Private lending enters construction cost equation

An article by Miami Today's Abraham Galvan featuring contributions from Tripp Scott's Matthew Zifrony

While construction lending interest rates remain high, more commercial developers are seeking private lenders as an alternative.

Institutional commercial lending right now is a little bit harder to pinpoint given the construction costs and creeping interest rates, said Bibi Azcuy, co-managing partner for the Sidley Austin law firm.

“Given the demand, we have seen some private lending in the market,” she said. “Obviously, private lending is a little bit more expensive, but they don’t have the same underwriting process that an institutional lender might have. There’s a little bit more flexibility there. But in general, construction lending has slowed down a bit.”

Construction loan interest rates are currently around 8.5 % to 9%, Ms. Azcuy said. “It hasn’t hit rock bottom and it hasn’t skyrocketed, either. We’re finding that it’s teetering longer than we ever expected. I don’t think anybody would have anticipated it would hold up for this long.”

A combination of the interest rates and the cost of the materials is making it difficult to get subcontractors into work agreements, said Matthew Zifrony, director for the Tripp Scott law firm.

“Unlike before, contractors would commit to the pricing, even with putting in a clause about liquidated damages and if there are construction delays,” he said. “They’re a lot more reluctant to put those clauses in because there are so many things that they can’t control when it comes to their subs and the material. They just don’t feel comfortable and being put in jeopardy in something that they can’t control.”

When developers go to private loans, they automatically get higher interest rates, Mr. Zifrony said. Now, the private loan interest rate is more in line with what the conventional lenders are charging, and they have more flexibility and less paperwork.

“Conventional loan interest rate used to be at around 4.5%, and if you went to the private lender it was around 7.5%,” he added. “When I see people go into the private lender, it’s no longer because they couldn’t get their loan through the institutional lender, it’s more that the private lender was another option for them to consider now with rates being pretty close and sometimes identical.”

It’s tough to predict interest rate trends in the coming months due to inflation, he said.

“It’s almost like we take one step forward and two steps back. Inflation data was more promising last month, and then this month it wasn’t quite as promising,” Mr. Zifrony said. “As we get closer to an election year, the interest rates are going to have to come down because I just don’t think that the party in power is going to want to keep the interest rates as high as they are and have that impact their ability to get reelected.”