« Real Estate Capital Basics – Standby Commitments Observations

Real Estate Capital Basics – Construction Loans Observations

RECI, 01 December 1993, No comments
Categories: Education

Important negotiating issues for structuring construction loans are as follows:

Sponsorship with limited “run rate” (regular cash flow from various properties) underwritten more conservatively
during difficult economic cycles funding sources will do deals with limited structure, instead focusing on strong preleasing, borrower guarantees and additional enhancements such as letters of credit. Of course, leverage is also restricted to levels below 70%.
During a favorable economic cycles, recourse, preleasing, collateral performance and run rate become less critical issues

Sponsorship mitigates risk by hedging interest rates via purchasing swaps and other interest-rate futures contracts. Such financial instruments are relatively short-term obligations (thirty to ninety days) structured as staged purchases spanning the construction term. These contracts either earn, or lose, profits based upon interest rate movements and overall financial market conditions. These profits or loses are principally cancelled by interest rate payments, or savings on the construction loan – nearly a “wash.” However, while no profits or loses are incurred, the sponsorship keeps interest rate costs under control.

The Real Estate Capital Scoreboard® – March, 1995 »

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Las Vegas, NV - February 6, 2010 - According to industry leaders gathering in Las Vegas this week, debt capital is readily available for 2010. Optimism is in the air and the mortgage lenders are starting to offer more generous terms and conditions. In summary, timing is excellent for select borrowers in securing debt based on the following conditions: (1) Recovering economy, (2) Ample supply of capital and (3) Limited supply of financeable real estate assets. The following highlights summarize the 2010 state of the realty capital markets including an overall outlook and overall funding program offerings: Back to Basics: As lenders workout of their legacy problems, new funding goals surface which are clearly more ambitious than 2009. Still underwriting of actual numbers w/o projections, yet inflation fears exist. Most lenders are Indifferent to spreads, but not competition. Valuing real estate properties in a declining market still a challenge. More allocation of funds available above target amounts if deal flow is of sufficient quality Underwriting Dynamics: As has been the case last year, high-quality projects in major markets backed by excellent sponsorship and cash flow characteristics are most desired—especially based on low leverage of 65% of value. Location/Property Types: Major MSAs strongly preferred for optional pricing and leverage. Otherwise a substantially most costly financing with lower leverage. Preferred property types ranked in order: (1) Multifamily, (2) Credit-Tenant lease of all property types, (3) Industrial, (4) Retail, (5) Office - however medical office ranks equal to Industrial and (5) Lodging. Pricing (Permanent Fixed-Rate Loan): Agency pricing for apartments starts in the low to mid-5% range for 5 year or greater term. Life company pricing starts mid-5% to 6% for 5 years or more term mostly targeted for commercial property pricing (agencies are more competitively priced) More entrepreneurial funds start at 7% or more targeting secondary markets, smaller fundings, older properties and lodging assets. Add a pricing premium of 25 to 50 basis points for loans below $5 million. Yield differential disappearing - typical ($5 to $50 million) vs. larger loans. Forward funds available up to a year based on 6 o 8 basis points premium per month. Leverage: Above 65% LTV on a select basis combined with lower spreads. Values based on the lower of: (a) purchase price, (b) appraised value or (c) lender imposed capitalization rate.