Investing w/ Acquisition & Development Capital (A&D Loans)

acquisition & development capital financing a project Oct 16, 2021

What is acquisition and development money? A&D capital is a specific kind of loan that can be used to your advantage when investing in the build-to-rent space. Let's talk about it in more detail...

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What about the length of the construction loan on a normal conventional loan versus a commercial loan? Are they typically longer/shorter? What's that like?

Sherida Zenger

Residential financing is going to usually be 12 months. You can get it longer, and commercial is usually going to start at 18 months, the total term.

Steve Olson

And we're getting them longer now because of construction delays.

The commercial loan has to be 18 months at least because that commercial lender wants to be sure that once this property is done, the buyer has sufficient time to lease it. Typically to 90%.

Because once again, they're qualifying a business here, and you're not going to build a commercial property and lease it, (ie. 50 units or more), in 12 months. You're probably not doing it in 18 months, given how things are going right now.

So most of these terms are creeping up on 24 to give you time to build and lease and then refinance out of that commercial construction loan.

So you said something about terms not being as favorable? What do you mean specifically?

Sherida Zenger

I'm meaning more your long-term interest rate, usually on commercial, you know, it's anywhere from a quarter to a half a percent more, sometimes it can be even more than that. But it's usually a higher interest rate for your permanent financing long-term financing.

Steve Olson

What else? I can think of a few things...higher interest rates, amortization period.

Sherida Zenger

Yeah, you're gonna go 25 years. Some of them have been able to do 30 years, but it's usually 25 years. And they're usually a 7 or 10 year ARM or something of that nature.

Steve Olson

And if you're a big, accomplished borrower, with HUD. HUD might amortize over 40 years. With no balloon payments.

So the typical commercial loan is, well, we're amortizing this over 25 years or whatever. But you got to pay off in 10 years. And on some of these giant HUD deals, and they're tricky, but some guys are really good at them. I've personally never done on 40 years, due in 40 years. That's crazy. We get got to get some of that capital going.

I think too, one thing that you got to keep in mind is when you have a commercial long-term loan, you're subject to audits by the bank, right? They said they underwrote that saying, Oh, yeah, you do meet the debt coverage ratio. But in a year, do you, they're going to want to know, right? So you got to have that dry powder, in case you don't, because they're going to require more collateral for the loan.

The advantage of fourplex loans which has been our bread and butter is that 30-year fixed true. Nobody's bothering you, because it's only you qualify for it. Nobody's asking any questions, and it's an excellent inflation hedge.

Sherida Zenger

One thing that I like that we do is with Lane, we get everyone pre-approved ahead of time. So when you're going through our process, you're actually getting pre-approved for your long-term financing, which is a little bit harder to get approved for than the construction. So don't let the construction loan scare you off.

Chase Leavitt

Just know that the construction loan, like we've talked about, is more of a 12-month loan, interest only. The rates can be about a point higher than the 30-year fixed conventional loan.

So just know the rates are a little bit higher, you don't want to be on that loan forever. You want to be in 12 months, or it's as short as you can whenever the construction is done. And then when it's done. It's just a simple refinance into that 30-year fixed conventional loan.

Steve Olson

That's assuming, though, that you're going with the bank. If you're going with hard money, it's three, four, or five points higher. It's a lot. And I would add to that, when you get a construction loan through a bank, your terms are usually better if you prepay your interest reserve, if they know that's just sitting in their bank. They've got that they can pull that out every month. That's worth something.

I've seen it get a couple of loans across the finish line, where they were marginal on it. Well, what if we prepay the interest? Oh, they perk up a lot.

Sherida Zenger

They like that, having that money sitting there.

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