Lending to builders - a new offer from Sberbank
Construction, from a lending point of view, is a “complex” industry. Construction companies usually do not have sufficient collateral and unstable revenue, and therefore approaches to lending here must differ from other industries. The head office in the Nizhny Novgorod region of the Volga-Vyatka Bank of Sberbank of Russia solved the credit problems of construction clients. Currently, Sberbank's loan portfolio in this sector in the Nizhny Novgorod region has exceeded 9 billion rubles.
Vsevolod Vladimirovich, what approaches to lending to construction companies is currently used by Sberbank?
First of all, it should be noted that we resolved the difficulties with lending to the construction industry about three years ago, when we created a special structure at the bank. If earlier we tried to adjust the client to existing banking regulations, now we are writing regulations to suit the best construction practices. Therefore, we easily negotiate with builders.
All construction companies can be divided into two categories: contractors and developers. If we talk about contractors, we lend them against a concluded contract and secured by the assignment of claims. Of course, we first study the history of the company, find out what contracts it has previously fulfilled and what financial results it has achieved. We also check the construction customer, finding out whether he can really pay for this contact. If there is any doubt, additional security may be required. At the same time, we understand that the collateral amount of many construction companies is not comparable with the volume of the contract being performed. Therefore, the pledge is most often perceived by us only as an additional guarantee of the enterprise’s interest in fulfilling the contract. If construction companies have a lot of orders, we calculate how much money the company needs and issue it a loan to replenish working capital.
The second group of builders are builders and developers. How are they financed?
Many Nizhny Novgorod developers already have completed projects that bring them a stable income. Sberbank issues loans secured by such objects. This is the most popular scheme in the Nizhny Novgorod region. If the loan portfolio of Sberbank in the Nizhny Novgorod region as a whole for the construction industry now amounts to 9.3 billion rubles, then approximately 4 billion rubles in loans have been issued as collateral for existing facilities. The popularity of this scheme is explained by its exceptional convenience for construction organizations. The loan is issued for a period of up to ten years; borrowers do not have to confirm the intended use of funds, and therefore manage them at their own discretion.
If the developer does not have collateral, Sberbank provides him with project financing secured by the facility under construction. The loan term is also up to ten years, but, firstly, the entrepreneur must contribute at least 30% of his own funds to the project, and secondly, the money is allocated strictly for its intended purpose. Sberbank construction experts study all the documentation for the project and in the future the bank finances only those works and materials that are indicated in the estimate agreed with us. In addition, we check the progress of work on a monthly basis. All this is less convenient for developers, however, project financing in the Nizhny Novgorod region is in high demand.
In addition to financing the construction companies themselves, the Head Office for the Nizhny Novgorod Region of the Volga-Vyatka Bank of Sberbank of Russia actively lends to their clients - both individuals and legal entities. For small businesses, we have developed the Business Real Estate product. Entrepreneurs who previously worked in rented space were given the opportunity to purchase commercial real estate on a mortgage for five to seven years. Often, mortgage payments are comparable to rental rates. Therefore, entrepreneurs have already appreciated this product; 10-15% of the total loan portfolio of Sberbank small businesses in the Nizhny Novgorod region are loans for the purchase of real estate. For individuals, mortgage rates and terms are also very acceptable, which is why up to 70% of housing in the region is currently purchased on credit. 2013 showed that thanks to the normal functioning of mortgage programs, developers can attract a sufficient number of equity holders at the initial stages of construction projects. Therefore, developers often need very little credit funds. You just need to decide what is more profitable in this case: to bear the credit burden yourself or to shift it to buyers.
And which of the developers today does not have the opportunity to get a loan from Sberbank?
The biggest obstacle to obtaining a loan is the tarnished reputation of the potential borrower. If the developer has not previously fulfilled its obligations, then it will no longer be able to receive a loan. Moreover, I’m not talking about companies, but about the people who made the decisions: owners and top managers. You can create a new company, but you cannot be born a second time. Sberbank is now solving all other problems with lending to construction sites.
