CONSTRUCTION & DEVELOPMENT LENDING

Construction and Developement Loans are among the most speculative and risky business loans that a Lender can make.  Because of the increased risk associated with these loans, they may be subject to additional requirements.

For example, the borrower of a construction and development loan must have a minimum of 35% equity interest in the project being financed, based on the value of the project at the time the loan is made.    Another way of stating this is that the loan-to-value (LTV) ratio for development loans cannot exceed 65%. 

There are two commonly asked questions about this provision. 

1.)  How is a borrower’s equity interest measured?

A borrower’s equity interest in a project may include down-payment money and the value of land owned by the borrower on which the project is to be built, less any liens.  The borrower’s equity interest is measured in relation to the value of the project.

2.)  How is the value of the financed project determined?

In the definition of “loan-to-value ratio" the term “value” is defined as the market value of the collateral used to secure a loan.  Market value is typically reflected in appraisals and other valuation tools available to American First Equity,LLC.  This includes the appraised value of land owned by the borrower on which the project is to be built, less any liens, plus the cost to build the project.  This valuation is to be used for calculating the borrower’s equity interest and the maximum permissible loan amount based on a 65% LTV ratio.   Because commercial and development projects are typically very speculative in nature, appraisals that attempt to determine the future market value of the completed project will not be utilized in calculating the loan amount.