Loan Placement For Different Loan Types

Loan Placement For Different Loan Types

Commercial Loan Size Calculator

Commercial real estate lenders no longer rely on just the Loan to Value Ratio and the Debt Service Coverage Ratio to compute their maximum loan amount. Instead, the new Debt Yield Ratio is often the limiting factor to how much money you can borrow.

For example, you might be able to qualify for a $5 million new commercial loan based solely on the Loan to Value Ratio. The Debt Service Coverage Ratio might slightly cut that loan back to just $4.85 million.

What might really kill you, however, is the Debt Yield Ratio. The Debt Yield Ratio may cut your loan all the way back to just $4.3 million.  

This free calculator will help you:

  • Use Loan to Value, Debt Service Coverage Ratio and Debt Yield Ratio to determine your max loan size
  • Help you identify the limiting ratio in your loan scenario
  • Help you battle intelligently for a larger loan amount

Local Commercial Lenders Will Give You a Better Deal

If a commercial real estate lender has to foreclose on a property, it’s usually a lot easier to manage the property if the property is located nearby. This is why lenders greatly prefer to make local commercial real estate loans, rather than commercial real estate loans in distant cities.

You can use this preference to your advantage by insisting that your local bank give you a better deal than the banks lending statewide or nationwide. Bottom line: You’ll often get a lower interest rate from a bank down the street than from a bank located 200 miles away.

In addition, banks will often make riskier commercial real estate loans if the property is located just down the street. Let’s suppose you have just gone through a divorce and your credit score is lousy. If so, the little bank located just two blocks from your office building is far more likely to approve a commercial real estate loan on your office building than some far away national lender.

Every business goes through ups and downs. If your business is losing money, before you apply to some expensive hard money lender for a commercial real estate loan, you should at least approach the bank located just down the street from your warehouse. Sometimes banks will make loans that are arguably hard money quality  if the the property is located close to the bank.

Acquisition and Development Loans

A land development loan is an advance of funds, secured by a mortgage, to finance the making, installing, or constructing of the improvements necessary to convert raw land into construction ready building sites. In other words, a land development loan takes an unimproved parcel and breaks it up into a number of smaller, improved parcels upon which homes or commercial buildings will be constructed.

Apply For an A&D Loan

Important note:
 When applying for an A&D loan using Divergent Capital, ask for a “Construction Loan” in the Loan Type section and describe the property as “Land” in the Property Type section. This will make sense to you when you start entering your loan request.  

Apply For a Commercial Construction Loan  

The kinds of improvements we’re talking about might be subdividing, leveling, grading, building roads and bringing sewer, water and power to the site. These kinds of improvements are also known as horizontal improvements.  A land developer might may, “I need $1 million for the horizontal improvements.”

An acquisition and development loan (A&D loan) is a loan where a part of the proceeds are used to purchase the property. The total project cost would include the cost of the land, the hard costs for the horizontal improvements, the soft costs (including an interest reserve and sales commissions) and a contingency reserve. The minimum cash contribution of a developer on an A&D loan is usually 25% of the total land development project cost.

As a general rule, the minimum cash down payment required for a land developer to purchase a piece of land is 30%. Please note that while many hard money lenders will not exceed 25% to 50% loan to value when refinancing a piece of land, many reasonable hard money lenders will finance up to 70% of the purchase price of the land, if the developer is putting down 30% in cash.

If anything other than cash is used as the down payment, like a seller carried second mortgage or some “credit” for work already done, the size of the loan that the typical hard money lender will make will fall precipitously, probably down to the 55% LTV range. The 30% down payment must be in cash.

Land lenders will look carefully at the migratory patterns of the state. The population of the United States is on the move to warmer climates. The Southeast is enjoying a huge inflow of legal immigrants, especially North Carolina, South Carolina, Florida, Alabama, and Georgia. California is still a preferred state for many lenders, but it is actually suffering from a net outwards legal migration. Arizona, Nevada, Idaho are enjoying a large net inward legal migration, and Utah is still a popular destination.

