How to prepare an effective property development loan proposal - Finance your property development
If you're looking to finance a property development project, you'll need to create a well-crafted proposal that details your plans and how you intend to execute them. This blog post will walk you through the steps involved in creating a winning property development loan proposal. So whether you're a first-time developer or an experienced pro, read on for tips on how to get your loan funded.
A property development loan proposal is a document that outlines a proposed project and the associated costs. The proposal will typically include a breakdown of the costs associated with the project and information on how the lender will be paid back.
Why do real estate lenders request a loan proposal?
- A loan proposal is a document that a real estate lender requests from a potential borrower to assess a loan's feasibility.
- The proposal includes detailed information about the property that is being purchased and the borrower's financial situation.
- It allows the lender to decide whether or not to extend a loan to the borrower.
- A substantial loan proposal makes it simple for the lender to reach preliminary conclusions fast.
- Even if a loan application isn't perfect, the proposed loan could be a good or excellent lending opportunity.
It assists you in gaining an understanding of the financial aspects of the transaction, the physical nature of the existing property and to-be-built improvements, the property's surroundings, the market, the supply and demand characteristics of the finished product, the status of the property development process, the timing of project milestones throughout the loan, and the borrower's experience and background.
The length of a loan proposal might range from a single page to over 100 pages. The lender must balance his workload, individual output, and the comprehensiveness and clarity of the borrower's loan application.
What does every property development loan proposal require?
Forming a strategy before meeting with your lender will boost your chances of approval. Self-confidence, presentation, incisiveness, visualizations, and inventiveness can assist in constructing your case. Combine these elements with an excellent investment opportunity.
If you were a lender, would you prefer to lend a substantial sum to someone who appears confident or unsure? Real estate investors should be confident in their funding requests.
Make sure your presentation is easy to follow and understand, whether verbal or formal. Practice your pitch with a friend or mentor who can offer feedback and anticipate inquiries.
Making a compelling case to your lender can be difficult amidst the numbers and documentation. Prepare your essential points and clear answers before the meeting. Stuttering may show the lender that you don't know your numbers or are confident in your transaction.
Remember that lenders have several loan proposals to consider. Present information so they can easily say "yes." Help them decide in your favor using data visualizations or an excellent presentation.
Lenders have seen various loan proposal templates and samples. Standing out among uniform proposals will strengthen your argument.
Although no research has been done to determine the relationship between solid loan proposal submissions and the quality of the loan facilities that arise, they are likely mutually exclusive to a substantial extent.
If you perform a good job, the facility will be reserved based on your and the lending institution's standards, not the quality or completeness of the loan application. You should use your leverage as a lender to get the most relevant and valuable information from the prospect, but you should also be flexible to avoid losing a good deal.
How to make your property development loan proposal effective?
In some proposals, you may find hundreds of pages of maps, charts, graphs, plans, pictures, and government papers. Many potential borrowers assume that a presentation will be more effective if it passes the "weight test"—that is, if it contains as much information and material as feasible.
Additional information will help you underwrite a loan faster and more efficiently because you won't have to look for or request as much information. Significant, shiny proposals, on the other hand, may reduce your chances of success for various reasons:
- The amount of information supplied may overwhelm the reviewing loan officer, who usually has a limited time. Rather than being immediately examined, he can put the presentation on hold while he evaluates loan ideas that are easier to understand. Extraneous material may indicate that the borrower is attempting too hard to persuade the reader that the project is worthwhile. The loan officer's lack of information to complete his underwriting might also be hidden by extraneous and repetitious material.
- An overly long and glossy presentation may appear too polished for midrange and smaller enterprises. Furthermore, the cost of creating the presentation may cast doubt on the borrower's ability or desire to save money. It may also cast doubt on his ability as a capable creator and doer as opposed to a marketer and showman.
When creating a proposal, the most crucial thing a borrower should consider is who his target audience is. The most acceptable real estate development loan proposals are ones that give the reader, the account officer, some thinking.
Proposals should be well-organized, short, and factual so that he can quickly grasp the project's scope. Following the loan officer's expression of interest, the prospective borrower should expect requests for more information.
He can offer to submit some of the less critical material at that time, and the account officer can determine whether or not he wants to evaluate it.
How to prepare a property development loan proposal?
For preparing a property business loan proposal, you should include the following elements in a step-by-step manner.
