Using Architectural and GC fees to satisfy part of "down" payment

[Ty Mar]

Hi BP,

I am a senior architect with 16 years of experience with high rise residential design. I gut rehabbed a couple properties (designed and built) with my own resources, but considering this route for investing further, can i include architectural design fees and GC fees as part of my down payment when seeking a loan for a buy-hold or fix and flip property? Are there any regulations controlling what services can or cannot be included in the down payment?Thanks.

[Derek Carroll]

Ty Mar this used to be very common. Now it's going to be tougher for a lender to let this slide for any of a few reasons depending on the lender

1) when many lenders quote their loan to cost (LTC) they exclude certain soft costs from allowable costs. They'll then lend their quoted LTC based on the lower number. You'll be required to bring the difference. Every bank is different but any fees direct to the borrower are many times excluded. Arch and eng are real expenses and as long as the amounts that you self allocate here are in line with market then these can count towards down payment. GC fees and developer fees (to the borrower), interest reserves, contingencies...these are all soft cost items that aren't usually going to be counted as loanable expenses.

2) if your bank treats any/all of the above as loanable expenses then you could very well face the requirement that fees paid back to the borrower come at the back end of the draw schedule as reimbursements after borrower equity is in place.

3) banks are now up against regulations called Basel III which create "penalties" (capital reserve requirements) for them making loans for what are known as High Volatility Commercial Real Estate. Banks then charge higher rates for these loans if they make them at all. These regulations say that a borrower must have at least 15% cash equity into the deal.

4) lastly you didn't mention if you don't have the cash or if you just don't want to use it but on a development deal most banks are going to require at least 10% of the loan amount in liquidity and they like net worth equal to the loan amount.

All that said, I'd still reach out to a bunch of the smaller community and regional banks and credit unions. Someone may get aggressive if they like the deal enough.