Latest / Private Lending Insights / Private Construction Financing by Center Street Lending

Transcript

Private Construction Financing by Center Street Lending · Private Lending Insights

• Rocky Butani (00:00) Welcome to Private Lending Insights. I'm your host, Rocky Batani. This episode is all about ground up construction financing for residential investment properties throughout the country. I interviewed Jeremiah Weidman and Eric Brown from Center Street Lending. This company is based in Orange County, California, but they lend nationally and they love funding construction loans. So in this episode, we get into a lot of details, a lot of specifics about how construction loans are financed. I asked them to provide some insights on what they're seeing in construction lending in general throughout the country. think you'll get a lot of great insights about ground construction financing. So let's get started. Here we go. Rocky Butani (00:43) all right gentlemen thanks for joining us for this episode of private lending insights and so Center Street lending you guys do a lot of construction loans so I just wanted to get some insights from you on what's happening in construction lending talk about your loan programs and get any other information about ground up construction, lending for residential investment properties and small multifamily. So with that, gentlemen, if you could just give us some insights on what you've seen as far as trends within the private lending space just in the past year for ground up construction specifically. Erik Brown (01:25) Yeah, mean, Rocky, thanks for the opportunity to be a part of your platform. You know, I would say last year you're only seeing a stronger appetite from investors for ground of construction. I like to tell people, know, get investors and I call it graduating. You know, they graduate from buying an investment property and doing a cosmetic remodel. Then they, you know, they decide, you know what, I can probably gut a thing. you know, let me gut a house next. And they're like, you know, maybe I can add some square footage. Maybe I'll do an ADU, right? And then, you know, they get up to, and then they get to the senior level of, know what, I'm going to tackle ground up construction. you know, as we've all seen the... Residential investment space that we all live in, know, it's only become more and more diverse and you've seen more people enter this space and I think really Ground up construction is by far the most inquiries that we get over on our side and seeing Stuff all the way from people buying just plots of land with plants approved to people wanting to scrape down you know, or grandpa's house that hasn't been touched in a long time, or a house that got fire damaged, et cetera. I've seen a lot of people try to do subdivision type projects. I would say that's probably the biggest trend in the last six to 12 months is smaller subdivision type projects. Rocky Butani (03:03) Anything to add to that, Jeremiah? Jeremiah Wiedman (03:05) Yeah, I mean, basically what's happening is that, you you got a lot of older homes, right? And people, can only like rehab the house as much as you can. So people want brand new homes and want to live in good areas. So a lot of people do is scraping them and then building nicer homes. So that's definitely a trend I'm seeing. Obviously huge trends are like ADUs. That's pretty popular. Condo maps, people splitting stuff up, you know, that's kind of some common trends that we're definitely seeing. So ground up is by far huge inquiries we get. Definitely at Center Street Lending because we have the platform to do them. Rocky Butani (03:38) And Eric, you mentioned that you've got these borrowers that are mostly flipping houses, doing cosmetic rehabs or heavy rehabs, and then now they're getting into construction loans. Are these clients that you've had, that you've funded their flips in the past and now they say, hey, I want to get into construction and a ground up project, not just a major rehab. Are you typically only taking on those borrowers if you've already funded? their deals in the past. Erik Brown (04:10) Great question. So, you know, we are one of the unique lenders that will do ground up construction loans to borrowers that don't necessarily have a ground up track record. You know, we do take into account the experience that the general contractor that they're using on us. We're always going to be bullish with our client base that we have because we want to take care of the clients who take care of us. Absolutely. But we do look at doing loans to first-time investors for ground-up construction. We're gonna be stringent on FICO scores, liquidity, probably throttle back leverage a little bit, but we are one of the few lenders that will do that. And I'll leave you with this point. I got a statistic a couple months ago. Of my client base, 95 % of my loans are repeat. clients so it's one of those things if you come in and we want to make sure you have a great experience and stay with us is really what we try to do so when clients do come to us and say you know what I want to take on this type of project I know I don't have that that history yet will you take a chance on me and it's very hard for us to say no to clients like that Rocky Butani (05:31) Nice, but you do require them to have a general contractor so they're not managing the project themselves. Yep, that makes sense. And Jeremiah, you mentioned there's a lot of teardowns that you're seeing. Is a teardown generally easier than if you just bought a plot of land and built on it, or is it all the same once you demo the property? Erik Brown (05:34) Absolutely. Absolutely. Jeremiah Wiedman (05:54) It's typically easier because all this stuff is already there, like the on-site, off-site utilities are already there. It makes sense because there's basically homes in the area. When you buy vacant land, you've got to pull a of stuff in, which makes it little bit more challenging. Rocky Butani (06:07) Makes sense. as far as someone buying land and getting it ready for construction, do you fund any of that or are you only jumping in when it's ready for vertical? Jeremiah Wiedman (06:19) Yeah, I mean, basically there's typically two cases. There's either they're buying the land or they already own the land. Most of the cases we get, the client already owns the land. They've now already spent the money on the soft costs. So they've got the plans approved. They've got their permits. They've got everything kind of lined up. They'll come to us now for the construction budget to go vertical. That's kind of what we really like it. And then we'll finance typically 100 % of the construction. Depending on the ratios, we'll try to get money back to them. That's one situation. The other situation, if they're buying the land, depending on the loan to cost