Know Basic Property Financing Techniques

"Leverage in land development doesn’t always have to come from borrowed funds. Several methods are available for reducing risk but developing the same a Sale and leasebacks Land and equity investors Sweat equity...."

 Low-cost construction loans can reduce interest costs by hundreds or thousands of dollars per unit.„In syndicated rental projects; typically one-third of the equity is advanced for construction, further reducing interest carry costs.

Project Financing Mechanisms

1.1. Market-rate loans

Market-rate loans are offered by banks, Saving Institutions and Mortgage Companies to Homebuyers and Investors in rental property. Insurance companies and public pension funds also make direct real estate loans, but the transactions are typically too small. There is no set "market rate" of interest for housing loans - rather, a range of rates which are found in the market.

1.2. Below-market-rate loans

A below-market-rate loan can be defined as any loan with an interest rate that is clearly lower than prevailing market rates, taking into account the market factors just described and the particular benefits and risks of the transaction in question.

1.2.1.        Common sources:

1.2.2.        Direct low-interest loans from government agencies

1.2.3.        Lending using federal sources

1.2.4.        The proceeds of selling tax-exempt bonds

1.2.5.        Credit-enhanced investments

1.2.6.        Housing finance agency reserves

1.2.7.        Community Reinvestment Act (CRA) motivated

1.3. „Project-based loans

Project-based grants are used for the acquisition, construction or renovation of affordable housing. These are distinguished from other types of grants that might, for example, be used to pay rent subsidies, capitalize a loan pool or underwrite the operating expenses of a nonprofit housing organization.

1.4. Deferred payment loans

In the affordable housing industry, "deferred payment second mortgage loan" typically means that all payments of principal and interest are deferred until resale of the property or conversion to another use. Such loans are also called "soft seconds". They typically generate no return on investment, are not amortized (repaid monthly).

1.5. Owner equity and equity proceeds

Owner equity can be defined as cash or something else of value provided by the owner to a real estate transaction that involves acquisition, construction or refinancing. For example, a homebuyer's down payment is equity. An investor's cash paid into a deal is equity. The market value of land or buildings provided to a deal is equity. With rehabilitation of a property for an existing owner, the owner's equity is usually valued as the difference between the market value of the property and debt on the property.

1.6. Lease purchase loans

In a typical program, a local government agency or nonprofit group arranges financing for a group of homes - whether homes to be built, rehabbed or simply bought in the open market. The program sponsor sells the homes to low- income families who do not currently qualify for conventional financing - usually by failing to meet down payment requirements. A slight surcharge on the monthly payment builds up a reserve account for the down payment.