How to find the right commercial builder

In July 24, 2017

Commercial Real Estate - how to build the perfect CRE team

 

Wondering how to find the right commercial builder? Tapping the experience of a local banker who specializes in commercial construction is invaluable.

They’re immersed in commercial projects every day and intimately familiar with what’s happening in their city.

Commercial banks often play a quarterback role as a consultative resource – especially when building from the ground up is a new experience to the borrower – and they’re happy to share this expertise with their customers.

“From a bank’s perspective, construction loans have considerably more risk than a commercial real estate purchase. Rather than a well-defined transaction to purchase an obvious tangible item like a building, construction loans are a many-layered deal that involves multiple parties. We’re trusting in the process and the reputation of the builder, and assuming a build that takes months or years will result in the finished property as expected.”

“We’re handing a builder money and expecting them to do something with it,” says Nathan Burnell, Horizon Community Bank’s vice president and commercial loan officer at the Lake Havasu City branch.

Since the success of a construction project relies heavily on the builder, not just the borrower, bankers evaluate them with careful due diligence as a secondary credit risk. All three are connected at the hip during the entire build process, which is why bankers who do a high volume of construction loans have a deep level of expertise with local builders.

They are an ideal resource for those looking to find a local builder whose reputation and work quality can be trusted.

In keeping with their past experience on other construction projects and connections within the community, commercial banks commonly have a list of approved builders they prefer to work with… and it’s a resource to be trusted.

How do banks select their preferred builders?

While consumer banks might not have a deep level of commercial expertise, commercial banks have solid processes in place to vet builders. It’s their livelihood, not a project.

Screening is all about digging into a builder’s personal and business history to uncover…. well, everything.

They Take a Close Look at Past Experience.

What kind of work experience does the builder have? Have they successfully completed similar projects? Looking at past projects is essential. Part of the bank’s screening process includes asking the builder for a written summary of their history, along with a list of customer and subcontractor references from each projects.

If a bank is asked to fund a $2 million project, for example, they’ll be expected to fund withdrawals against that amount at regular intervals, handing over significant amounts of money to the builder. To protect themselves and ensure the money is spent as intended, they want to know who they are giving that money to, in terms of reputation, financial responsibility and credit history. Nothing is left to chance and decisions aren’t based on assumptions.

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Not only do they look at who these references are, they call each one to ask questions. If you are doing your own due diligence to choose a builder, emulating this process is very, very smart.

Lenders Do a Thorough Background Check.

Relying on word-of-mouth information is a great place to begin, but lenders don’t stop there. They evaluate the financial stability and history of the builder through a variety of reporting resources, such as credit agencies, public records, and trade associations.

The bigger the loan, the more they dig.

Does the builder have pending discipline actions or complaints with the Arizona Registrar of Contractors? How long have they held their general contractor license? Are they current with their equipment leases and taxes? Does one of the partner’s have past businesses in liquidation or sub-contractors who refuse to work with them? Do public records show a pending lawsuit or past bankruptcies?

A detailed background check can reveal risks that a simple license search won’t reveal. While most states have resources for a businessperson to purchase a background check, partnering with the right bank and leveraging its processes will simplify the process.

Trust me, they’re careful.

And while they probably won’t share the full reporting with you, they’re happy to share their experiences and feedback.

If you aren’t comfortable choosing a banker and trusting their list of preferred builders, then scheduling non-obligation consultations with several commercial bankers in your areas can be an effective way to start your search. Networking with commercial real estate agents and other business owners who’ve built from the ground up can also be effective.

Ready to schedule a consultation with us about your construction loan or tips on finding a builder? Nathan can be reached at NathanB@HorizonCommunityBank.com for those near Lake Havasu City. Those living in the Phoenix area or Henderson, Nevada should contact their nearest branch or loan office, and ask for the commercial lending expert.

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