A decade past the housing bust and the recession that followed, traditional banks are still harnessed by regulatory frameworks that continue to limit their ability to underwrite investments that are deemed to be risky. The result has been an overall reduction in the growth of the building industry that had the potential to stymie the country’s economic recovery.
Private Lending’s Role
The hospitality industry has been particularly hamstrung by the hesitation of banks to fund their new developments. Private lenders have been the saving grace for developers who had nowhere else to turn to when they needed to meet their capital goals. Unlike traditional financial institutions, private lenders can fund varied projects that might carry an increased risk without being tethered by restrictions.
Construction lending continues to be unappealing for banks because they must comply with regulations that have decreased the flexibility of their lending practices. Even as banks have become pickier, private lenders have welcomed higher-risk projects with flexible and innovative lending solutions. Rather than being limited to a specified set of requirements, private lenders can take concepts such as a project’s future earning potential, highly-desirable location and more into consideration when making the underwriting decision.
Far from using shoddy lending practices like those used by banks that then fueled the housing bust, private lenders instead seek to effectively mitigate risk in some areas while embracing others that are performing well. This willingness to create innovative funding solutions has helped key industries like hospitality weather an unfavorable lending environment and allowed them to meet their capital needs.