and the ARV, we will lend up to 60 % on day one of the land value or purchase price. Rocky Butani (07:00) Got it. So that's if they had already purchased the land, they got it ready. Now what about in the case where they're just buying a piece of land that someone else has already done all site work. So they're going to buy the land and then it's ready for vertical. Jeremiah Wiedman (07:16) Yeah, so kind of the same situation. They're buying the land. So if the ratios fit, we will lend up to 60 % of the land and then 100 % of the construction. Rocky Butani (07:29) Nice, so they just bring in 40 % cash to the purchase of the land and then you fund 100 % of the ground up vertical. Jeremiah Wiedman (07:38) Exactly. Typically, it's a 12 to 18 month loan. The rehab or construction budget is what we call fund control, where it sits in a separate escrow account. They only pay interest as they draw. It's based on a reimbursement. They start the work, we reimburse them. What makes Center Street a little bit differently is kind of what alludes to Eric, why we have so much repeat business is because we've been around for about 14 years and we're servicing our own loans, which makes us a little bit different than most private lenders. Most private lenders will send to like a third party company like an FCI or BSI. Those guys will manage the third party payments and draws. We're doing it all in house. So that's huge. So that's why Eric knows what his clients are doing. And I know what my clients are doing because we're seeing the draw reports, we're seeing the payments. And that's why we have a lot of repeat clients. Erik Brown (08:21) Thank Rocky Butani (08:24) And how about the inspections whenever you hit a certain milestone or it's ready for phase two? Who does the inspections and how does that timing work? Jeremiah Wiedman (08:35) typically have a third party company that will go out. So the draw department will get a request from the client and then the inspector will go out, take pictures, make sure that the work is completed. That report comes back to us internally. We'll verify it to the budget they sent us and then we release the wire to the borrower. Rocky Butani (08:54) Well, let's step back to the actual funding. When you say that you'll fund 100 % of the vertical costs, at the time of closing, does the borrower get a bunch of money to start the project, or do they need to front that first phase of the project and then get reimbursed? Jeremiah Wiedman (09:12) Yeah, so on a purchase, you know, usually what happens is that's why ground construction is a little bit more, I would say, capital intense more upfront, is that we definitely require the clients to have what's called reserves. So if they're a new client, we typically want 10 % of the budget and about six months of payments. So when they close and they start to do the work, they're usually going to sit down with their general contractor or their owner builder, and then they're going to plan out their phases. They're going be like, hey, this is going to be a five-phase project. And they're going to typically have enough money to start the initial construction. And then when they get to that phase, then they'll usually request a draw. And then they'll do second phase, third phase, fourth phase. Rocky Butani (09:53) So let's say the construction budget is 200,000, for example, or maybe that's, is that too small for a construction project? Okay. Okay. Fine. Let's go to the other extreme. Let's say it's a million dollars and they, and they split up the project into five phases. Each phase costs $200,000. So once, once you funded the loan there, it's really there. Jeremiah Wiedman (10:01) A little on the smaller side. Yeah. Yeah. Okay. Erik Brown (10:11) you Rocky Butani (10:18) they're putting out that $200,000 to start the first phase. And then once they get to the end of the phase, then you reimburse them for that 200,000. that how that works? Erik Brown (10:18) you Yeah, essentially, but what I like to inform clients is we're not going to hold you to a draw schedule or a phase schedule, right? You have the ability to pull a draw whenever you see fit. The way you're describing that makes me feel like I'm talking to five clients every day type of thing. I'm like, hey, I'm not going to hold you to your draw schedule. I don't even ask you for a draw schedule. You're gonna have one with your contractor and he's gonna wanna get paid in phases, et cetera, and all those things, but we're gonna reimburse you for work that's complete. And I heard you mention, know, broken construction. And I wanna remind people that we will reimburse for soft costs. That's something that we do do. Very rarely we take on projects where horizontal development's going on. And what I mean by that is, know, roads, curbs, gutters, those type of things. That's rare for us to do it. It's something that we do do, but very rare. So again, I tell clients, I'm like, listen, if you can front load a project for 50, 60%, go for it. But if you need draws, you know, in five, 10 % increments, that's up to you too. You get to manage that however you see fit. So I tell them, you know, this is your business. This is your project. You get to run on how you see fit. I'm just here to support you. Rocky Butani (11:55) Nice, I don't even have to, if I'm the builder, the borrower, I don't have to even just give you a set schedule of, here's my different phases. So let's just say it's a million dollar construction budget. I put out $50,000. I can reach out and say, hey, guys, I need $50,000. then each of, yep, okay, so then you spend on the sector. Erik Brown (12:02) No. I want that $50,000 back. Absolutely. Right? And then you'll see you have the rare clients that are like, you know, I didn't pull a draw once and I'm done. Here's my listing. I'm ready for an inspection. We'll fund your whole project if you want to front it in equity yourself. So we're very accommodating from that standpoint when it comes to construction. I'm not gonna go and say, you know what, hey, it's been 60 days. You need to pull a draw now. Not something we do. Rocky Butani (12:45) That's interesting. So I can basically manage my own cashflow. If let's say I didn't want to start paying interest on that money, then I can just, I could just put it all out, whatever I have in cash reserves. I spend all of that and then I'm not paying interest on the low income. I haven't run any. Erik Brown (12:52) Exactly. Exactly and they on smaller fix and flip projects. I tell clients all the time I say, you know You can you front your project you get it done and you want to get some equity back before you sell it Complete the project call for one draw In a perfect world you're paying interest on the construction money for less than 30 days when you get that equity back to go and move on to the next project