Is land cost included in LTC?
If a company already bought the land and is going to develop it, but they want to take out debt to do so, would the lender include that in their LTC when determing proceeds?
Question 2: If construction has already begun and now the developer wants to take out debt to finance the rest of the project, will the LTC only include future costs or the total project cost?
For Example: Project cost is 100M, we have complete 20M of it and now we want debt. If a lender loans at 70% LTC, could we get 70M or would they only be willing to offer 56M (70% of remaining costs ~80M)
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Understood. Thanks very much.
And if you wouldn't mind:
If construction has already begun and now the developer wants to take out debt to finance the rest of the project, will the LTC only include future costs or the total project cost?
For Example: Project cost is 100M, we have complete 20M of it and now we want debt. If a lender loans at 70% LTC, could we get 70M or would they only be willing to offer 56M (70% of remaining costs ~80M)
deleted as I believe I was incorrect, do not want to mislead anyone
Please delete this, this is wrong, I’ve never seen a lender not factor land value into LTC as it is a piece of the collateral
For the right deal and the right sponsor, you could get a lender to do 70% of total project costs even if you’ve already spent $20MM. I’ve seen scenarios where a group has owned the dirt for 20+ years, had massive land value appreciation over those years and the lender (in this case a debt fund) was going to lend 75% LTC and was going to let them value the land at today’s valuation.
Rare to find these days - primarily because of HVCRE rules
Land should be included in LTC, i.e. you will get $70M, assuming the appraisal report supports your valuation.
Some of the above responses are incorrect. Land value should be included in LTC. You will have to get the land appraised. The appraised value will be the land cost in the lender budget.
I used to be a construction lender. This happened all the time. Also have done this twice as a developer.
Land is always included.
100% you will need to include land in "C" part of LTC. In fact, this is what most deals fall apart on at this stage. Developer wants high land valuation to max out their total development costs (ie get more money from their investors), LP Investors in the deal want the land to be less so that their equity invested is worth "more", Lenders want the land to be worth less as well to cover their basis. Often times, it'll be appraised independently, but that all comes down to various parties involved in the deal gaming the appraisal process.
Yes. Land value is a cost. Land cost is included in LTC. Lenders care about how much cash you are putting into the deal in total so they know how committed you are to it.
To add on. Lenders will include the land but frequently will only include cash basis in the land rather than current value. If the land has been owned a long time some appreciation will be included.
Accurate
Land included in LTC absolutely.
btw, if construction has already started that makes borrowing a little more complicated. Construction may need to be halted for purposes of establishing clean title. Also, there will be a lot of questions about why there wasn’t financing in place from the outset.
LTC = Land + hard costs + soft costs + reserves?
Then when it’s time to take out a perm loan, should ideally be higher than construction loan to create value
Can someone confirm this?
That's correct. "Should" is the key word. You're forecasting a go-forward valuation using next-twelve months financials and NOI. If you're capital calling on equity for a refi from construction to perm, either the building budget has blown up or you'll need to vet you stabilized value and your operating assumptions. Maybe you're being conservative on inputs (base rent, rent growth, vacancy factor, opex load) or maybe the development may not be justified based on the market data and forward projections you've made.
The scenario in which land would not be included in construction LTV is if the land is encumbered by a land loan already.
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