When it comes to Build for Rent Financing, its likely that for any development of a BFR community through the project lifecycle from acquisition through stabilization four different loans will have to be sourced and executed. The biggest challenge for developers in this space is replacing the Land + infrastructure (horizontal) loan with the vertical. No one likes starting a development project with financing lined up for only the first portion of the project. What happens if the market shifts during your 18 months of horizontal and then your vertical lender doesn’t like your market, or their total loan dollars for your project drop by 10% and the lender expects you to make up that 10% difference with a surprise cash infusion?
In most cases the horizontal capital will be viewed as riskiest and hence the highest cost of capital, so you want to replace this capital as soon as possible with your vertical loan. You have a few options: you can go into your own pocket and eat the difference (lowering your IRR), shop for other vertical lenders, bring in outside equity partners to make up the difference in the total capital needed to complete the vertical and what your vertical lender is willing to provide (lowering your IRR), or you could sell the land as-is and can cover your outstanding loan and your own investment. Whatever the approach, legal fees and other professional fees are likely to be duplicated or triplicated through the live cycle. While some of that is unavoidable, some efficiency is possible and a fair amount of time can be saved, which is equally if not more important
How can a developer streamline their BFR financing for the whole lifecycle of a BFR project and mitigate the risk of being abandoned between the financing steps by different lenders? Having worked through stalled projects and bringing new capital to stalled land development and stalled vertical development projects our team knows how to design financing road maps where we can put the pieces of the financing puzzle together in the front end to maximize the developers IRR and minimize the chances of deals going sideways from a financing perspective. Having existing trust and ongoing relationships with our capital partners versus a strictly transactional relationship really helps when there is a uniqueness to the project where there is a need for some lender flexibility.
LDCRE’s Capital Markets team can add the most value when we are engaged in the early stages of the project and assisting in designing an optimal development budget that carries through into the cashflow (income and expenses) for the asset(s).
Case Study: we remodeled our developer client’s proposed capital structure for a project and paired it with one of the debt funds in our preferred lender network. Through our financial remodeling and pairing him with the right capital partner we lowered the developer’s cash contribution by over 75%, while staying under acceptable LTC percentages. We did this without increasing the loan risks from the lender’s perspective and saving the developer from bringing in a costly LP which would cause significant dilution. Our model and financing solution drastically increase the developer’s IRR and mitigates potential headaches of having an unnecessary sizable equity partner in the deal.
Please feel free to reach out to us and have us review your BFR projects in need of capital.
LDCRE has been active in the Build for Rent (BFR) /Single Family Rental (SFR) space for years. Our platform (www.LDCRE.com) markets over $500 Billion of commercial real estate for sale with a large portion of that as residential rental (multifamily, SFR, mobile home communities, etc.) and residential land.
Our capital team has been active in capitalizing land, build for rent, and build for sale townhomes, cottage, horizontal apartments, etc. This product type is in its infancy stages, so there are still financing bottlenecks for a developer to take a project from start to finish. This is a positive in the sense that is slows the new developers and projects entering the space. But for active developers in this space, it’s a headache.
Have a project for us to review, send it over…
Paul Cronin, Head of Capital Markets: pcronin@LDCRE.com
Brendan W. Hotchkiss: bhotchkiss@LDCRE.com