The states of the cold Rust belt are certainly not great locations for land loans. Land lenders will usually scale back their loan to value ratios in Michigan (very depressed), Illinois, Indiana, Ohio, Pennsylvania, New York and New Jersey. Folks are moving out of these states in droves.

When underwriting a land development loan, the underwriter will look carefully at where the property is located in the entitlement process. If the land is zoned agricultural, and the nearby town is anti-growth, a reasonable loan to value ratio for a land loan might be just 10% to 25%. If the nearby town is pro growth and the subject property is located close to the town and in the path of growth, a reasonable loan to value ratio might be as much as 40% to 50%, even if the zoning is still agricultural.

A parcel that already enjoys a tentative map for a residential subdivision might be eligible for a refinance in the range of 50% to 60% of value, especially if the current property owner got the property rezoned. Be careful, however, of the property that is “just a few weeks” from a tentative map. That “few weeks” could easily extend into a “few decades” if the local Board of Supervisors votes against the map.

One of the first things a lender will want to know is, “What is the exit strategy?

How are we going to get paid off?”

If the borrower is just living off the cash he can pull out of the land until some unlucky hard money lender becomes the biggest fool, the loan is not one many lenders will chase if the land developer is an old pro and has a plan to develop three commercial pads and a condo project pad, each of which he will sell off, a land lender will be much more aggressive.

You can apply to hundreds of land lenders using  Important note:  Don’t forget, when applying for an A&D loan using Divergent Capital, ask for a “Construction Loan” in the Loan Type section describe the property as “Land” in the Property Type section. Once again, this will make sense to you when you start entering your loan request.

How Are Commercial Construction Loans Underwritten?

Construction lenders underwrite commercial construction loans using five ratios:  

  1. the Loan to Cost Ratio
  2. the Loan to Value Ratio
  3. the Debt Service Coverage Ratio
  4. the Profit Ratio
  5. the Net Worth to Loan Size Ratio.

The process sounds complicated, but the math is actually very simple.

Apply For a Commercial Construction Loan

Always make sure you verify what type of financing is best for your project before we get into each of the five construction loan underwriting ratios in details, let’s make sure we are applying to the right kind of lender. Most commercial construction loans are made by a lender located close to the proposed project. In real life, you will almost never see some big New York bank with lower rates come swooping in to steal a small commercial construction loan from some nearby bank. Commercial construction loans are made by local lenders because the lender needs to conduct six or seven progress inspections over the term of the loan to make sure that the bank’s money is actually being used to construct the building.

Secondly, most commercial construction loans are made by commercial banks, as opposed to life companies, conduits, credit unions, REIT’s, nonprime/subprime commercial lenders, or hard money commercial lenders. The reason why is because banks are setup to easily disburse small loan amounts. In contrast, life companies seldom want to bother with issuing loan checks of less than $5 million. In addition, commercial banks greatly prefer short term loans. Most commercial construction loans have a term of just 12 to 18 months, which is right in the sweet spot for a bank. 

Finally, commercial construction loans can be very profitable to the bank. The bank typically earns one or two points upfront, but the bank isn’t required to disburse most of the loan proceeds until much later in the term of the loan, as construction is completed. This supercharges the bank’s return on investment.  As a result, most banks love to make commercial construction loans, as long as the econoour is fairly healthy.

Apply For a Commercial Construction Loan

But will your project qualify for a commercial construction loan?  

The bank will use five major underwriting ratios to qualify your commercial construction loan:

  1. Loan to Cost Ratio
  2. Loan to Value Ratio
  3. Debt Service Coverage Ratio
  4. Profit Ratio

Net Worth to Loan Size Ratio

We will examine each of these ratios in turn below. Now, guys, below you will find ratios that appears to include  gasp  algebra.  Relax.  I assure you there is no algebra involved. These calculations are simple 5th grade math  addition, subtraction, multiplication, and division  so please don’t let your eyes glaze over. This is important knowledge, and we will do our best to make it fun.

