Case Study: $42M Construction Loan for 85-Unit Multifamily Development

By Trevor Damyan, Commercial Lending Solutions, Los Angeles

Los Angeles construction lending has become a minefield. Entitlement processes stretch for years, hard costs have increased 30% since 2020, and lenders demand extensive developer track records. When an experienced multifamily developer lost their construction lender mid-process on a shovel-ready Valley project, we had to move quickly to keep the deal alive.

The Challenge

The borrower approached Commercial Lending Solutions after their previous construction lender abruptly exited new originations. This created an immediate crisis for a fully entitled, 85-unit development in the San Fernando Valley that was scheduled to break ground within 60 days.

The project itself was solid: a five-story wood-frame structure over concrete podium, targeting workforce housing in a supply-constrained submarket. The developer had successfully completed two prior ground-up projects in the Valley totaling over 150 units, establishing both market knowledge and execution capability.

However, the financing environment had deteriorated significantly. Regional banks had tightened construction lending criteria, requiring higher equity contributions and more conservative leverage. National construction lenders were cherry-picking only the largest deals with proven sponsor relationships. Community banks lacked the capacity for a $42 million facility.

The timing pressure was acute. The developer had locked in subcontractor pricing that would expire within 45 days. Hard cost escalation was running 2-3% monthly, making any delay extremely expensive. The general contractor was threatening to move crews to other projects without immediate commitment.

Market Dynamics

San Fernando Valley construction lending reflects broader Los Angeles market challenges. Entitlement timelines average 18-24 months, creating significant carrying costs before construction begins. Labor shortages have pushed wages up 25% over two years. Material costs remain volatile, with concrete and steel seeing periodic spikes.

Lenders have responded by requiring detailed cost verification, extended due diligence periods, and enhanced completion guarantees. Many traditional construction lenders shifted focus to renovation and value-add deals rather than ground-up development.

The competitive landscape favored borrowers with multiple project completions and existing banking relationships. First-time developers found construction debt nearly impossible to secure, while even experienced sponsors faced reduced leverage and higher pricing.

The Solution

We identified a regional bank that was actively growing its construction portfolio in the San Fernando Valley. The lender had recently hired an experienced multifamily construction team and needed to deploy capital to justify the new headcount.

More importantly, this bank viewed the Valley's supply constraints as a long-term opportunity. Zoning restrictions limit new high-density development, while population growth continues driving rental demand. The lender wanted exposure to this dynamic, particularly with an experienced sponsor who understood local market conditions.

We structured the transaction to address the lender's key concerns while meeting the developer's timing requirements:

Loan Structure:
- Loan Amount: $42 million
- Loan-to-Cost: 65%
- Term: 30 months with 6-month extension option
- Interest Rate: Prime + 100 basis points (floating)
- Monthly draws based on third-party inspection reports
- Interest reserve funded from loan proceeds

The 65% loan-to-cost ratio required the developer to contribute $22.5 million in equity, demonstrating significant skin in the game. The floating rate structure aligned with the bank's asset-liability management requirements while keeping initial payments manageable during the construction phase.

Risk Mitigation

We negotiated several provisions to strengthen the transaction. The developer secured a pre-arranged permanent financing commitment from an agency lender, eliminating refinancing risk. Construction draws required both architect certification and third-party inspection, ensuring proper use of funds.

The interest reserve covered 36 months of payments, providing a buffer beyond the expected 30-month construction timeline. The developer also provided a $2 million completion guarantee, backed by liquid assets from previous project distributions.

Execution

The transaction closed within 35 days, allowing the developer to meet subcontractor deadlines and avoid cost escalation. The regional bank's local decision-making authority eliminated the delays typically associated with committee-based approvals.

Construction commenced immediately, with the first draw released within two weeks of closing. The project is currently 40% complete and tracking to budget and schedule.

This transaction demonstrates how market dislocations create opportunities for both borrowers and lenders. While construction lending remains challenging in Los Angeles, experienced sponsors can still access competitive financing by partnering with lenders who understand local market dynamics and have capital deployment objectives.