A SPEC construction loan is an interim construction loan only, and not the permanent financing because the exit strategy is to sell the property.  “SPEC” here is short for “speculating”, because the builder or investor is speculating that they can sell the property at a profit.   For this reason, the builder or investor is not expected to have debt ratios calculated with them carrying this loan.  Bank SPEC construction loans will require tax returns, but the analysis of those is generally limited to trying to determine if the guarantor(s) have enough income to meet their own obligations during construction and marketing time.

Liquid reserves remaining for the guarantor(s) after close of escrow are very important for any bank’s underwriting of SPEC construction loans.  Recent experience on similar projects in the same market area are also important to get the very best SPEC construction loan rates.  If the guarantor(s) are not the builder, but are investors, the general contractor’s experience doing similar recent builds can mitigate the investor’s lack of experience to some extent.

The banks that are doing SPEC construction are picking and choosing between many strong projects.  Generally SPEC construction loan rates for the premium deals, where the guarantor(s) and the GC are experienced, post closing liquid reserves are substantial, loan-to-cost and loan-to-value are low, credit is good, and the investors have outside income, are in the prime + 2% range.  If and when some or most of these elements are missing, the rates of more flexible SPEC lenders are in the mid-sevens.

Note that whereas the stated exit strategy is to sell the property, if SPEC construction lenders are paid off, they do not care how they were paid off.  If investors obtained permanent financing at the end of construction to keep the subject property as a rental, or even if they get themselves a “stated income” permanent loan to keep a property and occupy it, the SPEC lender is paid off and they’re gone.  It doesn’t matter how they are paid off.

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