The Client will make more money using our bond services as the down payment vs raising equity.
Let’s take a typical construction deal with a 30% profit margin.
Timeline: 2 Years
Project Costs: $100M
Completed Value: $130M
Profit: $30M
Typically, a Lender will do 75% LTC, leaving the developer to come up with 25%. In this instance the Developer’s equity contribution will be $25M. The Developer can either pay that all in cash out of his own pocket (very unlikely) or he will have to raise the money via profit splits and preferred equity, both options can be very costly and sometimes not worth it. The average costs in raising equity includes a 10% annual preferred intertest rate and a 50/50 profit split.
Here is a breakdown of bond financing compared to normal financing (raising equity) and normal financing (100% debt). As you can see, bond financing is much more lucrative to the Developer’s own personal pocket and generally 2x – 3x the bottom-line profit.
Normal Financing (Raising Equity)
Original Sale Price – $130M. 6% Cap Rate
Original Cost to Build – $100M
Original Profit – $30M
Minus Profit Split (50/50) – $15M
Minus Preferred Equity (10%) – $5M
Net Profit – $10M
Normal Financing (100% Debt)
Original Sale Price – $130M. 6% Cap Rate
Original Cost to Build – $100M
Original Profit – $30M
Minus Senior Loan (8% Interest 75% LTC) – $12M
Minus Secondary Loan (5% Interest 25% LTC) – $2.5M
Net Profit – $15.5M
Bond Financing
Completed Project Value – $130M. 6% Cap Rate.
Total Project Cost – $100M
Bond Amount – $25M
Additional Property Tax (1.5%) – $1.950M
New Sale Price – $97.5M. 6% Cap Rate
New Project Cost – $75M
New Profit – $22.5M
No Profit share or preferred equity. Developer keeps all the profit to himself.
The bond route produces an infinite ROI loop, where nothing out of your own pocket goes into the deal.