or keep your other projects that you got going on, you know, I don't want a lot of investors get equity rich and cash poor very fast and I've been there myself investing in projects so I know the feeling and we try to be as helpful as we can. Last thing I want to do is be a hindrance to and put guardrails up on you. You know if you go outside and you know you get caught speeding you know we'll remind you hey this is this is how we go but we're not going to you know I'm not taking you to jail none of those type of things. Rocky Butani (13:56) So theoretically, I could use Center Street Lending as even kind of like a backup capital provider, right? Like if I have enough cash to do the project, and then it's just if I happen to use up all that cash before the end of the project, then I can jump in and maybe, like let's say that you agree to fund a million dollars, and then I only used up 100,000 or 200,000, am I still? Erik Brown (14:07) Essentially. Yeah. Rocky Butani (14:25) I'm not paying interest on the entire amount, right? It's just, would. Erik Brown (14:27) Exactly, yep, non-dutch interest it amazes you how many times right you know I'll get reporting on my side for payoff requests etc And I'll reach out to a borrower and say hey you have X amount of dollars left in your construction budget You get the beautiful project listed you want to pull this money. Oh wow I totally forgot about that. Thanks for reminding me. Yeah, I actually will pull that draw Rocky Butani (14:49) Nice. So let's just take the opposite scenario where you have a builder that doesn't have that much cash reserves. From what you said earlier, you want them to have about 10 % of the construction budget in cash reserves, right? Erik Brown (15:06) Yeah, that's our minimum. Jeremiah Wiedman (15:07) Yeah. Yeah. Rocky Butani (15:09) Okay, and then does that vary depending on the scope of the project and other factors? Erik Brown (15:14) You know, you can give them the grade with experience and FICO's and all that fun stuff. You do get into the gray a little bit. Really, we try to stick to 10 % as a minimum because anyone that's been involved in construction knows that there's going to be something that pops up and there's going to be some type of cost overrun. I always like to look at the construction budget they provide to us and we allow up to a 10 % contingency as well. A lot of people that send over budgets and you look at them and go, you don't have a contingency in here, let's put one in here, because something will pop up and you go, gosh, I didn't think about that, or totally forgot to put that line on, I'm on here. we do, like I said earlier, much more accommodating, flexible, whatever adjective you want to use for people that do have life for life experience on those type of projects, but always want to try to set up clients for success, which is. why we review the budgets up front and make sure that they do have a contingency in place. Rocky Butani (16:20) Right. And Jeremiah, earlier you said that sometimes at closing, you'll give some money back. I didn't quite get that. you explain that? Jeremiah Wiedman (16:28) Well, that's in the case if they own the land. A lot of times they'll buy the land with cash, so they'll own it free and clear. We're a cost-based lender, so when people buy the land with cash and now they spend all this money, they're in it. They have a lot of equity into it. So then when they refinance, it's technically a refinance because you're basically using the land as collateral to get the construction budget to build your home. Well, now there's room to give you some cash back. So some people call it a land draw, but basically it's a cash out that you're providing money back on the dirt day one based on the premise that you have a budget with a future ARV of a house you're gonna build. there's a lot of people wanna buy the land cash because what happens is it's not a very streamlined process all the time depending on what city and county you're in. You might own that land for six to three years before you get the permits planned and there's a lot of approvals. which I think might lead to another question you have is like, are some of the setbacks? It's counties, right? The permitting process, right? So I think that's another advantage of Senate Street Lending is that we get a lot of guys that we did the loan and unfortunately in the 12 months or 18 months, there was a problem. There was maybe a different law that came out or some fire situation and we got to basically help them get in there and refinance again so that they can complete the project because they didn't have the approved. permits or plans or the project change, material costs got up or down. So a lot of these things change all the time. Rocky Butani (17:58) Well, let's go through a sample scenario. Let's say I purchased the land for $200,000. I've gone through all the permitting and it's ready for construction funding, ready for vertical. And let's say the construction cost is a million dollars just for round numbers. I have $200,000 worth of land. So at closing, if I needed some funds, you're saying that you would provide some funds to me once the loan closes. Jeremiah Wiedman (18:30) Yeah, so it always depends on the situation, right? So if you bought the land for 200 grand, some of the questions we ask of like, when did you buy it? How long ago? What have you put into it? know, typically if they bought it for 200, they've now spent some money on plans, permits, architecture, blueprints, some grading. don't, you know, depend. So what we do is we take the total cost, right? The 200K for the purchase. Let's say in this case, they spent 100 grand in cost by the day, they have a million dollar budget. So we usually take, so that's like what? That's like 200 plus 100 plus a million, right? So, you know, in this case, you know, sometimes what happens is this, person might get a little cash back in this situation, you know, but maybe not much. It just depends on the budget. We take a look at the budget as well, kind of fine tune that. But if they spent all that money, then a lot of times they can potentially get some cash back to, help them kind of, you know, buy more materials and, you know, kind of go from there. Rocky Butani (19:34) So if that's the case, if it is possible to get some of that cache back, they could theoretically use some of that cache to just start the vertical project. And then they can request a draw whenever they're ready to. Jeremiah Wiedman (19:46) Yeah, a lot of times too, these are kind of moving targets, right? They're still working on the project when they get the loan. It's kind of a, it's really like a cat and mouse situation, right? So sometimes you're like, Ooh, I want to do with all my own cash. And we're like, Ooh, but like, then you're tapped out, you know, so you kind