Commercial Real Estate Development Loans - Continued...

Now is the time, the hour in which you must decide what the capital funding plan will look like for your project.  Will it be over-leveraged?  Will it work for what you are trying to accomplish without creating undue exposure to subjective investment risks that you cannot adequately qualify, much less quantify?

Commercial real estate development loans are packed with provisions that make borrowers scream in agony.  There had to be an alternative and someone had to step up and create one.

Get ready to look at a whole new way of financing commercial real estate development projects.  Let's start the discussion with a working example, okay?  That will make it easier to illustrate.

Assumptions:

Total Development Cost: $10,000,000 (USD)

Type of Development: Multifamily Rental Housing Project

Expected Stabilized Cash Flow (EBITDA): $1,200,000

Effective Hurdle Rate: 12%

Total Max Loan Origination Amount: $8,200,000 (82% LTV on Cost)

Total Equity Required to Close: $1,800,000 (18% LTV on Cost)

Annual Mortgage Payment (rounded): $622,000

Depreciation: $429,000

Cash Flow: $749,000

Cash-On-Cash Return: 41% Per Annum

Now we will add in the syndication layer and see what happens with a post-construction syndication.

Total Development Cost: $10,000,000 (USD)

Type of Development: Multifamily Rental Housing Project

Expected Stabilized Cash Flow (EBITDA): $1,200,000

Effective Hurdle Rate: 12%

Total Max Loan Origination Amount: $7,500,000 (75% LTV on Cost)

Total Equity Required to Close: $2,500,000 (25% LTV on Cost)

Annual Mortgage Payment (rounded): $569,000

Depreciation: $429,000

Cash Flow: $401,000 to Developer and $401,000 to Investor

Cash-On-Cash Return (Investor): 16% Per Annum

Cash-On-Cash Return (Developer): 100%+ (paid out at closing - no long-term capital at risk).

Outcome:

Developer's return has been dramatically increased by virtue of the financing that takes out the developer's original $500,000 investment in the proposed project.  The investors in the syndication are looking at a near-term return window of 16% per annum on their capital investment and after ALL depreciation expense is netted out of the project.  The developer can now shop the permanent mortgage loan at the institutional placement level and reduce the overall Loan-To-Value Ratio, with a consequential savings in the interest rate.

Time to get some of that for your project and/or your real estate investment portfolio.