1. Executive Summary
The executive summary, also known as a summary, provides the reader with a short overview of the transaction and should be limited to one or two sheets of paper.
2. Description of the Area
The description of the location should be succinct and to the point. The goal should be to connect the description to the subject property through pertinent facts and observations.
Unfortunately, location descriptions are frequently plagiarized from assessments, tourist guides, and advertising, and they can span dozens of pages. The geographical area covered in those narratives is frequently irrelevantly huge, while detail regarding the more vital immediate area is typically absent.Fortunately, it is typically not difficult to get your information on a topic using the Internet, newspapers, and published information. However, locating valuable information that the borrower should have provided will take some time. Here are some tips for collecting data for real estate investors.
3. Market Analysis
A competitive market analysis will generally include exact comparables ("comps") of nearby and similar properties to the one that the loan will collateralize. Always make comparisons with caution. Even among the most respected property developers, market comps are frequently overstated.
Comps for a commercial project, for example, may depend on asking rents rather than signed leases. Higher comparables inflate cash flows and value, making a loan proposition appealing.
They can also make the loan request appear more conservative, leading to the lender making a larger loan than is prudent. An over loan situation allows the borrower to return his investment before paying off the loan.
Because the loan is nearly always contingent on an independent appraisal approved by your institution, if the borrower's comps are off, say, on the high side, the loan commitment, contingent on a satisfactory appraisal, can easily be changed downward.
However, you should always strive to have a good feel for the market because you do not want to waste your time and the time of others obtaining a loan approval based on a poor market analysis. Getting a loan approved but then being unable to fund it due to a poor appraisal will not improve your standing with your bank. It can also engender "bad will" toward a possible borrower or a relationship.
4. Description of the property
Include a concise description of your property in the real estate development loan proposal. If there is an existing structure, determine what will be done with it (demolished, rehabilitated, etc.). Here or in an exhibit area, floor layouts, site plans, or whatever else is relevant may be exhibited or referred to. It is the security that the lender will be lending against.
5. Economic and Financial Analysis
This component of a loan application, which may be the most crucial, explains how the entire transaction works in terms of dollars. You should have a complete financial picture from the day the first dollar leaves your business to the day the last dollar returns.
A single-page cash-flow statement may be all that is required in a permanent loan proposal if the property has already been developed and is producing a cash flow that presumably can support the loan that has been requested.
However, a dynamic process is involved in a real estate development project. You will most likely fund the loan regularly, costs will rise over time, and revenues may not arrive for several years.
Spreadsheet analysis is the best way to describe the time dimension. If the borrower does not supply one, you should consider making one yourself.
6. Analytical Notes
The borrower should offer explanations of his critical assumptions as part of the financial-economic analysis. He should also clarify any ambiguities when working with a complex spreadsheet.
7. Exhibits, maps, and photographs
Include a map of the area as well as photos of the property. For starters, they're simple to make. For another, they provide a quick conceptual foundation for the lender to evaluate the real estate loan proposal.
Regardless of their advantages, you should not allow them to overpower you. Artist renderings, which the project's architect virtually always creates, are invariably more beautiful than the finished product.
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When you decide to underwrite a loan, you'll need to go beyond the first loan proposal to address issues and concerns to give a good loan presentation and close the deal if the loan is accepted.
Ascertain that the borrower realizes that he must be ready to reply to your requests for information promptly. If the borrower fails to provide timely information, there may be a delay in the loan. If a portion of the loan is to be used for property acquisition and the borrower has agreed to buy on a specified date, failing to close on or before that date may result in penalty fees, interest charges, opportunity costs, or, worse, the loss of a significant down payment.
If the borrower loses money, he may accuse you and your business and sue to recoup his losses, notwithstanding his tardiness and sole responsibility for delays.
Even if you do not receive all of the information and materials you desire, what you do receive or do not receive might be instructive. Consider the perceived risk connected with the proposed loan, the borrower's ability, sophistication, and size, the extent and nature of the project, and the importance of the relationship to you and your institution when insisting on precise information.
Keep in touch with the senior manager to gain his opinion and share your problems. Top management should balance borrower concerns and your requests. Send a letter or fax when you request information or have lengthy phone conversations with a borrower. If the borrower doesn't meet your institution's requirements, you can't approve his loan.
Information required for a development loan
The more the borrower can prepare, put in order, and transmit to you while the underwriting process proceeds, the less pressure he and you will feel when the closing date nears.
