The Basics Of Construction Financing -A Primer Part 4
How To Secure financing And Prepare Documentation For Your Lenders
Many of the biggest projects involve a high level of personal finance from a group of investors. But if you’re looking to complete a project from a few hundred thousand dollars to a large project worth many tens or hundreds of millions of dollars, you may also need to engage a company like CambridgeHomeLoan.com in order to properly structure financing that might fit your needs. If you have enough equity than just one loan typically from private equity. Private equity loans are more expensive than bank loans but allow you to purchase the property and have your construction loan ready to go all in one loan.
In some cases for larger deals you might want to consider taking out a second or a Mezzanine loan. In a mezzanine loan, the collateral is usually the stock of the corporation that owns the property. This is one of the biggest reasons why you’ll want to use a real estate holding company, which will own the property. Typically, mezzanine loans share the same term as the first loan you procure, but they come at far higher interest rates — usually 9.5 to 12 percent.
Most of the largest projects use mezzanine financing, with mezzanine loans typically totaling at least $5 million. EB-5 FINANCING Due to today’s credit and regulatory environment
* Ground Up Construction
* Fix, Rehab, Rent
* Fix and Flip
* Construction To Perm
* Planned Unit Developments
* Multi Family Developments*
EB-5 Financing is the most popular and often the best option for financing the biggest projects. EB-5 is a federal program designed to bring foreign investment into the U.S. and create jobs. In EB-5, foreign investors each contribute up to $545,000 into a project and earn U.S. citizenship. To secure EB-5 financing, you’ll go to a licensed, regional EB-5 organization that will evaluate your project. If it meets their criteria, they’ll have their contacts abroad pitch it to international investors.
EB-5 financing is often structured as a mezzanine loan. PREFERRED EQUITY Preferred equity isn’t technically a loan; it’s actually when a financial firm provides part of the down payment on a project. It’s used if a lender is unwilling CambridgeHomeLoan can help close the gap between your down payment and your project cost.
When your project achieves ROI, the preferred equity investor receives reimbursement of their principal first, but you’ll be paid your principal before they take interest. Usually, preferred equity investors charge a high interest rate, about 15 percent, but sometimes they’re the only option available.At CambridgeHomeLoan.com we underwrite your loan and then place it with the proper wholesale source to be as sure as possible that your loan closes.
There are always items that come up along the way on your credit, in your background and on your project. Having underwriting that be flexible and account for those unexpected items is the key to your project coming to fruition.
CONSTRUCTION LENDING MADE SIMPLE WWW.CAMBRIDGEHOMELOAN.COM
800-826-5077
To prepare your documentation for your lenders start early so when the time comes you are not only educated in the process but organized in your paperwork. You should anticipate constant communication with your lender. Once you have a clear project plan and keep your prospective lender in the loop as your project progresses. Your lender will want to see your pro forma for your construction project that shows the anticipated income and expenses not only for the construction but for up to 10 years following stabilization. The pro forma or income/expense must include a realistic estimate of the lease-up period — i.e. the time it’ll take for your property to achieve stabilization and post stabilization.
BUILDING THE RIGHT TEAM AND LINING UP THE RIGHT TENANTS
Lenders perceive less risk when the right team is involved. Lenders are all about the warm and fuzzy feeling that the project will succeed. Your project will either perfectly fit into your lenders underwriting or more likely will have to sell this project to his loan committee or at the very least request what internally is known as exceptions along the way. Your project is much easier to get over any of those issues along the way if you have disclosed all of the parties involved and if all of the parties involved are experienced and profession. A high net worth from the principals never hurts but even more importantly today is a healthy FICO score and a good track record.
It’s always easier to get a loan for an owner-occupied, single-tenant or multi tenanted building than for a non-owner occupied facility. Why? Because there’s a clear plan for how your property will be used and who will pay the bills.
For multi-tenant facilities, having tenants lined up makes it easier to procure financing. Lenders on multi-tenant retail projects may require pre-leasing to one or more anchor tenants before providing financing. Banks may not make this type of loan at all until a specific percentage (50 percent, for example) of the property is leased to reputable, good-credit tenants. In other cases it is about having good tenants, healthy reserves and a good net operating income. Retailers and potential tenants are everywhere.
