We are planning a significant ground-up construction deal on the West Coast that would move forward in early 2019. We have done one previous deal in the U.S. and did not have any issues finding a senior lender and covering the entire capital stack. What can we expect the lending conditions to be like when we start looking for a senior lender? Should we be prepared to put more private equity in the deal? Are there other funding sources that we should consider?
Answers
The answers depend wildly depending on property type / size / borrower / etc. but in general we do not anticipate lenders to be more conservative as the end of 2018 approaches. There is an unprecedented amount of debt fund capital raised that would go into a large west coast construction loan.
Not sure when you did your last deal but the market is more liquid now that it has been 1, 3, 5 years ago as points of comparison. There are many new lenders.
There is no shortage of capital in debt markets today. In addition to the traditional construction lending sources, banks, non-bank lenders are not subject to the regulatory requirements that govern banks; however, their cost of funds is higher than for traditional banks. When you talk about the entire capital stack, I don't think that you can borrow 100% even in today's competitive lending landscape. However, there are lenders who specialize in high yield loans-yes, even construction loans. Spreads are ticking up, but the competition is fierce.
I am reluctant to name names in a general response. I will mention that there are Asian banks who seek to work with Asian developers.
Lenders are already conservative if you are seeking loans from institutional lenders. However, private lenders are allotted easier to work with and less restricted that your usual institutional lenders.
Capital stack should not be less than 10% to obtain good pricing for construction financing.