How to get your real estate projects funded
In order to obtain necessary financing for your development or project, it is important to make the proposal as attractive to the lender as possible. The builder must carefully prepare his loan package and all documentation to ensure it is thorough and complete. Your relationship with the lender will be optimized if the presentation and documentation is complete.
Documentation:
Determine what your lender wants in your loan proposal. Ask the lender to be specific about what they require. If you are uncertain about their requirements, ask for clarification. Lenders would like to see a complete package for their initial review. If you send them an incomplete package, it is often put to the bottom of their priorities. You want to present a package that will have their full attention.
To begin, carefully prepare the needed items and documentation. The lender will need to see your financial information and your track record. Your loan request should include as much information about market studies as well as pro formas and documentation that all regulatory approvals have been obtained, environmental concerns have been addressed, and impact fees have been paid.
A standard needs list for the needed documentation is below.
About the project:
- Location and description
- Site plan
- House plans
- Survey
- Preliminary title report
- Appraisal
- Market study
- Project feasibility study
- Pro forma analysis
- Estimate of project costs (Line Item Budget)
- Development and construction schedules
- Zoning approval documentation
- Proof of payment of impact fees
- Infrastructure agreements documentation (if applicable)
Personal Information:
- Two years Federal income tax returns for your entity.
- Two years personal Federal income tax returns
- Current financial statements
- Documentation demonstrating personal collateral
- Copy of Partnership or joint venture contracts
- Personal guarantee
- Company track record
- Copy of the Articles of Incorporation, By Laws and Operating Agreement for your LLC
- Entity as well as the EIN number
- Company structure
- Personal and business references
Carefully document costs. Present a detailed cost breakdown. It is important that your cost estimates are in line with other projects. The lender will want to be certain that your development will be within budget and no last minute funds will be required to complete it.
Include any additional pertinent information that will give them a complete picture and create a favorable impression. If you have access to market information, provide data on the market and the basis for your sales price as well as absorption rate assumptions.
Presenting Your Packaged Loan Request:
Present a detailed and professional proposal. The presentation should be clear and concise. Create a cover page and an Executive Summary including information that supports important points. Provide summary spreadsheets of profit and loss statements, cost breakdowns, and anticipated cash flows, but also be sure to append full annotations for each line item.
Include information for your lender about your experience in the building industry. They will want to know your track record. Your loan request will be better received if the lender can determine the builder or developer has the experience and financial capacity necessary to complete the project and repay the loan. Provide documentation on the history of your company, highlighting its successes and financial condition. Lenders typically require end of year company balance sheets and personal tax returns for the past two years. Giving them more than just the numbers and providing them with a prospectus that includes photographs of completed projects and a statement of your company’s goals and philosophy that you are a builder with a vision and the ability to plan and market yourself will be well received by the lender. It is important to recognize that many eyes will be reviewing the information you provide and you will need to create a positive, concise impression.
Make sure that your proposal documents the construction schedule for the project, the anticipated schedule of draws, and the anticipated repayment schedule based on reasonable and well-documented sale price and absorption rate assumptions. Take the time to skillfully convince the lender that the project will be completed as intended.
It is important to be flexible and resourceful in making your loan request more attractive. If the lender is reluctant to fund your projected based on the original package, be prepared to offer changes designed to make the deal more attractive. Perhaps you can offer more up-front cash or you can shorten the term of the loan. If you are developing land, you may need to secure lot purchase contracts to appeal to the lender. The lender may want a strong guarantor or a second source of repayment. Another approach is to seek sources of community or economic development funds to support the project’s financial stability.
Loan participation arrangements could be an option. It is possible the lender may be unable to provide full funding because of restrictions on capital. Insured institutions that are working out their own financial difficulties are often limited by operating restrictions. Small community lenders have legal lending limits. Often, the loan is too large or the borrower or the borrower’s partner or affiliate already has a loan outstanding with the lender. When this is the issue, the lender may be able to work with other financial institutions on a participation agreement.
If it becomes apparent that the lender cannot honor your loan request, it is time to pursue other alternatives. If your lender asks for a great deal of documentation, be prepared to provide it, because it is a good indication the lender is interested in doing business with you. When the lender appears to show little or no interest in doing business with you or home builders in general, it is best to consider alternative lenders. There is no point in continuing with a lender who is not returning phone calls or requires you to submit a worst case scenario appraisal. Or, if a lender asks you to justify a project, based on its value if the market collapses, they are probably not interested in funding your project.
Your Lender Relationship
It is good business to develop lasting relationships with your lenders. Be respectful and try to bring as much business to them as possible. If you get a land acquisition or development loan, it would be good business to get your construction loan and the mortgage financing for your customers from the same lender.
Be forthcoming with your lender and get the lender involved in problems at the early stages. It is not a good strategy to hide problems from your lender. Being truthful about your successes and failures, as well as your personal finances and your company’s current financial condition, is important to the relationship you have with the lender. Be sure to alert them to any potential problem as soon as it becomes apparent. The earlier the lender becomes aware of the problems, the easier it is for you to work together toward the solution. Remember that you are in the home building industry for the long haul. Your reputation for trustworthiness is important and will follow you.
Inform your lender that you are working with more than one financial institution. Explain why you are developing ties to others and confirm that you still plan to conduct most of your business with them. Building strong ties with a specific lender is important, but do not depend exclusively on one lending institution. It takes time to cultivate lasting relationships with lender. Therefore, be sure to develop new relationships before it is financially necessary.