A Strategy To Develop Construction Lending

When banks couldn't make development loans during the recession, Community First captured the business instead.
Drew Grossman

It’s too risky. It caused the recession. It’s irresponsible. The concerns surrounding construction and development lending abound.

If you’re going to do business lending, the last part of it you should jump into is construction and development, says Kim Van Osdol, senior vice president of business services at Community First Credit Union ($2.0B, Appleton, WI). And that’s coming from a man who has guided the nearly $30-million-per-year construction and development portfolio at Community First for the past six years.

It’s a risky thing to do if you’re not working with strong businesses in the right scenarios, he says.

Van Osdol joined the credit union in 2008 when Community First’s services were in high demand. After the Great Recession hit, regulators swooped into Wisconsin, as they did across the country, and all but shut down construction and development lending at banks. Credit unions, however, could still make the loans, giving Community First the opportunity to capture that business. As part of its strategy, the credit union recruited Van Osdol and his team of business lenders and operations specialists.

Construction and development loans outstanding
Data As of March 31, 2014
Callahan Associates | www.creditunions.com

As Wisconsin banks decreased their lending to construction projects significantly since the recession, other lenders such as Community First stepped in to fill the void they left.


Source: Callahan Associates’ Peer-to-Peer Analytics

The strategy paid off. In 2009 construction lending accounted for less than $5 million of Community First’s portfolio, according to Callahan Associates Peer-to-Peer. After the recession, however, with Van Osdol’s new team in place at the credit union, construction lending grew steadily each year, reaching $21 million in 2013.

The increased interest from developers allowed Community First to be selective about the members it granted construction loans to.

We look at each borrower, the scenario, the equity, the whole nine yards, independently, Van Osdol says.

Construction and development MBL snapshot

Community first Credit Union
data as of 3.31.14

  • $20.5 million in loans outstanding
  • 61 loans outstanding
  • $27.7 million in loans granted in 2013
  • 108 loans granted in 2013
  • $243.6 million in total MBL

In fact, Van Osdol’s team is twice as diligent underwriting construction loans compared to other business lending. Community First runs the loans through a series of checklists with title companies, lenders, and its operations staff. As a result, the business lending team had zero losses during the past five years that it’s made construction and development loans.

Build Local

Community First serves 12 counties with 23 branches in a 50-mile radius around Appleton, WI. That footprint, which includes five large communities, allows the credit union to spread out its risk while lending in a geographical area that it knows well.

We don’t do business in areas that we don’t know, Van Osdol says.

Knowing the area means understanding everything from the school districts to the competition faced by a new business under construction. To get a complete picture, the business lending team tracks the performance of all businesses in its area, not just those it lends to.


Community First Credit Union
data as of 12.31.14

  • HQ: Appleton, WI
  • CEO: Catherine Tierney
  • ASSETS: $2.0B
  • MEMBERS: 107,897
  • BRANCHES: 23
  • 12-MO SHARE GROWTH: 8.7%
  • 12-MO LOAN GROWTH: 19.1%
  • ROA: 1.55%

We love members that not only survived from 2008 to 2011 but prospered, because if they were successful then, they’re going to have an even better success rate now, Van Osdol says.

Knowing the member is even more important than knowing the area. About 75% of Community First’s construction and development lending has been to existing members. The ratio, however, is gradually skewing toward new members as the credit union expands into new markets where it is averaging one new branch each year. The credit union just opened a branch in Oshkosh and is finishing work on its third branch in Green Bay.

Businesses saw that we’re as good or better than any of the banks they had dealt with before, Van Osdol says. They tell their friends and other acquaintances, so we’ve grown just by word of mouth. We’ve never done any advertising.

Currently, the credit union’s $20.5 million in construction and development loans account for about 8% of its $243.5 million business loan portfolio.

Construction and development loans originated year-to-date
Data As of December 31, 2013
Callahan Associates | www.creditunions.com

Community First granted 109 construction and development loans in 2013, with an average amount of almost $257,000.


Source: Callahan Associates’ Peer-to-Peer Analytics

Enrich Communities

Community First also benefits from tax increment financing (TIF), a program that allows local governments to fund public or private projects by borrowing against the potential increase in property tax revenues. For example, a new town center with high-end shopping and fancy restaurants will increase the value of surrounding real estate, generating additional tax revenue. A local government uses that tax increment financing to fund the town center and then collects higher property taxes when the value of homes and businesses in the surrounding neighborhoods rise. The program has helped bring high-quality business to the credit union setting in motion a cycle of positive reinforcement.

As a result of the recession, the municipalities in Community First’s territory had a lot of empty, unused property on their hands after developers failed to complete construction. That left local governments without the larger tax base they needed to generate revenue.

The municipalities got more aggressive in offering TIF funding for anybody that would do development, Van Osdol says. Several of our larger development loans are tied in with the municipalities. That made it very easy for the developers to provide us with good equity at the beginning of the projects.

Those projects, in turn, have helped enrich four of the five communities the credit union serves, where the tax base increased as a result of Community First funding development loans.

May 19, 2014

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