- Borrowing members' names and addresses, their Social Security numbers, the borrowing entity, and their tax ID numbers.
- Management members' and critical equity contributors' financial statements.
- Individual and business tax returns (minimum of two years).
- A resume or narrative describing all of the major players and crucial players.
- Significant participants' financial and commercial references.
- If the property has already been purchased, a copy of the sales contract or closing statement is required.
- If there have been any recent capital upgrades to the property, make a list.
- Specifications and plans.
- Budgets for hard and soft costs.
- Schedule of how the equity and loan proceeds will be used (sources and uses statement).
- Statement of operations in pro forma.
- Attorney or attorneys' names.
- Architects' and engineers' names.
- Construction manager, general contractor, leading subcontractor names, and resumes.
- A copy of the most recent real estate tax bill, as well as water and sewer bills
- Insurance firm, as well as the amount and types of coverage.
- If appropriate, recent unit sales and leases.
- If applicable, copies of leases or lease abstracts (summaries of lease terms) or a few examples of leases chosen by you.
- A current rent roll includes square footage, lease terms, clauses, bump-ups, escalations, rent per square foot, tenants' names, expiration dates, arrearages, and other essential lease details.
- A copy of the offering prospectus with changes if the property is an existing condominium or cooperative.
- At least two years of property operating statements, if applicable
- Existing mortgage documents, including outstanding sums
- If available, a recent evaluation and feasibility study.
- If available, a recent Phase I environmental report.
- If accessible, engineering papers, zoning analyses, municipal permissions, etc.
The Internal Rate of Return (IRR) is the rate of return at which the present value of cash-inflows equals the present value of all cash-outflows.
Cash flow in real estate is a simple calculation of how much money is coming in and going out each month. You need to know the rental income, mortgage payments, property taxes, and any other associated costs to calculate it. Once you have all those figures, you can subtract the expenses from the income to get your monthly cashflow.
Debt/equity in real estate is when a company borrows money from a lender and uses the money to purchase the property. The company then owns the property, and the lender has a claim on the property if the company does not repay the loan.
The loan-to-cost ratio in real estate is the percentage of a property's purchase price financed with a loan. You can calculate it by dividing the loan amount by the purchase price.
Real Estate Development Project Loan Approval Sample
A professional loan proposal sample for a real estate deal may be helpful if you want to learn how to create a loan proposal for real estate or adjust to the template you have on file. The following is an example of a loan proposal that you may use to help you structure your own in the future.
The following example is a loan presentation for a construction loan to renovate and convert a six-story manufacturing facility to residential use.
ABC Group (ABC) buys a vacant six-story building on XYZ Street. Property owner is selling its decades-old manufacturing facility for $8million.
The business is no longer feasible after a decade of increased overseas competition. Real estate values have risen, and residential and retail demands have soared. The family is motivated to sell because the building's traditional usage is no longer sustainable, and its worth is high.
ABC's ownership and development of the XYZ area for residential and retail use is a desirable prospect, given the building's location, clean condition, property market attributes, and acceptable agreed price of $8,000,000. A transaction summary follows.
ABC group is buying the property for $8,000,000. Planning, permissions, coordination, organization, and construction will take a year after closure.
There will be nine homes and 4,500UOM of retail space. All residential units should sell in the second year.
Conservatives are expected to sell eight in the second year and one in the third. The eight sales will pay off the $11.5MM acquisition/construction debt.They should entirely lease the retail area by the second year. Using third-year retail cash flows, discounted cash flow, and loan-to-value methodologies, a $3.5MM refinancing is estimated for the fourth year. Retail space will likely be sold within 10 years.
Demand for housing and retail space soared as the city's economy did. The area now has art shops, furniture galleries, and upscale eateries. It's a nice spot to live and visit. This desirability is fueled by successful professionals who desire to reside in one of the city's most active and prominent neighborhoods. Both sales and rental prices are now high in the area.
The six-story, the full-basement building, is on a 50-by-100-foot square lot. It's a red brick building from the early 1900s supported by steel and wood columns and sturdy oak beams. Despite minor settling, the structure looks pretty sound due to large dead loads from fixed machinery. The home's four windows are a plus.
Many nearby buildings only get light from the front and back. The building's 11- to 16-foot ceilings are another noteworthy feature.
