Over the years I have seen/heard construction lenders allocating value to land at cost vs markup due to entitlements, etc.
Assuming a non traditional situation where a developer was sold land for an extremely low amount (in exchange for agreeing to provide infrastructure and other services to the City), whereby the land value (per appraisal) today is nearly 20x the amount of cost spent to acquire land, how do lenders typically credit the capital stack on the land portion.
Developer wants to contribute zero equity and says land value is more than enough to meet the 35% equity requirement.
Thoughts?
Based on the highest ranked content on WSO, the treatment of land value in the capital stack by lenders can vary significantly depending on the lender's policies, the specifics of the project, and the broader market conditions. However, there are a few key points to consider when discussing how lenders might view the imputed equity of land, especially in a scenario where the land was acquired at a significantly lower cost than its current appraised value:
Appraised Value vs. Cost Basis: Lenders often look at the current appraised value of the land to determine its contribution to the equity portion of the capital stack. If the land has been appraised at a value significantly higher than its acquisition cost, this appraised value can be considered when calculating the equity contribution. However, lenders may also consider the cost basis, especially in assessing the risk and the developer's equity in the project.
Equity Requirement Fulfillment: In scenarios where developers argue that the land value alone should fulfill the equity requirement for a project, lenders will closely scrutinize the appraisal and the assumptions behind the land's valuation. They will consider factors such as the entitlements, the market demand for the project, and the feasibility of the proposed development plan. The developer's ability to provide infrastructure and other services, as mentioned, could positively influence the lender's assessment by demonstrating added value to the project.
Risk Assessment: Lenders are inherently risk-averse and will evaluate the overall risk of the project. A land value that significantly exceeds the acquisition cost may be viewed favorably, but lenders will also consider other risk factors, such as the developer's experience, the project's viability, and market conditions. The developer's claim of zero equity contribution beyond the land might raise concerns about the developer's commitment to the project and financial stake in its success.
Lender's Policies and Market Conditions: Ultimately, the lender's internal policies and the prevailing market conditions will play a crucial role in determining how much imputed equity is given to the land. Some lenders might be more conservative and require additional equity or guarantees, especially in non-traditional situations or if the market is perceived as volatile.
Negotiation and Structuring: The developer's negotiation skills and the structuring of the deal can also impact how lenders view the land's equity contribution. Providing comprehensive documentation, including detailed appraisals, entitlement information, and a solid business plan, can help in making a strong case for the land's value as equity.
In summary, while a significantly higher appraised value of land compared to its acquisition cost can be leveraged to meet equity requirements, lenders will conduct a thorough risk assessment and consider various factors before crediting the capital stack on the land portion. Developers should be prepared to provide detailed documentation and possibly negotiate terms that align with the lender's risk appetite and policies.
Sources: This is how guys are getting rich in real estate, Question For the Credit Guys: When Is A Borrower Over levered?, From Real Estate Finance to Founder of Development Company - Q&A, Learning curve in development, This is how guys are getting rich in real estate
If it appraises I would expect the lender to be fine with it.
In my experience, we've always gotten full credit from lenders for appraised value (regardless of how much we paid for the land).
Think of it this way - regardless of how much you paid for the land, appraised value should (in theory) equal market value. So you could sell the land for appraised value, get cash, buy a different piece of land with cash, and then you'd expect of course for that to be counted as equity contribution. Same concept even without the in-between cash transaction.
Minus enim aliquam nihil aut rerum. Qui mollitia voluptatem perferendis dolores. Sint saepe quis vero eaque rerum est hic. Est unde magnam cupiditate qui architecto necessitatibus quas.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...