Blocks & Lots

Condo inventory loans: how condo developers refinance

What is a condo inventory loan? It’s when a developer of a condominium building adjusts its financing to meet the market. In most cases it allows developers to repay maturing construction loans and hold units for sale at a later date.

Though these loans have traditionally been used with mid-market condo developments, they are increasingly being used in the luxury sector as well.

Why are lenders willing to offer inventory loans?

The main reason lenders like condo inventory loans is because their risk is mitigated. The condo project they are lending on has already been completed and is a viable commodity. Lenders are not looking at a hole in the ground. The sponsor already has skin in the game having invested time, effort and money to complete the building. A temporary lull in sales can be expected in a soft market. However, if the overall project is in good shape it makes sense for a lender as they will receive interest payments every month capitalized through a reserve.

Why are sponsors keen to engage in these loans?

These are very advantageous to a sponsor because it gives them more time to achieve their prices for units. In some instances, they are able to recapture equity and lower their interest rates by 1.5 to 2 percent by switching out of a construction loan.

It is a lender’s goal to lend money and in lieu of limited acquisition projects to fund, inventory loans offer a good alternative. As competition to fund these loans increases, borrowers stand to benefit from competitive interest rates.

A lender will be more enthusiastic to become involved in a project while there is still a large inventory. This means that the more desirable condos in a building are still available as opposed to just the less desirable ones, which happens once a development has been on the market for a while.

The advantage for the lender in this situation is that they get to keep the loan out longer. Thus, with this in mind, they are generally more favorable to taking out an existing loan versus pure repatriation of sponsor equity late in the sales process.

How do condo inventory loans help buyers?

The main advantage to a buyer is that this type of loan is designed to stabilize the financing of a condo. A financially stable building will mean a condo can function as it was intended and the upkeep and running of it will not be affected. This stability helps to maintain property values.

Are there any disadvantages to buyers?

For new buyers looking to snag a deal in a down market a condo inventory loan isn’t much help as it enables the sponsor to keep sales prices elevated.

How are typical condo inventory loans structured?

As with most loan programs, there are usually several options depending on the type of project. But certain guidelines will normally apply. These are:

  • Loan terms are usually 12-24 months with extensions possible.
  • Leverage is generally capped at 60-70 percent of bulk sellout value. The lender will establish value based on a combination of an appraisal, the sponsor’s estimated sellout value, broker conversations, and, most importantly, other condo sales within the building and competitive properties.
  • There are various levels of the pre-payment penalty.
  • The lender will establish minimum release prices on an individual unit or $/SF basis to make sure that sufficient value remains in the unsold condos as each condo is sold off. 
  • Cash flow leakage from sales can be negotiated and allows some portion of the net sales proceeds from individual unit sales to be returned to the borrower leaving a portion of the inventory loan outstanding.