SBA lenders are receiving an unprecedented number of servicing requests on SBA construction loans due to lingering pandemic related and current economic difficulties. The COVID-19 pandemic has significantly impacted the construction industry, causing limited supplies of raw materials and rising prices for needed building components. Additionally, supply chain issues have resulted in stalled construction projects with unknown dates of completion. These factors have led to increased requests by Borrowers for extended interest only periods, extended maturity dates, and additional loan proceeds. This article will briefly address considerations for SBA lenders in managing some common servicing requests related to construction loan projects in this challenging environment.
- Request for extended interest only period or extended maturity. In approving a request from Borrowers to extend the interest only period or maturity date for a construction project, lenders should obtain supporting documentation justifying the need for a longer interest only period or maturity. Correspondence or documents from the contractor indicating the reason for the delay in the project and the anticipated time of completion are beneficial. Ongoing inspections prior to approving such requests are also critical to show the project has been completed thus far according to schedule.
- Request for additional loan proceeds. Given the rising cost of supplies, many Borrowers may be subject to price increases in their quoted work or bids, which may not be covered by the initial loan allocation. Borrowers often ask for additional loan proceeds to cover the increase in project costs. Documentation showing additional invoices from the contractors and estimated cost to complete the project should be requested. Lenders may also consider requesting an additional amount of equity injection from the borrower to share in the cost. Lenders should document the loan credit file with an updated financial analysis of the borrower’s repayment ability based upon the new terms.
- Request to change general contractor. In the current climate, conflicts may arise between the borrower and the initially chosen contractor leading to a request to change contractors during the course of the construction project. Such requests should be handled carefully. Lenders should perform an analysis that includes inspections to determine the percentage of the project completed, obtain lien waivers, confer with litigation counsel (if needed), and discuss whether the change in contractor results in a material adverse change that may require lender to consider capping the loan and limiting losses on a project that may not come to fruition within the approved loan parameters.
Borrower requests on construction loans are similar to post initial disbursement requests on non-construction loans, as lenders in most cases must obtain updated financial statements when appropriate, analyze whether it is prudent or commercially reasonable to grant the borrower’s request, and confirm there are no material adverse changes in the Borrower’s financial condition or the project that could impair the Borrower’s ability to repay the loan. However, construction loans also require lenders to perform a higher level of continuous oversight to ensure projects will be completed in a timely and efficient manner. As with any servicing request, lenders must carefully document the loan file with sufficient detail for any proposed change in terms, and modify relevant loan documents accordingly. For more information concerning SBA loan servicing and loan closing matters, please visit our website or contact us at firstname.lastname@example.org.