Real Insight. Real Estate.

Developers of ground-up construction in today’s economic climate are piling up horror stories of projects they are working on that have stopped dead in their tracks due to short falls in financing. In some instances, developers have had to ask their contractors to immediately halt progress on a site just after laying the foundation for a new building.

However, these developers need not worry as they can still secure financing for completion of their projects. All they need to do is go to their local or regional bank and prove to the lender that they are in such great shape that they don’t require any capital whatsoever. The bank will then be happy to let them borrow. Yes, I realize that this makes no sense at all–it’s a classic Catch-22. But such is the current availability of financing for ground-up construction.

Basically, if you can prove you don’t need a construction loan, the bank may actually consider giving you one. With borrowers beginning to default left and right on commercial property loans, the number of owners who can prove such financial health are few and far between. Moreover, getting construction financing for a new facility that will not be owner-occupied is damn near impossible.

Securing debt financing for new construction projects has not only become difficult in the private sector but public sector as well. Many municipalities looking to develop new infrastructure simply cannot afford to pay the interest rates required on municipal bonds. Towns with tax revenue streams strong enough to pay high interest rates often already have stellar public infrastructure.

In Joseph Heller’s 1961 novel Catch-22, the protagonist Yossarian comments “That’s some catch, the Catch-22.” In response, Doc Daneeka says in the novel, “It’s the best there is.”

Sure, try telling that to a developer looking for a construction loan.

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