Developers and Mortgage Brokers - Learn How Apartment Construction Lenders and Commercial Construction Lenders Underwrite

Here is how your apartment construction loan or your commercial con- struction loan will be underwritten. The first test is the Profit Test. Will your finished project be worth more than it will cost to construct?

A related test is the Loan-to-Value Ratio. After the project is completed and, say, your strip center is occupied, will the construction loan be less than, say, 75% loan-to-value.

Some of our construction lenders are so hungry for deals that they might even allow 80% loan-to-value. But if you still need more equity, it may be pos- sible for you to obtain a mezzanine loan.

Apartment construction lenders and commercial construction lenders often will not trust the appraisal. Instead, they will look to the Loan-to-Cost Ratio. What percentage of the total cost is the construction lender being asked to cover?

Historically developers were asked to cover at least 20% of the total cost of the project, usually in the form of free and clear land. After all, the coonstruc- tion lender wants the developer to have some skin in the game.

Modernly, however, apartment construction loans or commercial construc- tion loans up to 90% of cost, or more, are possible. And if the developer needs even more leverage, a mezzanine loan is sometimes possible.

Will the apartment construction lender or commercial construction lender be able to get out of the deal? If you build your strip center, will the center make enough money to qualify for a takeout loan large enough to pay off the construction loan?

To determine if the takeout loan is large enough to pay off the apartment construction loan or the commercial construction loan, the construction lender will compute the Debt Service Coverage Ratio. The ratio must usually be larger than 1.25. In other words, the net income from the project must be 25% larger than the proposed payments.