The main type of residential buildings built in our country are multi-apartment residential buildings. Lending for their construction is very specific. The fact is that the income from a project to build such a house cannot be clearly determined in advance. Income arises from the sale of apartments, and at the moment when construction begins, it is impossible to say with certainty at what prices apartments will be sold by the time it is completed. In addition to general price fluctuations on the market, the cost of apartments is also affected by unpredictable changes in the terrain. For example, the appearance of plans to build a metro station or a multi-story garage next to a house usually increases the cost of apartments, while plans to build a cement plant decreases it.
In addition, the costs of constructing a residential building cannot be determined in advance. During construction, so-called unforeseen work and costs always arise that are truly impossible to foresee. For example, in one of the residential buildings under construction, a water pipe burst onto cement stored in the apartment. Over the weekend, the apartment turned into a very strong concrete cube. You can imagine the amount of unforeseen work and costs this event caused.
Because of these features, lending organizations can never be sure that the building will be completed on time and within budget, and that the housing will be successfully sold. Accordingly, banks can never be sure that the developer will be able to repay the loan issued for construction. In this regard, foreign banks, when providing loans for the construction of multi-apartment residential buildings, traditionally use a special scheme in which most of the risks are transferred to other organizations. This diagram looks approximately as follows.
The developer, at his own expense, acquires a land plot (or the right to lease a land plot). Then he hires a design organization and orders a project from it. The design organization carries out the project and insures it. At the same time, the presence of errors and omissions in the project that may lead to an increase in construction costs is insured. Naturally, insurers do not work with design organizations that often make mistakes, so such organizations are forced to leave the market. It should be noted that this method of rejecting incompetent organizations is very effective.
Having a project, the developer announces a competition to select a construction contractor, which must provide a performance bond. It is guaranteed that the construction organization will be able to fulfill the contract within the agreed time frame and for the price specified in the competitive proposal. The guarantee is usually given for an amount of about 10% of the cost of the contract with the contractor. It can be in the form of a bank guarantee (of course, not from the bank that finances the construction), or in the form of insurance or a guarantee. In Holland, for example, there is a special guarantee fund dedicated exclusively to providing such guarantees to construction organizations.
Knowing how much construction should cost him, the developer analyzes the situation and trends in the housing market and prepares a business plan, i.e., a document that must convince the bank of the profitability of the project. All these activities, from purchasing land to preparing a business plan, take up to 30% of the project cost.
The developer goes to the bank with a business plan. At the bank, either banking specialists or experts from a specially hired independent firm study the business plan, the results of a housing market study and compare the contractor's proposal with the average cost of construction of similar facilities. In case of a positive expert opinion, it is recommended to issue a loan for approximately 70% of the project cost. After all, the developer has already incurred 30% of the costs. However, no loan is issued. A loan agreement is signed with the developer, which comes into force after some time (usually after about 2 months), subject to the developer fulfilling a number of obligations.
There can be quite a lot of these obligations. Basically, they boil down to the fact that the developer must provide opinions from independent organizations confirming the legal purity of the land purchase transaction, the environmental cleanliness of the site, etc. In addition, there may be additional obligations.
In the USA, for example, where banks in the 1980s hit hard by massive bankruptcies of developers, they usually require that the developer, before receiving a loan, find buyers for at least 70% of the apartments under construction, that is, for the part of the building financed by the bank. Potential buyers must sign an agreement under which they undertake, if the residential building is delivered on time, to buy the apartment for the agreed price.
Moreover, their obligation must be confirmed by an advance payment, usually in the amount of 5% of the cost of the apartment. The developer does not have the right to use this “prepaid” money for the construction of the facility. During the entire duration of the project, they remain in escrow accounts with the creditor bank. If the developer does not fulfill his obligations, this money is returned to the buyers. It is important to note that the bank recognizes the pre-sale agreement as valid only when the buyer can confirm that he has the means to buy the apartment after construction is completed.
