What Are You Paying For Spec Interim Construction Loans?

Question

Here is our current debt selection for spec interim construction loans:

80%- LTC = Roughly 6%, 1 point
85% LTC = Roughly 9%, 2.25 points, 5% profits sharing 
90% LTC = Roughly 10%, 2.5 points, 10% profits sharing
95% LTC = Roughly 11%, 2.75 points, 15% profits sharing

Note the latter three (frothy) loan scenarios are from one source and they'll reduce points on later transactions.

We're looking for some private money options as well, but the hassle to benefit ratio is quite high for private construction financing so a more traditional source of funding is better for this reason.

Unfortunately we also have a high hassle factor with the small banks' regulators only wanting them to finance 1-2 spec loans per bank.  So each new project we have to take to a new lender OR pay a higher rate to a hybrid asset-based/balance sheet lender.  The amount of effort involved in starting a new banking relationship for each project is quite high.  We have about 10 small regional banks that are either loaning us money or have said yes to loaning us money.

Any thoughts on a solution to this brain damage?  I'm happy to pay a small premium in rates and points to write all of my loans through one lender.  I realize they have concentration risk concerns and such, but I was wondering if anyone has a good solution for this so that we can focus our effort more on  projects, raising equity, business development, etc. and less on finding a new debt source for each project.

We are considering being a finder for a fund manager I know that raises debt in trade for him steering some loans our way.  We frequently have investors that are not interested in equity funds, but would gladly invest their money in a debt fund that has first lien position to provide security for the money.  This is still inefficient and we would rather just borrow money on our good credit and strong financials than to goof around with raising the debt on our own.

Will Barnard · Answer

Bryan, when I was spec building in TX back in the day, I used all private money for the deals. I borrowed at 10%-12% with no points and no equity share. I am a big believer in PM loans. I hate conventional funding, it may bless expensive, but the paperwork and hassle are just not worth it in my opinion.

My advice is to go after more private money.

Account Closed · Answer

Will Barnard  Can you expand a little on how your private money worked when you were spec building?  Were your lenders secured, and if so, how?   Or was it a personal guaranty?  I'm all for cutting out the paperwork, but am wondering what your PM lenders needed to feel secure.

Bryan Hancock · Answer

Hey....it was worth asking right?

I think we have a better solution anyway.  I'll try to call you this week to discuss.  A fund manager we know and are friendly with is going to capitalize each deal with preferred equity instead so we can work through the UDFI issue with debt.  The yields to him for the "debt" will be a bit higher, but it will be much easier.

Bryan Hancock · Answer

Would it be possible for you to share some of these private money resources with us Will?  We'd be happy to send you some dough for some referrals if the money isn't being used elsewhere in your portfolio.

Will Barnard · Answer

All the loans were secured. I owned the dirt so I had skin in the game and the lender would fund the construction costs and have a deed (first position) on the property. They would also be named as additionally insured on the hazard policy. I would have a lump sum balloon payment due in 6 months, I could build in 4-5 months at the time.

What Are You Paying For Spec Interim Construction Loans?

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