What Happens to Smaller Construction Lenders When Values Drop from Initial UW
What happens to smaller construction lenders and their loans when were going into a down market and values drop. An example is pre-construction you value the deal at $100mm and today years later it's worth $80mm.
Does that just mean the lendersbeen reduced? Also is the way this work is let's say they raise funds to deploy. They had $1 billion to deploy of investor capital (so HNWI, pension funds) and used $100mm of that for this loan. What happens on the equity side when the lender has to revise the current value and that it didn't hit expectations, does $20mm just disappear and investors are like wtf? Or are they promised a certain return (lets say 5% to make the math easy). So the lender pays the HNWI/PF $500k for that $100mm and have to make payments on it meanwhile the developer has their own rate, let's say 7% and the lender is still making that spread even at the $80mm value and is only an issue if the owner has to sell? What happens if this drop in value occurs over multiple loans in the portfolio and the initial $1 billion is now worth $700mm? What happens when the construction loan is repaid, so this $100mm loan after 2-3 years depending on terms is repaid so they lender gets interest + the $100mm is that dispersed to investors and the lender gets interest + fees for their part?
If anyone could give a better overview/example of a debt fund that would be helpful.