Friday, September 20, 2019

What Lenders Need to Compete in Today's Commercial Construction Boom

By Frank McCracken
July 8, 2019

Frank McCracken
Commercial Construction

FrankMcCrackenFrank McCracken is CEO for McCracken Financial Solutions Corp., a software solutions provider for the commercial real estate industry, He has nearly three decades of experience creating products and services for commercial banks, insurance companies, mortgage bankers and quasi-governmental agencies. The company's website is

A booming economy is creating a significant business opportunity for organizations that have well-run commercial lending operations. According to the Mortgage Bankers Association, commercial and multifamily mortgage originations will total $530 billion in 2019. This translates to more commercial construction lending activity. The problem is, institutions with outdated operations will find it challenging to keep up and compete with larger banks.

At banks big and small, commercial construction budget management is typically being done manually. This not only slows down commercial lending operations, it ultimately affects customers. A recent study revealed 88% of contractors wait longer than 30 days for payment. Plus, more than 80% of the contractors surveyed had filed mechanics' liens against a project in order to ensure they get the money owed to them.2

The Need for Commercial Lenders to Close the Technology Gap
Many banks are still lagging behind in their ability to efficiently manage commercial construction budgets. The higher volume of construction loans for these banks during a robust economy has stretched their already limited resources even thinner. While exposing them to unwanted risk, this also limits their ability to effectively intake and manage new commercial construction loan projects--which means business opportunities are being lost.

This white paper is designed to help any commercial lender assess the challenges they're facing, in order to build and run a more efficient commercial construction lending operation.

Common Challenges Managing Commercial Construction Budgets
1. Technology Limitations of Spreadsheets or Homegrown Systems
Despite the increasing complexity of commercial construction lending and servicing, banks are still using spreadsheet-based methods. In many cases they're using antiquated homegrown systems that are less and less equipped to track the real-time status of budgets, liabilities, work completion, loan conditions, approvals, in-process change orders and more. In addition to being labor- intensive and inefficient, these manual methods of managing complex construction budgets are open to scrutiny from regulators for their lack of history and audit capabilities.

2. Lack of Visibility Across Specific Budgets and the Entire Pipeline
Banks using a manual, spreadsheet-based system for commercial construction lending often develop processing silos that make it very difficult to get a micro or macro view of budgets. This limited view can impair both visibility and productivity.

To compile a big-picture look at the status of a commercial construction budget or the overall pipeline, bank employees typically need to call up multiple spreadsheets and sources that reside in different locations. As there is no central repository for related documents and notes, these are also typically stored in emails of team members, or in a shared folder that is not easily accessed. While opening up these operations to risk, this creates many inefficiencies as bank employees are attempting to manage complex commercial loans manually.

3. The Inability to Quickly Develop and Share Custom Reports
Requests for complex and diverse reports often surface with little notice. However, the ability to easily produce and share reports--to meet the needs of diverse internal and external stakeholders--is often lacking with homegrown spreadsheet-based systems.

Commercial lenders today often need to generate reports with very specific data on a construction budget--while outputting that data into custom ad hoc report formats to fit the need of each recipient. Whether a report is being produced for upper management, auditors, regulators or customers, it can be a time- consuming process.

4. Managing Sources and Uses While Maintaining a Balanced Budget
One of the greatest commercial lending challenges for banks is the need to accurately account for multiple funding sources as they relate to specific line items. In some of the more complex commercial construction budgets, the loan documents may dictate how funding sources need to fund specific line items.

These relationships, which can be difficult to maintain in a spreadsheet, are critical to ensuring tight monitoring and control of funds.

5. The Multiple Frustrations of Inefficient Draw Processing
A single draw can take several days to approve and execute with a manual spreadsheet-based system. Budget analysts assigned to a specific project need to make sure all conditions for the draw are completed, the funds are available and all necessary title continuation and approvals are in place before cutting a check. If delays are too long, at best, it can lead to an unhappy customer who is feeling the heat from contractors, subcontractors and suppliers. At worst, it can cause delays in the construction timeline.

6. Exploring ‘Beyond the Spreadsheet' Alternatives
As it is across many fields and industries today, powerful and affordable software options are now available for banks that need to modernize and simplify their day-to-day operations in order to intake even more commercial construction projects. Areas where today's more powerful and affordable construction budget management solutions can help include:

--Simplified entry, processing and reporting. At a basic level, core automated features eliminate the tedious daily tasks that staff now need to manage.

--Intuitive user-defined templates enable them to create new budgets using a menu of predefined line items. Staff should also have the ability to compile and share reports at a moment's notice, tailored to the needs of a diverse range of recipients.

--Streamlined draw processing with automated verifications. Bank staff are able to easily create draw requests, and to split them out into multiple transactions based on how funds need to be disbursed to payees. The core software also monitors post-closing conditions and compliance factors, which must adhered to during the life of a budget or as each draw is processed. These factors include required permits, lien waivers, required site inspections and remedies for environmental issues.

--Risk management to reduce exposure. Leading construction budget management packages reduce risk and exposure through precise control that streamlines the flow of day-to-day activities and decision making. This includes construction completion percentage vs. cost percentage analyses, automated cues and alerts for budget issues and pending work queues, and the ability to process revisions to change the overall budget project costs or reallocate funds between line items.

--Managing multiple funding sources and line-item uses. Many complex commercial construction projects require the ability to define all funding sources for a project. These can include proceeds from multiple mortgages/loans, reserve accounts, tax credits/grants, borrower's equity and more. Advanced software solutions enable funding sources to be tied to specific line items as defined by construction loan agreements, while capturing retainage and holdback requirements. The balance/status of each source is tracked in real time, while also ensuring funds are not being moved in ways that could affect the integrity of the overall project.

--Portfolio-wide visibility and flexibility. As the volume and scope of construction lending grows and evolves within an institution, it's crucial to have complete visibility of costs and funding across its entire portfolio. The flexibility to handle different types of projects is also key - i.e. new commercial construction versus rehabs, expansions and a wide variety of construction programs with multiple phases and scopes.

For lenders today, the growing complexity of commercial construction is making spreadsheet-based systems less and less viable. Today's advanced software applications for commercial construction budget management provide the visibility, accuracy and control needed on both the macro and micro levels--while simplifying the handling of multiple funding sources, line items and in- process transactions that typifies today's fast-paced construction environments.

By providing these multifaceted advantages, today's next-generation software empowers commercial lenders to step into a whole new world of possibilities for leveraging their resources, maximizing revenue and expanding lending activity to compete during the current commercial construction boom.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at; or Michael Tucker, editorial manager, at

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