Since the bulk of home buyers all over the world, except for our country, are people who are unable to immediately pay the cost of an apartment, each buyer must confirm the possibility of obtaining a mortgage loan. In principle, he can obtain a mortgage loan from any bank, but usually buyers undergo an underwriting procedure (credit check) with the same bank that is financing the construction of the house and enter into a preliminary mortgage loan agreement with it.
When all the borrower's obligations to conduct legal, environmental and other surveys have been fulfilled, 70% of the apartments have been pre-sold, 5% of the price of each apartment has been credited to escrow accounts and preliminary agreements have been concluded with all buyers to provide them with mortgage loans, the bank... no , does not initiate financing, but enters into a collateral agreement with the borrower. Despite all precautions taken, financing will not be provided without collateral.
Development organizations are usually small organizations. They often do not have assets commensurate with the cost of the loan, so the developer pledges the building itself as collateral. In this case, both the building itself and materials in the on-site warehouse and in transit, construction machinery and mechanisms, life and health of personnel and damage to third parties must be insured.
As financing and construction proceed, the cost of the mortgaged building increases and at the same time remains the same amount (30% of the total cost of the project) more than the amount of funds allocated by the bank.
To ensure that the growth in the value of the collateral corresponds to the amount of the loan actually issued, the bank allocates loan funds only to pay for completed work, i.e., work that increases the value of the mortgaged building. Bricks brought to the construction site are not paid for, because the fact of their delivery does not increase the value of the deposit. Payment is made only after the wall is laid from this brick.
Thus, a multi-level bank protection system is formed, which should protect it from losses both in the event of successful completion of the project and in the event of its failure - exceeding the planned deadlines and costs. Construction risks are transferred to insurance and guarantee organizations, and the risk of lower prices in the market is transferred to future home buyers.
If the project is successfully completed, the borrower must repay the loan from the proceeds from the sale of the apartments. When selling apartments, buyers make payments to the developer's account in the construction lender bank. From there, the funds are automatically used to repay the loan. Thus, when purchasing each apartment, the amount of the collateral - the share of the building owned by the developer - is reduced, and at the same time the amount of the developer's debt to the bank is reduced by the same amount.
If a building is built late or at excess cost, the bank receives satisfaction from the collateral, and the developer's losses in most cases are covered by insurers or guarantors.
This system is well established and, with one variation or another, is used for lending for the construction of almost all multi-storey residential buildings (condominiums) abroad.
In our country the situation is completely different. Construction in our country is almost never financed from credit funds, and the housing construction financing system is usually based on investments from apartment buyers. In most cases, agreements for shared participation in construction are concluded with buyers. Based on these agreements, buyer-shareholders during construction invest an amount equivalent to the cost of the apartment, and upon completion of construction they receive ownership of the apartment.
This system is extremely risky for buyers. In fact, they turn from buyers into entrepreneurs and, accordingly, bear entrepreneurial risks. The main risk is the risk that the funds collected from shareholders (buyers) will not be enough to complete the construction of the house. In this case, the shareholder will find himself a share owner of the unfinished construction and will most likely not be able to get his invested funds back.
It would be more natural to build residential buildings not with the funds of shareholders, but with borrowed funds. Buyers in this case would purchase apartments in already built buildings and would not risk anything. The risk for banks, subject to the application of the scheme described above, would also be minimal. However, loans for the construction of residential buildings are almost never issued. This is not at all due to the maliciousness of banks, but to the fact that it is almost impossible to apply the traditional risk-reducing Western scheme in our country.
There are several reasons for this. The first is that there is a very narrow circle of those developers who could receive loans under the classic foreign scheme. After all, they need to have enough of their own funds to finance the initial stage, that is, register a site, pay for design and survey work, analyze demand in the housing market and select a construction organization.
In addition, it should be noted that it is almost impossible to find a contractor willing to provide a contract performance guarantee, or a design organization able to insure the risk of errors in design documentation.
