case stady ilustrator 01

$19,000,000: $10,200,000 “Non-Recourse”

Credit Facility and $8,800,000 in JV Equity Financing
for 9,550 SF Creative Office Conversion with Ground

Floor Retail in Miami, Florida.

Acquisition Loan

What is an acquisition loan?

When an investor is looking to finance the acquisition/purchase of a real estate investment property, an investor will seek an acquisition loan.

Who should get an acquisition loan?

An acquisition loan would be a great fit for any real estate investor looking to add to his rental portfolio. When real estate investors find an investment opportunity but don’t have the capital to acquire the property without financing, they look for an acquisition loan in order to execute the deal.

Benefits of an acquisition loan?

Acquisition loans allow investors to scale their real estate investment portfolios at a much faster rate and relieve investors from missing out on investment opportunities due to the lack of capital.

Disadvantage

Acquisition loans don’t take into consideration the renovation / rehab that the property will require. This is a disadvantage for real estate investors with a fix and flip business plan. Acquisition loans eliminate rehab/renovation costs from the loan sizing calculation and only size the loan using the property’s value.

Investors can only use a certain percentage of the loan to rehab each property. The amount is based on the property’s value and the maximum percentage allowed per property. Lenders do this to limit the risk of an investor deploying too much capital on one property.

Example

An investor from South Africa has $250,000 in liquid assets ready to invest in real estate. The investor discovers four opportunities.

Property 1 = $180,000
Property 2 = $150,000
Property 3 = $160,000
Property 4 = $130,000

To acquire all four properties the investor would need $620,000. The investor alone can’t afford to purchase the four properties. However, acquisition loans allow the investor to purchase all four with the help of financing. An acquisition loan is an incredibly helpful tool for real estate investors as it helps them scale their business, wealth and income.

Real Estate Acquisition Loans

What is a real estate acquisition loan?

Acquisition loans are used to purchase real estate properties or a business entity that owns a portfolio of properties. Lenders will require borrower information and property information for the properties being acquired.

What property information is required?

Lenders will require a 12-month proforma, 10-year proforma, residential leases, rent rolls, capital expenditures, purchase contracts, tax records and utility bills.

What borrower information is required?

Lenders will require proof of liquidity, three months of bank statements, credit reports, background checks, business entity information, proof of identification, two years of tax returns, and a summary of their experience and real estate transactions.

Benefits

Higher Proceeds

The loan is sized based upon the financial performance of the core asset. This strategy decreases the weight of the borrower’s credit report. These real estate acquisition loans can produce higher net proceeds as the loan is based on the assets ability to cash flow and perform over time. This allows private lenders to provide funding quicker.

Fast Closing

In the real estate industry time is of the essence. Especially in competitive markets where investors are battling for opportunities. Therefore, established, and experienced investors prefer going through private lenders who deal with real estate transactions on daily basis. The lenders real estate experience and expertise allows for a fast closing in comparison to going through a bank. Private lenders can close a deal as fast as needed when time is of the essence.

Scale

The greatest benefit of a real estate acquisition loan is that it allows real estate investors to scale their business. Most private lenders will only lend to experience real estate investors. However, if an investor can manage to get a few properties under their belt through a traditional bank loan then scaling becomes significantly easier as private real estate lenders will be willing to work with you. The two greatest benefits of working with private lenders are their high level of flexibility and high level of experience with real estate deals.

Popular property types for real estate acquisition loans

The most acquired real estate property types through acquisition loans are single family residential (SFR), townhomes, condominiums, studios, duplex, triplex, fourplex, and multifamily.

Construction Loans

What is a construction loan?

Construction loans are short-term loans for investors who need financing to build a personal home, an investment property or investment properties. Construction loans are considered high risk and require a higher interest rate. Borrowers typically rollover these loans into long term financing and secure a lower interest rate now that the property or properties are no longer under construction and are stabilized. Construction loans aren’t only for the development / construction of new homes; construction loans can be used to fund renovations / rehabilitation projects.

Terms

Lenders will require a real estate developer to provide an in-depth business plan for the construction process, as well as show proof of the contractor’s experience and qualifications. On average, lenders will require a minimum down payment of 20% for construction loans and a strong credit history.
Lenders can structure the construction loan as an interest only loan where the borrower will only be required to pay interest monthly but will owe the entire principal balance at the end of the project or loan maturity.

