A slower than expected condo sales market, an abundance of bridge capital, and a belief in a fundamental value level in the market has made condo inventory financing available again. Financing is available from a variety of capital sources. Loans can be non-recourse. Leverage and rate largely depend on the size and location of the project.
- Pricing for non-recourse condo inventory loans greater than $25 million can be as low to mid-single digits at lower leverage levels
- Pricing for loans less than $25 million will yield high single digit interest rates in major markets.
- Loan term may vary but is usually in the 12-24 month range with extension options.
- Varying levels of prepayment penalty.
Leverage is generally capped at 60%-70% of bulk sellout value. The lender will establish value based on a combination of an appraisal, the sponsor’s estimated sellout value, broker conversations, and, most importantly, other condo sales within the building and competitive properties.
The lender will establish minimum release prices on an individual unit or $/SF basis to make sure that sufficient value remains in the unsold condos as each condo is sold off. Cash flow leakage from sales can be negotiated and allows some portion of the net sales proceeds from individual unit sales to be returned to the borrower leaving a portion of the inventory loan outstanding. That structure is a win-win situation for the lender and borrower. It allows the lender to keep capital out longer and increases the borrower’s leveraged IRR by having equity returned earlier. Lenders care about the use of proceeds for the loan. They are more favorable to taking out an existing loan versus a pure repatriation of sponsor equity late in the sales process when the remaining collateral will usually consist of the least desirable units at the property.
Offers vary greatly from lender to lender so it is important to broadly survey the capital markets to create competition and get the best loan for the sponsor.