of want to be in the sweet spot of leverage where you're like, Hey, I'm still working on it, but I put all this money into it, but I now need construction loan. You know, so there's that, there's like, that's what we always advise our clients of like, Hey, make sure the liquidity is there. in case you have the money for the draws to continue the project. yeah, it just depends on the situation. Every situation is different. Rocky Butani (20:24) All right. And what are some of the challenges that you've seen with your Builder clients in the past year? Let's say 2024. Maybe 2023 was a different story. Just in the past 12 months of 2024, what are some of the challenges you've seen? Erik Brown (20:41) You know, it's always a challenge in our end with the way we're set up is, you know, I'm not gonna, I'm not gonna advance dollars on materials that aren't on site and install. That's always a sticking point that kind of gives a sticker shock at everyone no matter how many times you feel that you say to them once they get into it and they pull the draw and they go, what do you mean? I put $100,000 down on framing. It's there, I have to receive, look at it. And I always tell people, say, you know, it's amazing how many times that framing never even shows up on the site or gets delivered to another job site. So, you know, as a lender, gotta eat, I gotta take every, I gotta de-risk as much as I possibly can while trusting you at the same time, right? So that's always the hardest thing, I think, for people when they get into these construction projects is, what do mean you can't? reimburse on deposits. That's just something we don't do. And quite honestly, I don't think any lender does. So that's the hardest thing and biggest challenge really. Everything else kind of gets worked through. Our draws get done quick. I mean, we have two different outlets and we're working on a third to get construction draws reimbursed as quickly as possible. These are taken from the time you send the inspection to us to get funded five business days, sometimes three. But the deposits, that's the biggest challenge in 2024. We're no longer in a supply shortage. You're not hearing that anymore. Supply is definitely available to everyone. Not hearing that projects get installed because, shoot, I can't get this material. Jeremiah, you got anything to add to that? Jeremiah Wiedman (22:36) Yeah, mean, like, I mean, it's the basic thing with construction, right? Is that liquidity, right? You got to make sure you have the cash because like someone sneezes the wrong way. Something happens this way. I mean, we've all seen the Fix and Flip shows, right? With Chip and Joanna and, you know, Chip's calling the borrower or the client going, OK, you got to pay five grand for this. It's like nobody wants that phone call. But it's like as much as you can plan, you got to make sure you have a contingency in there because things are going to change. So I think people have to be flexible with that, you know, and. We're a partner with the developer. We want you to succeed. What they're doing out there is such a hard job, right? Originating the loan is only the first step. There's the whole process of helping the person with the draws, the servicing, budget items are changing. So it's a constant kind of like trying to get them to get the project complete and then sold. What investors do out there, like, I mean, we gotta give them a lot of love. It's really a lot of hard work and it's very challenging. We wanna be there to help them with it. We're not trying to make it harder. We're trying to be like, we wanna do the loans and grow the business. Rocky Butani (23:46) And how about maturity defaults? you had a lot of clients that reach, let's say, the end of the term, whether it's 12 months or 18 months, and then they need more time because things got delayed or they weren't able to sell the property? Erik Brown (23:46) you you Jeremiah Wiedman (24:01) Yeah, it's definitely very common. I think that's another huge benefit of our companies because we're servicing the loans and the draws. We can run a report and go, hey, like Eric just mentioned, you're 60 % complete. We could do an inspection. So our whole thing is we want to make sure that you're moving on the project. If you're moving on the project, we're going to work with you. We're going to help you get it done. Whether it's an extension or maybe doing another 12-month loan, make sure that you get it complete. Rocky Butani (24:29) So you mentioned earlier some of the projects that you're doing. could range from ADUs to planned unit developments, but what's the most common type of project that you guys fund? Erik Brown (24:41) would say for right now, still Fix and Flip's our most common product. Next up's probably Scrape and Build. See a lot of ground-up construction requests. Fix and Flip's the most common just because there's more people doing that. But Word Funding, I believe I saw a statistic that about 40 % of the loans that we originate right now is some form of either Scrape and Build or straight ground up construction where someone bought a piece of dirt. Rocky Butani (25:16) And how about the number of units? you doing any projects where it's more than one house? Erik Brown (25:24) We are, I would say, we try to stick as much to one to four as we can. We'll go up to 10 units. Anything above 10 units, kind of gotta go make sure we get committee approval internally. But one to four, see a good amount of people either scraping something or subdividing a piece of dirt to build four houses or put as many structures as they can. take advantage of ADU laws, specifically in California as well. see lot of ADU, junior ADUs building as much housing as they can because there's only so much dirt in the world. Rocky Butani (26:05) And as far as the 10 units you mentioned, are you talking about one property with 10 units like an apartment building or did you mean 10 separate houses? Erik Brown (26:13) Yeah, both, but yeah, lot of people come. Multi-family construction is a hot commodity right now. There's not a ton of people funding those projects right now. We'll take a look at them. Those projects where you're building one structure, five plus unit apartment buildings, we're really, really hard on making sure someone's got like the life experience, whether it's the general contractor or the borrower themselves. Rocky Butani (26:40) All right. And how about geography? Where in the country are most of the projects at Center Street funds? Erik Brown (26:47) who were Southern California based for the most part. Your Orange County, San Diego County, LA County, Riverside, San Bernardino County. would say, know, really the majority of our business is in that pocket. We're trying to become more nationally well-known and branded. Now we're in the Tennessee's, the