The Challenge of Securing New Construction Financing

Lenders are conservative in the underwriting on new construction multifamily projects, and it has made securing financing a challenge. While multifamily is a favored asset class among commercial real estate sectors, lenders are conservative on loan-to-cost leverage versus loan-to-value. Continental Partners recently secured construction refinancing for two new construction projects in Los Angeles, and brokers on the deal said that while there are challenges, lenders are still active.

“One of the more difficult jobs that we have in the marketplace is securing non-recourse debt on a property that has no collection history,” J.M. Grimaldi, EVP at Continental Partners, tells GlobeSt.com. “It isn’t that money is harder to access in today’s marketplace, but rather that painting a picture for a property that doesn’t have performance history is an uphill battle.”

The two new construction deals include cash-out construction refinancing for a class-A, 18,400 square-foot multifamily property in South Los Angeles, and a cash-out refinancing for an 8-unit multifamily property located in East Hollywood. Securing the leverage borrowers needed was among the challenges on these deals. “Lender feedback was solid. We were able to pinpoint a lender that was able to look at the market value of the land instead of what they paid for it to help increase the loan amount,” Brian Asheghian, an associate at Continental Partners, tells GlobeSt.com. “We did get lenders interested, but it was a challenge to find lenders that would step up and only offer non-recourse and look at the deal based on loan-to-value rather than loan-to-cost.”

Asheghian added that loan-to-cost restrictions are among the major challenges for securing debt on new construction properties. “There are loan-to-cost restrictions. Some lenders will only go to 80% or 85% of cost and other lenders will do up to 90%. Some lenders will only look at what you purchased the land for and not the value of the project,” he says.

It is true for all asset classes that new construction deals are more challenges, exactly for these reasons, but multifamily assets continue to be more appealing to lenders, despite existing challenges. “Historically, when it comes to comparing multifamily to other asset classes, they are the darling in the mix,” adds Grimaldi. “I am going to have more lenders stepping up for multifamily than on other asset classes.”

Borrowers can secure better loan-to-cost leverage with an alternative lending source, but will pay a higher interest rate. “That is a function of comfort with pricing that a borrower has,” says Grimaldi. “If they are willing to pay a higher coupon, we can go down a more unregulated track and push loan-to-cost higher than a regulated track but with a higher interest rate.”