- Acquisition & Development Loans
- Apartment/Multifamily Housing Loans
- Bridge Loans
- Construction Financing
- Hard Money Loans
- Mezzanine Loans
- Land Loans
- Takeout Loans
- SBA (Small Business Administration) Loans
An acquisition and development loan is used to acquire the land to be developed and provide sufficient capital to construct the site improvements, including: site grading and drainage; sewer and water lines; installation of utility lines; curb, gutter and sidewalk installation; and street paving, including the construction of any storm water collection boxes.
Apartment/Multifamily housing loans have special programs available only to this specific property category. The United States government has a special interest in promoting housing for all those living within its borders. Consequently, it has developed special loan programs available only to those constructing multifamily housing. These special loan programs include: Low Income Tax Credit financing, Department of Housing and Urban Development financing (HUD) and Tax-Exempt Bond financing. Other programs are also available for single family homes, including: Federal Housing Administration (FHA), Veterans Administration (VA), Fannie Mae, Freddie Mac and various other types of home mortgage financing.
A bridge loan is temporary financing for an individual or business until permanent financing can be obtained. Money from the new financing is generally used to pay back the bridge loan, as well as other capitalization. Bridge loans are typically more expensive than conventional financing because of higher interest rates, points and other costs amortized over a short period, and various fees. To compensate for the additional risk, the lender may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.
A construction loan finances construction, and contains interest reserves, where repayment of the loan is based on when the project is built. Repayment of the construction loan occurs when construction has been completed, an occupancy permit has been obtained from the local building department, and a permanent loan or “take out” loan has been secured. The length of a construction loan is usually twelve to twenty-four months, depending on the length of time to construct the project.
A hard money loan is generally obtained from a private individual or finance company seeking to maximize its return on investment by taking a higher risk. These loans require substantially more points (or upfront costs) to be paid at the time of the loan closing, carry a significantly higher interest rate, are shorter than a typical construction loan and are secured the real estate involved, the personal assets and guarantee of the borrower. Hard money loans are appropriate in some instances, but may result in the loss of the property being acquired but also in the loss of other assets that have been pledged as collateral for the loan.
In real estate finance, mezzanine loans are often used by developers to secure supplementary financing for development projects (typically in cases where the primary mortgage or construction loan equity requirements are larger than 10%). These sorts of mezzanine loans are often collateralized by the stock of the development company rather than the developed property itself (as would be the case with a traditional mortgage). This allows the lender to engage in a more rapid seizure of underlying collateral in the event of default and foreclosure. Standard mortgage foreclosure proceedings can take more than a year, whereas stock is a personal asset of the borrower and can be seized through a legal process taking as little as a few months. A mezzanine loan is a relatively large loan, typically unsecured (ie., not backed by a pledging of assets) or with a deeply subordinated security structure (e.g., third lien on the property but non-recourse to the borrower). Maturities usually exceed five years with the principal payable at the end of the loan term.
A land loan is used strictly for the acquisition of the land to be purchased for the construction of a project. Land loans are usually considered higher-risk loans and typically require more equity. Standard loan-to-value percentages are 50 to 60% of the value or cost of the land, whichever is less.
A permanent or “take out” loan is obtained to pay off the construction loan; it “takes out” the construction loan. Depending on the type of project being financed, permanent loans may have a loan amortization period from 15 to 40 years. Generally, the loan amortization period reflects the life of the asset.
After 10 years, a permanent loan will have a balloon payment due. A balloon payment consists of the entire principal and any unpaid interest, which are due and payable at the end of the 10 year period, even if the loan is amortized over 30 years.
There are numerous SBA loans, but the two most common types of SBA loans used for real estate are the 504 Program and the 7(a) Program. The 504 Program allows the owner of a small business, who may have difficulty obtaining financing through more traditional sources, to apply for and obtain a loan for his business that includes the acquisition and construction of a new facility.
The 7(a) Program may also be used for the acquisition and construction of a new facility by a small business owner, but the loan amortization period is usually shorter and the loan typically includes the purchase of equipment or the need to obtain working capital. Both loans are guaranteed, in part, by the United States Small Business Administration, and the funds are generally obtained from an approved SBA lender. These loans may take longer to underwrite and finance because the underwriting and disclosure process is more stringent, however, the borrower may be able to secure a higher loan-to-value, based on its financial strength and collateral. SBA loans generally require personal guarantees and may require the pledge of additional collateral.