Nov 27, 2023

Hi all,

Working on a case study and facing a tricky one due to some given assumptions:

Value-add project (Acq + Major Refurb)
I'm buying a property now (Call it Dec-23)
100m with 10% Deposit now and rest in Feb-24

Const. loan is going to be 70% LTC

What I would generally do:
Total Costs =

10% Deposit = 10m

Rest = 90m

Refurb = 80m

Interests = 15m

Total Costs = 195m

Loan 70% LtC = 136.5m

Eq = 63.5m

Issue is, I'm getting the loan after 1 year (planning granted). As such I can't use the loan proceeds on the asset acquisition.  (100m-63.5m=36.5m missing)

What would you recommend?
1. Detaching the Asset acquisition from the refurb within Source & Uses and assume I'm doing a 100% Equity acquisition and 30%/70% on refurb costs?

1. Maybe it's a mistake within instructions and the 90m remaining post deposit are payable after loan is granted? (Feb-25 instead of Feb-24?)
What's the industry standard?
Thanks a lot in advance !

Your first loan drawdown will typically refund 70% of costs spent. I.e, your first drawdown would pay 70% of month 0 construction cost as well as 70% of the costs already incurred (70M)

Thanks.

But in that case, I’m buying now (100m) but will get the loan in 1 year (once planning permission is granted) so how should I model this?

Thanks.

But in that case, I’m buying now (100m) but will get the loan in 1 year (once planning permission is granted) so how should I model this?

That the first dollars get funded with equity.  Which is how basically all construction loans work in the first place - you always put your equity in first.  Or always in my experience, and your lender has to be some kind of moron to allow you to requisition debt dollars before expending your equity.

Also some of your math is wrong.  For example, you have \$15mm of "interest" which I assumed means capitalized interest.  But you won't need to fund any of that until you actually close on your loan - you won't fund an interest reserve a year before the loan closes.

Honestly, the real life answer to this question would be to take out a low leverage land loan up front to pay your deposit and carry some of that cost, and then take that out when you close on the construction financing.  As a case study, this deal seems to make very little sense, since the land cost is enormous for a deal which isn't even entitled, but my guess is your professor/interviewer doesn't want to hear "why the fuck am I doing this deal at all?"

I’m already doing the « normal » way

But on a 70% LTC basis, I don’t have enough equity to fund the asset acquisition.

Month 1: acquisition deposit (10m)

Month 3: acquisition « rest » (90m)

Month 12: planning granted -> loan granted

So before month 12, my only solution is to assume the acquisition is 100% Eq right?

I believe in reality we would have another debt tranche for this acquisition? Or that maybe our LP would be happy to fund this part, at the end of the day it’s a 5 year commitment.

For the refurb I’ll do 70% LTC with Eq drawn first + rolled up interests (there is a refi month 36/36)

Thanks

Uggghhh I had a whole response and the site ate it (incidentally, that happens a lot, can a mod look into that?).

The most important thing is not totally related to your case study, but is worth pointing out since it may help you think through it.  Your LP would never do this.  You need \$100mm of equity to buy the property, and then you'll refund \$36.5mm of it at construction closing.  How do I, as your LP, get paid for that?  I'm not going to tie up capital for a year and then have you give it back to me with no return.  You certainly won't want to pay me for it as if it were outstanding for the full 5 year life of the project, and I certainly won't want to wait til Year 5 to get my paltry one year of returns.  Basically you'd have to capitalize a pref payment, which your eventual lender will hate and will be highly inimical to your overall returns.

Which is why (a) no one would ever buy a deal where the acquisition basis was this high compared to the cost of improvements, and (b) why land loans and bridge debt were invented.  If you need to raise \$100mm to do this deal, you may as well just raise that, lower your LTV, de-risk the deal and accept a lower return.

Quia sit non sint est porro tempore. Exercitationem et sed occaecati soluta.