Acquistion & Development Loans -- Gone Up In Smoke

Last week I asked everyone whether they knew of any lending institution making A&D loans these days. After that posting I received a number of emails and phone calls on the issue. The results are not encouraging. Most area lenders have virtually ceased to lend money for acquisition and development. No one knows when it will change. The concern understandably centers upon the developer/builders' ability to then sell the homes they are building or to lease the office space in a new building.

In addition, Bank regulators are scouring through the lender's records looking for reasons to write down assets, making 'caution' the operative word in a lender's vocabulary today.

For those few (and I mean few) lenders still lending to developers, the rules have changed. Demand for these loans far exceeds the supply of available funds, allowing the lender to be quite choosy. The pricing has gone up considerably as lenders want a higher return for taking the risk. Also, the capitalization requirements and financial covenants expected of a potential borrower have become much more stringent in the past 60 days; i.e., lenders will reject an applicant that is too leveraged and not sufficiently capitalized.

Of the handful of borrowers that succeed in obtaining loans, it often is because that borrower had sufficient collateral and cash flow to qualify for a more traditional secured loan. For developers that are land rich, cash poor and highly leveraged, they are out of luck.