In the risk-free money days of yore, it paid big to fund loans for residential construction. Banks seemed to trip over one another for the honors as a builder's best friend. Now, as sales slow by as much as 40 or 50 percent in some submarkets, home builders can't help but wonder where all the lenders' love and trust has suddenly gone.

Jamie M. Pirrello Twenty-five months into the housing downturn, stress on cash flow has all but devoured many cash reserves. Still, interest payments, principal curtailments, overhead, and vendor payables each need funding. What 2008 will tell is whether builder-lender relationships can endure through thick and thin.

As concerns over residential construction loans in Florida and the Southwest intensify, the word on the street is that Bank of America now requires its special assets group to review and approve all decisions made by local line managers.

"Most builders don't realize how bad it is, and they are not being realistic," says Paul Engler, senior vice president of JP Morgan and head of its Southwest housing division. "Markets throughout the country are challenged, and the markets in the Southwest are not excluded from this statement."

"It is not business as usual," agrees R. Bird Anderson, senior vice president and head of Wachovia Bank's national home building division. "But that is not to insinuate that we are bringing the hammer down. Certainly, we are not suspending capital flow. Recognizing that in many markets there is excess inventory, we need to be thoughtful and judicious about extending new credit."

Oh, Eight!

Even more pain lies ahead as loan renewals occur in 2008. Falling asset values, lower equity as a result of operating losses and impairments, and negative cash flow–in some books, that's called three strikes.

"Banks don't want to own real estate, but we may get forced into that position," Engler says. "Why not take a 10, 20, or even 30 percent hit to move the property? Wouldn't this be better than having to take the property back and liquidate it?"

In today's market, "most properties can be liquidated for more than the debt," according to Engler. But not for long.

There's little question about where banks focus. "The first thing is management," Anderson notes. "Are these the kind of people who are survivors? Number two, do we have the asset coverage for the debt? In most cases we still do, despite markets where we have had asset value declines. The next concern is: Do we have liquidity with this facility?"

When it comes to amending existing loans and providing extensions, Wachovia wants to ensure "we are not putting ourselves in worse shape than we already are in," Anderson says.

In a similar vein, Engel argues, "Reducing the size of facilities and de-levering the company is a positive thing. Why not sell assets to de-lever your company and take a loss in 2007 rather than waiting?"

Engler and Anderson concur that builders who proactively and realistically develop strategies to navigate through the storm have the brightest prognoses.

"I would tell a builder a bank is trying to mitigate its risk and structure [a loan renewal] effectively in a significantly different environment," Anderson says. "The builder should not to see this as having the plug pulled out from under them."

The topic of lender negotiations will come to the forefront in 2008. Builders will likely find managing relationships with lenders to be straining. As builders adopt a number of strategies, looking for win-win outcomes and taking a realistic approach will be two keys to success. Lenders prefer not to own real estate, but they will if they have to.

For more insight into how you can develop an effective terms-renegotiation strategy for 2008, join us live in Las Vegas at Big Builder '07's session, "Capital A for Access," on Nov. 28.

–Jamie M. Pirrello is the CEO of Vision Homes USA, a Fort Myers, Fla.-based home builder. He may be reached via e-mail at

Builder Strategies

When Dealing with Loan Renewals

  • Management credibility is paramount.
  • Develop realistic projections–don't look dumb.
  • It's better to be conservative–it's brutal to go back.
  • De-lever your balance sheet.
  • Reduce debt by selling assets–it's all about survival.
  • Generate cash and carry back tax–think "refund."
  • Find win-win opportunities.
  • For the builder, cash is king.
  • For the lender, reducing risk is the name of the game.

Learn more about markets featured in this article: Anderson, IN.