Commercial Construction Loans – Abandoned Deals

Further, we have seen many commercial construction loans get canceled, "mid stream".  And we are referring to loans that have closed on the land acquisition component, than the funding bank backing out off the rest of the project.  This is something we have never seen before with commercial mortgages.  This puts borrowers in particularly difficult positions, as they have debt payments on unfinished projects and puts a stain on the deal for other potential lenders.  As they will all start off with the assumption that the borrower had done something wrong. 

Commercial Construction Loans 

It also puts the funding bank in a very bad position as well, as they have a lot of liability to deal with and stand a very good chance of being sued for damages by the borrower.  They have not honored their commitment.  Also, by not completing the project they further hurt themselves, due to the fact that a good portion of these borrowers may not be able to find financing and will default on their loan. 

For example, we recently worked on a project that we could not close.  The project was an automotive repair type construction project, ground up.  The borrower purchased/closed on the acquisition of the land at $600,000 and had financed $450,000.  The other $150,000 was supposed to be the total down stroke of the entire project (not just the land) which had an additional $400,000 construction component to it (it was an SBA loan, 85% financing).  That was basically all of the cash the borrower had.  The bank pulled out and now the borrower has a $4,500 a month interest only payment and very little options on how to entice another bank to come along and complete the deal. 

As far a potential solution on the above transaction (and other similar ones), is for the borrower to bring on a partner.  Though not ideal for the borrower, it is probably the only way to get the above commercial construction loan closed and to avoid a complete financial disaster.  On the above transaction, all of our sources wanted to see cash reserves, post close, of at least 5% of the $1,000,000 project cost and to come into the deal with another 10% injection.  He was at 85% financing and needs to be at more like 75%.       

This is just one example.  Some of our clients that have come to us have had better “endings” to their stories.  For example, we just knew of the sources that would fund their loan requests as is, with no further cash injection or need to bring on a partner.  Bottom line, borrowers that have an “abandon” commercial construction loan, need to figure out a solution, as soon as possible.