of the firms that specialize in construction risk management, there are a handful that provide service nationwide. Many of the small local firms do very fine work and might be a good fit for small or regional lenders; however, if you are a national lender, you may be concerned about managing numerous different vendors, and the variance in cost and quality that may ensue.
At any rate, the bottom line appears plain and relatively easy:
- Doing an upfront Document & Cost Review should be a requirement for all construction lenders.
- Third-party groups can augment lenders’ capacities to approve and manage construction loans.
- Lenders should find a reputable, experienced firm that suits their footprint.
I’d be happy to answer any questions, feel free to email me at [email protected].