Is there really any financing available right now for commercial projects?

That question seems to be rising these days more often than scaffolding. The answer, say both developers and financial institutions, is yes—but with a far more critical eye on risk.

In today's wary credit environment, construction lenders want to know who a commercial developer has lined up as tenants to go into a new building before financing a project. Also, lenders are more apt to stick with core clients who are willing to put up a considerable stake of their own money in a proposed project, developers here say.

"If you've got a good financial statement and a strong project with good tenants, you can get financing," says Dick Vandervert, who heads up Vandervert Developments LLC and Vandervert Construction Inc., both of Spokane.

The Vandervert companies have six projects currently under way or planned in the Spokane area, five in the Tri-Cities, and a few others elsewhere in the Inland Northwest, he says. Planned projects here include a $7.2 million La Quinta Inn & Suites hotel and a Village Centre Cinemas theater complex, both on the West Plains.

Despite an increasingly conservative lending market, all Vandervert Construction projects are going forward because they are pre-leased or will be occupied by their owners, Vandervert says.

"Projects that aren't pre-leased are on hold," he says of commercial construction projects in general.

Mike Silvey, owner of Silvey Construction Inc., of Spokane Valley, says lenders he's met with have told him they are going to be more selective in what projects they finance. Silvey Construction specializes in construction of medical office buildings and other commercial structures. Its projects include the Wandermere Family Dentistry building, north of Spokane.

Lenders today are especially wary of speculative projects, Silvey says.

"The spec side is pretty tight," he says. "I don't think a lot of people have the appetite for much speculation."

Greg Conley, division manager of community real estate for U.S. Bank here, says most lenders are taking a hard look at a developer's ability to pre-lease space to tenants before a project is built—and also at the fiscal health of prospective tenants—before financing a project. Also, U.S. Bank always has required developers to put a certain amount of cash equity into projects for which they're seeking funding, Conley says. As a conservative lender, the bank underwrites to a set percentage of the construction cost, rather than the total value of a project, he says.

Prior to the current economic recession, some lenders provided financing based on total project value, which generally was more than the construction cost, basically underwriting 100 percent of the project, Conley says.

"We're looking more at cash flow and how much of a loan the (lease) income will serve," he says.

While some financial institutions, including U.S. Bank, have been criticized for not deploying capital raised through the U.S. Department of the Treasury's Troubled Asset Relief Program (TARP) to loosen up credit, Conley says, "That's a catch-22. Do we exacerbate the problem by overzealously trying to use that money to finance new development that we can't justify?"

Additionally, demand for commercial construction loans, especially in the retail sector, has dropped off, he says.

"We have a core group of developer clients," Conley says. "Their retail contacts are not opening new stores."

Office and apartment buildings are about the only types of speculative commercial projects that might get financing, he says.

"The Spokane market isn't overbuilt with them," Conley says.

Silvey says having established relationships with lenders is critical, because lenders aren't competing against each other for financing projects as aggressively as they have in recent years.

"Instead of half a dozen lenders trying to get our business, now we have to chase them a bit," he says. "If a bank is happy with your track record of reliability and performance, I think money is still available. If you have a history of being too optimistic and not making projections, it's going to be difficult to find financing."

Lenders also are requiring developers to put up more equity these days before agreeing to finance projects, Silvey says.

"If you only have a certain amount of cash you can use, and banks are requiring us to put up 25 percent or 30 percent, when before it was 20 percent, you're not going to be able to do as many projects," he says.

Al French, an architect, developer, and Spokane city councilman, says even lenders with lots of money to dole out have become "ultraconservative" when it comes to financing construction projects.

"Until underwriters are more confident that they can accurately assess risk, it's going to be difficult to find financing," French says.

Some healthy banks that have received TARP funds to encourage lending are being more cautious, and are choosing instead to acquire other banks, he says.

"It's a way for them to build their balance sheets for what looks like is going to be uncharted waters for a while," French says.