Need Construction Loan - building my first 3-flat!!

[Roseann Koefoed]

I'm building a 3-flat in East Garfield Park, west side neighborhood of Chicago.  I own about 80 MF units, but this is my first ground up construction.  I have a partner who is the GC.  I've paid for the land, architect/permit fees, excavation and foundation out of pocket.  But I'm looking for a $500k loan to finish the project.

This will likely be the first of many.  About to go under contact on a second lot in the same area.  So looking for a lending partner that will help me grow as efficiently as possible.

Also would love to connect with anyone doing something similar or with any development wisdom to share.  Thank you!

[Doug Smith]

Its pretty straight forward. Underwriting will want to see some progressive experience in renovations, but as long as your not taking a quantum leap, it should be do-able. You can use the cost of the land and the other costs you have already spent toward the down payment, so I suspect you won't have to inject anything else into the deal. I would, however, need to know a bit more. I'll PM you. 

[Doug Smith]

Its pretty straight forward. Underwriting will want to see some progressive experience in renovations, but as long as your not taking a quantum leap, it should be do-able. You can use the cost of the land and the other costs you have already spent toward the down payment, so I suspect you won't have to inject anything else into the deal. I would, however, need to know a bit more. I'll PM you. 

[Kristi Kandel]

Quote from @Roseann Koefoed:

I'm building a 3-flat in East Garfield Park, west side neighborhood of Chicago.  I own about 80 MF units, but this is my first ground up construction.  I have a partner who is the GC.  I've paid for the land, architect/permit fees, excavation and foundation out of pocket.  But I'm looking for a $500k loan to finish the project.

This will likely be the first of many.  About to go under contact on a second lot in the same area.  So looking for a lending partner that will help me grow as efficiently as possible.

Also would love to connect with anyone doing something similar or with any development wisdom to share.  Thank you!

@Roseann Koefoed first congratulations! 

I’d recommend getting terms from private and hard money lenders. Likely 5-8 companies that UW loans in this market. 

You can also try regional banks to get the construction and stabilized loan terms. 

Make sure you have a backup plan (contingencies) for if/when obstacles arise and you’re required to spend more money and possible more time (3-6 months) to the overall project. 

For your first ground up it might make sense to bring in your contractor as an equity partner building the project at cost in exchange for equity. That way they truly care about the project’s outcome (time and money) and are your partner helping you solve the challenges that will inevitably arise during construction.

Taking a smaller piece of the pie to gain experience can go a long way in the bigger picture. 

[Maureese Jones]

Would love to connect and get more information on this project.

[Ed O.]

Talk to local and regional banks. They'll offer the best terms and rates. Lock your rate in for all five years when you take out your loan. Not all banks will do this. Typical loans are 5 year balloons with interest only in year 1. Any bank that wants to float your rate until completion is not looking out for you. There's been posts about people on this board building at 3% and the bank floated their rate to 8 or 8.5% over the year it took them to build. 

Don't waste your time or sanity on the larger national banks like B of A, Us Bank, etc. They simply don't understand this segment of the market. The one time I took a flier from a lender at Us Bank, the man lied to me, to make me want to work with him by offering terms he couldn't deliver on. 

You should also talk to banks you're presently working with. Some banks want new build loans and price accordingly. Some don't want them, but will still do them - their terms are usually inferior by quite a bit. 

[John Warren]

@Roseann Koefoed definitely this is something you will want a local bank for. I have done construction loans in the suburbs in Berwyn and Cicero, so my bank wouldn't be the right fit. You might check with banks like Marquette bank or CIC. Maybe look at a Wintrust as well if you have a relationship with one of them. Most of the time, you put down 25-35% of the total cost basis of the project. 

I can PM you the bank I have used to see if they are the right fit. They are not all that far from the property, so there is a 50/50 chance they can do the deal. 

[Dan Slaughter]

Congrats on your project.  New construction can be super exciting and lucrative.  Just like renovating a property, plan on it taking longer and costing more than expected.  

I've been using a local bank and local builder for my projects in Florida then a refi into a DSCR after construction to get back as much capital as possible.

[Ryan Davies]

You can do a ground up loan pretty easy on something like that. Just depends on the flexibility you need.