Loan to Cost Ratio

The most important ratio in commercial construction loan underwriting is, by far, the Loan To Cost Ratio. The Loan to Cost Ratio is the construction loan amount divided by the total cost of the project, the result being multiplied by 100%.  

Loan To Cost Ratio = (Construction Loan Amount / Total Project Cost) x 100%

Loan to Cost Ratios look like this:  

86.1% LTC or 80.0% LTC or 76.4% LTC.  

Obviously the lower the Loan to Cost Ratio, the safer the loan is for the bank.

The Total Cost of the Project is the sum of the land cost, the hard costs, the soft costs, and a contingency reserve equal to around 5% of hard and soft costs.  Usually a commercial bank will insist on a Loan to Cost Ratio of 80.0% or less. In other words, the developer must have at least 20% of the total cost of the project invested in the deal.  Are you, a developer, short of equity. Here is how to raise more equity.


Bryan Adams is a good ‘ole boy and a shady real estate developer. He wants to build some apartments in Atlanta, so he applies to Nearby Milestone Bank for a $4 million commercial construction loan.  

Will he qualify?  

Does he have enough of his own money in the deal?  

In other words, does he have enough skin in the game?

Bryan paid $500,000 for the land, but he didn’t pay with all cash. He only put down $150,000 in cash, and the seller carried back a $350,000  contract of sale (think of a contract of sale as just a first mortgage carried back by the seller).  About now some of you are probably thinking, “Hmmm, this may not be a doable deal. Most banks require the developer to contribute the land to the project free and clear (or at least pretty close).”

Continuing with our example.  Bryan gets bids and submits a hard cost breakdown of $2,600,000. His projected soft costs, including construction period interest, are $820,000.  A contingency reserve of 5% of hard and soft costs would be $171,000. We are now ready to compute the Total Project Cost.

Total Project Cost = Land Cost + Hard Costs + Soft Costs + Contingency Reserve

Total Project Cost = $500,000 + $2,600,000 + $820,000 + $171,000

Total Project Cost = $4,091,000

Now let’s compute Bryan’s Loan to Cost Ratio:

Loan To Cost Ratio = (Construction Loan Amount / Total Project Cost) x 100%
Loan To Cost Ratio = ($4,000,000 / $4,091,000) x 100%
Loan To Cost Ratio = 97.8%

Do you really think some bank is going to be foolish enough to cover 97.8% of the cost of some risky construction loan?  Of course not!  

The general rule is this:  Banks typically want the developer to cover at least 20% of the total cost of a commercial construction project. That’s a pretty important sentence. You might want to read it again.

How much money will Bryan need to contribute to get the apartment building constructed?

Answer:  At least twenty percent of the total project cost.  

Okay, let’s do the numbers.  

We already know the Total Cost of the Project from above.

Minimum Developer’s Contribution = Total Project Cost x 20%
Minimum Developer’s Contribution = $4,091,000 x 20%
Minimum Developer’s Contribution = $818,200

Now the only money that Bryan has in the deal so far is the $300,000 that he put down on the land. He is short by $668,200; so Bryan puts on his white colored, lightweight three piece suit, inserts his bright blue pocket handkerchief, and heads off to the home of his 68 year old grandmother, Betty White.  Promising her a rock solid, “guaranteed” investment, he convinces Betty White to mortgage her free and clear home and to give him the $668,200 he needs to cover 20% of the total cost of the project.

Loan to Value Ratio

The Loan to Value Ratio, as it pertains to underwriting a commercial construction loan, is defined as the Fully Disbursed Construction Loan Amount divided by the Value of the Property When Completed, as determined by an independent appraiser selected by the bank, all times 100%.