Put a package together early and as soon as your project is under way start contacting realtors, brokers and potential lessors with your leasing package. I used this strategy when i purchased or arbitraged commercial properties and it worked amazingly well. We would tie up a property, retail, office, miixed use, etc. go for financing and at the same time be contacting tenants. In almost every case we were able to procure a tenant or two prior to closing on the financing. This made the lenders job much easier and increased the value of our property even before closing on it.
TYPES OF FINANCING AVAILABLE
Different Types of Construction Financing Sources
There are always multiple options for financing any real estate construction project. Some of those financing sources include Private Financing, Federal Programs and various state opportunities. For most construction projects private funding or wholesale construction loans through an agent are the easiest to obtain.
Bank Loans – Bank loans may be a good fit for smaller construction loan, under $3 million dollars A bank loan may be attractive if all of your documentation is perfect but banks have very little flexibility when something comes up in due diligence that is out of the box. If you can get through a local lenders underwriting, their rates are typically low.
CONSTRUCTION LENDING BANKS
Banks that spectialize in construction loans typically have teams that have extensive knowledge of construction and can make great advisors during your process. Again their underwriting is stringent so most construction loans will not meet their requirements..
At CambridgeHomeLoan.com we see a log of construction lending business from investors that fell out of due diligence with their banks at the last minute and need urgent financing. Be aware that when working with a bank you should have enough time on your contract to allow for having to change directions at the 9th hour.
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800-826-5077
SBA LOANS SMALL BUSINESS ADMINISTRATION LOANS.
The SBA offers its 504 Loan program (commercial construction loan) to forprofit businesses that occupy their own properties. It’s available to small and mid-sized businesses for projects of up to $20 million. The SBA Loan allows you to preserve capital, maximize tax deductions and control overhead, as you only need to put 10 percent down and may potentially use land as equity. It offers a long-term amortization (25 years for first loan, 20 years for second). The way you use your space is limited though. You can only lease up to 40 percent of a newly constructed space to another business and up to 49 percent of an existing building you upgrade.
TAX INCREMENT FINANCING
Throughout the U.S., run-down, vacant areas and facilities reduce property values. Communities aim to raise property values and generate sales tax revenue by attracting strategic investments in their area. One tool they use is Tax Increment Financing (TIF), a TAX INCREMENT = property tax value after development – property tax value before development long-term tax incentive offered by a municipality (rural or urban). TIF has been used in 49 states (not Arizona) and has been around since the 1950s. Through TIF programs, owners pay the up-front costs of a project, but as the property value of the facility and the surrounding TIF area rise, the increases in property tax value are actually paid to the owner in the form of tax increments.
A tax increment is the difference between the property tax value of a property before and after development. Each year for a set term (usually not more than 15 years), you’ll a receive tax increment payment. The more you raise the property value, the more money you get back.
HOW TO GET A TIF
To get a TIF, you need to work with a Community Redevelopment Authority (CRA) and show that your project increases the value, not only of your development, but also of the surrounding properties within the TIF area. And you need to show that your project will spur additional investment in the community. A TIF has to pass the “but for” rule, which states “development wouldn’t happen but for public help.” It’s a mechanism to make impossible projects financially feasible. To get a TIF, you’ll likely need a specialty consultant and must meet a range of requirements.
DRAWBACKS OF TIF
Securing TIFs is one of the more difficult and longest of the lending processes requiring public review of your project. First off your investment property must be located in a designated TIF district, this option alone limits the number of projects that are available. And the municipality can use TIF money for specific purposes only (depending on the type of TIF district). TIF funding usually involves some type of infrastructure improvements, which makes it appealing to the public such as clearing land, installing storm water retention, extending utilities and services or a similar project.
While a TIF may reduce the initial cost of construction, the payoff may not come for a period of time. There is some risk involved, as your property must achieve a higher value. As you must pay for the project up-front, you may still need to secure initial project financing.
