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Construction Loans - Continued...
Continued
from page 1...
The secret
lies in the analysis of the proposed transaction parameters to answer the
following key questions:
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What
is the unleveraged hurdle rate the transaction is expected to
generate? This is an important matter, because if the
transaction cannot provide a hurdle rate that is higher than the
interest rate on the loan, then the transaction will no longer be a
supportable transaction and the lender won't lend no matter what the
deal provides.
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What
is the leveraged equity return hurdle rate? The leveraged rate
is what most people focus on, but it is not the only measure.
The more important measure (above) is the unleveraged rate.
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What
is the total projected equity gain once construction is complete and
the project has been stabilized at its maximum economic operating
capacity? This is very important because the construction risk
syndicate investors (who will be providing at-risk capital
contributions of cash for the deal) will be provided for mainly from
this gain. Yes, it is shared with the developer, but the
larger the share going to the developer, the more likely it will be
that the transaction will no longer work.
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The
commercial real estate fractional ownership syndication program approach
is designed to isolate investors to specific investment holding periods
that correspond to the two (2) main phases of the transaction:
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the
phase of activities and operations that are undertaken prior to the
date the project has completed all construction operations and has
reached its maximum sustainable operating capacity; and
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the
phase of activities and operations that are undertaken after the
date the project has completed all substantive construction
activities and operations have already reached their maximum
sustainable operating capacity.
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To make
things more clearly understood, the first option relates to the
pre-construction phase, construction phase and initial lease-up phase of
a given commercial real estate project that is expected to produce an
ongoing series of cash flows (housing sales, per se would not qualify -
talk to us about the alternative financing structures). The second
option relates to the stabilized ongoing operations - the key to the
developer's long-term interest in the transaction.
Simply
put, the developer is going to - in almost every case - deal off the
near-term equity gain to the construction risk investors as their return
in the project, while the developer keeps the lion's share of ongoing
distributions resulting from the stabilized operating capacity of the
project. They get the near-term equity gain and the developer gets
the long-term equity gain. This has the added effect of
eliminating the classic conflict-of-interest that has hobbled developers
of commercial income-producing properties - now this issue is gone.
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Do
You Know The Secret?
When it comes to commercial real
estate development finance, it doesn't matter whether you need to raise
$5 million or $50 million, the out-of-pocket costs, advance fees and
project due diligence costs will always require the same relative
investment dollars the promoters have to fund. Do you know what
that amount is? Do you know the Secret? |
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