A condo inventory loan is a type of loan used by real estate developers to pay off maturing construction loans on a new condo building that has already been fully developed.
“These loans are for condominium developments that are completed but not sold out,” said Reid Hogan, a Commercial Real Estate Advisor at MultifamilyCashin. “The developer pays off more expensive construction loans and has more time to sell remaining units.”
Essentially, the condo inventory loan “is a bridge between when construction financing and the sales of actual condos take place,” added Meg Epstein, CEO and Founder of CA South, a real estate development and investment management firm based in Nashville.
Condo inventory loans allow developers to spend more time selling their condos, without having to pay for construction, Epstein said. They are considered a bridge loan meant to refinance on the original construction loan, pushing the repayment date back, allowing the condo owner more time to sell the individual condo units.
Typically, investors will take out a condo inventory loan if their condo is not fully sold out within three to five years of the construction loan’s issuance. Loan amounts end up being 60% to 70% of the total value of the unsold units, with a term of 12 to 24 months, Hogan noted, adding that the new interest rate on the condo inventory loan is also lower than the construction loan it replaces. The unsold units in the condo serve as collateral on the loan.
Construction loans and condo inventory loans serve different purposes and have different loan terms. For starters, a construction loan is one you get from a bank when you’re starting on a project, whether that means building or renovating, Epstein explained.
“So if I’m going to build a $50 million building, I’m going to go to my bank, and I’m going to get a $30 million loan, and I’m going to have to put in $20 million in equity,” Epstein said. “So that $30 million construction loan is meant for the purposes of building the project.”
Hogan added, “Construction loans are short-term interest-only loans that finance construction. They are riskier than a loan on a finished property and are therefore more expensive.”
Sometimes borrowers will be able to finish the construction project and sell all units within the terms of a construction loan, depending on the specific loan and the time it takes to complete a project. However, borrowers often need more time to sell the condo units after construction is complete. That’s when a condo inventory loan might come into play, granting property owners more time to sell their units before having to pay back the loan.
Condo inventory loans come with a number of advantages for the borrower, and little to no downside outside of the possible risk of not being able to sell your property, especially Class A properties. For starters, condo inventory loans have lower interest rates than construction loans. In addition, borrowers have more time to sell their remaining units and are granted much more flexibility, because they don’t have to pay off the costs of construction right away.
“As a developer, I might have a short construction loan,” Epstein said. “But maybe I don’t like pre-selling my projects because I find that I’m able to get more dollars for projects that are completed and fully furnished, and people can walk through.”
In this scenario, a condo inventory loan would allow time and flexibility so that owners can fully complete their projects and get the best deal possible.
