Where the equity problem actually comes from
The debt is there, the equity isn't. That's only half right. The equity gap has grown because the bank's loan has shrunk: two years ago 65% of cost, today 55 to 60. Every point that comes off the loan is a point you find from a partner, at a partner's price.
| Bank | Debt fund | Mezzanine or preferred | HUD 221(d)(4) | |
|---|---|---|---|---|
| Loan to cost | 55 to 65%, more with land equity | Up to 75% | Stacks the total to 80 to 85% | Up to 90% |
| Recourse | Usually full | Non-recourse with carve-outs, burn-off available | Behind the senior | Non-recourse |
| Pricing today | 6 to 7% and up | 8% and up | 10 to 14% | Mid to high 5s, fixed for 40 years |
| Term | 24 to 36 months | 24 to 36 months, interest only | 36 months | 40 years |
| What they need from you | Net worth at or above the loan, around 10% liquid, a bonded contractor with a guaranteed maximum price, and three comparable completions | The deal underwritten, the interest reserve inside the loan, and a track record they can see | Co-invest, and an intercreditor with the senior | Patience for a 12 to 18 month approval |
The three-completions test is why capable second-time developers sit at 57%. It's a bank rule, not a market rule. A debt fund doesn't need it.
A sponsor with one or two completed projects that the bank has decided not to count.
A site with entitlement or environmental history the bank can't get comfortable with.
A project that needs 70% of cost and a bank that stops at 60.
A principal who won't sign a full recourse guarantee.
A bank that changed its terms since the last conversation, and a developer who found out late.
If the deal is straightforward, your bank will do it and you don't need us. If it has a wrinkle, that's the work.