How Developers Acquire Capital

Developers face numerous hurdles in acquiring funding for large projects and recent economic turmoil has made it harder. One workaround was to demand high presale investment from unit …

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Developers face numerous hurdles in acquiring funding for large projects and recent economic turmoil has made it harder. One workaround was to demand high presale investment from unit buyers and that’s still a core strategy even as the economy continues to recovery. Experts say banks are typically only willing to lend up to 30% of construction costs and that the rest is met through buyer deposits and developer equity. Developers say they try to get 50% of deposits locked down before they start pouring concrete, and a good relationship with a bank prior to breaking ground always helps. For more on this continue reading the following article from JDSupra.

A few years ago, when condo developers began requiring significant up-front deposits from buyers prior to the finish of a project, it was a work-around for a lack of financing in the market.

In the last year, lenders have taken notice, taking the money as a vote of confidence from the market that has prompted them to begin lending again.

Although lenders have more confidence, don’t expect them to lend more than 20 to 30 percent of the construction costs of a project anytime soon, said Adam Lustig, a partner in the real estate group at Bilzin Sumberg Baena Price & Axelrod. He recently completed a more than $40 million lending package for a condo project in Sunny Isles Beach.

He spoke to the Business Journal about the lending market:

SFBJ: What are the conditions that developers/ borrowers must meet to make it to the closing table?

Lustig: Presales and large deposits are critical. Banks are generally lending between 20 percent and 30 percent of the total construction costs. The balance is coming from buyer deposits and developer equity.

SFBJ: What are the challenges that remain a roadblock for obtaining large loans?

Lustig: With 2008 still very fresh in their minds, banks are extremely cautious about making condo construction loans. Condo construction loans receive heavy scrutiny from banks’ internal credit committees and, in some cases, from regulators, as well. Closing conditions are extensive and developers have to jump through a number of hoops in order to get to the finish line.

SFBJ: What is the percentage of condo deposits a developer must have in hand to get a lender’s attention?

Lustig: In this market, 50 percent deposits have become the norm. Developers need to have the vast majority of the units presold in order to get financing. My client, 400 Sunny Isles LLC, closed on a $43.1 million construction loan from Regions Bank early this month after securing presale contracts with 50 percent deposits for nearly all of the units at the 230-unit 400 [Key International] project. That’s a perfect example of what lenders want to see in place.

SFBJ: Does it help to have an existing relationship with a bank, or does a developer just have to have a certain number of deposits?

Lustig: It helps to have an existing relationship with the bank. Banks are being very selective about who they are willing to lend to, and having an existing relationship is important.

SFBJ: What about the size or scale of the project? Does that factor into bank lending?

Lustig: Yes. The larger the loan, the more likely that the bank will syndicate the loan. Banks are being very careful about having too large an exposure to any one project.

This article was originally published in the South Florida Business Journal.

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