However, it must be recognized that even for those who have enough funds to carry out the preparatory work, banks often refuse to provide loans due to problems with collateral. The fact is that in our country it is almost impossible to take the building itself under construction as collateral, and most borrowers do not have other property comparable in value.
Until recently, using a construction project as collateral was impossible in principle, since unfinished buildings, with the exception of those whose construction was stopped due to lack of financing, could not be recognized as real estate at all. Now the situation has changed somewhat. The Supreme Arbitration Court in 1998 ruled that any “unfinished construction projects that are not the subject of a valid construction contract” can be classified as real estate. Thus, developers received the right to register objects under construction as real estate and, therefore, use them as collateral.
The problem, however, is that it is necessary to register before concluding a contract, when nothing has been built yet and the unfinished object simply does not exist as real estate. Consequently, there is nothing to register or pledge.
Of course, there is a way out. The contract can be terminated after part of the foundation has been built, the building can be registered, a pledge agreement can be concluded, and then the contract can be re-concluded. This operation can be carried out only because contract agreements are not subject to any registration. After all, it is impossible to conclude a contract to complete the construction of a mortgaged building. The fact is that when concluding a contract, the general contractor also receives the building under construction as collateral. If he is not paid for the work performed, he has the right (Article 712 of the Civil Code of the Russian Federation) to retain the completed building.
It turns out that, according to our legislation, only developers who carry out construction on their own can register a building under construction and use it as collateral. They do not need to enter into construction contracts.
As a result, if banks agree to take the building itself as collateral as collateral, it is usually when its appraised value at the time the collateral is concluded is higher than the amount of the required loan, and the developer is also a general contractor.
In those few cases when this happens, serious difficulties often arise at the stage of selling the constructed housing and repaying the loan. As already mentioned, under the scheme adopted abroad, as the home is sold, the loan is repaid, and the sold apartments are released from collateral. Unfortunately, this does not happen here. Sales of apartments are almost always carried out under the scheme of equity participation agreements. Since equity participation agreements are not registered, the bank has no way to control how many and for what amount they are concluded. Accordingly, if sales occur earlier than planned, the borrower has the opportunity not to inform the bank about this and not to repay the loan early.
In the author’s practice, a situation arose several times in which, by the time the loan was repaid, it turned out that all the apartments had long been sold to individuals (under equity participation agreements), and the funds received were invested by the borrower in the next property. In this case, the bank faces a dilemma: either
try to obtain satisfaction from the collateral by starting litigation with individuals who purchase apartments, or arrange a fictitious repayment of the loan and issue it to the same borrower for the construction of a new facility. Banks usually choose the latter and submit to the dictates of the borrower, while forever losing interest in lending to housing construction secured by the building under construction.
Thus, in modern conditions, using a building under construction as collateral is, on the one hand, almost impossible, and on the other, extremely risky. In the vast majority of cases, banks try to provide loans for housing construction against other collateral. Most often, loans are provided against the security of other buildings and under the guarantees of local administrations. The author knows of a case where a loan was provided for the construction of a residential building secured by a fleet of construction machines.
Obviously, only very large or very “close” developers to the administration can provide such security, and even those are rarely able to find security for more than one object. Thus, developers are forced to work according to a shared participation scheme, constantly risking not raising the required amount of funds and not completing construction.
The problem can only be resolved at the legislative level. Housing construction lending will not develop until developers have the opportunity to pledge the building itself as collateral and lose the opportunity to sell apartments from the mortgaged building without repaying the loan.
Unfortunately, no one is addressing this problem. Judging by the “Concept for the Development of Housing Mortgage Lending in the Russian Federation” (section “Lending for Housing Construction”), adopted by the Government of the Russian Federation in January 2000, such a problem simply does not exist.
V.M. Mints, Candidate of Economic Sciences
I continue to consider popular bank lending programs and today I propose to talk about construction loan. From this publication you will learn how banks issue loans for home construction, what are the key lending conditions, what is required to obtain a loan, whether it is profitable or not, etc. Since we are usually talking about quite serious amounts and obligations, in order to make the right decision you need to very carefully weigh all the pros and cons.
