Learn some insights about ground-up construction projects for residential properties in Pennsylvania. Rocky Butani, CEO of Lender Link, interviewed Chris Tereo from i Fund Cities, a direct lender based in Philadelphia. Watch the video or read the transcript below.
Rocky Butani:
What are some of the unique things about home building or ground construction financing in Pennsylvania, whether it’s Philly or Pittsburgh, versus some of the other markets and states where you lend?
Christopher Tereo:
Yeah. So one thing I’d say to any investor or lender for that matter, to fund the ground up construction, there’s a lot more that goes into ground up than just a normal fix and flip. Everything from local municipalities, zoning codes, building codes. So ground up construction in Philadelphia, in the city of Philadelphia, looks way different than it does in Houston, Texas. Houston, Texas doesn’t have zoning at all. So it’s all about the approval process, and that’s why we talked in an earlier episode about, you know, why certain lenders only want to fund things that are already approved or entitled. And that’s because we need to make sure that the investor understands, you know, what they’re able to build and can they do it in a timely manner because as a lender you could set someone up for failure by giving them a loan too early and they’re paying interest on, you know, whatever that initial loan amount was but they might not be approved to build in eight months. So in reality, they should have probably gotten a different loan. And that’s on an experienced lender and loan officer who understands real estate to guide them towards the best option for funding.
So more on construction in the greater Philadelphia region, you know, we still see a ton of ground up infill development in the city of Philadelphia. There’s still a need for it. I would say we’re seeing less of the ground up condos and more of the ground up triplex where the exit’s going to be a DSCR, or we’re still seeing a lot of, this is specific to Philadelphia, a lot of the PUDs, planned unit developments, town home developments. So those numbers still make a lot of sense both for the lender and the investor And then overall you see a lot of while there’s still a lot of development happening in Philadelphia There is sort of this push to the suburbs as well where we’re seeing a lot more of the single-family development type stuff in the greater Philadelphia area and surrounding suburbs which we’re super excited about. And yeah, I think there’s still a ton of opportunity in PA, obviously, but if we’re talking about Philadelphia and the greater PA area specifically.
Rocky Butani:
What are some of the neighborhoods that seem to be hot with the infill development in Philadelphia at this time?
Christopher Tereo:
It’s still the common neighborhoods everybody that’s investing here would know. So you have Point Breeze, Grays Ferry, and on the other side of the city you have Queen Village, you have Pennsport. Up top, up northeast you would have Kensington, which there’s a ton of development going on, Fishtown Kensington. And then less, we were saying less development, you know, maybe numbers haven’t appreciated as people thought in the Brewery Town and Strawberry Mansion area, but we are seeing a ton of development in the Germantown pushing more further northwest. Germantown, Mount Airy, even into Manayunk as well, East Falls. So yeah, there’s still a ton of opportunity out there. And you see a lot of, as I mentioned, the PUDs, PUD development up in that northwestern Philadelphia market.
Rocky Butani:
And how about permitting and getting building approvals? Is that generally difficult in the city of Philadelphia?
Christopher Tereo:
Good luck. I wish you the best of luck. That would be my answer. And make sure you have at least zoning permits approved before you try to get a loan, at least with us, because we’ve seen time and time again where even something that’s buy right can easily get pushed back and get shot down by either the local RCO or zoning board. So it is super important to make sure you have a good plan and a team. You have your, just like you have a lender and a builder, an architect, zoning lawyer, and this is for ground up construction because these things are more involved, you gotta make sure you have a solid team.
Rocky Butani:
And how about going outside of the city of Philadelphia? What are some of the cities in the greater Philly market that are primed for ground development or have a lot of activity?
Christopher Tereo:
Sort of you know, Bala Cynwyd you have Newtown Square, obviously there’s a ton going on out in the main line, but like right outside of the city, people that are you know, maybe graduating from the starter home in the city and now they have a couple kids and they want to get out to Chestnut Hill or you know, there’s just a ton of opportunity right in that sort of outside of the city range and you stop paying the Philadelphia, you know, income tax and you want to be right outside but still have a good commute in. Yeah, there’s a ton. Conshohocken there’s a ton of opportunity as well. But I would also say, so I know this is PA, but we’ve also seen a massive uptick in New Jersey, South Jersey, new construction as well. So it’s a great way to be close to the city, maybe you don’t want to go out to the main line or Chestnut Hill in the suburbs in PA, and you want to be a little closer to the shore down the summer, a better drive, skip the bridge traffic. We see a ton of stuff ground up in New Jersey, South Jersey right now.
Rocky Butani:
What if we go outside of the greater Philly area? The capital of Pennsylvania is Harrisburg, right? So is that a desirable market? And how about Pittsburgh and how about north of Philadelphia, like Scranton and areas like that? Are those areas hot for home building at this time?
Christopher Tereo:
Oh yeah, absolutely. I think there’s a, you get like Northern PA, you get into like Scranton, Bethlehem, a little closer you have New Hope, Doylestown. I mean there is a very big push that you kind of saw started in COVID, people looking to maybe just, I don’t know, get some more fresh air, kind of get out of the city. You thought that might stop once, you know, people were back in the office, but we’re still seeing a ton of push out into those markets. So yes, Harrisburg is big. You have Wilkes-Barre, Scranton, Bethlehem. We don’t have as much of a local presence out in Pittsburgh, although that is going to change for us in this next quarter. We’ll have a local sales rep, so I don’t have as much data out there. But yeah, we do a ton of not just new construction, but also renovation, fix and flip in a lot of these central PA, northern PA markets.
Rocky Butani:
In terms of doing ground of construction projects, vertical construction, could you give us just an overview of your loan program? What do you offer to builders?
Christopher Tereo:
Yeah, So, you know, assuming you qualify, you know, you have a solid FICO score above a 680. you know, you’ve done new construction before, you’ve either done new construction or you have significant rehab experience, that’s typically what it takes. You know, we offer 85% LTC, so loan to cost, not to be confused with LTV, so up to a 85% LTC on new construction. You know, and where, you know, we kind of touched on this in an earlier episode, but where we really separate ourselves from banks is obviously speed, leverage, efficiency, banks they cap you on spec ratio, they limit you on exposure, which means the number of loans they can give you at a given time, the LTVs are lower, and they require deposits, which also further brings down your leverage.
And it all depends if are you investing your own cash, or you raise an equity, which is super expensive. So we give you the ability to help grow and scale that business and also diversify your lending by partnering up with us while still maybe maintaining a banking relationship. But maybe we’re more competitive in certain areas and to be honest, we’re in this market where we’re not much more expensive. We never say we compete with banks on rate, but we compete on everything else. And honestly, I’d end it with we have the expertise in new construction. So we’ve built it ourselves, we fund it all the time, and it’s really important to have understands how new construction operates. Can’t stress that enough.
Rocky Butani:
And if let’s say I’m a builder and I’ve got an infill lot in the city of Philadelphia and I’ve subdivided it, can I use some of that equity as part of my equity for the vertical construction piece that you might fund?
Christopher Tereo:
Yeah, anybody that’s worked with us knows that we’re probably one of the most creative lenders when it comes to figuring out how to use equity to work for you and recapitalizing your equity. So what that means is you buy land for, just round numbers, you buy land for $100K, you add a bunch of value by, you know, entitling it, getting zoning approved, maybe subdividing the land. And as long as it’s seasoned appropriately, which is a year, and you come to us for a loan, we cash out, refi you into a new construction loan, cover 100% of construction, and maybe even get you some cash back towards your original basis, which is either cash in your pocket, you can go buy the next piece of land with, or maybe it’s an early cash return to your LP investors, and they get super happy about that.
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