Commercial Construction Financing, Land as Full Equity
I’m in the middle of completing construction documents and wanted some input regarding capital planning before reaching out to lenders again. 

Preliminary history: 

Land originally bought vacant and with no entitlements for $1,500,000 (free and clear).

Entitlement planning costs: $250,000

Construction Documents costs: $350,000

Total All-In Expenditures so far: $2,100,000 (land + soft costs) 

After obtaining entitlements and general market appreciation, the value of land is indicated at roughly $2,500,000

Basic Rough Math (not actual numbers): 

Cost of Construction: $10,000,000

Market Cost of Land (free and clear): $2,500,000

Total Project Cost: $12,500,000

Financing Needed: $10,000,000 (assume all   FFE, interest reserves, contingencies, hard costs, etc. are included)

Financing Assumptions: 

Loan to Cost: 85% (SBA)

Maximum LTC Loan Amount: .85*$12,500,000 = $10,625,000

Equity Required: 15% = .15*$12,500,000 = $1,875,000 (Equity in land exceeds this)

Actual LTC = $10,000,000/$12,500,000 = 80% 

Based on early conversations with a lender, they indicated a cash injection would still be required. 

The main question is, does the equity in the land not cover the full equity/cash requirement? If not, how much of the equity in the land can be attributed towards the 15% equity requirement?

Based on the potential cash injection requirement, I’d assume the market value of the land and costs incurred so far might only contribute some percentage to the equity requirement. Anyone have any insight of how much additional cash should be expected for commercial deals in this size range? Back-of-napkin calculations or metrics will help too!
[{"id": "hnpspcn", "text": "Short answer is no. Most banks won\u2019t value the land at full speculative illiquid market value (especially if it\u2019s \u201cappreciated\u201d) \n\nYou can maybe get original purchase price or 50% of current appraisal value as credit. \n\nBanks want skin in the game and I think it\u2019s unlikely to get 85% LTC. Is it an owner occupied deal?\n\nAnyway, I can\u2019t believe you\u2019ve spent so much cash without securing financing \ud83d\ude2c", "replies": [{"id": "hnr82px", "text": "I do full land equity with an appraisal for the underlying land value even if it has appreciated. 80% is the highest LTC I would get conventionally with a bank however, 85% possible if it is insured or through a second tier bank or with a mezz slice.", "replies": [], "depth": 2}, {"id": "hnrbwam", "text": "Thank you for the insight. The idea of 50% land equity as contribution towards total equity requirement sounds familiar. The deal would go through the SBA 504, which would allow the bank to fund 50%, CDC to fund 35%, and owner requirement of 15%. \n\nIt\u2019s a hotel that our company would own and operate. For a prospective development that required entitling the land, it was difficult to float the idea of secure financing as the entitlement process can take 3-5 years.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hnq3l8h", "text": "What type of property is this that it qualifies for SBA? Hotel?", "replies": [{"id": "hnrehoj", "text": "Hotel, yes.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hnq4jtl", "text": "I hope those aren't your actual figures... the only SBA loan you could do that large is a 504 and they are a HUGE pain in the ass.\n\nAlso, \"appraised value as equity\" was a not an insignificant issue after 08-09 so regulations were passed restricting it (HVCRE anyone?).  Generally you will have to prove you spent cash to have it counted as equity.", "replies": [{"id": "hnrcj0k", "text": "HVCRE is the original reason the cash injection requirement conversation came up. SBA adds paperwork but with a 25 year fixed rate at sub 3% interest rate (all fees included), makes the process worth.", "replies": [{"id": "hnrfvcx", "text": "504s come with a decent 3rd party lenders fee on the front plus an annual guarantee &amp; servicing fee so if you're sub 3% all in well done", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hnq6xpp", "text": "Most will only consider real cash in the deal, so your equity would be 2.1M.  Then, your real project cost is 12.1M.  Without knowing what you are building, a good guess would be around 65-70% LTC through banks. I would say conservatively, you are looking at a real Loan amount of about 8M.  (I am a commercial mortgage broker)\n\nMore info on who will be the tenant would help.", "replies": [{"id": "hnredc7", "text": "Thank you for the response. The proposed development is a hotel that our company would develop, own and operate. The 65% to 75% LTC is generally for conventional financing, the SBA 504 program should allow 85% LTC as special-purpose, correct? \n\nBased on my calculations, we\u2019d be looking at roughly similar cash injection requirements (compared to your method) when accounting for marginal contribution from market value of land equity (50%) and soft costs (25%). Resulting in a cash requirement of 25% of total equity requirement.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hnskmc7", "text": "80% would be the max LTC on hospitality construction through the SBA 504 program and land value can be used as equity into the deal instead of its cost basis as long as it has seasoned 24 months. I would recommend working with a mortgage broker that has a niche in the hotel industry, since there are only a few out there doing hotel construction financing. I've met a couple in the last year through networking. DM me if you need a contact.", "replies": [], "depth": 1}, {"id": "hnsl47q", "text": "Could you recommend a lender? Can you share loan terms with Sba please.", "replies": [{"id": "hnspz03", "text": "Local lenders have been the most interested and active in lending recently. I\u2019d reach out to banks in the project area that offer commercial financing and work with SBA 504. Easiest way is to contact large, local credit units and community banks. If you see new construction or property transactions, you\u2019ll be able to see the lender from a title/recorded document search. \n\nSBA 504 terms are the same for every project. For example, a 25 year amortization at the current November debenture rate would be about 2.922% fixed for the 25 years. These rates change monthly and updated rates are published roughly the first week of the month. I\u2019m operating under the assumption of 85% LTC with a bank lending 50% and the CDC lending 35%. Total equity requirements can be between 10-15% of LTC. \n\nCheck out this link for current rates: \nhttps://cdcloans.com/sba-504-rates/", "replies": [{"id": "hnstsdz", "text": "Is that just the 35 percent portion? What is the 50 percent portion?", "replies": [{"id": "hnsynpc", "text": "35% of the project will be financed per the SBA rates and terms. 50% financed with local bank terms, which varies widely based on product type, fixed rate period, amortization, etc. For hotels, current financing terms I\u2019m seeing are 4.25% fixed for 10 years with a 25 year amortization. Interest rate goes down by .25% if you go with 7 year fixed and down another .25% if you go with 5 year fixed. Need to satisfy other requirements such as total LTV, DSCR (~1.35), etc.", "replies": [{"id": "hnuzn3u", "text": "Well the whole project is initial financed by the local bank.   The 504 debenture for the 35% piece won't happen until months after construction is finished.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hntgw0c", "text": "There\u2019s no way a lender will go 85% LTC.", "replies": [], "depth": 1}, {"id": "ho0tpmm", "text": "Hey there, direct lender &amp; developer ([forbix.com](https://forbix.com)) here. Based on my reading of your post, I believe you could benefit from utilizing a CRE hospitality construction loan if it is possible to do rather than SBA loan. SBA lenders are are quite reluctant currently to restaurants and hotels especially with the news of the new covid strain omicron, travel in Europe &amp; South East Asia already getting new restrictions as of this week. Anyways let me know if you want me to look at any numbers I would be happy to help. Message me anytime.", "replies": [], "depth": 1}]