Florida's, Texas, Washington, Oregon. Jeremiah Wiedman (26:51) Mm-hmm. Erik Brown (27:16) North Carolina, South Carolina, seen a lot of, yeah, seen a lot of business in the North and South Carolinas. know, really in areas where laws seem to be more favorable for investors, entrepreneurs, business owners. Jeremiah Wiedman (27:16) It's increased, yeah. Rocky Butani (27:35) Are most of the projects that you fund where the builder is planning to sell the property or do you have a lot of builders that do build to rent projects? Jeremiah Wiedman (27:46) think it just depends like maybe they'll go in with a selling mindset but then change their mind if they can rent it so I you know Erik Brown (27:53) I'd still say the majority of people are going in with the mindset of, I want to sell this. And I would, you know, if I had to put a percentage on it, I'd probably 75 % is end games to sell and get a 25 % client base that most try to retain. know, Saudi investors are trying to take advantage of, you know, not paying short-term capital gains tax. A lot of people try to go past that 12 month hurdle. Rocky Butani (28:23) 12 months meaning they want the project to go more than 12 months so that the profit is the capital gains versus ordinary income. Erik Brown (28:31) So they can pay long-term capital gains tax versus short-term. Yeah. Rocky Butani (28:36) Makes sense. So long-term capital gains, typically what we're talking like maybe 20 % or so. if it was less than a year and their tax is ordinary income, then they're paying whatever tax bracket they're in, which could be up to 37 for the federal, right? Interesting. Yeah. I never thought about that for builders. But what if it was a case where they're finished in nine months? Erik Brown (28:41) In that ballpark, yeah. Good. Correct. Rocky Butani (29:04) Are they going to drag it out as much as they can to get to that problem? Erik Brown (29:06) Exactly, right? Then you start punching numbers on a calculator to see what makes more financial sense. Absolutely. But you know, it is amazing, you know, if you go back and you look at some projects and see, you know, buy to sell base, it's more common than you think where a property ends up selling, you know, just over that 12 month mark. Rocky Butani (29:27) Or if they sell it at month 10, then they could just tell the buyer, sorry, we can't close escrow until after the 12 month mark, right? Erik Brown (29:32) Yeah. Jeremiah Wiedman (29:35) Yeah. Yeah. Rocky Butani (29:36) Yeah, I like it. Yeah, talk about pricing and terms in general for most of your loans at this time. What are what are the general terms that you typically offer for your average construction project? And with the the rates, could give me a range, you know, like what's the minimum and what's the maximum? What's the minimum term, maximum term? Erik Brown (29:54) Yeah. Right. You know, right now I would say 12 months is fairly standard if they're permanent ready, ready to go vertical and build. You know, they're still going through the permitting process. 18 months is pretty standard. Pricing for ground up construction, you know, ranging anywhere from, you know, bottom floor pricing, call it nine and a half, high side 11 and a half. Rocky Butani (30:24) And sorry, anything you were gonna say something, Jeremiah. Jeremiah Wiedman (30:28) Yeah, it's interesting because sometimes we say that and people get kind of like, my, like sticker shock, but like you actually probably save more money with that than a lower rate, like on a fix and flip because you're paying on the whole loan amount day one. So we try to break it down in a calculator to show them like, Hey, there's no, you know, there's no pre, there's no prepayment penalty. So it's actually less money because you're only paying as you draw. Erik Brown (30:49) And I always like to tell people too, know, it's a lot cheaper than a credit card. Jeremiah Wiedman (30:54) Yeah. Erik Brown (30:55) lot cheaper than trying to finance your project on a credit card. Rocky Butani (30:59) So for any builder that might want to do business with you, what are the requirements on your end? What do you expect them to have and what types of investors do you want to work with? Jeremiah Wiedman (31:12) So I think it's hard to generalize, but there's pretty much four main things. The number one thing we're looking at is the asset itself. What are you building? What's your deal? Does it make sense? Remember, we're private money, right? So we're always going to be asset-based first. So we always look at the deal. Then we're like, OK, great. Well, who are we lending the money to? So then we look at the person's credit, their liquidity, and their experience. there's a lot of gray area in all that stuff, right? So we definitely want to make sure the person's got decent credit, right? And we want to make sure they have liquidity, and then we want to make sure they have experience. But as I mentioned, there's different, like, you know, factors within that, right? Maybe you got a guy who's got a bunch of fix and flips, and he's added a bunch of square footage. He's got a general contractor. It's like, OK, well, the asset's really cool. Let's do that one. Or maybe you got a guy who's never built in his life, but, you know, he's got a ton of money and, great credit. He's got a All-star builder doing it. It's a low leverage. Okay, it's a great location. We'll do that You know, I think the biggest thing with construction is that you know, everybody's looking for a loan to cover everything You know, it's like remember it's a partnership. We're here with you and Leverage is very important, but you got to leverage responsibly, know You don't want to be too into the spectrum of like I want to leverage everything and then I don't want to leverage anything It's like a real fine line between the two, you know I think that's why it's so important. You can't generalize. You have to get on the phone with the clients. You've to discuss the project. I think that's what we do really well. Like, hey, what are we doing here? What are we trying to do? What are you trying to accomplish? Let's see if we can make it work. So I don't know that's kind of a circle around what your question is, but there's not a hard cut, like, no, we won't do this, or yes, we'll do that. It's kind of like, let's look at it see if we can make it work. Erik Brown (33:01) Well said yeah, we got guidelines and we got a gray area. And we live in both. Rocky Butani (33:01) No, that's right. Jeremiah Wiedman (33:06) Yeah. Yeah. Rocky Butani (33:09) how about brokers? Do you work with brokers and is working with a broker any different than with a borrower directly? Erik Brown (33:18) We, mean, work with, yeah, work with brokers. Take that relationship just as serious as we do as direct clients. You know, we're not going to market to broker clients. We will let them