Question

5. A bank is financing 100% of the construction costs of a real estate development secured by a Ist mortgage on the property (land + structure). With a full draw-down of the facility, the $340K budgeted project cost is now only 75% completed vs. estimated costs to fully complete. The land was appraised at $185K based on the planned construction. Unpaid sub-trades, whose value is not yet counted in the building's value to date, amount to $13. The expected cost over-run cannot be covered by the owners. The bank may fund the costs to complete if it is in its best interests. Alternatively, it can demolish the structure and sell the raw land for $350K on a standalone, undeveloped basis since RE prices have risen. It can then possibly sue the guarantor for any unrecovered amounts. Demolition costs of the existing structure are estimated to be $65K. Assuming the completed property could be sold at its invested cost outlay, what is the loan-to-value percentage of its two options (complete/demolish)?: * 88%/112% 54%/156% 71%/119% 109%/56%

Answer 1

109%/56%

Solution:-

Cost Incurred till date=340000*0.75=255000

Add:-Appraisal of land=185000

Add:- Unpaid sub trades=13

Total Cost=440013

Total selling price =350000

Less:- Demoloition cost=65000

Net Selling Cost=285000

complete/demolition=440013/285000=1.9439 which is equal to 109%/56%