A few markets might not feel as sharp a financing pinch, particularly healthcare, public works, and institutional projects, because those show market need or have greater owner equity, Pfeffer says. Butthe residential market’s weak fundamentals – with new projects lacking viable revenue streams – make it anathema to banks. The drought’s impact already has led residential project powerhouses to file for bankruptcy protection, as New York’s HRH Construction and H. Thomas O’Hara Architect did last year.

Contractor ChallengesThe evaporation of project financing hasn’t echoed in contractor working capital lines. But there is still an impact on the pricing and process to secure these lines of credit, which help contractors bridge the cash-flow gap in the first 60 to 90 days of a project – funding operations before they collect on their first invoices to owners.

While these loans usually chart off of a contractor’s entire book, today’s light backlogs are making lenders pause, says Bruce Salmon, regional vice president and commercial banking group manager at M&T Bank in Melville, N.Y. “These days, when I look at a new contractor client, I’m looking into the developers and the projects, too,” he says.

Salmon says he gauges a contractor’s volume, cash, track record, profit margins, financial statements, and other records, but now he goes back further. “I’m asking now for more reporting than in the past, and I’m checking in more often,” Salmon says. “If it was six months or a year between contacts before, now I’ll talk to them once a quarter or monthly to ask how it’s going, get a new work schedule, and review how payments and receivables are flowing.”

Some lenders haven’t adjusted practices. Michael Gallina, chief commercial banking officer for Northeast, says he relies on his sector experience and a longstanding client base to maintain lending requirements. But he says available financing ebbs with the amount of work, and there is less now in New York.

That has left many contractors “cash-rich” because they aren’t spending on new projects, Grassi’s Gavin says. And even available credit is at a premium. “The pricing is definitely going up,” he adds.

For now, financing is available for contractors with healthy books, particularly those focused on transportation, school, municipal, and federal agency projects. However, contractors that thrived on private sector work don’t always make smooth transitions to the prequalification, bidding, and budgeting regimens of public works, Salmon says.

“It’s a tough thing for a bank to discern whether their private sector expertise means they’re going to be successful in the public sector,” Gallina adds.

“If you’re a contractor dealing with private owners, I’m not sure you’ve hit bottom yet,” Gavin says.

Smart PositioningWhile there are no sure moves to secure construction financing in this marketplace, there are ways to improve prospects.

A first tip is to think small, says Pfeffer. Even if the fundamentals are solid on a $300 million development, the $30 million project is much easier for banks to fund.

“Don’t bite off more than you can chew,” Northeast’s Martinek adds. “And don’t look at a project emotionally. You have to take off the rose-colored glasses.”

Developers should also scrap speculative project pitches to lenders for now, says Laurier’s Terlizzi. “That’s the first thing that’s going to get the door slammed,” he adds. “If you don’t have the economics well sorted, with pre-leasing or pre-sale commitments, my sense is it will be a very short conversation.”

Conversely, proffering significant equity as an owner can help, Terlizzi adds. “Equity risk has to be fairly well-represented in the capital structure,” he says.

Pfeffer and Terlizzi say another smart move is to focus on sectors with ample funding – such as public agencies – or demographics still driving demand for new construction, such as hospitals, nursing homes, medical offices, senior housing, and lower-end residential properties. Niches such as industrial warehouses are also resilient regionally, says Martinek.

Good business management can also appeal to lenders. Pfeffer says with the market tight, developers should jump at access to top-line contractors and architects. And contractors should also employ high-quality professional services, particularly lawyers and accountants who prepare their financial statements for banks, Northeast’s Gallina says. Paying attention to overhead costs and collecting on invoices also is more critical today, he adds.

Then there are “workarounds” for specific opportunities. Pfeffer says some developers are approaching owners of stalled projects, and banks holding the notes, to negotiate deals where the new party gets control at a discount, with the old owner exited in a “friendly foreclosure” and the bank writing down some losses or selling to another bank.

Terlizzi says another option might be seeking financing from union pension funds, whose mission is not only to invest but also create jobs for their membership.

And Gavin says owners and contractors should approach financing as a “team-building process,” trying to get lenders and others involved early in project planning to build consensus for viable proposals. “The bank might say, “We’d like something on a smaller scale,’” he adds. “To design the whole plan and then go ask the bank might not be as productive.”

Ultimately, industry players should remember that a year ago, bankers weren’t even having financing conversations, but now many are seeking solutions, Pfeffer says. And it’s likely that private capital might awaken as opportunistic investors try to gain position before the market rebounds.

“As painful as it is,” Terlizzi says, “the market is going to correct itself.”