manage that relationship with the client as they want. You know, if you want my team reaching out to them, we'll reach out to them. If you don't want us reaching out to them, you know, at all during the loan process, we're happy to run everything through the brokers themselves. Jeremiah Wiedman (33:18) I'll let Eric take this one. Erik Brown (33:46) You know, we mark everything inside our internal system. You know, if they came in through a broker, we'll market it as such. We'll put the broker's name and associate it. You know, really respect that relationship that the broker has with their client and manage that as they see fit. Because at end of the day, you know, they're running the business too and we want to support their business. Rocky Butani (34:13) Great. And how about the size of the projects? What's the minimum that you would fund for a construction loan? Erik Brown (34:21) really 150,000 is like bare minimum. And that's even hard for us to get done. High side, know, we're doing some stuff in the five plus million range. Again, that's gotta get internal loan committee approval. But it is projects that we're taking a look at. know, our sweet spot is really call it three million is kind of max and very rarely do you see stuff above three million. Rocky Butani (34:28) And how about on the high side? Erik Brown (34:49) But we'll get a handful of projects done every year that are five plus million dollars with the right borrower and area, et cetera. Jeremiah Wiedman (35:02) Yeah, especially if it's like not a single asset and we're breaking it up with them maybe multiple loans or maybe somebody's like building like, you know, like that's four units, but they're selling each unit off individually. Then you could go higher on the loan amount because you're breaking it up. Rocky Butani (35:18) And in that case where someone's building multiple houses, let's say they've bought a huge piece of land and they've got a plan to build up to 20 houses. How would you structure that, the financing on that? you say, hey, we'll fund the first five. Once that's done, then we'll give you a separate loan for the other five. Does that ever happen and how does that work? Jeremiah Wiedman (35:43) Yeah, I think it depends. It's like, we don't do a ton of those. It just depends on the situation. Typically, yeah, you want to do the first phase and the second phase, third phase, fourth phase, but it also depends on what leverage are you at, what are they in the project, are they different models? There's just a lot of factors that go into it. But yeah, we would probably start like three or five at once. Rocky Butani (36:04) Well, how about if it was a property in California and you're building two large houses? Do you want the builder to do one at a time or is it more efficient to fund the whole thing? Let them build both at the same time. Erik Brown (36:20) So I think that's one of those things where we'll get on the call with the client and say, what is your plan? What are you trying to achieve here? Are you trying to fill these at the same time or are doing them separate? Get inside their head. Right. Get inside their head and figure out what they're trying to do so that I can structure a loan that works best for you. last thing I want to do is originate a loan where you're going, well, this, this just handcuffed me. I can't do what I was intending to do at all. So I want to say that we're trying to Jeremiah Wiedman (36:31) Are you setting them off? Yeah, you set them off individually. Are these? Erik Brown (36:49) Do it either way to be honest. I'm more trying to what works best for the client, you know, to go back to your subdivision question. I mean, I can think of a handful of times where I've funded loans, where, you know, they have access to build all 20 homes at the same time if that's something they want to do. Now, I'm not requiring you to build it out in phases. Usually they have a phasing schedule and that's what they intend to do anyways. But again, I'm going to build a loan that works best for Rocky Butani (37:20) Definitely. And have you seen a lot of your builder borrowers that come to you maybe in the past year that they used to use banks and now they can't get financing from a bank for whatever reason. So they're going into the private lending space. Erik Brown (37:37) Yeah, you do see that fairly often. And you know, it's, it's interesting. I wouldn't say that they don't necessarily qualify for a bank anymore. You hear more, you know, I was so frustrated with this took so, took so long. You know, I was exhausted with how much documentation I had to provide for construction draws. It took a month to get a draw, all those things, you know, I, the last thing I want to do is give death by paper cut to clients, especially on construction draws. Jeremiah Wiedman (37:37) Yeah. Erik Brown (38:06) not try to make you breathe out with paperwork. You literally complete an Excel form and sign a piece of paper for our construction draws. We then send an inspector out to the property. He either meets yourself and or the general contractor, project manager at the job site, says, know, here's the line items that I see that you guys are requesting a draw on. Can you show me what you've done and explain the project to me? Usually you have the same inspector coming out so as you do more draws they get more familiar with you and try to streamline the process as quickly as possible and they go, okay, yeah, that makes sense. I'm not asking you for invoices on, well, you said framing was 100,000, let me see your Home Depot receipt. you went to get all lumbered. We don't do that. That's not something we're gonna go and do. This is all based on percent completion of each line item that you're gonna get reimbursed on. Rocky Butani (39:05) okay, let's, let's switch gears to just focus on, on California. So most of the loans you're funding are in California. Are these typically luxury homes? Are they standard homes? they, does it, does it kind of range in, you know, from, low to high or I mean, what's the, what's the type of projects you're typically funding? Erik Brown (39:25) Yeah, I would say the majority of the time we're funding loans that are, know, match the neighborhood that they're in. Rarely are we gonna fund the biggest, baddest house in the neighborhood. We're trying to match what fits that specific market. Rarely are we building, you know, partnering up on the ultra-luxury. high end market if it isn't in the specific area that supports it. Rocky Butani (40:02) So if it's, let's say a luxury build, mean, if you're, if your construction budget's 3 million, what do you anticipate that sale price is going to be upon completion? Are we talking about a house that's worth 10 million more, less? Erik Brown (40:19) You know, you're gonna say hey my budget's three million, you know gut