Guidance on projecting the debt-funding requirement on a single-family master-planned community.

Hello Monkeys, 

I am underwriting a residential development site designated for horizontal development/single-family homes. 

The houses will sell during the construction period, and the investor is putting up 30% equity to fund the project construction cost.

I am having trouble projecting the debt funding. One plain vanilla approach I understand is to take the loan on the entire 70% shortfall. But it just doesn't sound right.

I have been underwriting MFA on a built-to-hold basis. My approach to project debts uses  DSCR of 1.2X of stabilized income or 65%-70% of the project cost - whichever is lower.

Now in this horizontal development on a built-to-sell basis. I just can't find the appropriate income-based approach.  

Comments (5)

Aug 5, 2022 - 6:33pm
Steam, what's your opinion? Comment below:

Because there is no income approach to apply; this is a development deal, you will be obtaining a construction loan. Base case would assume you can't utilize proceeds from the sales to offset other development costs unless the lender is involved in the entire project, they will likely require a pay down of their principal prior to allowing total proceeds to pay for future phases. Sales won't be released until the principal is reduced to an agreed upon amount, it all depends on what your loan documents will state.

If you need a model done, PM me and I can draw one up for you.

  • 1
Aug 7, 2022 - 12:52pm
FreelancerCRE, what's your opinion? Comment below:

When I'm working on models that are requested to be more high-level, I just input a variable called "Time between Construction Start and Sale Closes", this variable, for example, is 12 months. 

Then I calculate the interest costs (interest only construction loan) for those 12 months. 

If you're building out a multi-year project, you can have the excel set up such, assuming 5 years to build and sell 100 houses, each year there is 20 houses built, so 20 multiplied by that interest cost above. 

This doesn't include any pre-development costs obviously 

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  • Associate 3 in RE - Comm
Aug 8, 2022 - 10:29am

Thank you so much for your reply. I used the same approach as you suggested. The project is not multi-year - so I created a Capital/Interest reserve account to calculate interest on construction draws that gets to pay off as soon as excess funds are available from sales proceed.

Do you think there is any need for using DSCR to project the maximum loan amount a lender would be willing to lend when 30% equity is put in for the land acquisition

Most Helpful
Aug 8, 2022 - 11:06am
decrebepro, what's your opinion? Comment below:

Lenders typically provide a revolver on these deals. Size your debt based on the total amount of leverage you think you can get - usually 60-65% of cost. All of your equity goes in up front (you should be getting a homebuilder deposit which you can turn around and inject as equity). If the land takedown is > 35-40% of cost, then the lender will start funding day one. Loan funds all costs going forward, but you pay down the debt on a rolling basis as you sell lots to the homebuilder - say 75-100% of net sales proceeds. The result is that the loan gets paid down and drawn back up, because the land development costs on these deals are so spread whereas you should be getting into revenue fairly quickly.

Aug 10, 2022 - 11:11pm
C.R.E. Shervin, what's your opinion? Comment below:

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