Funds

Lenders might issue the project funds directly to the contractor building the home or homes, rather than issuing the funds directly to the borrower. The contractor would receive the funds in either a lump sum payment or in monthly installments. Lenders go directly to the contractor to decrease the risk of the funds being misused.

Who qualifies for a construction loan and who might not?

Construction loans are a go-to product for real estate developers, real estate investors who have built their business around a fix and flip strategy or a build to rent strategy, and people looking to build their residence to their own personal specifications. The only way any of the above wouldn’t qualify is if they intended to act as the project’s general contractor. Unless they have a proven track record of doing this successfully, they probably won’t get approved unless they find a new general contractor with the proper qualifications and experience.
Otherwise, these borrowers will be directed to an owner-builder construction loan.

When should I start the refinancing process?

On average, construction loans last 12 months and the refinancing process can begin immediately after construction is complete. Why? Risk decreases significantly as the property has successfully completed the construction process. The property is considered stabilized, and ready to sell, rent or live in.

Multifamily Construction Loan

What is multifamily construction?

Multifamily construction is the development of multifamily investment properties. Multifamily investment properties are residential assets with five or more units on a single property. For example: apartment buildings.

What is the purpose of the loan?

The main purpose behind multifamily construction loans is to secure funding for the development of the multifamily property. Most developers don’t have the capital to develop a multifamily property out of pocket. Multifamily construction loans allow for developers to scale into a larger project compared to their capital’s capabilities alone.

How to qualify for a larger multifamily construction loan?

Partnerships: Multifamily construction loans are for the development of buildings that come with an an immense financial responsibility and commitment. Therefore, lenders require proof of liquidity (20% of the loan amount). To help lessen the responsibility and commitment per borrower, investors will develop multifamily properties with a partner(s). Partnerships allow investors to combine their capital to qualify for a larger loan to develop are a larger multifamily building that they wouldn’t be able to develop as an individual investor. Partnerships also decrease the level of risk that each investor will hold in the deal.

Example

Individual

Loan Amount = $1,1250,000
Individual Cash = $225,000
Liquidity Requirement = 20%

Partnership

Loan Amount = $3,000,000
Combined Cash = $600,000
Liquidity Requirement = 20%

Interest Rates

Interest rates are one of the most significant components of financing especially when receiving a multifamily construction loan. The percentage of interest will vary depending on the developer’s credit and current market. Rates on Construction loans are usually fixed and remain the same during the time of the loan.

Financing option for developers with poor credit and legal issues

Commercial mortgage-backed securities (CMBS) are significantly more flexible with the approval process of a developer with a poor credit report and legal issues. Commercial mortgage-backed securities are more lenient on developers and offer low interest rates.

What is the term for a multifamily construction loan?

Most multifamily construction loans are between 12 and 24 months as that is typical time frame for a construction project. At the end of the term the developer / borrower is obligated to pay back the entire loan balance within 1 to 2 years post-construction.

Ground-up Construction Loans

What is a ground-up construction project?

Ground-up construction projects are when a real estate developers or investor develops a brand new property on undeveloped land.

Short term

Ground-up Construction loans can range from 12 to 24 months. The term of the loan can be structured to fit the project timeline. Ground up construction loans can be rolled into long term financing at completion.

Covered Costs

The funds provided in a ground-up construction loans are to be used solely for the hard and soft costs of the development project. Lenders can structure the loan to include the acquisition of the land if the developer doesn’t already own the property.

Down Payments

Ground-up construction loans require a minimum down payment of 20% which can be the sum of cash and equity already invested into the deal. The lender will require proof of equity invested into the project.

Who should seek out a ground up construction loan?

  • A developer who already owns the raw / undeveloped who is looking to develop a structure
  • Experienced investors who are looking to hire a development team to develop a property
  • Developers who need immediate access to funds to successfully complete a construction project

Due Diligence

The developer / investor will need to provide property information, project information, order third party reports and provide borrower information. Below are some of the documents a lender will request:

Construction Draw Information

The requirements for a construction draw schedule depends on the lender. Borrowers, investors, and developers need to be prepared to provide the required documentation before and during the loan. During the loan lenders will require proof of all fees reported prior to each draw. This requirement also benefits the lender as they will know exactly how much cash to have on hand prior to a draw. Draw setback can put construction projects on pause. Borrowers should ask the lender if commitment funding is available as this allows borrowers to avoid paying interest on construction funds until they are drawn.

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