Construction lenders are looking at their own internal mini-perm rates at 7 to 7.5 percent, using a 1.35:1 debt-coverage ratio based on a 25- to 30-year amortization schedule to underwrite the amount of money the project is capable of supporting for a permanent mortgage. This permanent loan amount would also be the maximum construction loan offered.
While this sounds good, when you take a look at the real estate market for storage facilities, the cap rates for existing storage facilities sold in the last 12 months may be 6 percent in any given market. The lender is adding 100 basis points to the cap rate and calculating value from net operating income based upon a 7 percent cap rate, even though the current market might reflect a 6 percent cap rate. The lenders are concerned the Federal Reserve Board will increase interest rates at some point next year. Cap rates will also increase for all classes of income-producing real estate assets.
Support Your Loan Request
No matter how good you think your project is, the lender cannot see it through your eyes. You need to supply as much support as possible to convince your lender to deliver an acceptable construction loan. A professional feasibility study from a well-recognized company in the industry will be beneficial to show the lender your project has merit. This feasibility study should cover your market area, potential rental rates, existing competition and projected competition. This information can be obtained from the city and county planning departments. These proposed projects could conceivably compete with your venture, if and when they are built.
For the most part, appraisals are ordered by the construction lender processing your construction loan. Most construction-loan borrowers do not invest the money to have an appraisal completed prior to going to the bank. A solid appraisal from a recognized appraisal company would provide a significant amount of information to your lender. It can help the lender underwrite your transaction, and could make the difference between you receiving a letter of intent for your construction loan or not.
Build the Right Team