Construction loans for commercial real estate (CRE) remain a major part of commercial bank lending. This program provides an overview of the key issues involved in analyzing and underwriting commercial construction loans and assessing the risk involved.

In a sense, the underwriting is a mix of (a) CRE project viability, (b) sponsor analysis and (c) construction feasibility. Further, the underwriting is difficult due to several unknowns. First, usually there is no historical operating information. Second, the developer/sponsor may have a number of other projects under construction or in the pipeline. Third, many property types do not get significant pre-leasing prior to or during construction. Finally, the developer may not have selected or engaged a contractor, or other key steps in the construction process may not have been finalized prior to bank underwriting.

Topics to be covered:
• Understanding the type of project (full construction vs. repair/remodel/repurpose)
• The three major areas of risk to the developer when constructing an investment property
• Determining project feasibility and cash flow sustainability
– Engaging a third-party market feasibility report
– Working from developer projections or market data
– Issues with pre-leasing (or lack of preleasing) and your bank’s appetite for speculative (spec) risk
– Re-lease and rollover risk into the future
• Key steps in analyzing the developer/sponsor’s experience and financial condition and key information needed beyond tax returns
• Assessing the construction risk
• Special issues with owner-occupied loans
• Identifying the degree of risk and communicating appropriate levels of monitoring and controls to the administrative team, over and above the basic processes used to assure that the project is within budget, on time and proceeding per the plans and specification