The coast of Southern California is home to dozens of properties which are undeveloped, or have not been developed. They seem to offer countless opportunities for profit. Visit our website and learn more about Altura EC.
Some of my friends, associates and family members have worked as successful real-estate developers for many years in Western United States. They have continued to share their frustration in finding project financing. Mitch, Newport Beach’s developer stated that he went from being able to receive 70 to 90 percent of the costs of building an apartment compound at 5 to 8 percent per year in the 1990s through the 2000s. He now gets offers to finance 20 to 30 percent of project cost since 2007. In mid-2007, a Newport Beach developer said that he had gone from receiving 70 to 90% of the cost of construction on an apartment complex at 5 to 8% interest per year in the 90s and early 2000s to getting offers for 20-30% loan-to-cost financing.
These projects are a great way to fill the gap that exists in the employment sector of construction, and create thousands of new construction jobs. Pacific Investment Management Fund in Irvine California is an incredibly reputable mortgage fund. To find out what projects it funds, I met with their Vice President for Lending. Hard money lenders are often called private lenders who try to close the financing gap that institutions have created due to the freeze in credit markets. In our two hour conversation at Pacific Investment’s conference table with a view of Newport Beach, Mr. Joseph gave us the following advice or tips to anyone who is looking for funding for their project or for a development.
Brian Joseph is the Vice President of Lending for Pacific Investment Management Fund. Here are his 4 top tips:
1. It is important to make a good impression. Preparing a short, concise and well-organized executive summation should take a day or two. Paint a complete picture of the entire project. Also, explain the need for this project in a competitive real estate marketplace. You need to stand out in the pack. A well-organized and nicely presented package can help you achieve this.
2. To help you prepare pro-formas for your project or evaluate the current financial situation, seek the assistance of an accountant. Add these ratios to any project that involves commercial activity: Debt Coverage Ratio (DSCR), Return on Investment, Breakeven Point, Vacancy Factors, using a low industry standard.
3. An appraisal should be based on conservative assumptions. Most appraisals were done to satisfy the needs of the client, rather than those of the lender. More projects are killed by an inflated valuation than any other reason. It is important for the developer to tell their appraisers that they should bring in wholesale values. It will enable the developer to determine true profit margins as well as adjust factors such cost.
4. Before attempting to secure financing, if the client is unable to provide the additional 35% in cash and you need to exceed a loan of more than 65 percent based on future project value then bring a business partner on board. The “skin in the game” factor is very important. Many lenders want to make sure that their clients are willing to take on the same risk as the lender. Since the client typically takes the largest share of profits, it is crucial that they also take a part of the risk.