Loan Value Ratio = (Fully Disbursed Construction Loan Amount / Value of the Property When Completed) x 100%

Generally banks want this loan to value ratio to be 75% or less on typical commercial investment properties (rental properties like multifamily, office, retail, and industrial) and 70% or less on business properties, such as hotels, assisted living facilities, and self storage facilities

Example Continued:

Proud as a peacock, shady Bryan sits down with his banker and shows him the $668,200 cashier’s check from trusting, ‘ole Betty White.  “My Total Construction Cost were $4,091,000. You said that if I could cover 20% of the total cost, you would make me a construction loan for the rest. Well, I came up with the 20%.  

When can you have the legal documents ready on our $3,272,800 construction loan?” asks Bryan.  

“Not so fast there, Bryan,” replies his banker.  “You have satisfied the Loan to Cost Ratio test, but now we also have to check the Loan to Value Ratio test.”

A grumbling Bryan writes the bank a check for $5,000 money he had planned to spend on Bravo Boom Boom and some nose candy  to cover the cost of an appraisal and the toxic report.  Five weeks later (the appraiser was constantly making up excuses) the appraisal has finally been completed. It came in at $4,200,000.  

Will this be enough?  

Well, let’s do the calculations.

Loan to Value Ratio = (Construction Loan Amount / Appraised Value Upon Completion) x 100%
Loan to Value Ratio = ($1,636,400  / $2,100,000) x 100%
Loan to Value Ratio = 77.9%

“I’m sorry, Bryan, but 77.9% loan value, based up the appraiser’s estimate of the apartment building upon completion, is too high. We’re going to have to cut your commercial construction loan back to just $3,150,000  which is 75% of the appraised value. That means that you will have to come up with an additional $122,800.”

Bryan is stumped. He has already taken Betty White’s last dime.  

Where is he going to come up with an additional $122,800?  

Then Bryan remembers his rich Uncle Mark.  At first Uncle Mark wants no part of Bryan’s building scheme, but then Bryan reminds Mark of the time they went out together to the strip joint, and Mark had gone off to a private room with Bubbles.  “I don’t think Aunt Krissy would be too pleased to hear that story, Uncle Mark.”  (Hey, I warned you that Bryan was a slime ball.)  

Mark comes up with the money and agrees to be a member of the new LLC that Bryan would assemble.

Debt Service Coverage Ratio

The Debt Service Coverage Ratio is defined as the Net Operating Income of the proposed project, as projected by the appraiser, divided by the annual principal and interest payments on the proposed takeout loan.  A takeout loan is just a garden variety permanent loan that pays off a construction loan. Remember, the construction loan will just have a 12 to 18 month term.  As soon as the apartment building is constructed and leased out, Bryan will rent it out. When it is 90% occupied, Bryan will apply to a permanent lender, typically a money center bank, for his takeout loan.

Debt Service Coverage Ratio = Net Operating Income / Proposed Annual Payment on the Takeout Loan

The Debt Service Coverage Ratio is customarily expressed to two digits, such as 1.17 or 1.32. The Debt Service Coverage Ratio must usually exceed 1.25. In other words, the projected Net Operating Income, as determined by the independent appraiser selected by the bank, must be at least 125% of the annual principal and interest payment on the proposed takeout loan.

Example Continued:

Bryan returns to the bank with his new $122,800 cashier’s check from Uncle Mark, so now he clearly has enough skin in the game  or does he?  “Okay, Bryan,” says the commercial loan officer at the bank, “Now we have to look at the Debt Service Coverage Ratio test.  “More tests?” thinks Bryan, “You killin’ me here, Smalls.”  “Let’s see if your deal passes the Debt Service Coverage Ratio test,” continues the loan officer.  “We’ll assume that your takeout loan will probably have an interest rate of 5.0% and a 25 year repayment amortization.  Plugging in a $3,150,000 loan amount, a 5% annual interest rate, and a 25 year amortization term into our financial calculator, I get an annual principal and interest payment on your expected takeout loan of $223,500.  I see from the appraisal that the appraiser estimated that the property, when completed and leased out, will generate $306,194 in Net Operating Income. Now let’s insert all of the numbers into the formula and see what Debt Service Coverage Ratio that we get.”

