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Builders Told to Work With Lenders to Resolve Problems
With builders reporting an adverse shift in land acquisition, land development and home construction (AD&C) loan terms and availability, and as challenges mount for builders with outstanding loans, NAHB has added a “Builder’s Guide to Working With Lenders to Resolve AD&C Problems” to its "Back to Basics" Toolkit for association members.
“Lenders are receiving current appraisals reflecting lower values on lots and homes, as well as market studies significantly scaling back absorption estimates,” the guide says.
“As a result, lenders are seeking additional equity for outstanding credits and balking at loan extensions.
“Defaults on AD&C loans are rising. The bank regulators have issued more restrictive guidance on real estate lending and are reviewing the methodology utilized by banks in determining loan loss reserves and levels of delinquent and non-accrual loans for AD&C commitments. In this environment, banks are actively reducing exposure levels to home building credit.”
The article strongly advises builders not to ignore calls or other forms of communication from their lenders. And the consistent message from banking experts and experienced builders to builders who are having problems with outstanding loans is that they should take immediate steps to talk to their lender.
“Timely communication and good faith negotiations can minimize the pain from the credit crunch,” the article says.
“If a lender is aware the builder is on top of the situation and seeking solutions, the institution will be more likely to engage in positive dialogue. More often than not, it is in the lender’s best interest to work with a builder on a loan to achieve the best outcome rather than to foreclose.
“The lender should be inclined to assist the builder in resolving factors impeding the timely construction, delivery and settlement of homes. The lender and the builder have a mutual interest in ensuring housing production is converted to revenues for the repayment of project debt.”
Included in the guide’s advice to builders on working with lenders to resolve AD&C problems:
- Understand the loan agreement, including all requirements, deadlines and penalties. “Look for possible loopholes that may offer opportunities for modifications to the loan terms, particularly provisions that may allow more time and/or flexibility in repayment.”
- Determine who is making the decisions and whether they are being made locally or at a regional or national headquarters. Find out the names of the individuals who must sign off on all decisions affecting the loan. “It is critical to involve the lender’s decision makers as early as possible in the negotiation process.”
- Assemble a comprehensive package of meeting materials — including current financial statements and project sales/settlement reports with monthly absorption numbers; cash flow and valuation analyses; analysis of borrower and guarantor contingent liabilities; a current market study of value; a current sub-market analysis identifying existing competition, to provide support for expected sales prices and estimates of the market pace of turning the inventory; and information on sources of any additional liquidity or long-term capital, such as family, trades, suppliers or outside investors.
- Obtain professional advice on the past way to proceed, including consultation with accountants, lawyers and loan workout experts. Use the local home builders association to enlist the assistance of associate members. “It can also be helpful to ask the lender for recommendations. Working with individuals who already have established credibility with the lending institution can foster positive deliberations and outcomes.”
- In the current environment, expect lenders to order new appraisals to determine the current fair value of loan collateral and to identify and quantify potential losses.
- Expanding time frames for repayment, combined with decreased values and intensified regulatory scrutiny, will lead lenders to seek additional concessions from builders, including: additional cash equity, additional collateral, guarantor support, loan fees and higher interest rates.
- “Meet with the bank as soon as possible to reach a positive consensus. If possible, schedule the meeting prior to an event of default, which will help minimize the ‘surprise’ factor for the bank,” the report recommends. “Negotiate in good faith for continued loan advances, based upon current market conditions, to provide the funds to ensure (lien-free) completion of site development and/or home construction and ultimate repayment. Keep in mind that the lender’s priority is to obtain repayment of the loan in a manner that will minimize losses and avoid regulatory penalties.”
- At the initial meeting, expect negotiations to begin immediately. And avoid common missteps: stay focused on the issues, remembering that everything is negotiable, and attempt to receive something in return for every concession; do not agree to any concessions without having sufficient time to carefully review them; don’t argue; keep the climate positive; and don’t allow the negotiating process to become deadlocked.
- To follow up, schedule the next meeting date and use the intervening time to consider alternatives to the options presented by the bank.
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