So, construction loans, based on their name, imply a specific intended use. Namely, payment for building materials and construction and repair work/services. Even 10-15 years ago, banks predominantly controlled the intended use of funds issued under such programs, but now a loan for housing construction is most often allowed to be used uncontrolled, that is, there is no need to provide the bank with any receipts, payment slips and other supporting documents.
However, if we are talking about a specific targeted lending program for construction, then the bank will almost certainly control the construction process in general terms, in particular, upon its completion it will be necessary to provide documents confirming that the house was built and put into operation. In addition, bank employees can periodically visually check how the construction process is progressing, and if problems arise, there will be more such checks. And if the fact of misuse of funds is revealed, the borrower may have serious problems, including an increase in the interest rate or a requirement for early repayment of the loan (you must carefully study and see what conditions are indicated there in this regard).
A loan for building a house usually involves a fairly impressive loan amount, and such large amounts are most often issued only with collateral. Previously, many banks had the practice of issuing loans for construction secured by the land plot on which the object was supposed to be built, with the condition of further obligatory pledge of the real estate itself after it was built and put into operation. Also, some banks lent against unfinished construction as collateral in order to complete it. Today, if such lending programs for construction exist, there are very few of them, and the conditions there are quite strict.
The fact is that the mechanisms for mortgaging land plots and unfinished construction are quite complex, and in many cases it is completely impossible, so such loan collateral is undesirable for banks. But banks will be happy to give you a loan for construction secured by real estate or other property you already own.
Thus, if you need a loan to build a house, you don’t have to look for just such a targeted program. You can just as easily take a large amount of traditional consumer money and spend it on building a new facility.
This would be a completely acceptable solution, since such loans are issued for long periods, at fairly low interest rates, and with fairly flexible requirements for the borrower.
A few words about what form is best to take out a construction loan. Here, the most interesting option would be not a simple loan, but a non-revolving line of credit. That is, it is profitable to take out a loan for construction in tranches necessary to pay for certain goods and works, as needed, so that interest is accrued only on the used part of the line, which would allow significant savings on loan costs. Because construction is not carried out in 1 day or month, and if you take the entire amount at once, then a huge part of it will “stay there” for a long time, while interest will already be accruing on it.
It is best to take out a construction loan in the form of a non-revolving line of credit.
Now let's talk about how advisable it is to take out a construction loan. In my opinion, this is one of those few species. Especially when it comes to periods of strong debt: at such times, prices for building materials and construction work rise very quickly, and therefore paying them in advance may be more profitable than accumulating your own funds, even taking into account the overpayment on the loan.
However, you need to adequately and objectively assess your financial capabilities. We are talking about considerable amounts, and over many years. The maximum possible terms of construction loans are close to, although, as a rule, somewhat less. That is, a loan for housing construction can be taken out for at least 10 years, and you must be sure that you will definitely be able to repay it.
The best option would be to finance construction using not only borrowed funds, but also your own funds, and the greater the share of your own funds, the lower your loan costs will be and the less likely it is that you will not be able to repay it.
After completion of construction, you should strive to repay the loan ahead of schedule in order to minimize expenses, but it is better not to do this before completion, because new sudden expenses may always appear for which there may not be enough funds.
Well, in conclusion, traditionally consider the main advantages and disadvantages of lending for construction.
Advantages:
- It is usually cheaper to build a house than to buy a ready-made one;
- Thanks to a loan, you can start construction right away, without accumulating money with the fear that it will be “eaten away” by inflation and devaluation;
- The terms of construction loans with firm collateral are quite favorable in comparison with many other lending programs.
Flaws:
- Most likely, you will have to mortgage the property and incur corresponding additional expenses;
- There are risks of losing the collateral due to problems with repayment;
- There are risks of not completing the planned facility (the loan amount may not be enough due to increased inflation).
