Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Equity and Financing

In addition to an acceptable level of preleasing, the developer should also have his equity monies lined up. Ideally, the project construction financing should also be in place.

Having adequate reserves is often the key to a successful project. Development contains a lot of unknowns and, therefore, having an adequately funded contingency reserve is very helpful.

Construction financing is typically secured before a spade is placed in the ground. The developer wants to ensure that he has sufficient monies to complete the project. What is more, as mentioned below, mechanics' lien issues arise if work, however small, is started before the construction loan is recorded. Construction financing is typically issued by a bank and is usually structured as full recourse. In addition to the pitfalls of not providing for adequate reserves, success or failure of a development project can be a function of not anticipating and planning for contingencies relating to financing. It is therefore highly recommended that an extension and a miniperm (intermediate loan of three to five years) be built into the loan commitment. No one can know what the economic climate will be when the project is completed. No one has a crystal ball that can foretell whether funding will be readily available or severely constricted, or whether the pricing will be affordable or very expensive. Therefore, building flexibility into the loan in terms of extensions, an intermediate-term additional time ...