check. I'm gonna say okay That's probably a five and a half six million dollar house at least Otherwise, you know you start doing math on you know, what what what does it cost to sell it? What's my whole cost all those things, you know? It doesn't doesn't end up being a profitable deal anyways, right? And that's something that we look at on our side to work underwriting loans to is you know What's the profit margin on this right and then sometimes we'll talk to clients say, know Jeremiah Wiedman (40:25) Yeah. Erik Brown (40:48) You only got like a 10 % profit margin on this. Are sure you really want to do this? Really? I never really noticed that. Didn't even think about that. Yeah, well, here's all these costs that are either going to occur through the construction phase. And when you go to sell it, I don't know if there's something I want to do at all then. Rocky Butani (41:09) And if you get a request where it is a $3 million budget, it's going to sell for $6 million and there's enough profit, the numbers make sense. Are you comfortable with lending on houses like that with such a high value? Erik Brown (41:24) Absolutely. Rocky Butani (41:26) And what are some of the deals that you've done that have a really high completed value? Like have you funded projects where the sale price is 10 million or 15 million? Erik Brown (41:40) Rarely. I wouldn't say that's something that's our sweet spot. You know, can think of a good amount of projects where, you know, gross sales price is going to be in the 15 to 20 million dollar range. You know, I can think of about 10 of those off the top of my head. But usually those are built in three or four houses. Jeremiah Wiedman (41:40) Yeah Yeah. Rocky Butani (42:02) Okay, and so what's the general range in California? Let's say Southern California. What are the typical construction budgets and the sale prices just on average? Jeremiah Wiedman (42:15) just depends on the area because the budget's going to reflect what kind of finishes they're going to be doing. So we kind of have like a general rule of thumb that construction should be around like this per square foot. And then when it's really high, we're like, what are they doing? And then we're like, what are they trying to achieve? What comp? What kind of finishes are they going to do? Then we start looking at the builder. What have they done before? Is it high-end stuff, low-end stuff? Is the stuff just a move? Is it just workforce housing? It really depends. The high luxury stuff, those are sitting on the market a little bit longer. So what we're getting is lot of you know, scraping builds, like, you know, anywhere from like 15 to 4,000 square foot houses, right, you know, maybe a little bit bigger, you know, but when you start to see stuff, maybe in like Georgia, where these people are building like 10,000 square foot houses, you know, we have to look at those a little bit more specifically, because how long are those going to last for? In California, you're getting a lot of ADU build. It's a lot of ADU conversions, a lot of people building ADUs, because they're going to basically build these ADUs and they're going to put tenants in there. So there goes your kind of rent strategy. Very common. They're streamlining that process a lot. It's technically ground up, right? Because they're going to build a 2,000 square foot ADU and maybe have like, you know, a double, like they're double stacked. So that's pretty common, you know, or I just did one the other day where it's a $5 million future value, but it's, he's going to split it into two separate condos. So each one makes sense because they're only about 2.5 million, which is like the sweet spot in that area. But when you get to high, high ARVs, it's like, who's going to buy that? You're really kind of segmenting yourself to a certain percentage of the population. Who's going to do that? So we look at that like number one. We always look at the deal first of like, does this deal make sense if what is selling in the area the last six to 12 months? Rocky Butani (44:03) And within California, you said that most of your deals are in Southern California, but what specific areas do you like? Do you prefer Orange County? Do you like all of Los Angeles County? Are there certain pockets that you prefer in general? Jeremiah Wiedman (44:18) I do a lot in San Diego County, like North County and just in the cities generally, because a lot of my referrals come from there. And we get a lot in LA. I think Eric does a lot in Orange County because he's from here. He's from Orange County. So he gets a lot of stuff there. And we get a lot of Bay Area stuff too. We get a lot of San Francisco, San Jose, East Bay. So I would say, that's, yeah. Rocky Butani (44:43) How about everything in between? you do anything in Santa Barbara, Ventura County? Jeremiah Wiedman (44:47) Yeah, yeah, we don't. mean, not as much for me specifically. I don't see a lot in there, but like LA, San Diego, Orange County, like the whole southern area of, say, majority of is what we see. Rocky Butani (45:01) And how about in the Central Valley or the Sacramento area? Jeremiah Wiedman (45:05) Yeah, definitely. Yeah. Yeah. Erik Brown (45:06) Yep. Rocky Butani (45:08) Nice and Anything you could tell us about california That like any any challenges you've seen in california whether it's specific parts or or the state as a whole when it comes to construction at least after you funded maybe not Not getting into the permitting process because that that has its challenges everywhere. But but once you've come in and and provided the financing, Are there any challenges that you see happening? Jeremiah Wiedman (45:39) think it depends on what area. If you're on the coast, you've got to deal with the Coastal Commission. That's always a challenge. We have seen certain areas that are a little bit harder to get stuff going specifically. So we're seeing trends in certain pockets in California. Erik Brown (45:42) you So you certain areas have issues with tenants and squatting. Jeremiah Wiedman (46:03) Yeah, LA is tough with that. That's a really good point. hillside projects are difficult. But going back to the San Diego, that seems like they're really streamlining that stuff. That seems to be going through a lot quicker. Yeah, I think it just depends on the area. Rocky Butani (46:27) And what exactly is the challenge with the hillside? Because you have a lot of land that's available that's on a hill. And if the engineering checks off, what exactly are the challenges that you typically have with the hillside? Erik Brown (46:42) One is just being able to get to the area to go and build. And then two, it's expensive to move dirt. And people go over budget really fast on those type of projects. And they're difficult builds. You're shoving caissons into the ground. You're putting up large retaining