Having the necessary funds to purchase another business at the right time can be a significant source of comfort. But it can be hard to understand how these loans work and how you can strategically use them.
Acquisition and development loans can help you borrow capital to acquire hotels, raw land, development sites, multi-family properties, and much more. The merger and acquisition industry in the U.S. manages tens of thousands of deals annually. Here’s what you need to know about acquisition and development financing.
How Does an A&D Loan Work?
These loans can help you buy a property and make improvements for a construction-ready building site. Usually, a part of the loan is used to purchase the raw land. Simultaneously, the remainder of the proceeds is utilized for enhancements like grading, zoning, subdividing lots, and installing water, sewer, or power lines.
The project’s total cost usually includes the land’s price, the hard costs of horizontal improvements, a contingency reserve, and the soft expenses, including sales commission and an interest reserve.
You need to make a significant down payment to obtain an acquisition and development loan, generally in cash. If your loan is approved in a situation where the developer uses collateral like your mortgage on the current property, the lender’s percentage contribution might be lower.
What Factors Can Influence an A&D Loan?
Whether it’s the raw land’s zoning, location, local economy, or the political environment of that area, all these factors can affect the financing you receive from your lender.
Aside from the land’s value, your lender will consider the quick sale value of the land if the project fails or is abandoned. Whether you have additional collateral available or your developer’s cash flow is consistent are also essential factors that your lender might consider.
Lenders also consider a developer’s exit strategy as a project involves considerable risk. The more a company can show a good history of development projects, the more lenders will be willing to take a chance. As a result, you need to provide a detailed and practical plan that makes lenders confident in your project’s profitability.
Types of Acquisition Financing
This is the riskiest form of financing since there are no assets to be claimed, and your lender might even be required to surrender some ownership in your combined company.
If you’re looking for inexpensive and versatile financing, debt financing might work for you. The amount of debt that can fund an acquisition varies according to the combined organization’s estimated cash flow. In this case, the companies need to be financially strong.
Looking for reliable acquisition and development financing in New York? Having a rich history of funding over $2 billion in transactions, GCP Fund offers asset-based lending, bridge loans, construction and development financing, mezzanine finance, and much more! Contact us today to benefit from our reputation of successful and quick closings!