D32-LancMtef Farming Saturday, April 1,1989
STATE COLLEGE (Centre)
“It doesn’t take a whole lot to go
wrong before you can have an
unhuppy customer or a financial
loss on the job. And those are two
critical results you do not want to
realize,” said Gregory E. Diehl,
senior vice president with Key
stone Agricultural Credit Associa
tion. “Anyone in business knows
that 100 many unhappy customers
damage your professtional reputa
tion, which will eventually put
you out of business. Financial los
ses only help you go out of busi
ness faster.”
Diehl presented the concerns
lenders faced when administering
construction loans to attendees at
the Eighth Annual Farm Builders
Conlcrcncc earlier this month.
“My objective is to give you some
insight that I think will help you
anticipate and confront those many
challenges that cause you frustra
tion, dissatisfied customers, and
lost money,” he explained.
To understand construction
loans, according to Diehl, builders
should know that risk is the chance
of loss, construction loans pose a
highcr-ihan-normal risk to banks,
and there is only one construction
loan program, however loan con
trols vary widely according to the
risk perceived.
Construction loans are risky for
sevcial reasons. One is the finan
cial position of the mutual custom
er. “Customers with marginal
equity make more controls neces
sary. If the building is going to
generate the income needed to
repay the construction loan, expect
strict controls,” said Diehl. “In
cases where the bank’s collateral is
dependent upon the building being
completed as porposed, you will
sec loan controls.”
Those people with strong equity
and buildings that don’t generate
direct income or contribute colla
teral values, such as a machine
shed, require few loan controls,
according to Diehl.
“While you probably don’t
know your customer’s financial
situation, the degree of loan con
trols will give you some indica
tion,” he added. “As a builder, you
need to know that loan controls are
a function of risk the bank
perceives.”
Construction loans also are con
sidered risky because there are
risks inherent to the construction
project itself. A basic building
such as a machine shed could be
considered low risk. Machine
sheds don’t normally produce
direct income and don’t add a lot of
value to the farm operation. “There
are things that could still go wrong
with the project, but even if they
do, the bank would have very little
concern,” said Diehl.
A high risk project would be
something like a layer house. Not
only is the project highly special
ized, but the customer would nor
mally require a large loan. Accord
ing to Diehl, customers would usu
ally take on a $500,000 debt to
build and equip a layer house. In
addition, during construction,
interest is accruing on any loan
proceeds that have already been
disbursed.
Subcontractors and materials
suppliers can add to the project’s
risk. “They are third parties for
which the customer and banker
have no control,” stated Diehl.
Another risk is possible cost
overruns. Many things can
increase the project’s cost includ
ing delays or added expense in
excavating caused by rock or
storm-water control requirements,
Many Risks Influence Construction Lending
additional expenses involved in
locating an adequate water supply,
inadequate insurance protection,
and weather.
“I have experienced situations
where cost overruns resulting from
problems like those I just men
tioned are so great... that there
wasn’t sufficient income to service
debt, provide for living and adver
sity, nor adequately recapitalize
their business,” related Diehl.
“Those are the kind of lessons
experience teaches bankers that
risk must be thoroughly evaluated
and controlled in a prudent
manner.”
There are also Pennsylvania
state laws that can affect the pro
ject’s risk factor. The most critical
law is the the Mechanics’ Lien
Law, according to Diehl. This law
allows those who do work or supp
ly material for the construciton of ‘
U.S. Regaining Share Of World Corn Markets
NASHVILLE. TN Produc
ers will have to be better market
ers of their crops in the years
ahead, said Frank Beurskens,
president of Advance Trading Inc.
of Bloomington, 111.
And, Buerskens advised the
audience at the Sunrise Marketing
Seminar at the NCGA Com Class
ic, “There will be greater volatility
in the markets ahead and market
ing will be extremely important.”
Beurskens recommended that
farmers learn all they can about
the world economy and the mark
eting system. “The world eco
nomy influences everything we
do,” he said.
Beurskens touched on the posi
tive and negative factors affecting
com and soybean prices. The posi
tive factors for com include:
* There’s been a big turnaround
in com demand and the U.S. is
regaining its market share of the
world grain trade.
* Soviet demand for grain is
buildings to file real estate liens if
they are not paid.
“If a lender ignores this law and
fails to control loan proceeds, he
could find himself in a junior lien
position or, what’s worse, the cus
tomer ends up with more debt than
expected, which could cause the
forced sale of the property in order
to satisfy a builder’s claim,” Diehl
noted.
Another important law deals
with multiple advances made
against a real estate mortgage.
Normally when a mortgage is
closed, ail of the loan proceeds are
disbursed at the same time. In con
struction lending though, the dis
bursements could be made over a
period of six months or longer, and
in Pennsylvania any mortgage
used to secure a construction loan
must state so and often the dis
bursement schedule..
increasing.
Negative factors include:
* U.S. government stock
liquidation.
* The increase in South Afri
ca’s com planting will make up
for the decrease in Argentina’s
com crop this year.
* Mild winter weather cut
livestock feed demand.
“Overall, the world com situa
tion is not that negative,” Beurs
kens concluded.
The soybean price picture is
more negative, he said. Although
soybean usage and demand have
increased steadily since 1973,
U.S. soybean acreage has declined
since 1979. The substituting of
soybean plantings on com base
acres is coming two years too late,
he said.
Other soybean market influ
ences include:
* The Soviets are buying com,
not protein crops like beans.
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“Bankers aren’t just conserva
tive, they’re normal people who
like you, hate to lose money. In
order to lessen the chance for loss,
they make every reasonable
attempt to manage or control the
various risks just covered,” said
Diehl.
He concluded with several sug
gestions that will help contractors
keep farmers happy and profits
coming in.
1. Get accustomed to using
good documentation. That
includes contracts, building plans,
and specifications. In the long run,
they will save time and money.
2. If you leave any part of the
project to the customer, assure
yourself they have the wherewithal
to do it and document it.
3. Find out how the customer
intends to pay for the project. Get
♦ The European Community’s
soybean consumption is going
down as they are substituting
other commodities for protein
sources.
* High prices from the drought
have cut demand.
Beurskens said that South
American economics, particularly
in Brazil and Argentina, will not
improve much in the years ahead
because of high inflation and other
economic problems. “If the eco-
Call or
Write For
Your Nearest
Dealer
t -.' r.
some references if bank financing
is nol to be used.
4. If no one else requires it,
insist on a joint meeting between
you, the customer, and the banker,
Do this after loan approval in
order to review contracts and bank! 1
controls ‘on advancing loan
proceeds.
5. Make sure you understand
the terms of the bank’s construc
tion loan agreement.
6. Establish regular progress
meetings involving your customer
and the bank, regular communica
lion in such a manner is one of your
best ways to insure against
disagreements.
7. Remember that good con
trols work in everyone’s favor,
From proper insurance policies to
construction loan agreements, they
help manage risks to everyone
involved.
nomic situation does not improve
in Brazil and Argentina, we might
see acreage return to the U. 5.,” he
said.
Beurskens also advised the
audience to watch the growing
concentration in agribusinesses
that buy from farmers. As the lar
ger companies snap up their
smaller competitors, he said, the
amount of competition is cut and
prices farmers receive could drop.
“That’s your biggest fear in the
next decade,” he said.
010 ANTIC
SUCTION
IN
Lancaster
Farming's
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