I have been in the commercial loan business for over 34 years now, but I still learn more about commercial real estate finance ("CREF") almost every day. This week I learned a new commercial loan term:
A lender may want full recourse on the loan to start (so they know the Varsity is on the field). Once a debt service coverage ratio (DSCR) of 1.20 is hit for three consecutive months, the recourse burns off. This commercial loan is now a non-recourse loan.
My thanks go out to David Repka of Bison Financial Group for this clear explanation. David is looking for commercial construction loans of over $10 million and can be reached at 727-537-0330.
When a bank makes a ground-up commercial construction loan, it gets to see a detailed set of Plans and Specifications and a Construction Contract with the general contractor.
Unfortunately, for most small balance commercial renovation loans, there is no detailed set of plans and specifications. To make matters murkier, the owner wants to act as his own general contractor because he intends to do much of the work himself.
How can a small balance commercial construction lender like Blackburne & Sons make sure that its money is being properly spent on improving the property and that the owner-borrower is not over-spending the budget fixing unforeseen deficiencies that were discovered after the sheetrock came down?
Now I know all about construction control companies. Using a construction control company does not solve my problem. The problem is that there is seldom a detailed set of plans for the renovation work proposed. To make matters worse, there is no contract with a general contractor to which my lending documents can refer. Therefore the construction control company has nothing against which to gauge the project's progress.
For example, what exact work is to be performed in apartment number twenty-six? What are the costs and the specifications of the materials to be used to renovate apartment number twenty-six? Is there enough money remaining in the construction budget to renovate each apartment?
How on EARTH can I document the fact the owner-borrower-renovator has gone over budget? How can I document that the renovator has used substandard materials or failed to complete all of the planned renovations in apartment twenty-six? Remember, there is almost never a set of plans.
Now if this were a $10 million commercial construction loan, we could demand that the owner-borrower-renovator hire either an architect or an engineer to prepare a detailed set of plans. But what if my commercial loan is only $600,000? Economically such a requirement is infeasible.
Now Blackburne & Sons is fine making commercial property renovation loans when there is already a roof and four walls. As long as the renovation component is less than 40% of the commercial loan proceeds, we're fine. We make a ton of such commercial property renovation loans.