April 21, 2017 News

Y. David Scharf Quoted on Lenders Demanding More Documentation from Developers for Construction Loans

April 21, 2017 - Morrison Cohen Partner Y. David Scharf is quoted about lenders asking for additional documentation from developers seeking construction loans in the article “Lenders Demand More Transparency for Construction Deals” that appeared in Real Estate Finance & Investment on April 18, 2017.  Lenders are seeking to gain insight into a construction project’s viability and to track the project’s progress. Additionally, the greater documentation is creating tension in the marketplace between developers and contractors.

Historically, developers used their judgment when filling out these requisition documents in order to allow for flexibility, according to Y. David Scharf, partner and chair of the real estate loan work-outs, restructurings, and foreclosures group at Morrison Cohen. But when the economy turned in 2008, lenders were stuck holding the bag on a greater number of uncompleted and stalled projects.

This led many lenders to hire forensic construction consultants to pinpoint why projects failed. “At some point, banks started saying, ‘We should do this on a more proactive basis from an auditing perspective,’” said Scharf. “With more stringent auditing, they can do a better job of policing the money that goes into a project and verifying that the request for funding is accurate and consistent with reality.”

The shift toward greater documentation is also altering the relationship between contractors and developers. Developers, who now have difficulty securing funding for change orders and overages, are pushing back on contractors to work faster, often stretching the realities of an already-tight schedule. “There’s tension in the marketplace that’s being created by accountability,” Scharf added.