Construction loans, prevalent and lucrative some two years ago have proven to be an elusive target. The market collapses around existing developments have contributed to the decline in the capability of lenders to make these types of loans. In climate such as the California market there is some availability provided the building will be owner occupied and the scope of the use of the building is medically related.
To get an idea of the reasons why these limitations exist, just look out your window as you’re driving about your town. In most locations that I’ve gone to it’s obvious that there are extraordinary levels of vacancies in all aspects of the real estate industry. Multifamily has been especially hard hit for a variety of reasons, not the least of which is that families are pairing up and sharing residential space together. Medically related office space however, in general, is still in demand. Drs. are graduating or becoming tired of working for-the-man and are wanting to set up their own practices.
Notwithstanding the above there are pockets of construction financing available on a case-by-case basis when it makes absolute sense to provide additional leasable space or where it makes sense for a business to construct and occupied their own space in areas where you’re the space typically would not be available.
The good news is that there are still construction funds available. The bad news is that these funds are becoming more and more expensive as the market has become tighter and tighter. Even the best business plan will not survive the scrutiny of wary underwriters that are becoming beat up with the unusually high foreclosure rate due to non-completion of existing projects. In the old days when a contractor began running short of funds the bank would have granted extensions of credit in additional funding to make the project work. With the wave of FDIC forced closures of certain banks, the funds just factually are not available because the bank has gone away.
So the industry as a whole is being asked to make decisions on a huge quantity of construction loans that are perhaps one half made up of loans that are required as a component of a completion project. The completion project could be defined as that requiring additional funding in order to complete the original project which has undergone cost overruns or bank failure.
The moral to the story is that you should not give up on these loans however you should make a concerted effort to match yourself up with borrowers and other entities that have a realistic expectation of the current market conditions.