[Alex Hunt]

Happy to connect on the financing aspect! Also have some experience in ground up, but large lake houses versus MFH. 

Congrats on the 80 units, that’s awesome! 

[Roseann Koefoed]

Thanks everyone for the feedback!  My GC is my partner on the deal, he gets 25% of the upside plus his GC fee and I'm 75% of upside.  GC will also co-guarantee the loan with me so he's invested and financially at risk.

We have a couple hard money quotes at this point, but are really focused on using a local bank for better terms.  I've contacted LakeSide Bank and Wintrust so far.  Will also contact CIC.  Wish me luck!

[Jacob Sherman]

You are able to obtain no income no doc ground up construction financing . Its usually 50% of land covering 100% of construction 

[Ed O.]

@Roseann Koefoed

Do you mind me asking what the GC Fee runs? If it is consistent with the residential market here, 10-14% -AND- you're giving him upside, this is not a fair deal for you. GCs that build get their piece as a fixed fee or a market driven % of cost. If they're inside of the range above, you're overpaying by a lot and the GC, is getting rich off of you. If you haven't signed a contract with them, I would suggest reconsidering this arrangement. 

The GC gets paid plus a big piece of the upside, with less risk. If the GC defaults, the bank will get the funds from you to cover him. Consider if you had a GC build a bunch of houses for you 10 years ago and paid full price (GC Fee) and gave them upside - this would be extremely costly. 

Given your unit count, I would suspect you're not needing him as a guarantor to get the deal done. If you don't need him to sign loan docs with you, you're giving away too much - overpaying for their services by a good margin if he/she is taking a full GC fee too. 

[Robert Ellis]

Quote from @Ed O.:

Talk to local and regional banks. They'll offer the best terms and rates. Lock your rate in for all five years when you take out your loan. Not all banks will do this. Typical loans are 5 year balloons with interest only in year 1. Any bank that wants to float your rate until completion is not looking out for you. There's been posts about people on this board building at 3% and the bank floated their rate to 8 or 8.5% over the year it took them to build. 

Don't waste your time or sanity on the larger national banks like B of A, Us Bank, etc. They simply don't understand this segment of the market. The one time I took a flier from a lender at Us Bank, the man lied to me, to make me want to work with him by offering terms he couldn't deliver on. 

You should also talk to banks you're presently working with. Some banks want new build loans and price accordingly. Some don't want them, but will still do them - their terms are usually inferior by quite a bit. 

 best terms are from national firms that have hundred of millions of dollars to deploy and who lend in 50 states. Easy Street for example. They have 20 different products and can help you out of most situations. I wouldn't talk to local or regional banks they are still dusty and slow. I'd love to see a local bank or credit union beat a national lender. The majority of local banks we talk to for Columbus OH wouldn't even fund a deal for an out of state investor (credit unions, etc). We have partners in Austin TX, New York, and Dallas investing in new builds here in triplex builds. 

[Ed O.]

@Robert Ellis

Can you tell me where the best national lender rates are at, and a guestimate on their fees on the loans? 

And to that point - any of the other 4 or 5  people actively doing build to rents that are on BP - what are you seeing in terms of rate and fees on build loans? 

Thanks for mentioning Easy Street - I'm always looking at and for more options. Their build rates are a full 3+ points higher than what I'm paying now. I'm guessing they've got to get some fees on the deals in addition to title fees to pay their originators. 

I'm in the high 7s now with no points on a 5 year balloon on build loans. The local banks I've worked with have been pretty quick. I do get your point about some local banks not being good - I've talked to a bunch of crappy ones over the years. 

[Tan Su]

@Roseann Koefoed hi Roseann, would love to connect with you and learn the new construction, I am planning on doing something similar! can you message me your contact? 

[Robert Ellis]

Quote from @Ed O.:

@Robert Ellis

Can you tell me where the best national lender rates are at, and a guestimate on their fees on the loans? 

And to that point - any of the other 4 or 5  people actively doing build to rents that are on BP - what are you seeing in terms of rate and fees on build loans? 

Thanks for mentioning Easy Street - I'm always looking at and for more options. Their build rates are a full 3+ points higher than what I'm paying now. I'm guessing they've got to get some fees on the deals in addition to title fees to pay their originators. 

