One of the biggest trends in 2018 involving Small Business
Administration construction lending, at both national and regional
events alike, is the resounding feedback from SBA advisory panels
on the need for concentration on SOP-appropriate construction
monitoring with third-party funds disbursement.
Although many lending institutions
have a system in place for conventional
loans, the SBA specifically references the
only blanket alternative to bonding being
when “a third party
in the business of
providing construction risk management services controls the disbursement
of proceeds.” The lender must also “
document in its file that the construction was
completed in conformance with the plans
and specifications and that all lien waivers and releases from all
material men, contractors and subcontractors involved in the construction have been obtained.” This applies to any loan with SBA
guaranteed construction component proceeds above $350,000.
This has become a pressing issue as construction loan approval
volume, particularly for small business loans, has skyrocketed,
fueled by a strong economy and robust job sector, and the rapid
business growth that comes with it. Existing business owners are
expanding their facilities with additional space, and renovating for
tenant and rent improvement and rent value-add. New business
construction has also proliferated at the same time.
With a growth in volume comes an added risk of loan default.
The SBA does not administer loans themselves—they are a partner
lender and guarantees a percentage of a small business’s loan on
behalf of the borrower. This means that if a small business with an
SBA-guaranteed loan can’t pay back their loan, the SBA will be
responsible for a set portion of that loan.
As most defaults that occur in construction projects are payment
related, the SBA is trying to encourage proactively identifying
when issues could arise throughout the construction process. This
is a service to your borrower, as well as a protection for the lender.
When executed properly, construction progress monitoring combined with funds control and disbursement ensure that loan proceeds are going into the project as intended.
Suppose a dental office is looking to expand and upgrade existing facilities. A pre-construction budget review will go over each
line item to make sure existing loan logistics work in the short and
long-term. Are you budgeting for Formica counter tops and simple
cabinetry finishes, but you end up with marble and much higher-grade cabinetry? A simple omission like this could end up raising
the risk of default. A budget review also makes sure that specific
funds are allocated to specific line items, which becomes important
if contractors are managing multiple projects or portfolios.
The funds control process needs to not only verify percentage
complete through review of monthly pay application requests, but
also audit each line item against invoices/vouchers, lien waivers,
change orders and audit support documentation. To preserve the
SBA guarantee, loan files need to maintain detailed paper trails to
show that the process is being carefully safeguarded. Although
many lenders encourage and use third-party funds disbursement,
SBA loans are unique in that they mandate this as a compliance to
bond alternatives within their SOP, as stated above.
Loan proceeds include the ability to roll in administrative
costs, which help small business owners absorb most, if not all, of
the cost of the fees incurred through the review, monitoring and
funds disbursement procedures required of SBA loans.
AJ Nosek is a national client manager with Partner Engineering &
Science Inc. in Pittsburgh. He may be contacted at email@example.com.
The views expressed here are the author’s own and not those of the ALM
Real Estate Media Group or its publications.
The Benefit of Construction Monitoring SBA Loans
By AJ Nosek
BRICKS AND STICKS
Wood Office Towers Gaining Popularity
Generations of office workers got accustomed to toiling away in
steel and concrete towers. But several innovative designers and
architects have unveiled a new concept that uses 19th century technology to create modern office spaces: mass timber construction.
New timber projects such as Minneapolis’ T3 building have
already debuted and experienced resounding success with tenants
and investors. Amazon agreed to occupy about half the seven-story
structure, billed as the largest wood building of this century, shortly
after it opened in 2016. That lease helped motivate LaSalle
Investment Management to purchase the building earlier this year.
And Chicago may get its own T3. Hines, the Houston-based
developer of 444 W. Lake St., one of Chicago’s newest trophy
office towers, recently formed a partnership with Diversified Real
Estate Capital LLC and Big Bay Realty LLC, to develop a similar
T3 building on Goose Island, one of the city’s newest and fastest
growing submarkets. The former industrial area has a host of older
warehouses, many converted to office use, and should attract cre-
ative tenants that find timber-based architecture appealing.
“From a developer’s standpoint, wood buildings are cost effec-
tive, and aesthetically they are very warm,” says Archie Landreman,
regional director of Wood Works, a program administered by the
Wood Products Council. “It feels good to be in a wood building.”
The momentum for such construction is growing. Other wood-
based buildings in the US include the Design Building at
University of Massachusetts-Amherst, a four-story Candlewood
Suites hotel near Huntsville, AL, and many across the Pacific
Northwest.—Brian J. Rogal ◆