Our Unique Loan Services

project margin analysis


Funding a Project Based Solely on the LTV of an Appraisal is a Mistake!

Our proprietary software Project Predict® was developed to produce a Pro Forma that projects the viability of residential construction projects and loans, from a single family house, attached or multi floor structures. The Pro Forma is driven by industry standards for improved land, direct costs, professional fees and permits, all other soft costs, displayed in a spread sheet with monthly disbursements, and paybacks throughout the projected term of the project (predicted by current market absorption rates) as the starting point to analyze and underwrite the economics of a proposed construction loan.


DO YOU NEED A PRO FORMA?


As a detailed line-item budget projecting the feasibility of a loan request compared to a borrower’s submission, (if one is submitted) it is the basis for Monitoring and Trending a Loan


“A credible pro forma is a key determinant of a projects feasibility”
(Office of Comptroller of the Currency published August 2013, and updated January 27, 2017)

PRODUCING THE PRO FORMA


To generate a Pro Forma a Price Point is the preferred value to use. The Pro Forma can be created without the Price Point, however it is rare that a borrower will approach a Lender without knowing the Price Point.


The initial Pro Forma calculated is based on the assumption it is financed without equity, a current market absorption and, the lender’s interest rate. If the Pro Forma projects a net margin acceptable to the Lender (usually not less than 7%) equity is entered and the Pro Forma is calculated to achieve the Lender’s policy terms of Loan to Value and Loan to Cost.

Then, using the borrower’s costs, a 2nd Pro Forma is run to compare with the 1st Pro Forma and the Master Cost internal document, enabling the basis of a discussion with the borrower. Before running the 2nd Pro Forma we need to address the conversion of the Borrower’s costs to the format that protects the lender, with accurate costs as defined in the Master Cost document.

MASTER COST

vs

BORROWER’S COSTS


The MASTER COST document consists of line items for each Hard Cost construction category by model type, separated into Common and Finish, excluding all other line item categories. The document is designed to ensure the inclusion of all required Hard Costs, a component of the Pro Forma. Of critical importance, it provides the detailed source of construction draws, simplifying the inspection process by eliminating the need to interpret the line item draw requests.


“An inaccurate budget can lead to cost overruns and a need to advance additional funds for completion”
(Office of Comptroller of the Currency published August 2013, and updated January 27, 2017)

ANTIQUATED STATEMENTS AND AFFIDAVITS


65 years ago Contractor’s Statements consisted of 11 or 12 lines of construction categories. The same forms are still being used in most loan requests and draw submissions, even as the construction categories have expanded to in excess of 80 line items. Compounding the issue, it is not unusual for each borrower to present statements and affidavits suitable to them but different from others. It’s no wonder then that Bank examiners consider construction lending difficult to review and prefer that banks stay away from this profitable industry.


The fact that disparate presentations surface each business day, it is necessary to do the following:


CHANGE THE OLD TO THE NEW

We, convert the old to new, providing consistent, inclusive documents by breaking down the trades into descriptive categories eliminating interpretation by inspector when performing draw inspection.


Just as your Construction Loan Agreements are consistent, the economics of the project included in those documents should be sourced from equally consistent Contractors Statements.

STATEMENTS AND AFFIDAVITS THAT PROTECT YOU

All the Statements should provide a question free Loan Recap up to the last draw submission. To achieve that objective, the Statements are configured from left to right as follows:


Contract/equity/Loan amount/Extras/Credits/Adjusted Loan/Net change/Previous Paid/This payment/Total paid/Balance to become due due.


REQUIRED COMBINATIONS OF STATEMENTS FOR THE FOLLOWING PROJECT TYPES

SINGLE FAMILY HOUSES: OWNERS; IMPROVEMENT; COMMON HARD COST; FINISH HARD COST ATTACHED SINGLE FAMILY AND MULTI FLOOR STRUCTURES OWNERS; IMPROVEMENT; STRUCTURE(S); COMMON HARD COST: FINISH HARD COST

2nd PRO FORMA


This Pro Forma can be run without requesting copies of contracts and bids to complete the Master Cost where required, and can be the basis of discussion with the Borrower determining whether to proceed.


If proceeding, the borrower must provide contracts and bids for Master Cost line-items to verify Hard Cost and all contracts or bids for the remaining costs.


We suggest that the final Pro Forma, be an Exhibit to the Loan Documents.


MONITORING AND TRENDING


“Timely construction monitoring is essential to evaluating construction progress”
(Office of Comptroller of the Currency published August 2013, and updated January 27, 2017)

In addition to the above services we Monitor and Trend each construction loan with a visit and pictorial record of site conditions and progression of product production to closing. When provided with Draw requests, sales contracts and closings (if more than one unit or house) we Trend the revolver maximum, the month projected, anticipated draws and paybacks, and the Loan Payoff month.


One Single Family

Three Structures

One Duplex Structure


Master Costs

Master Costs