Debt Service Coverage Ratio = Net Operating Income / Proposed Annual Payment on the Takeout Loan
Debt Service Coverage Ratio = $153,097 / $111,750
Debt Service Coverage Ratio = 1.37

“Okay,” says the bank loan officer, “a Debt Service Coverage Ratio of 1.37 is good.  All it had to be was larger than 1.25. You’re good here, Bryan.”  “Thank goodness,” thinks Bryan, “I was running out of people to con or blackmail.”

Profit Ratio

Just about the last thing that a bank wants is for the developer to skip out of town before completing a project. This most frequently happens when the developer runs into cost overruns, and the developer realizes that there is no point in completing the construction. He won’t be able to sell the property at a profit anyway because of the cost overruns.  Banks therefore insist on verifying first that the developer stands to earn a good projected profit going into the deal, just in case there are cost overruns. If the projected profit is huge, then the developer has a capitalistic incentive to stick around, even if there are cost overruns.

The Projected Profit of a construction project is the Value of the Property Upon Completion minus the Total Cost.

Projected Profit =  Value of the Property Upon Completion  Total Project Cost
The Profit Ratio is defined as the Projected Profit divided by the Total Cost, all times 100%. The general rule is that bankers want the Profit Ratio to be larger than 20.0%.

Profit Ratio = (Projected Profit / Total Cost) x 100%

Example Continued:

“Now let’s look at the Profit Ratio,” says the bank loan officer.  Bryan fidgets and squirms.  “First let’s compute your Projected Profit.”

Projected Profit =  Value of the Property Upon Completion  Total Project Cost
Projected Profit =  $4,200,000 – $4,091,000
Projected Profit =  $109,000

“Now that we have the Projected Profit, we can compute the Profit Ratio.”

Profit Ratio = (Projected Profit / Total Cost) x 100%
Profit Ratio = ($54,500 / $2,045,500) x 100%
Profit Ratio = 2.7%

Wow! This is a poorly conceived project.  Even if there are no cost overruns, this apartment building will only be worth 2.7% more than it will cost to build. It should be worth a minimum of 20% more than its cost to construct.  As the bank loan officer ponders the disappointing results of this Profit Ratio test, Bryan invites the banker out for “a drink or two” at his favorite watering hole, the local gentlemen’s club. After Bryan has lavished the banker with numerous drinks and several lap dances from the lovely ladies, the weakened banker admits, “You know, Bryan, I like you. The truth is that our Loan Committee seldom checks the Profit Ratio. I certainly am not going to bring up the Profit Ratio before Loan Committee we have one more financial ratio that we need to address.”

Net Worth to Loan Size Ratio

The Net Worth to Loan Size Ratio is defined as the Net Worth of the Developer divided by the Construction Loan Amount. This ratio must exceed 1.0. In other words, the developer needs to be worth more than the amount of the construction loan. After all, a bank doesn’t want borrowers with a modest $1,600,000 net worth borrowing $10 million from the bank.  

What if the loan goes bad?  

What if there is a cost overrun?  

What if apartment rents plummet while the apartment building is under construction?  

If the borrower’s net worth is only $1,600,000, what could he possibly sell to raise enough cash to rescue a $10 million project?

Net Worth to Loan Size Ratio = Net Worth of the Developer / Construction Loan Amount

Example Continued:

The bank loan officer says the next morning, “The last ratio that we need to satisfy is the Net Worth to Loan Size Ratio.  Let’s look at your financial statement, Bryan. It says here that you have a net worth of $904,000. Let’s plug that number into the formula.

Net Worth to Loan Size Ratio = Net Worth of the Developer / Construction Loan Amount
Net Worth to Loan Size Ratio = $904,000 / $3,150,000
Net Worth to Loan Size Ratio = 0.29

“Hey, Bryan, we have a big problem here.  While Loan Committee will probably not catch the Profit Ratio test failure, they certainly will catch the failure of Net Worth to Loan Size Ratio. You desperately need a co-borrower, someone with a big net worth.”  

