Commercial Construction Financing and Land Equity

[Dave Petes]

I’m in the middle of completing construction documents and wanted some input regarding capital planning before reaching out to lenders again.

Preliminary history:

Land originally bought vacant and with no entitlements for $1,500,000 (free and clear).

Entitlement planning costs: $250,000

Construction Documents costs: $350,000

Total All-In Expenditures so far: $2,100,000 (land + soft costs)

After obtaining entitlements and general market appreciation, the value of land is indicated at roughly $2,500,000

Basic Rough Math (not actual numbers):

Cost of Construction: $10,000,000

Market Cost of Land (free and clear): $2,500,000

Total Project Cost: $12,500,000

Financing Needed: $10,000,000 (assume all FFE, interest reserves, contingencies, hard costs, etc. are included)

Financing Assumptions:

Loan to Cost: 85% (SBA)

Maximum LTC Loan Amount: .85*$12,500,000 = $10,625,000

Equity Required: 15% = .15*$12,500,000 = $1,875,000 (Equity in land exceeds this)

Actual LTC = $10,000,000/$12,500,000 = 80%

Based on early conversations with a lender, they indicated a cash injection would still be required.

The main question is, does the equity in the land not cover the full equity/cash requirement? If not, how much of the equity in the land can be attributed towards the 15% equity requirement?

Based on the potential cash injection requirement, I’d assume the market value of the land and costs incurred so far might only contribute some percentage to the equity requirement. Anyone have any insight of how much additional cash should be expected for commercial deals in this size range? Back-of-napkin calculations or metrics will help too!