Thank you for writing to me and I will try and answer your question, but just to make sure I understand it.
You seem to be saying that the borrowing amount is 120% of the cost structure; both
acquisition and construction and you want to know how they can do that.
First Things First:
Ultimately the financier need security for the loan - that is fundamental to the borrower/ lender system.
As this is a fact in the commercial world, when the developer is preparing
his Application for Finance, it naturally includes the end sales value of the
development - all the units.
These Application figures include a profit of say 25% minimum. So the application really show the financier all the costs (100%)+ 25% profit, OK?
To support the Finance Application the developer will have included a formal sales valuation supporting the sales prices used in the Application.
This sales valuation (appraisal) will be rather conservative, because Valuers (Appraisers) don't like being sued by banks if the actual sales prices achieved are lower than the valuer's estimate.
The financier has to be prepared to accept these figures as fair and reasonable as security for the loan.
If that is the correct appraisal of the deal, it means that the borrower has no equity in their deal - it's all being done on borrowed money.
That then can only mean that the development/sales market must be
very strong + the borrower must have an excellent development record of successful and profitable projects.
In addition the financier may have additional security over other property the developer may own ... like his home.
Under this type of deal, you may ask how the developer gets his profit, if he must pay back all the cost + all the profit to the bank.
Well I did say that the sales valuation was conservative ... so that keeps the bank happy from a security point of view, but the developer must have known that he would sell the units for higher prices.
In addition he would have added a cost contingency for his own safety. If he did not have to spend the contingency, then that adds to his profit.
The best advice I can give you is to see one of the lenders sales staff and get them to spell out their system. After all a salesman wants new clients and you may become one.
Remember banks and financiers only have one product to sell - MONEY - it's a commodity, just like a car and a washing machine.
There is no mistery about it - these organisations have sales staff and their job is to bring in new business. Get them to come and see you and present their product.
Then do the same with a number of lenders - record all the data they give you - don't trust memory - 'cause when you come to make your own application, you won't have all the info at your finger tips.
I hate the idea of pushing my own wheelbarrow, but being associated with the development/renovation business as you have been ...
is Not the same as being the developer ...
When you start a deal, it is too late for you to start learning How To Do It ...
Have seen many who have "Been There &
Done That" ...
They report to me, that as a result of not knowing something, that they needed to make a decision NOW!!! ...
THEY HAVE LEFT A LOT OF MONEY ON THE TABLE, that could have been in their pocket, by Just Not Knowing.
Invest in Knowledge First ... it is the cheapest of all the decisions you make.
All the best,
"If You Could Learn "How To Be A Developer" And Do Real Estate Development Profitably