I'm trying to model a mixed-use complex that has ground floor retail with a grocery anchor and second and third floor condos. I have construction debt currently at 75% LTC, but whenever I go to roll it over to permanent debt in year 3 there's no way 75% LTV will come close to covering since the NOI is so low in comparison to the cost. I have little to no experience with condos - so what is the right way to tackle this beast?
I currently am not sure:
- Whether to include the condo sales in NOI or as a below the line capital event
- Whether to use the condo sale money toward investor/sponsor distribution or against the construction loan
- If the construction loan on cost to permanent loan on value strategy is even done with condos
- How the pref is handled with condo sales - my cash available for distribution is going to start not covering it at some point because the NOI from the retail + grocery is low in comparison to the initial contribution.
- If I'm way overthinking this
If anyone has a condo model or mixed use model out there or even just knows the right approach, I'd really appreciate it.
5 second answer, I will come back to this. But if it were purely condo the income would be treated as a capital event. It is done with bridge to perm financing. I'm gonna look back through some old models(if I have them), but the condo sales should trigger a paydown on the debt before any distributions take place.
1) Condo sales should be treated as a capital event.
2) Sale proceeds need to go towards paying down the loan. This something that is explicitly spelled out with the lender. Usually it is not for the full selling price per unit- developer still gets to keep some CF, but the acceleration is pretty substantial. If loan basis is $200K/unit, paydown on unit sales will be greater than $200K. On a side note, this is one of the reasons lenders hate condo loans- you rarely ever have money out on the darn things!
Sorry if this doesn't make sense. It's been a long week.
Re: your second point. I recently did a deal where we had a similar issue: if they sized the loan based on LTC, we would only be truly levered up for a few months and they would never put that much money to work. We managed to work out a revolving structure where we could re-lever after every takedown (this was an LD deal, so longer sales period than a condo and more cost/sales overlap). The lender still wanted to be paid of with a certain % of revenue left in the deal but it was pretty cool to come to a creative compromise
Thanks, guys. SB+1.
1) Capital event
2) The loan agreement typically states the waterfall goes as follows: i) pay down commissions/non-lender sales costs, ii) exit fee, iii) pays down loan. There is no way that today you can get away with leakage towards paying down yourself, or a pref for your investors.
3) No. If there's a lot of units then the bridge lender construction lender will have set your initial maturity accordingly so the market can absorb these units. Otherwise, no. There obviously can't be any debt yield and dscr tests for extensions, but there very well may be a maximum LTV covenant depending on the value of the unsold inventory at maturity. Condos that go through trouble in not being able to extend their loan typically try to procure condo inventory loans.
4) Are you talking about preferred equity? If so, interest typically accrues for condo deals with this type of capital. If you're talking about preferred returns for an LP in the equity then it's the same as any other deal, cash available after paying down debt is available to pay down pref. The pref accrues until that happens, which is why condo deals need a high sellout relative to the construction basis to make the economics work.
5) Yes. Think of this high-level and it won't be confusing. Lenders protect their money and are not concerned if the equity/pref gets paid down, and will certainly not allow it to happen before their outstanding loan is paid down.
Hey guys, I was recently tasked with modelling a mobile home property, whereby the company would sell off some of the homes on the site whilst still renting out the lot on a monthly basis to the tenant, and I was wondering where this income should show up in the pro-forma? I modeled it above the line as "other income" - is this incorrect? Thanks!
Revenue from sales or something along those lines. Be sure to include any closing costs
I've never done a condo/retail mix myself, but I have seen similar loan and waterfall issues come up in condo projects in Cabo. From what I saw, the condo sale income is usually handled as a capital event below the line, not in the operating NOI, and the lenders are quite strict on using proceeds to pay down principal before any cash goes to equity or investors. There are always nuances with construction and takeout financing and sometimes people get tripped up thinking condo sales work like rental deals for modeling, totally different beast when it comes to cash flow timing and getting any pref handled if sales take longer than expected.
If you want to see how returns and sales flows look on the ground, there are a lot of good case studies for a condo for sale cabo san lucasand how the process works with local lenders and foreign buyers. Might shed some light, especially if you're thinking about the way absorption and loan paydown play out in practice.
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