Leveraging Construction Financing: The ins and outs of finding the right loan.

• Author: Barbour, Tracy
• Position: FINANCE

Construction financing is extremely important to Spinell Homes. As Alaska's largest home builder, the company has erected 3,200 homes throughout Southcentral Alaska since 1987. "Almost every house we build is financed through our favorite local bank, Northrim Bank, and the exceptions are built for people with either their own cash or are larger projects where the owners have their own financing," says Andre Spinelli, vice president of design and development. "We also obtain loans for the development of subdivisions and commercial projects as well."

Recently, Spinell Homes completed the thirteen-lot Woodhaven Preserve subdivision near O'Malley Road and Huffman Road and the 79th Street GarageTown facility at the corner of 79th and Petersburg. Both Anchorage projects were financed through Northrim by Spinell Homes or the subsidiary 79th Street GarageTown--although Woodhaven Preserve was done with minimal financing due to cash on hand at the time of development. Spinell Homes also just closed on a land purchase and development loan that was used to buy the land and build the roads of Phase 9 of The Terraces Subdivision. The company anticipated beginning construction in August.

Who's Receiving Financing and Why

Construction financing is critical to helping companies like Spinell Homes complete new projects in Alaska. Project owners are also using construction financing to facilitate major remodeling projects.

For example, First National lends money for the construction of commercial buildings for owner-occupied use and also investment property. The bank works with a wide variety of partners, such as the Small Business Administration, United States Department of Agriculture, and Alaska Industrial Development and Export Authority, to provide the best financing options for its customers, according to Assistant Vice President and Loan Officer Ligia Lutan.

The construction loans that First National facilitates are driven by the private sector and range between $1 million and $25 million. The funds are used equally for new construction and remodeling.

Today, construction loans are a common tool for many developers and owners of commercial projects. Typically, developers like to obtain funds to bridge the time between realizing expenses and obtaining revenues. The key reasons that borrowers prefer to finance construction projects are limited cash reserves and low interest rates. Substantial costs are incurred during construction, and financing can alleviate the situation. "After the land purchase, planning, and design, cash can be depleted significantly, requiring bank financing," Lutan says. "Only after the construction is completed and stabilized do revenues begin and cash will flow."

However, Lutan points out that Alaska's commercial and institutional builders--those who primarily erect schools, office buildings, malls, and warehouses--are highly sensitive to state government spending and the capital budget in particular, which help fund new construction and repairs to existing buildings, utilities, and vehicles. They're also sensitive to the economy. "Due to Alaska's recent recession, we saw few, if any, large construction projects cropping up in Alaska," she says. "Most...