Cohousing-L Mailing List: Re: what are take out loans?

[jehako (jehako]

Hi-

I think the way it usually works is the developer of a property gets a 
construction loan based on a project budget (sources and uses statement) a 
proforma (that shows how funds move in and out of the project from initiation 
through final sale or lease-up), and project plans. The developer starts 
selling units as early as possible and using the proceeds either for project 
costs or to pay down (take out portions of) the construction loan. The idea is 
to use as little of the developer's own money as possible and to minimize the 
amount of interest paid on the construction loan. Depending on the set-up of 
the deal, this will either maximize the developer's profit (if a for-profit 
developer is in control) or lower the selling price of the units (if there is a 
nonprofit developer or residents who have some control and want more affordable 
housing.

There is a lot of uncertainty in any project and if things go wrong, it can 
destroy a developer's livelihood.. A developer will try for the maximum padding 
in the project to protect against uncertainty. A lot of the art of an 
affordable project is to remove the unknowns as early as possible. (This 
principle is a big reason why developers prefer new construction on a plain 
vanilla lot to re-using an old building that may have hidden risks in its walls 
and systems.)

If you think about this for a while, it is easy to see that early unit sales 
and certainty about the take-out financing will help the whole project, and 
maybe even induce the construction lender to offer a better rate. This is one 
reason I think that seriously stodgy banks like BB&T in the US like to support 
cohousing.

Jessie Handforth Kome
Eastern Village Cohousing
Silver Spring, Maryland


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