“Acquisition and Development” or “Horizontal Improvement” Loans
Also, known as acquisition and development loans or loans for “horizontal improvements”. The purchase of the property may or may not be included in the loan proceeds, which would be the “acquisition” part of the loan. The “development” part refers to the onsite and offsite improvements: planning, zoning, leveling, grading, subdividing the parcel into smaller parcels, bringing in utilities to the site (power, sewer and water), building infrastructure for roads, curbs, gutters, street lights, pavement, parks, flood control, as well as the “design” of the property including civil engineering, traffic studies, drainage studies, architectural, etc. Soft costs must also be calculated in: interest reserves, commissions and fees on the loan, and contingency reserves.
On all loans, the borrower MUST have “skin in the game” meaning that they have contributed money for the purchase (usually at least 30% of the purchase price), or they have paid for some of the soft costs out of their own pocket, or they have gained “sweat equity” by improving the property using their own funds, or the knowledge and expertise. For example, an architect can provide the architectural drawings, which can cost many tens of thousands of dollars, and he would typically be given credit for that by the lender.
In the end, though, you can expect that most lenders will require a minimum of 30% equity in the project, and many will require 50%. Capella Mortgage has done loans where the borrower came in with only 8% of their own money, but the value of the property far exceeded the purchase price. Capella Mortgage requires that the developer have strong expertise in their field, and a portfolio of accomplished projects proving that they are able to bring in a project on budget, resulting in profit to the developer.
Last note, hard money lenders get a lot of phone calls from people who have a dream of an amazing project that is needed in the community, and that has a large potential for success. However, these borrowers have very little experience, and very little money. In these cases, we recommend that the borrower find some partners who have the experience and the funds to make the deal a viable deal. Hard money lenders do not finance 100% for borrowers with no experience and no equity, and yet we get asked to do these types of loans on a weekly basis. So before you call a hard money lender for your A&D project, make sure you have your ducks in a row.