Predevelopment lending is the critical piece of funding developers need to get a deal from a tax credit award to their closing. While not as capital intensive as construction, developers are on their own during this time to cover the wide variety of expenses they face, from architectural and engineering fees to acquisition. This is where predevelopment lending comes into play. It provides funds to get you to a construction start where the construction loan and LIHTC equity can cover future costs and repay the predevelopment financing. And, of course, that financing is taken out in the end by the remaining LIHTC equity and the permanent debt that has been secured.
NEF has developed a specific loan fund around this project. We have $60,000,000 available with no more than $4M allowed to be out to one particular developer at a point in time. $2M is the max loan size, but in situations where there is an acquisition and a financially strong guarantor, we can go higher up to $3M.
In terms of security and collateral, we require full recourse to the borrow, and if it's used for land, we also need a first lien position. The financial strength of the borrow also helps us determine max loan sizes. For guarantors with liquidity and net worth below $500,000, the predevelopment loan amounts will be limited to $500,000 per project. If liquidity and net worth are below $1M, we can do a max loan amount of $750,000. We can do higher loan amounts when you get over the $1M threshold.
This product is available on all NEF syndicated deals and project types. So, if this is an acquisitions/rehab and you need to take down the building before closing, that would work, and it also works with new construction on raw land.
If you are thinking about using a predevelopment loan, knowing what costs are eligible are not eligible is essential.