A condo inventory loan is used by real estate developers to pay off maturing construction loans on a fully-built new development condo building. Initial construction loans used to finance new construction condo buildings in NYC are typically for three year terms with two, one-year extension options.
If a condo building hasn’t fully sold out within 3-5 years of the original issuance of the construction loan, a developer typically refinances with a condo inventory loan.
Refinancing with a condo inventory loan pushes out the repayment date for a building’s debt obligations, thereby providing a developer with more time and flexibility to complete the sell-out of the new development. Condo inventory loans typically have a term of 12 to 24 months. The loan is collateralized by the unsold apartments in the building.
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In addition to providing a developer with a longer runway for the sale process, condo inventory loans usually have lower interest rates compared to construction loans. This is because construction loans are riskier for a lender.
If a developer were to default on a condo inventory loan, the lender would be able to take possession of a completed building with readily marketable apartments.
This is a much safer proposition compared to taking over a partially built structure which would take much more time and effort for a lender to monetize.
Condo inventory loans are typically capped around 70% of the building’s sellout value. A lender typically establishes minimum price thresholds for sales of units in the building. This ensures that the total value of the collateral (unsold apartments) on a forward-looking basis based on recent sale comps remains above acceptable levels.
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Recent examples of condo inventory loans in NYC include a $553.5 million loan to Extell’s One Manhattan Square condo development in the Lower East Side as well as a $350 million loan to The Centrale, a condo high-rise at 138 East 50th Street in Midtown East developed by Ceruzzi Properties.
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In the case of One Manhattan Square, the new debt included a $553.5 million senior inventory loan as well as a $138.2 million mezzanine loan, totaling $690 million. Both loans carried an interest rate of LIBOR + 4%.
Most of the proceeds of the new financing were used to pay down the original construction loan for the One Manhattan Square development.
