1. Chapter 18 Acquisition, Development, and Construction Financing

2. Chapter 18 Learning Objectives n Understand commercial developments from the land acquisition stage through the construction stage n 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 n Understand those loan provisions that are common to commercial developments n Understand the basic mechanics involved in determining the loan amount and periodic disbursements

3. ACQUISITION: THE LAND LOAN n Acquisition of raw land n Speculator has no development plans but sees opportunity for price appreciation n Developer may specialize and has immediate plans n Warehousing is holding large parcels of land in advance of development

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

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

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

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

8. RISKS IN CONSTRUCTION LENDING n Unfinished or partially completed projects n Unknown construction risks such as weather, prices, strikes, etc. n Mechanic’s liens, personal injury, etc n Failure to meet building codes n Permanent lender commitment failure

9. CONSTRUCTION LOAN PROVISIONS n Reference to the promissory note n Construction procedure details n Loan disbursement details n Designed to insure expeditious construction, within budget and without additional liens

10. CONSTRUCTION LOAN ADMINISTRATION n Making sure that –Construction proceeds as scheduled –Construction work conforms to specifications –Cost overruns are avoided –No other liens supercede the lender’s –Permanent lender conditions are not violated

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