Bryan sits down again with Uncle Mark.  “Uncle Mark, I can’t do this project alone.  My net worth isn’t large enough.”  

“Then give me back our $122,800,” shouts Uncle Mark.  

“I’m sorry, Uncle, but I already spent it on the architect and the engineer. They have already completed their work, so they won’t give it back.  Unless you personally guarantee the construction loan, your $122,800 is gone forever.”  

Uncle Mark complains bitterly, but he pledges his $5 million net worth towards repaying the construction loan, and the deal finally funds.

Outcome of the Story:

Halfway through construction, Tesla Motors announces its plan to build another battery gigaplant in Bryan’s small town. Rents skyrocket, and Bryan’s new apartment building becomes a gold mine.  Uncle Mark make sure that both he and sweet Betty White get repaid in full, along with a share of the profit.  Uncle Mark personally walks Betty White’s check down to the high cost mortgage company that refinanced her home, and he refuses to leave until he has a Deed of Reconveyance (proof that the loan has been paid off) in his hands.

Seven months later Bryan is killed in a freak accident. He is hit by a meteor that hadn’t completely burned up in the atmosphere. Only two people attend his funeral, sweet Betty White and… a wellbuilt, bleach bottle blonde named Bravo Boom Boom.

Apply For Commercial Development Projects

In our important training article entitled, How Commercial Construction Loans Are Underwritten, I make the point that the vast majority of all commercial construction loans are made by banks. I also make the important point that the bank will usually require the developer to cover at least 20% of the total cost of the project. If the proposed project is a business property, like a hotel, the bank may require that the developer cover at least 30% of the total cost. Please note the words, “at least”. In many cases the bank may require even more equity from the developer.

So where does this equity come from?  

Where can a developer get more equity?  

This is the subject that we will cover in great detail today. This article should be helpful for commercial real estate developers, mortgage bankers, and commercial brokers (commercial real estate salesmen) involved in the sale or purchase of land destined for multifamily or commercial development or for residential subdivision or residential condominium development.

A commercial property developer can provide or find equity in a number of ways:


  • Equity in the Land
  • Prepaid Costs
  • Reg D Offerings
  • Joint Venture Partners


We will discuss each of the categories in more detail below: Equity in the Land:

Every developer since Bonnie and Clyde has made the argument to his banker that although he purchased the land just two months ago for $700,000 it is worth $2 million today because he got a really good deal. Such an argument usually will not work. The general rule in construction lending is that the land is only worth what the developer actually paid for it. Therefore if you paid $700,000 for the land, and the seller carried back a $400,000 first mortgage or contract of sale, the bank will only you give you credit for your $300,000 down payment.

However, there are some exceptions and some legitimate arguments that may succeed with your banker:

You optioned or purchased the property many months earlier, and then you got the property rezoned to a more valuable use; e.g., you got the land rezoned from agricultural to a 120 lot residential subdivision. When you have gotten the property rezoned like this, but before you have started any horizontal improvements (streets, gutters, utilities, etc.), these potential home sites are known as paper lots.

You successfully purchased and assembled a number of adjoining lots into a larger, more valuable parcel. This is called assemblage. For example, four tiny 1946 era rental homes lined a busy commercial strip (thoroughfare).  Each had a different owner. You successfully bought all four homes, knocked them down, and created a very desirable site for a law office and parking lot, which is now worth far more the sum of the cost of each of the four dilapidated homes.

There has been a significant economic event since your purchase that affects the area. For example, after you bought the land, Home Depot erected a new store 500 feet away. Your retail lot is now shadow anchored by Home Depot; i.e., your property is not in the same shopping center as Home Depot but it nearly next door. It will greatly benefit from the increased traffic count.

You bought the land many years ago, and real estate nearby has appreciated markedly since then.

