Education & Events

Underwriting Commercial Construction Loans

Date: 
Mar 21, 2019
8425 Woodfield Crossing Blvd
Ste 155E
Indianapolis
IN
46240-7321
Program Overview: 

PDF Brochure

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: 
  • 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
      • When should a feasibility report be required?
      • What are the key issues to be addressed?
    • Working from developer projections or market data
      • In addition to standard CRE underwriting parameters (break-even points for rental rate, vacancy, interest rate, etc.) and stress-testing at the transaction level, what are the unique issues when an actual history of the property is impossible?
      • In addition to basic CRE interest rate is stress-testing, how to stress-test the construction budget’s interest reserve, and identifying the tools your bank (or competitors) have for the forward setting of the interest rate on the permanent loan?
    • 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
      • Identify differences in various lease terms and typical covenants for different property types
    • Unique issues encountered with certain property types
      • Identify factors determining the appropriate amount of equity
      • Describe how loan structure can compensate for risk of special-purpose or single-purpose properties
      • What is HVCRE and how does that designation affect pricing and ROE of the loan?


Topics Continue below.

Speaker: 

Richard Hamm has been training bankers for 27 years, designing and delivering courses specializing in commercial lending and credit, including portfolio and risk management, commercial real estate (CRE) and appraisals, plus selling and
negotiating skills, and director training.  His clients include:

  • National associations such as the American Bankers Association (ABA) and the Risk Management Association (RMA)
  • Regional banking schools such as the Graduate School of Banking at Colorado and other major schools
  • State banking and community banking associations in ten states
  • Plus individual banks

He is based in Huntsville, AL and has owned/operated Advantage Consulting & Training for 13 years, after a 22-year banking career including senior positions in lending and credit, plus president during the formation of a community bank. He has BS and MBA degrees from the University of Alabama.

Agenda: 

8:30 a.m.         Registration & Continental Breakfast
9:00 a.m.         Program Begins
12:00 Noon    Lunch (included)
1:00 p.m.        Program Resumes
4:00 p.m.        Program Adjourns

Location: 

This seminar will be held on Thursday, March 21, 2019, at the IBA  Center for Professional Development, located at 8425 Woodfield Crossing Blvd., Suite 155E, Indianapolis, IN 46240.  Directions, map & a list of  local hotels are available on our website, www.indianabankers.org or by calling 317-387-9380.

 

Fees: 

$225 IBA Member
$155 IBA Each Additional Member

Participation in IBA programs is limited to members, associate members, and nonmembers from an eligible membership category at applicable member or non-member rates. Surcharge of 100% for Non-Members.

Additional Information: 

Topics Continued

  • Analyzing the developer/sponsor’s experience and financial condition and key information needed beyond tax returns
    • Development experience and quality/depth of staff and/or third-party providers
      • Are some services provided by related entities?
    • If projects are large enough, how does developer utilize non-bank-loan sources such as mezzanine debt or preferred equity (which have unique effects on loan structure and covenants of your bank’s loan)
    • Global analysis of contingent liabilities and liquidity/reserves, in addition to cash flow to/from other projects
  • Assessing the construction risk
    • Experience and credentials of the contractor, including red flags in the financial statements
    • Issues with the construction contract, including cost and budget feasibility, and cost structure (fixed price, cost plus, etc.)
    • The interest reserve, contingency, and retainage in the budget
    • The role of a surety bond, completion guarantee, and other enhancements
  • 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 specifications

 

Association Contact: 

If you have  questions, contact Marcy Borden via e-mail at              mborden@indianabankers.org or phone the IBA Office at 317-333-7162.

Cancellation Policy: 

Within three or more business days prior to the day of an educational program, no cancellation charge will be assessed. Within two days prior, 50% of the fee is assessed. Refunds are not provided for cancellations  the day before or absences on the day of the program. Substitutions are welcome at anytime.

 

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