Now you have an idea of what a home construction loan is, and you can draw conclusions about how interested you are in such loan programs. If you decide to use the services of a bank, then think carefully about this decision and try to choose the best one from all the available offers (you can read how to do this at the link).
That's all. Improve your financial literacy and learn how to profitably build your relationships with banks on the website. Here you will find many other useful materials that will help you with this. See you again on the pages of the site!
This is a sum of money issued by a creditor bank for the construction of various types of facilities. Banks issue such loans against the building itself or full or partial ownership rights to this object. Using loan funds, developers purchase materials and pay for all necessary work carried out during the construction process.
The relevance of issues to expand the scope of construction lending is due to the lack of high-quality and reliable buildings. This applies to both residential premises and administrative, commercial and other buildings. This has provoked a need for highly specialized specialists. The fact is that a characteristic feature of construction loans is large amounts of money transferred to consumer accounts. It is difficult to control the turnover of such volumes of money, which is why banks hire loan specialists in the construction segment to maintain accurate records.
Even the most developed companies involved in construction often do not have enough available funds to begin construction of a particular facility. Banking organizations are mainly interested in issuing such loans. Firstly, well-known reputable companies are unlikely to want to spoil their reputation with a bad credit history. Secondly, bank funds are an almost inexhaustible source of finance for them, so they will not spoil relations with banks. But it should be noted that the mechanism of credit relations in this industry is not properly developed in our country.
Factors hindering the development of relations in the field of construction lending
Not all banking institutions are ready to issue a loan to a construction organization, which is due to a number of factors. There are quite a few such factors. And among them, first of all, it is necessary to note the following:
1) It often happens that a developer plans to build a new facility on illegal land. Cooperation between banks and such developers is not advisable, as there is a risk of losing a huge amount of money. An illegally built residential building, shopping or entertainment center, clinic or legal office will not generate financial income to repay loan funds until the rights are legalized in accordance with the law.
2) In our country, the system of registering land rights is also not properly developed, which almost always entails the emergence of problems of various sizes, from minor conflicts to litigation.
3) The construction loan lender will be required to sell the unfinished building if the developer fails to do so.
4) Due to the above reasons, the creditor bank cannot have a 100% guarantee that clients will fulfill their loan obligations. In addition, there is always a risk of a decrease in the liquidity of creditor banks.
What legislative steps should be taken to develop construction lending?
- Liberalization of state policy in the field of transfer of land to private ownership.
- Development of new bills regulating the system of relationships in the field of construction lending.
- Development of regulations to ensure the accounting of rights to unfinished construction.
- Cancellation of legal restrictions that complicate credit relations against the backdrop of a possible default.
To develop and improve the lending system in the construction sector, it is advisable to introduce the following provisions:
1) Interest on loan funds must be repaid by the developer during the construction process, and the loan amount itself must be repaid after the building begins to generate income.
2) Before starting construction, look for potential clients for the sale of the constructed facility.
3) Banks, before issuing loans to construction companies, must carefully study the potential risk of construction.
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Required documents
1. Passport;
2. Land certificate/Extract from the Unified State Register;
3. SNILS / Driver's license;
4. For an amount over 1,000,000 rubles. (one additional document at the client’s choice):
- 2NDFL
- Help on bank form
- Copy of work book
- Extract from the Pension Fund (for non-working pensioners)
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Credit terms
Requirements for borrowers
- Citizenship of the Russian Federation;
- Age from 20 years;
- Permanent place of work for at least 3 months;
- Permanent registration in any region of the Russian Federation.
Required documents
- Russian Federation passport;
- One additional document of the client's choice: SNILS, Driver's license, 2NDFL, international passport, copy of work record book, extract from the Pension Fund of the Russian Federation (for non-working pensioners) for a loan amount of more than 250,000 rubles
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Credit terms
Requirements for borrowers
- Age from 18 years
- Availability of a mobile phone; indicating your work phone number if you work, or another contact phone number
Required documents
- Passport of a Russian citizen with permanent registration in any subject of Russia
- SNILS number
- Employer's TIN
How to get a loan for a country house
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