Prepaid Costs:

Anything the developer has paid towards architectural fees, engineering fees, legal fees associated with getting the property rezoned, governmental fees (plan check fees, sewer hookup fees, etc.), and toxic report fees will all be counted by the bank towards the developer’s contribution to the total cost of the project.  What the bank will not usually accept, however, is the developer’s land carry cost; i.e., any interest payments the developer has made on his land loan.  Using our example from above, you will recall that the developer paid $700,000 for the land and put $300,000 down. His $300,000 down payment will certainly count as a cost contribution, but not the $60,000 he paid in monthly interest payments to carry the land for 15 months while his building plans were prepared.

Remember: The general rule is that the bank wants the developer to bring the land to the table free and clear. In real life, this often does not happen; but the land should be pretty much free and clear of any mortgages. Now, of course, if the developer has a big pile of cash that he can bring to the closing table, that certainly will work in place of free and clear land.

Reg D Offerings:

What does a developer do when the sum of his down payment and his prepaid costs falls far short of the required 20% of the total cost of the project?

Many small to mid sized commercial real estate developers will raise money from family, friends, business acquaintances, and nearby wealthy folks.  

The developer will hire a firm to prepare a Reg D Private Placement Offering, which consists of:

  1. Private Placement Memorandum (PPM),  which is like a prospectus that describes the improvements to be constructed, the projected cost, the projected income, and the projected expenses, along with the risks
  2. The proposed Operating Agreement of the new limited liability company (LLC)
  3. Subscription Agreement, which is a legally binding promise on the  part of an investor to take a certain share of the offering.

Who prepares the Private Placement Offering?  

Private placement’s are securities, and if they are prepared improperly, the developer could get sued, or even end up in jail, if the project fails. It is therefore very important that the developer not try to prepare these legal documents himself. Well heeled developers will hire a securities attorney. The typical cost of a PPM is between $20,000 to $30,000.  To find a qualified securities attorney CONTACT DIVERGENT CAPITAL  in subject line “Reg D offerings [your state].”

JOBS Act:  In the past the SEC was very strict about Reg D offerings. The issuer was not allowed to publicly advertise. The issuer was limited to presenting his offering to family, friends, and people with whom he had a prior business relationship.  At the bottom of the Great Recession, Congress passed a very important and beneficial change to the securities laws known as the JOBS Act.  JOBS stands for Jump start Our Business Startups. Under the JOBS Act a developer is now allowed to publicly advertise his offering (certain advertisements have to be pre-approved) to strangers, as long as every investor in his offering is accredited. You actually have to verify it. Be sure to ask your securities attorney about the JOBS Act.

What does a developer do if he cannot afford to pay some attorney $20,000 to $30,000 for a Reg D Private Placement Offering?  

DIVERGENT CAPITAL can help you with templates that a developer can use to prepare his own Reg D offering documents. The cost is is average $10,000. There is considerable legal risk here, but hey, life is not without risk. You can find such companies on by typing, “Reg D PPM preparation.”  I did a quick search today and found one. I don’t know these guys from Adam, but if you want to know more please contact DIVERGENT CAPITAL, we will give you an idea of the type of service that we talking about.

Joint Ventures

There are institutions who will actually joint venture with developers and supply up to 90% of the required equity. This kind of equity money is called joint venture capital or venture equity.

Here are some cold, hard realities about joint venture capital:

Institutional joint venture (JV) investors
seldom want to invest less than $3 million to $5 million, and that is just the equity portion. This means that the total project costs usually needs to be Higher than $15,000,000.

Your Curriculum Vitae (CV) has to be very, very impressive. You must have successfully built a number of similar projects.  A curriculum vitae or CV, in this context, is like a resume, and it contains a list of all of the properties that a developer has built.

You will also need a large net worth to qualify for a JV, a net worth earned from successful real estate development.  I have jokingly told our sons, when training them on the subject of JV’s, that, “The only guy who qualifies for a joint venture is a guy wealthy enough to build the property for all cash.”  No doubt that saying is unfairly restrictive, but it is closer to the truth than what most people think.