Jack Prescott
The commercial lending industry is based around risk assessment and risk mitigation. Depending on the complexity of the project or company, a business loan can be a straightforward process; banks consider a client's revenue, history and business projections to determine whether a loan is viable. However, a commercial construction loan has more moving parts and complexity.
One of our recent clients, Paradigm8, had a vision to create a new wedding and events venue along with a new pro shop and tavern after their acquisition of Tahoe Mountain Club including Old Greenwood Golf Course in Truckee, Calif. The complicated construction plans involved moving an entire building from one part of the property to another, as well as significant renovations to existing infrastructure including the clubhouse. As a lender, it’s important to work with the client to identify and mitigate the project risks in order to create a successful structure for the client and the bank.
With these projects, your banking partner may have to get creative. In this instance, Plumas Bank partnered with the California Statewide Certified Development Corp., to facilitate a Small Business Administration 504 loan to secure the funding for a portion of the project, with Plumas Bank financing the rest. As a result, the new wedding venue was realized and is now booked out for the 2024 summer season.
This kind of creativity in getting to “yes” to make a project viable is especially important in construction lending.
The uncertain economy of the past few years has made it less likely for some banking institutions to finance loans for construction. Like all businesses, as the environment changes so do the strategies of the business, and banks are no different. Financial institutions may not be able to offer certain products in the current economy as the risk may be greater than the bank can comfortably manage within their portfolio. However, construction projects can still seek funding options. Community banks, for example, know their local markets and clients very well, and the risk for local construction may be viewed as acceptable.
Though the current market is seeing rates somewhat stabilize and the cost of raw materials slightly declining from their peak, there continues to be workforce shortages. According to the Association of General Contractors of America, 89% of their member firms report having a hard time finding workers to hire, and 61% have delayed project schedules because of this.
Despite these challenges, as we survey the Northern Nevada market and talk with our clients about what they’re experiencing, we see significant value in investing in the Northern Nevada construction industry.
The commercial real estate sector remains strong; many companies are now seeking larger spaces, and new companies continue to choose northern Nevada as a place to relocate their business or for expansion. In their most recent State of the Economy update, the Economic Development Authority of Northern Nevada reported that they’d hosted 99 site visits in 2023 and have more than 80 additional visits in the pipeline.
We’re seeing continued interest and viable growth in multi-family, office, hospitality and industrial construction as well as owner-occupied and professional practice real estate across the markets we serve. As a community bank, we’re continuing to invest in serving the local construction industry. We recently appointed Sushil Patel to our board of directors – a seasoned business professional in the hospitality construction industry – to leverage his insights and expertise for our clients.
Beyond seeing a strong business opportunity in construction lending, we also understand that a healthy construction industry is essential for a vibrant local economy. As a community bank, we look for ways to use our lending to benefit the community as a whole. We recently had the opportunity to utilize our creativity to finance the FISH Student Housing Revitalization Project in Carson City. The 36-unit apartment complex will be used as subsidized housing for adult students in trades programs. We were able to make a combination of a line of credit on an existing facility and then a construction loan on the project viable because we took the time to understand the project and saw its community value.
The construction industry has always had its boom-and-bust elements, but as we consider lending in that sector, we see strong opportunities to power the community and the local economy by deploying creativity to get to yes on projects. We are optimistic that the best days in this sector in northern Nevada are in front of us.
Jack Prescott is senior vice president, commercial lending manager for Plumas Bank. As a local leader in commercial banking, he guides successful business owners in Nevada, California and Oregon. Prescott has lived in Reno for over four decades and currently serves on the New West CDFI board of directors. For information, visit plumasbank.com. Member FDIC. Equal Housing Lender.
