How Do Developers Bridge the Gap Between Predevelopment and Construction Financing?

Question

Question for developers, lenders, and experienced investors:

I am currently developing a planned 20-unit boutique condominium community in Kaufman County, Texas. The land has already been acquired, and I have personally invested over $40,000 into the project to date.

I am currently working with my architect, civil engineer, structural engineer, and MEP engineer and am moving toward permit-ready plans. The challenge I am facing is bridging the remaining predevelopment funding gap of approximately $35,000 needed to complete the engineering, permitting, condominium mapping, and HOA documentation.

Once these items are completed, the project will be positioned to pursue the next phase of financing for the horizontal improvements and ultimately construction financing for the vertical buildout.

For those who have completed development projects, how did you bridge the gap between land acquisition and obtaining construction financing? Did you use private investors, bridge loans, equity partners, seller participation, predevelopment lenders, or another strategy?

I would genuinely appreciate any insight, lessons learned, or recommendations from those who have navigated this stage of the development process.

Stuart Udis · Answer

If you do not have access to the additional $35,000 needed to complement the $40,000 you have already invested, how do you expect to secure financing for a 20 unit ground up development? One of the first things a lender will evaluate is liquidity, and a lack of liquidity will be an immediate concern regardless of the merits of the project.

Rather than focusing solely on raising the remaining predevelopment capital, I would be thinking more strategically about the capital stack. You likely need a development partner who can contribute not only the remaining predevelopment equity, but also help satisfy the lender's required equity contribution and provide the financial strength lenders expect to see. Just as importantly, you may need a loan guarantor with the liquidity and net worth required by the bank.

Benjamin Lartey · Answer

Thank you for the feedback. I appreciate you taking the time to respond.

To clarify, I did not purchase the land outright. The property is currently financed and I am carrying a first-position land loan on it.

The challenge is not securing financing for the entire development at this stage. The project is currently in predevelopment, and I am working with my architect, civil engineer, structural engineer, and MEP engineer to complete the remaining plans, permitting, condominium mapping, and HOA documentation.

The remaining funding gap is approximately $30,000-$35,000 to complete those items and move the project into a permit-ready position. Once completed, the project will be in a much stronger position to pursue the next phase of financing for horizontal improvements and ultimately construction financing.

As for development experience, this is my first ground-up development project. Because of that, I have intentionally assembled a professional team and have been taking a phased approach to reduce risk and ensure the project is properly planned before moving into construction.

I completely agree that having the proper financing strategy in place is critical, which is why I made this post. I am interested in learning how other developers have successfully bridged this specific predevelopment stage before moving into horizontal and vertical construction financing.

I appreciate any additional thoughts you may have.

Henry Clark · Answer

OP.  Say it is a $12mm deal.  At 25% down you need to bring $3mm to the table.

Henry Clark · Answer

OP what did your lender say?  They should handle your Construction and pre financing.  With you putting down $XXXX

If you have “bought outright” the land in Dallas then they can use that as your downpayment potentially.  Just guessing for Dallas and the size that would be $1,000,000 or higher.  At 25% that would cover a $4mm loan.  20 unit boutique condo are you talking in the $12mm range?  If so you need to cover interest cost during construction period also.

You need experience and a success background though.  Do you have that?  Commercial and Industrial you have to start small and develop a track record.

Make sure you have the financial backing before you go down the road.   Otherwise pull out and take the loss.