Cohousing-L Mailing List: Affordability - For development - and Hard Hearted Bankers

[Munn Heydorn (munn]

I should make it clear that in my previous post,this one or any others I'm 
speaking for me only!  BTW, I subscribe in digest form which causes timing 
problems in posting.  Sorry about that.

When a lender looks at construction lending, much less acquisition and 
development loans ("A & D") he/she sees RISK, much more risk than a house 
loan or an apartment building loan on a completed building.  In normal (On 
something which is completely done) mortgage lending there is X level of 
risk based on credit factors mostly, but the building exists and has a 
dollar value.  That dollar value may not be what the lender expects when 
worse comes to worst, as many lenders found out recently, but in general 
that structure has some value and, unless a mistake was made or things have 
completely gone to pot, reasonably close to what the lender and appraiser 
thought was market value.  Land under development or a building under 
construction is tough from a valuation stand point.  It earns no income and 
is hard to sell until structures are completed.  In addition, construction, 
remodeling and A & D lending introduces a whole new litany of risks to 
mortgage lending; strikes, unknown factors in soils, susceptibility to 
windstorm damage/collapse when a building is partially done, cost over-runs...

Also, another factor is out there working against high ratio (High loan to 
value or loan to cost) loans for construction and/or A & D and that is the 
HASSLE factor.  Just think about it...  You're a banker in your wing tips 
and three piece suit (Assuming male) sitting behind your desk thinking about 
your next golf game and someone comes in, not to hand you the keys to a 
completed, troubled property-that's bad enough, but to give you the keys to 
the bulldozer for the A & D job that is half finished and in trouble.  
Believe me, that is a lender's nightmare; who wants to run a bulldozer in a 
three piece suit?  No lender wants to deal with an A & D loan that's tanking 
and a problem, even apart from the economic loss which, percentage wise, is 
liable to be higher than for a completed building mortgage.  Most lenders 
doing A & D deals look for a borrower with reasonably deep pockets in 
addition to a good down payment in order to allow for the unknown.

It is unlikely that a bank will be aggressive in lending to middle income 
individuals for development of land and housing; cohousing or otherwise.

I guess I'm agreeing with Rob Sandelin's and Pablo Halpern's recent postings 
on the subject.  I don't offhand have any great answers to the upfront 
dollars question for initial A & D/construction.  One possible, partial 
answer is to stage construction and, say, do the first 10 houses out of 30 
at one time, along with the related land development.  That poses costs, 
too, since it is likely to be less expensive and more convenient to develop 
the whole site at once rather that in pieces and, generally, it would be a 
plus to control the whole land site.  It may also be possible in the above 
illustration to just have a option on the balance of land for the 20 houses 
still to go.  Another alternative in a staged deal would be for the seller 
to subordinate the not yet used land; something not generally done except in 
a poor land sales market because of risk to the seller.  

Another thought, although against the American dream of paying a little as 
possible for everything bought, would be to pay somewhat of a premium for 
the land in return for staging, subordination or optioning part of the land. 
 At least that might make something work by getting some of the expense at 
the back end of the deal, albeit at a cost.  A friendly, helpful land seller 
can help make a deal work, but they're almost as greedy as lenders :-).   

One somewhat on point story.  One financially very thin developer purchased 
land from a widow who lived in an old house in poor shape on the land and 
who, in effect, took a house in the completed subdivision as partial payment 
for the land which held about 22 houses.  That new house for her was one of 
the last built in the development.  She, in effect, subordinated the land to 
the A & D lender.  All ended well, but it could have been a disaster for the 
widow if the deal had tanked.  Food for thought, in any event.

Obviously, to the extent that the folks building XYZ Cohousing have existing 
homes with some equity or other lendable assets, that may also be a pool to 
tap for start up costs in the form of refinancing or home equity loans.

Have a great Labor Day weekend. 
Regards,
Munn

Munn Heydorn, First National Bank of Chicago 
120 East Wesley
Wheaton, Illinois 60187
1-708-221-4452
munn [at] interaccess.com (preferred)  OR  commre [at] aol.com
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