Fundamentals of Construction Lending & Real Estate (Recorded)

This recording reflects information, laws, and best practices as of the recording date. Requirements may have changed since this session was recorded — consult qualified counsel or a current source for guidance on today's requirements.

Course Description

Most bankers acknowledge that construction lending is riskier than other types of commercial lending. Repayment ability depends on successful completion of the construction before the project can generate cash flow from the sale of the finished property, from rental or lease of the real estate, or from permanent take-out refinancing. During the construction period, the collateral is literally work-in-progress, and often the guarantors do not have sufficient outside net worth or income to pay off the loan.

Participants will learn how to evaluate the developer's ability to repay the construction loan — including the developer's and contractor's background and expertise, the developer's legal structure, owner's minimum equity, and repayment ability from project cash flow, collateral, and guarantees.

The session also develops an appropriate underwriting approach for the construction project to ensure the resulting structure lets the bank be repaid in full, on time, and as agreed — covering sources and uses, cost review of hard and soft costs, appraisal review, LTV, LTC, DCR, interest reserves, and bonding — and explains how to satisfactorily monitor and manage the credit exposure and construction activity, including the role of real estate construction administration (RECAD), inspections and disbursements, reallocations and change orders, retention, punch lists, charge-backs, and problem asset management of construction loans.

Learning Objectives

• Construction lending policy—defining a construction loan, outlining necessary information and documentation needed to evaluate a construction loan, and monitoring loan performance
• Appropriate underwriting and structuring—LTV, LTC, minimum equity, bonding, etc.
• Role and activities of real estate construction administration (RECAD)—sources & uses, cost review, inspections, disbursements, retention, liens, and construction problem mitigation

Who Will Benefit

• Commercial real estate lenders, analysts, and credit approvers
• Other commercial lenders and private bankers
• Loan review officers and auditors