Ground-up construction financing became nearly impossible to source in late 2023, with most institutional lenders pulling back from development deals entirely. When a Seattle-based developer needed $60 million to build a 125-unit luxury apartment complex, the conventional wisdom was that the deal would sit on the shelf until markets improved. Instead, we found a regional bank willing to provide full construction financing at terms that made the project pencil.
The Deal
The borrower had assembled a prime development site in Seattle's Capitol Hill neighborhood, with plans for a 125-unit luxury multifamily project targeting the area's growing tech workforce. The developer had a solid track record with three similar projects completed over the past five years, all delivered on time and within budget.
The project economics were strong—total development cost of $75 million with projected stabilized value of $95 million. Pre-leasing wasn't available at the construction stage, but comparable properties in the immediate area were achieving rents 15% above the sponsor's underwriting. The borrower needed $60 million in construction financing to supplement their $15 million equity contribution.
The Challenge
By late 2023, construction lending had essentially frozen. Regional banks that had been active in the space were dealing with their own balance sheet constraints, while national banks had pulled back from ground-up deals entirely. Private debt funds were pricing construction loans at levels that made most deals uneconomical—we were seeing quotes in the high teens for leverage that typically priced in the single digits.
The Seattle market added another layer of complexity. While fundamentals remained strong with continued population growth and job creation, several high-profile construction delays and cost overruns had made lenders nervous about new development projects in the region. Most construction lenders we approached were requiring 40% equity contributions, well above the borrower's comfort level.
The sponsor had already spent six months working with their existing bank relationship, only to have the deal killed in committee after initial approval. They needed to close within 90 days to secure their general contractor and maintain their construction timeline.
The Solution
We identified a $2 billion regional bank based in Portland that had maintained an appetite for quality construction deals in the Pacific Northwest. While most lenders had tightened their construction parameters, this bank was actually looking to grow their development portfolio with the right sponsors.
The key was positioning the deal around the sponsor's execution track record rather than just the project fundamentals. We prepared a detailed sponsor package highlighting their previous developments, including actual vs. projected construction costs, timeline performance, and stabilized leasing results. The bank's construction lending team had seen too many deals go sideways and wanted to work with proven operators.
We also structured the loan to address the bank's primary concerns around cost overruns and lease-up risk. Instead of a traditional single-close construction loan, we proposed a two-phase structure: an initial $45 million construction facility with a $15 million mini-perm conversion upon completion and 75% occupancy.
The Outcome
The bank approved a $60 million construction facility at 80% loan-to-cost, significantly better leverage than the borrower had been seeing elsewhere. Pricing came in at prime plus 100 basis points during construction, converting to a fixed rate of 6.25% for the two-year mini-perm period.
The construction phase includes standard protections—monthly interest reserves, completion guarantees from the principals, and third-party cost certification. But the bank's approval process took just 45 days from application to commitment letter, allowing the borrower to meet their closing timeline.
More importantly, the mini-perm conversion provides breathing room that most construction loans don't offer. Rather than facing a immediate refinancing requirement upon completion, the borrower has two years at a fixed rate to complete lease-up and optimize their permanent financing options.
The borrower broke ground in January 2024 and construction is progressing on schedule. Early leasing results are exceeding projections, with 60% of units pre-leased six months before completion. The sponsor is already discussing their next development project with the same bank.
This deal demonstrates that construction financing remains available for quality sponsors with the right positioning, even in challenging market conditions. The key was finding a lender whose risk tolerance matched the deal profile and structuring terms that addressed their specific concerns around execution and lease-up risk.