I'm in the high 7s now with no points on a 5 year balloon on build loans. The local banks I've worked with have been pretty quick. I do get your point about some local banks not being good - I've talked to a bunch of crappy ones over the years. 

for our lenders is more about LTV allowances. 15% to build a 350k asset is pretty good. what LTVs are you getting?

[Ed O.]

I'm working with a few regional banks and have always had really.good luck with them. 

Typically, we're able to finance 80% of appraised value, which ends up pretty good.  We get fixed rates from the day the loan starts until the end of the Ballon. If a bank tells they have to float the rate until completion and it's non negotiable, I'm definitely a non borrower with them. 

I did one time build a few that were at 80% of cost, which came out closer to 60% ltv... those hurt... 

We get interest only for either the first 12 or 24 months of the loan as well.

Rates recently have been between 7.79 and 8.19. 

[Roseann Koefoed]

Quote from @Ed O.:

@Roseann Koefoed

Do you mind me asking what the GC Fee runs? If it is consistent with the residential market here, 10-14% -AND- you're giving him upside, this is not a fair deal for you. GCs that build get their piece as a fixed fee or a market driven % of cost. If they're inside of the range above, you're overpaying by a lot and the GC, is getting rich off of you. If you haven't signed a contract with them, I would suggest reconsidering this arrangement. 

The GC gets paid plus a big piece of the upside, with less risk. If the GC defaults, the bank will get the funds from you to cover him. Consider if you had a GC build a bunch of houses for you 10 years ago and paid full price (GC Fee) and gave them upside - this would be extremely costly. 

Given your unit count, I would suspect you're not needing him as a guarantor to get the deal done. If you don't need him to sign loan docs with you, you're giving away too much - overpaying for their services by a good margin if he/she is taking a full GC fee too. 

Thanks for that feedback.  The GC fee is 5% of hard costs.  I underwrote multiple scenarios and am comfortable with the economics since he's doing all the day-to-day.  I'm the money on the deal and have approval rights (including ability to remove GC if things don't go well).  I also control the bank account so I see every check that gets cut and every debit card purchase.  

I should add that I have a history with this GC.  I own a couple Chicago MF that he did gut-rehabs on and his team still manages them for me. So I've known him for years and have a high amount trust in him.  I also believe things will go best if he's economically aligned with me.  When I was looking for more MF, he pitched the ground-up construction idea because I couldn't find any MF that I liked.  In short, I wouldn't be doing this without him.

However, your comment did register with me as I should have researched more about what is industry standard before getting started.

[Ed O.]

@Roseann Koefoed

ok - good. Glad to hear you've got a balanced situation. The wheels usually fall off when one side is getting a disproportionate share. 

Good luck with your project!

[Jonathan Klemm]

Hi @Roseann Koefoed - Wow you are crushing it on all fronts!  Great for you!

Where exactly are you building new construction in East Garfield Park? And what is the ARV?

I have a list of several great Chicago commercial lenders, happy to share it with you to see if you can find someone who is a great fit.

[Jennie Berger]

Quote from @Roseann Koefoed:

I'm building a 3-flat in East Garfield Park, west side neighborhood of Chicago.  I own about 80 MF units, but this is my first ground up construction.  I have a partner who is the GC.  I've paid for the land, architect/permit fees, excavation and foundation out of pocket.  But I'm looking for a $500k loan to finish the project.

This will likely be the first of many.  About to go under contact on a second lot in the same area.  So looking for a lending partner that will help me grow as efficiently as possible.

Also would love to connect with anyone doing something similar or with any development wisdom to share.  Thank you!

@Roseann Koefoed LOVE that you are diving into new development in the city - brava! Let's connect via DM and possibly even set up a time to meet (virtually or in real life). I'd love to see what you're building, and how we may be able to provide value to one another. 

My former partner and I worked as general contractors / developers on new construction SFHs and small multi units (3-4 flats) for the last 3.5 years. I'm taking a break from development right now, but still offering design consulting services to other investors, developers, and homeowners. (Not that you need design consulting, just thought I'd throw it out there in case) And, my passion for new construction never went away. Plus, as a fellow chick in construction, it would be great for us to be in each other's network. ;) Let's talk - I'll message you now!

Jennie Berger

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