FEDERAL PROGRAMS FOR SPECIALIZED PROJECTS
The federal government has created a range of loan and grant programs for specific project types. You can find more information on these programs at govloans.gov.
DRAWBACKS OF FEDERAL FUNDING
Federal programs are dependent on annual funding being there when you are ready to ve funded. Projects have to compete for this funding, so it isn’t guaranteed. Also, timing becomes critical. If you miss the funding round, you may have to wait up to a year or more, potentially jeopardizing your project timeline. Most federal funding programs are so specialized you’ll need to hire expert consultants to attain them. These consultants come with their own fees, adding soft costs to your project.
STATE-BY-STATE OPPORTUNITIES
Each state offers its own funding programs. Depending on where you build, you may be able to secure funding, so it’s worth researching what’s available at the state level. These loans also have many of the same pitfalls as the federal loan programs. They may have funding today or even when you start your submission process and then may run out of funds during your underwriting process. The program may not get renewed and you may have to look elsewhere for funding. Do your due diligence and speak with the department directly to understand the funding source and how it is replenished.
CONSTRUCTION FINANCING MADE EASY
PRIVATE EQUITY & BROKERS FOR CONSTRUCTION FINANCING
The most popular and most often successful form of financing for construction loans is Private Equity. Private Equity construction loans encompass a whole range of financing options for the investor. CambridgeHomeLoan.com has 11 sources of wholesale construction lending lines that consist of private equity. We are direct lenders ourselves, have wholesale lending lines, act as brokers and originators. All of these scenarios fall under the Private Equity resource. All that the term Private Equity means in this case is that the funds are backed by private sources that have given underwriting authority to structure and lend their funds.
The private investors receive greater than bank interest secured by real estate. The lender has more flexibility to overcome “exceptions” to the underwriting and get your loan closed. These loans do not have a committee and your loan officer has way more flexibility than a bank to help you get your loan closed. These loans can also be closed in 5-7 days vs a bank loan that can take months to close.
Private Equity:
The best source of financing for construction.
5-7 Day Close – No Funding Limits
FIX AND FLIP LOANS AND MULTIFAMILY LOANS
Fix To Rent Home Loans
- 1-500+ properties
- Single-family, 2-8 units, condos, townhomes, multifamily
- 5yr, 7, 10, 30, 40 year terms
- Up to 90% of cost
- Up to 100% of rehab
- Up to 75% of value
- $70,000 – $250 million
Fix To Flip Home Loans
- 1-500+ properties
- Single-family, 2-4 units, condos, townhomes, multifamily
- 12 To 36 month terms
- Up to 90% of cost
- Up to 100% of rehab
- Up to 75% of value
- $100,000 – $250 million
Multi Family /
Commercial Real Estate
- 1-50+ properties
- Multifamily, condos, Ground Up Construction, mixed use w/ majority residential, Self Storage, Other
- 12, 24 mo., 5,10,30,40 year terms
- Up to 90% of Purchase, 100% of Rehab $1M – $250M
- Bridge, Construction, Permanent, Refi.
A “fix and flip” loan is a bridge loan or sometimes called a hard money loan used to purchase property with the goal of selling it for a profit or refinancing it to rent once the repairs are completed.
A fix and flip loan is works really well in these situations.
- When you need to close fast (Our quick close time is 5 days!)
- A high leverage or a low down payment is required.
- The property needs funds for renovations.
- If you cannot provide verifiable income (no tax returns required).
- When the asset is not yet stabilized, leased up, or producing any income.
- If you need a short term loan with no prepayment penalty
Close in as little as 5 days! No personal income verification required.
Fix and Flip loans are a great way to leverage your existing capital to generate more income with the ability to close & flip more projects at once utilizing bank funds!
Program Summary
| Loan Amount: | $100,000 – $250 Million |
| Term Length: | 12 – 36 Months |
| Max LTV: | 90% |
| Rehab: | Funded 100% |
| Amortization: | Interest only |
| Interest Rate: | Starting at 6.99% |
| Closing Time: | 5 – 14 Days |
| Loan Use: | Purchase, Rehab, Refinance Cash out refinance |