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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?
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.
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