Understanding New Construction Financing Options in a Recovering Economy

The U.S. economy is beginning to show signs of recovery, at least in the construction and home building marketplace. The U.S. Commerce Department reported a 3.2 percent jump in new construction in May 2012 for the single-family home segment of the industry. This represents the third consecutive month of improvement in the beleaguered construction field. Sales of new and existing homes have increased somewhat over the last year as well, driven in part by growing consumer confidence, low mortgage rates and overall reduced prices throughout the marketplace. Recent figures may not be cause for celebration just yet, but they do provide grounds for cautious optimism on the part of builders. That optimism is likely to translate into more new construction and increasing demand for commercial building loans and other commercial mortgage lending arrangements.

Financing options increasing, but money still tight

Construction firms will still face significant obstacles in finding the best small business loans for their needs despite these recent gains. New construction loans typically require significant collateral for approval; in most cases, the real estate designated for the construction project can serve as that collateral. Some construction firms will have to provide additional security in order to obtain a new construction loan. This may take the form of income producing property owned by the firm or other assets as required by the specific lending institution. Sources for new construction loans Most commercial lenders fall into one of four categories:

• Government agencies and sponsored loans are available for companies that qualify; these loans are usually limited to projects that create affordable housing for senior citizens or low-income individuals. Rates are typically lower than with other construction loan options, but agency-sponsored loans generally come with stringent qualification requirements and numerous strings attached to the loan offer.
• Life insurance companies generally do not make direct commercial construction loans. In the rare event that they offer such loans, they require significant collateral and exercise extremely conservative lending practices.
• Conduit lenders are relatively new to the commercial mortgage lending marketplace and offer loans on behalf of a large pool of lenders. By packaging similar loans together as investments, conduit lenders can offer highly competitive rates on new construction loans. These loans require extensive documentation and may not be available for companies seeking atypical lending arrangements for their new construction project.
• Commercial lending institutions are the most common sources of new construction loans and can provide business bridge loans as well as commercial construction financing arrangements. Private investment firms may also offer loans for new construction as an alternative to traditional financing.

As the economy continues to improve, available options for new construction financing are likely to expand. CNF Exchange is committed to helping businesses find the funding they need to finance new projects, maintain current operations or manage temporary cash flow shortfalls. We bring businesses and investors together to benefit both.

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