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Real estate is back. So is construction lending. Be prepared.

A bank’s commercial construction lending portfolio often covers a wide variety of projects ranging from residential developments, apartments, condominiums and hotels, to office buildings and shopping centers.  Every type of commercial construction project requires a borrower with requisite expertise and skills to construct and market the project.  Accordingly, a bank’s construction lending team not only needs to believe the project is a viable one, but they must also have the requisite expertise and skill to understand if a borrower’s budget is  appropriate for the project.  Understanding the budget process helps to make sure that the loan will accommodate both the initial project costs as well as reasonable cost overruns.

Once the decision has been made to lend, the commercial construction lending team must document the loan in a manner that allows the bank to step into the shoes of its borrower, so that if the borrower is unable to finish the project the bank can complete it.  This will allow the bank to maximize recovery on the loan.  Proper documentation includes properly perfecting the bank’s security interest in the borrower’s real and personal property.  However, the bank should also get assignments of all licenses, plans, contracts, specs, and surveys.  In addition, when appropriate, a consent to the assignment by a third party (such as an architect or general contractor) should also be obtained.

Unlike many loans, construction loans require a lot of work on the part of the bank after the loan has closed.  Constant review of the progress of the project is absolutely necessary to help insure the success of your borrower while insulating the bank from loss by spotting small problems before they become big problems.  It is important to:

  1. review the budget with your borrower on a regular basis to make sure that initial projections remain on target;
  2. visit the project on a regular basis to make sure that it is getting completed in the manner your borrower is representing to the bank;
  3. make sure all contractors and material men are getting paid to avoid costly lien battles; and
  4. communicate with your borrower and make sure they feel comfortable approaching the bank before they get in trouble in order to avoid major problems.