Lenders Development Budget
Should development management fees and interest reserve/financing costs be included in a lenders development budget when sizing the loan?
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Interest reserve should be absolutely. Typical to see that, as well as hard and soft cost contingencies. Developers typically don’t like to include all these items (at the levels we want) as it increases their equity requirement. Management / developer fees, etc and other soft costs are up for debate and really up to the lender if you want to finance those costs. We don’t mind a nice padded budget with a robust interest reserve and contingencies - but don’t want to fund working capital or FF&E type items within the real estate loan. I’ve seen develop overhead/profit in budgets which was fine.
The fuck? Fuck you man
Lol right, sure let me overcapitalize but don’t cover the essentials nbd
Just telling you the way we do it.
It really doesn't make sense to fund FF&E items within the real estate loan - especially if you have any kind of convert to mini-perm option. Wed rather put the FF&E on a separate credit facility with a quicker AMT.
If you're building a hotel, doubt the lobby furniture is going to be around and/or have value after 7 years. Same as working capital - doesn't make sense but I'm not saying you cant find lenders out there who wont include it.
Developers want max leverage, lenders want moderate leverage. Story old as time. Good luck getting max leverage on a construction deal right now unless the sponsors have some bullet proof guarantee to go with it. And even if you want FF&E and working capital included, it is still going to increase your equity requirement as you have to bring in a % of the overall budget.
The lenders who will be around for the next 50 years will structure development loans appropriately. The ones who don't will be washed up in the next RE downturn.
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