The facility, chemical samples, and Goods' paperwork, permits, and storage revealed no environmental threats. Lead-based paint and asbestos can be readily and affordably confined or removed.
Demolition, cleanup, and new construction should go quickly because the building will be unoccupied, the outer walls are bare, and there is no ceiling cover.
Two freight elevators are operational, one with street access. It will ease equipment and material movement.
The rebuilt building will include retail on the main floor and housing above.
ABC will reduce the building's depth from 100 to 80 feet on levels 2 through 6. They can use the reduced Unit Of Measurement for a penthouse on the roof. A stairway on the seventh level will lead to a 200UOM enclosed "crow's nest" that will lead to the rooftop roof terrace.
Plans call for two units on levels 2, 3, and 4. The fifth and sixth levels may have one, two, or two simplexes and one duplex. The basement will provide 2,500 UOM of retail space, 1,500 UOM of residential storage, and 1,000 UOM of mechanicals, gas-fired heaters, and water heaters.
A skylight will be above the store's rear. The front of the real estate property will stay essentially unchanged, except for the fire escape.
One elevator will serve the area's flats. It's meant to be strategically positioned so each tenant can enter as soon as the elevator door opens. Every unit will include two bathrooms with stone worktops and top-of-the-line fixtures.
Kitchens will have Sub Zero freezers, granite worktops, and other high-end products. Oak flooring will be everywhere except in kitchens and baths.
Baseboards and crown molding will be high-quality. Sheetrock will cover exposed joists to offer sound insulation, light treatments, and a smooth, solid surface. Original columns and beams will be exposed to add authenticity.
Since ABC has extensive expertise in maintaining and rehabilitating the City buildings, finishings and work may be done successfully, efficiently, and cheaply. The final product will be market-ready.
With eight apartment sales and retail rent, the project will earn $15.7MM in its second year after ownership. It will generate $3.4MM after paying off the acquisition/construction loan. With one residential unit and no debt service, practically all of the $2.4MM in gross revenues fall to the bottom line, resulting in a $2.3MM net cash flow.
After three years, the remaining retail part, which generates $400M annually, can be financed or sold. If the retail space is sold for $1,646M after 10 years, the initial $3,046M equity investment will provide a 49 per cent IRR.
Sources and uses estimations show attorney's fees at closing. According to ABC's experience, condo closing costs, including attorney's fees, average $6,000 per unit. Fuel and utilities cost $1/UOM. Supplies, repairs, and maintenance cost $0.60 per UOM. ABC will have a hired salesperson on-site and advertise to encourage direct sales, so broker fees are 5% of gross sales. They will also hire staff six months after closing for $60,000 per year. Note that expenses grow annually.
Equity and loans total $3,046M and $11,500M. ABC's borrowing rate is 7%. Each sale requires a 75% principal paydown.
A total of $4,854 million was used. This conservative estimate may be higher than what will be realized.
The Bottom Line
Lenders want to understand your business. These lenders accept some risk, but a well-developed loan proposal helps them comprehend the dangers and enhances your loan approval prospects.
Putting all of the pieces of a loan proposal together will create a clear image of your project to the source of funding, allowing them to make a quicker judgment on whether or not they can provide the funding you require.If you want more insight into preparing an effective proposal or acquiring your own real estate development finance, enroll for the Property Mastermind.
How to write an executive summary for the loan proposal?
Writing an executive summary for a loan proposal can be challenging, especially if you're not sure where to start. However, by following a few simple tips, you can create a summary that effectively outlines your proposal and highlights the key points that lenders will want to know. First and foremost, keep it short and sweet. The executive summary should be no more than one or two pages, so don't try to cram too much information into it. State the purpose of the loan in clear, concise language, and provide an overview of how you intend to use the funds. Next, touch on the key financials. Lenders will want to see numbers that show your business is profitable and has solid cash flow.
What should a loan proposal include?
Your loan proposal should include - 1. Executive summary 2. Area Description 3. Market Analysis 4. Property Description 5. Economical and Financial Analysis 6. Analytical Notes 7. Exhibits, maps, and Photographs
Do property developers take loans?
Yes, property developers take out loans in order to finance their projects. This is because development is a very expensive undertaking, and it can be difficult to come up with the money needed upfront. Lenders are typically happy to loan money to developers, as they understand that there is always some risk associated with real estate projects. However, developers need to be careful not to overextend themselves, as they could find themselves in financial trouble if their projects go wrong.