A sponsor with a real track record, a funded project and a lender at the table still gets stopped by a net worth test. Land capital moves that test, because the test is sized off the loan and the land purchase makes the loan smaller.
Take a project at $56.9 million of total cost. A ground lease purchase of $17.5 million leaves a leasehold capitalization of $39.3 million. At 65% loan to cost on that number the loan is roughly $25.6 million, against roughly $37.0 million at the same leverage on the unbifurcated cost.
The land purchase removed about $11.4 million from the loan the guarantor has to stand behind. On a net-worth-to-loan test, that is $11.4 million less balance sheet the sponsor has to produce — and about $1.1 million less liquidity.
It does not always close the gap. A sponsor at $8–10 million of net worth still does not clear a $25.6 million loan. But it moves the problem from impossible to solvable, and it changes what a partner has to bring: balance sheet rather than cash.
Sponsors chase “non-recourse with a completion guaranty” as though the second half is free. It is not. The completion guaranty is the guaranty. Somebody has to be good for finishing the building, and on a $39 million build-out that obligation is underwritten against a real balance sheet.
Chasing a non-recourse structure does not remove the capacity requirement. It renames it. If the sponsor cannot stand behind completion, a non-recourse loan does not solve the problem — a partner with a balance sheet does.
The profile this fits: a sponsor with land, entitlements, a track record and real spend in the ground, whose net worth is tied up in illiquid positions and does not print well on a personal financial statement. The equity may already be funded by what they have sunk into the dirt. What they cannot produce is a guarantor schedule.
Land capital converts their least liquid asset into closing proceeds and simultaneously reduces the obligation they are being asked to guarantee. Those are the same transaction.
Most construction lenders want net worth at or above the loan amount and liquidity around 10 percent of it, though it varies by lender and by asset. Ask your lender for their specific test early, because it is often the constraint nobody priced.
On a development deal we require a completion guaranty and an environmental indemnity, with net worth and liquidity covenants on the guarantor. Satisfying the construction lender's own guarantor test is the sponsor's responsibility and never ours.
Sometimes. It replaces a cash partner when the equity is the gap. It does not replace a balance sheet partner when the guaranty is the gap, though it does make the guaranty smaller.
At conservative leverage, sometimes, but it will still carry a completion guaranty and carve-outs. Treat 'non-recourse' as a description of repayment risk, not of the whole obligation.
Never. We buy land and hold it. We will introduce leasehold lenders and arrange the debt, and we charge a 1 percent arranging fee at closing of that financing, but we do not hold that paper.
Stabilized NOI, total cost, the loan on the table, and the guarantor net worth and liquidity. We will show you what the land purchase does to the test.
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