Developing a multifamily property is quite an endeavor, and the more an investor-developer knows about how to get a multifamily real estate development loan, the more successful he or she will be at securing one.
Before seeking a development loan, a developer should have all the practical and financial details of the project worked out, as securing development financing can be a complex task. Being able to share a clear and cohesive vision of your project with your partners, funders, zoning commissions, and any others involved will help, as you will need all their support.
Why You Need a Multifamily Real Estate Development Loan
A development loan is used to prepare land for construction. There is a lot that can be required at the preparation stage, from clearing and leveling the land, including razing any buildings standing on it, to creating the infrastructure for your development. This might include installing roads, sidewalks, water and sewer lines, drainage systems, and electricity. These changes are referred to collectively as horizontal improvements. This is also the point at which zoning, permitting, and environmental compliance is addressed.
Land development is most challenging when it is financed separately from acquisition and construction. So, when possible, real estate development is often financed in large chunks. You will hear developers refer to AD&C loans—acquisition, development, and construction financing—for a project all at once. Financing everything from acquiring the raw land to the completion of the building is definitely preferable because it saves time and fees, but it’s not always possible. For example, if you’re developing land that was inherited, financing to acquire the land was not needed.
Another reason you might seek development financing is that you may simply be undercapitalized; that is, you were able to get an acquisition loan but now need additional financing to continue the project. Lack of experience as a developer, the inability to come up with a sufficient down payment, and personal credit issues could cause a lender to refuse full AD&C financing.
The Complexity of Securing a Development Loan
Lenders are understandably cautious at this stage of financing. Their risk is high because the collateral for the project has yet to be built, and the underwriters, who evaluate the creditworthiness of the project, have little to base their conclusions on. Therefore, your lender will ask for an unusually large amount of documentation—tax returns, financial statements and projections, lists of assets and liabilities, the project’s pro forma, cost estimates, names of the contractors you will use, and other information.
Your documents should be in perfect order and paint a convincing picture of a viable project and capable developer. If the documents do not support this picture to the fullest extent possible, provide supplemental information to make your case. Be diligent in making sure your additional material gets your message across succinctly, as your potential lender’s time is valuable.
Down payments can remain a complicating factor for a new and sparsely capitalized developer throughout the project. If you financed the purchase of the land, you probably received around 80 percent loan to value (LTV), meaning you made a down payment of about 20 percent on the land. Now you need to replace that debt with a new loan, which is certain to be larger since it covers the old debt and new construction. You will need to fund additional equity for the portion of the development that is not financed by new debt. You may be able to use your equity in the land as a partial down payment, but the down payment is likely to be higher if it is not in cash.
With all of the above in mind, you might want to consider buying investment property to develop with a partner. By combining forces with a more experienced developer with greater financial resources, you can receive practical support that can improve the planning, financing, and implementation of your project.
At CWS Capital Partners, we are a fully-integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We own and manage luxury multifamily investment communities in major markets around the country, and we employ a team of experts who can help you hone your investment strategy.
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