The construction possibility that skips permitting issues

How the COVID-19 pandemic allows brokers to save difficult deals

The construction possibility that skips permitting issues

While new construction loans for investors offer a wealth of opportunity for brokers in today’s market, there’s another segment of investors who need help on big projects now. Those investors are builders who had projects in process at the onset of the COVID-19 pandemic. The sudden lockdowns and lingering supply disruptions being felt to this day have put many of these projects into distressed situations as investors lack the liquidity and support to move an otherwise profitable project forward. These investors need a savvy broker and the right lending partner.

LendingOne, a commercial mortgage lender founded by investors, is seeing an opportunity to help. It is already working on securing refinance deals that will save distressed building projects and allow for a restart. Through flexible lending programs and smart refinances, brokers can work with LendingOne to either get these investors’ projects moving again or transition the project over to an investor on stronger footing.

“We just saw an opportunity in the Scottsdale, Arizona, region for a client who was building a 10-unit condominium building that was probably around 80% completed when COVID hit,” said Mark Zummo-Hurley (pictured), wholesale manager at LendingOne. “But with a lack of materials and laborers, they were in a crunch. They reached out to do a joint venture, or hoping to sell the project to someone who could overtake it.”

Zummo-Hurley explained that they can offer a range of options to clients in that situation. They can get the existing borrower a refinance as part of a joint venture with the new investor. Or they can do a straight bridge acquisition whereby LendingOne finances the new purchase price and the remaining repair cost. He explained that these deals are becoming more common than new construction as the challenges and costs of building from the ground up have become so much greater for investors.

These deals have become increasingly frequent, Zummo-Hurley explained, as a result of the months of shutdown unleashed by the COVID-19 pandemic. While many existing projects from a steady 2019 market were thrown into distress, the post-pandemic building boom has made permitting from new construction that much harder to obtain. Finding these distressed new build assets, then, is an ideal way to circumvent the bottlenecks we see in today’s market.

What most of these projects need, is a cash injection. The loans on these projects are maturing but the borrowers need a refinance now to finish out their project. Borrowers might be constrained now, by a deal negotiated when material and labor costs were far lower than they are today.

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LendingOne’s solution is to refinance the existing loan so they can pay off the first lien holder. Any equity that might have accrued in the property can then be used to cover holding costs or pay closing costs, meaning the only out of pocket expenses would come with the new appraisal. That can give a borrower anywhere from 12 to 18 months to complete the build. It gives the borrower fresh capital that can cover these additional expenses and get their project moving and profitable again.

While there are plenty of these deals to be had, it’s up to brokers to find them. Zummo-Hurley explained that brokers need to be keeping abreast of their local investment landscapes and finding the projects in distress and in need of new capital. Borrowers in this situation can be cagey and unwilling to talk about what they see as a failure - a smart broker though can come in without judgment and show them how their perceived failure can be turned into a success.

“It gives brokers that chance to reconnect with their client, to re-establish rapport, to help them, you know, gain trust in business from a consumer,” Zummo-Hurley said. “And many of these people who build have friends that build as well. And so it gives brokers an opportunity to network and to get other clients that they may not been able to obtain otherwise.”