walls. Just when you start getting into the hillside stuff, you know, Jeremiah Wiedman (46:43) experience. Erik Brown (47:11) Imagine trying to get a bunch of dump trucks and excavators up and in there and in areas to go and do the actual site work. It's difficult. It's expensive. It's a challenge and You can't move as quickly as you want some projects go a little bit longer There's a lot of challenges to go on with, you know, steep hillside type projects Rocky Butani (47:35) so with ADUs, are you seeing most of these ADU projects where you're building a separate structure? versus just expanding on the existing structure. Erik Brown (47:47) You see a mixture of everything. You see people building a structure. You see a ton of garage conversion, specifically in LA, to that style of home that was built in the 40s, 50s, where you had your two-car garage completely detached from your main living area. And people are converting that into extra living space and efficient way to increase value really quick. LA specifically has done a good job with making that achievable for investors. Rocky Butani (48:21) And what is the typical cost if let's say you took your average two car garage that's maybe 20 by 40 and they want to convert that to an ADU, what do you typically see as the construction budget for that? Erik Brown (48:37) 100 grand somewhere in there. You know, it's amazing. You get it. So, you know, it's probably a little bit cheaper than that. I mean, there's a lot of companies out there that specifically market themselves as, know, like ADU Warriors and go in there and, know, I can do this for 50 grand. So, you know, it's amazing how cheap, honestly, sometimes I look at it I go, wow, I'm really gonna do that for that? you know, if it's, if the... Jeremiah Wiedman (48:39) Yeah, what's a square foot like $125 square foot something like that 150 okay Erik Brown (49:06) The bones are good and you're just going in there and you're putting extra drywall up and a little bit of plumbing, electricity, changing up and some finishes in there. Stuff can get done for as cheap as 50 grand. Rocky Butani (49:19) And in that case is that the main house is rented and then they provide the ADU as a separate unit. So you've got just two separate tenants in a single family house. Erik Brown (49:32) Yeah, typically, you know, some people will market it as, know, hey, live in the main house and rent out the ADU and you can, you know, subsidize your mortgage payment. You see that a lot. Rocky Butani (49:43) But in that case, it's a owner occupied home, right? Erik Brown (49:47) Sorry, I'm talking, you know, investors marketing it to sell. Yeah. Rocky Butani (49:51) Okay, got it. That makes sense. they build it out to where it doesn't have a garage. It might have a carport or nothing. And they're just saying, hey, we've made the garage into a separate unit. And then you've got the main house that's also redone or built from the ground up. Erik Brown (49:58) Correct. Exactly. Jeremiah Wiedman (50:08) Yeah, there's different ways of doing it, Rocky Butani (50:11) And in the case where someone wants to build an ADU as a separate unit on their lot, how much space do they typically need for your, for your, let's say a small ADU, whatever the bare minimum is, what kind of lot size do they need for that? Jeremiah Wiedman (50:29) It depends on how big their lot is, how big the house is on the lot, how it's configured on the lot, where they plan on building. They squeeze them in there. Sometimes, mean, sometimes some of them are pretty small and they can get pretty high rent for them. Rocky Butani (50:46) And does the, do the cities typically require a certain amount of separation between the main house and the ADU? Jeremiah Wiedman (50:54) Good question. Erik Brown (50:55) There are you know each county and city has their specific laws and you know Unfortunately, I don't have everything memorized and in a pamphlet to pull up real quick. But Yeah, I would say you know any investors looking at doing that check check with your City that you're buying in and county as well makes your fitting their their guidelines because it is specific to the area Rocky Butani (51:22) And do you have any borrowers that let's say they have a rental house, they're not building the main house brand new, but then they want to put an ADU on the lot. Do you see that scenario where they're just saying, Hey, I want to maximize what I can get out of this property. So they put a brand new structure and do the numbers even make sense in that case? Jeremiah Wiedman (51:46) depends, everything, you know, sometimes they've bought it as an investment, they renovate it as a fix and flip, it as a rental, and that way they want to refi the ADUs, or they have the house and want to add the ADU, that just depends on the situation, but a lot of them are doing it because it does make a lot of sense, especially for the rental income. Rocky Butani (52:04) And then, it sounds like most of the time you see an ADU is when it's a brand new build. they're the, the developers putting the main house. And then if let's say it has a big backyard, they put a separate unit as the ADU and they sell it. You know, like a house with an ADU. Jeremiah Wiedman (52:21) Sometimes I don't really see the new builds mostly with the ADUs. It's mostly basically adding onto an existing house that's already there. That's mostly what I'm seeing. But I do see some, you know, either the ADUs in the house or it's, you know, detached. You're seeing more and more of that happening now. Yes, it seems a very common thing to do. Rocky Butani (52:40) And are most cities throughout California accepting ADUs? Is that a statewide thing that the state said, hey, you guys got to, you know, all you cities around California, you need to start approving these ADUs. Erik Brown (52:53) Yeah, absolutely. mean, there is a shortage in housing in California. You know, it feels like they're a little exhausted with the high rise apartment buildings and allowing people to maximize livable square footage on lots that can allow for smaller families to live in. Jeremiah Wiedman (52:55) It's big. Yeah. Rocky Butani (53:18) And that's a wrap. Thank you to Jeremiah and Eric for your time and for sharing all your insights about ground construction financing. this episode is sponsored by Center Street Lending. They're not paying specifically for this episode, but they do pay us a monthly fee to be on our platform. Center Street Lending has been listed on PrivateLenderLink.com for over three years. They offer ground up construction loans, rehab fix and flip loans, rehab to rent, bridge loans, and DSCR long-term rental loans. Click the link in the description to get to their profile page, reach out to them, and please tell them that you heard about them from LenderLink's podcast, Private Lending Insights.