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Construction Financing. William Gietema Arcadia Realty Dallas, Texas. Construction Loans. Money Moves Differently Short Term Transaction Intensive Process Intensive Overhead Intensive Fee Driven Expensive / Profitable. Sources of Construction Lending. Commercial Banks

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Construction Financing


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construction financing

Construction Financing

William Gietema

Arcadia Realty

Dallas, Texas

construction loans
Construction Loans
  • Money Moves Differently
  • Short Term
  • Transaction Intensive
  • Process Intensive
  • Overhead Intensive
  • Fee Driven
  • Expensive / Profitable
sources of construction lending
Sources of Construction Lending
  • Commercial Banks
    • Short Term Loans match Short Term Liabilities
    • High Returns Present Competitive Advantages
    • Local Knowledge:
      • Real Estate Market
      • Construction Market
      • Personal Relationships with Borrowers
    • Syndication of Loans Between Markets
special risks
Special Risks
  • Takeout Risk
    • Opportunity Cost
    • Risk of Loss
  • Commitment for Permanent Financing
    • Type of Commitment
    • Sponsorship of Commitment
    • Contingencies
      • Delivery Date
      • Specifications
      • Economic
special risks5
Special Risks
  • Start Risk
    • Boundary Surveys
    • Soil Tests
    • Environmental Tests
    • Availability of Utilities
    • Zoning Verification
    • Availability of Building Permits
special risks6
Special Risks
  • Completion Risk
    • Quality of Design
    • Quality of Budgets
    • Quality of Construction
    • Financial Strength of Contractors
    • Hold Back / Retainage
    • Contingency Budget
    • Quality of Contracts
  • Sponsorship Risk
    • Experience of Borrower
    • Financial Strength of Borrower
special risks7
Special Risks
  • Borrower Default
    • Right to Recover Through Foreclosure
      • Right to Foreclose
      • First Lien Priority in Title
      • Title Insurance
      • Lien Waivers
      • Assignment of Contracts
      • Assignment of Rents
    • Borrower Guarantees Loan
construction loans vs land development loans
Construction Loans VsLand Development Loans
  • Primary Difference between a Construction Loan and a Land Development Loan are the sources of repayment.
  • Construction Loans - Taken-Out (Wholesale)
  • Land Development Loans – Sold-Out (Retail)
      • Subdivision of Lien and Partial Release of Loan
land development loan
Land Development Loan
  • Construction Lender now Responsible for all Underwriting Analysis
  • Incremental Repayment Over Sales Period
  • Loan Performance Tied to Project Performance in the Market Place
  • Longer Term = Extended Risk Horizon
  • More Interest Rate Sensitive
  • Quality of Collateral Subject To Change
loan underwriting
Loan Underwriting
  • Very Conservative
  • Underwriting Loan to Value Based On:
    • Market Value
    • Hard/Soft Development Cost
    • Discounted Bulk Sale
    • Value of Collateral
    • Financial Strength of Borrower
time and risk
Time and Risk
  • Longer Term = Extended Risk Horizon
  • Incremental Repayment Over Sales Period
  • Loan Performance Tied to Project Performance in the Market Place
  • Quality of Collateral Subject To Change
release price
Release Price
  • Determines the Amount of Principal Repayment Made with Each Lot Sale.
  • Intended to Accelerate Loan Repayment
  • Shorten Risk Horizon = Reduce Risk
developer s risk
Developer’s Risk
  • Value of Inventory
    • Anti-Cherry Picking Clause in Builder Contracts
    • CC&R’s Including Architectural Regulations
  • Cost Overruns and Completion Risk
    • Contract as much away as possible
    • Architects, Engineers, Contractors, Lenders
    • Have Hard Cost Contingency in Loan
developer s risk17
Developer’s Risk
  • Builder’s Performance
    • Take Down Schedule
    • Specific Performance Clause
    • High Initial Lot Deposit
    • Burn Down of Deposit
    • Onsite and Marketing Performance Clauses
    • Quick Remedies Through Default Clause
time and risk18
Time and Risk
  • Increased Time = Increased Costs
    • Pass Through Incremental Costs to Builders
    • Have a Soft Cost Contingency in Loan
    • Reduce Debt Quickly
      • Agree to Higher Partial Release Price
      • Accelerated Builder Take Down
      • Bulk Builder Take Down
    • Increase Sales Velocity
      • Product Diversity
      • Small Phases
the worst case scenario lender declares default
The Worst Case Scenario: Lender Declares Default
  • What Happens Next Depends on the Guarantee the Developer Signed
    • Guarantee to Repay the Loan
    • Guarantee to Repay all Losses
    • Guarantee to Repay Lost Principal Amounts
    • Completion Guarantee
  • The Loan Must Give the Borrower the Rights to Cure and Extend
equity
Equity
  • Sweat/Earned Equity
    • Unrealized Value Created through the Development Process
  • Hard Equity
    • Cash or Value Which Fills the Gap Between Total Loan Amounts and Total Cost.
    • It has Ownership and Participates in Profits and Losses.
    • It Deserves High Rates of Return
    • It Should NEVER be Guaranteed
    • It Should NEVER be the Developer’s
summary
Summary
  • Construction and Land Development Loans
    • Structurally Different from Other Kinds of Loans
    • Process Intensive
    • Extremely Time Sensitive
    • Expensive
  • The Borrower Can Manage Risks
    • Conservative Underwriting
    • Product Mix and Phasing
    • Allocate Risk to Others
    • Aggressively Negotiate Guarantees, Extensions and Rights to Cure
things to remember
Things To Remember
  • You are Responsible for the Amount of Risk you Assume
  • You are Responsible for Managing your Risk
  • Negotiate Risk Away from You.
  • Never Use Your Own Money
  • Never Use Your Own Money
  • Never Use Your Own Money
  • Never Use Your Own Money
thank you

Thank You

Arcadia Realty

Dallas, Texas