Acquisition, Development, and Construction Financing

1
Chapter 18

• Acquisition, Development, and Construction
  Financing

2
Chapter 18 Learning Objectives
18-1

• Understand commercial developments from the land
  acquisition stage through the construction stage
• Understand that a large proportion of the
  covenants and restrictions contained in loans to
  finance the acquisition and development of
  commercial properties and directed at agency
  problems
• Understand those loan provisions that are common
  to commercial developments
• Understand the basic mechanics involved in
  determining the loan amount and periodic
  disbursements

3
ACQUISITION THE LAND LOAN

• Acquisition of raw land
• Speculator has no development plans but sees
  opportunity for price appreciation
• Developer may specialize and has immediate plans
• Warehousing is holding large parcels of land in
  advance of development

4
INSTITUTIONAL LENDERS

• Commercial banks and thrifts are main sources of
  land financing
• Riskiness of land acquisition loans
• No operating income and few tax benefits
• Physical suitability/ Legal factors
• Release Provisions

5
SELLER ACCOMMODATION

• Land purchase option
• Cost based on term of option, period of exercise,
  volatility of land prices
• Rolling options
• Additional options on more land as existing
  options are exercised
• Seller financing / Subdivision trusts

6
DEVELOPMENT

• Steps include
• Zoning, engineering and surveying, subdividing,
  and physical work
• Land development loan
• Subdivision control ordinances
• Impact fees - cost recovery fees, exaction,
  inclusionary zoning, etc.

7
CONSTRUCTION LOAN

• Short-term over construction period
• Interest rate is variable and usually over prime
• Interest payments are deferred
• LTV ratios in the 60 to 80 percent range

8
RISKS IN CONSTRUCTION LENDING

• Unfinished or partially completed projects
• Unknown construction risks such as weather,
  prices, strikes, etc.
• Mechanics liens, personal injury, etc
• Failure to meet building codes
• Permanent lender commitment failure

9
CONSTRUCTION LOAN PROVISIONS

• Reference to the promissory note
• Construction procedure details
• Loan disbursement details
• Designed to insure expeditious construction,
  within budget and without additional liens

10
CONSTRUCTION LOAN ADMINISTRATION

• Making sure that
• Construction proceeds as scheduled
• Construction work conforms to specifications
• Cost overruns are avoided
• No other liens supercede the lenders
• Permanent lender conditions are not violated

11
CONSTRUCTION LOAN DISBURSEMENT

• Lender requires some equity
• Developer wants to draw funds only as needed
• Interest accrues to borrower to the end of the
  loan
• Lender will usually charge a contract rate plus
  loan fees and points