Commercial Loans and Fun Blog

Commercial Loans and the Meaning of "Last Dollar"

Posted by George Blackburne on Thu, Oct 31, 2019

Last DollarA buddy of mine - an old veteran in the commercial loan business - sent me an email marketing flyer last week.  He had just closed a big commercial loan, and he was telling me about his special new program - a sort of fix-and-flip loan for large commercial properties.

Here is how my buddy described his new program in his marketing piece:

"Low-Cost Non-Recourse Gap Equity - We are under application on several opportunities to bring high octane capital to new construction and deep rehab projects at a coupon rate of starting in the 6's with no equity participation."


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"Our investor funds his last dollar to 85 to 90% of cost on new construction and up to 100% of qualified renovation costs.  Our active pipeline includes multifamily, senior housing, and hotel projects."

Confused by his flyer, I wrote to my buddy and asked, "What on earth does last dollar mean?"   He wrote back:

"Let's assume the total capitalization of a renovation project is $10 million - with an $8 million purchase price and $2 million in the projected hard costs of renovations."

"Our investor funds up to 90% of the $8 million purchase price, or $7.2 million, and 100% of the hard renovation costs, or $2 million - for a total loan proceeds, based on cost, of $9.2 million."

"This assumes the property's After Renovation Value (ARV) is $13.2 million, since our lender limits loan proceeds to 70% of ARV."


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"This gap equity program for commercial properties sounds terrific," I told my buddy, "but I still don't understand what last dollar means!"  My buddy must have thought that I was mentally-challenged.

Kneeling down and speaking very slowly to his slow-witted friend, my buddy explained:

"Last dollar refers to the highest loan-to-value reached when a lender loans his very last dollar.  (See the pic at the top squeezing out the last dollar.)  The term is used most often when mezzanine loans or preferred equity investments are stacked on top of very large permanent loans.  The permanent lender's last dollar is 60% LTV, the mezzanine lender's last dollar is 75% LTV, and the preferred equity provider's last dollar is 85% LTV."

At last the light bulb clicked on for me.


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But wait a minute.  In trying to explain last dollar, my buddy described an incredible way to reach very high leverage on new construction deals and commercial renovation projects.  Eighty-five percent of cost for new construction?  Perhaps as high as 90% of cost?  Plus 100% of renovation costs?  This is fantastic! 

The program is also non-recourse.  The minimum loan amount is $3 million, and the maximum loan amount is  $200 million.  

This lender will make these high-leverage new construction loans and commercial renovation loans nationwide.  Acceptable property types include multifamily, senior housing, hotels, and several other standard property types.


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Got a potential deal?  Please email me, George Blackburne III, no more than three sentences, along with your contact information.  Please type into the Subject line, "Gap Equity Program."  I'll make sure that the opportunity gets to my buddy.

You might even text me a message to 574-360-2486, "Just sent you a gap equity request."  I get an average of 1,350 email per day - every day - so its easy for me to miss emails.  Why don't I employ a junk mail filter?  I live in Indianapolis - a beautiful city, but a bit of a financial backwater.  Mortgage flyers are my window to the industry, and I don't want to miss a single one.  Add me to your newsletter list, so I can steal your jokes.  :-)


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By the way, I had to look up the term, high-octane too. High-octane, in this context, means exciting and full of energy.  My buddy was specifically using the term high-octane to refer to a loan that is very high in terms of loan-to-cost.  

It's no fun being slow-witted; but it really helps when I teach.  Since I have to reduce difficult concepts to baby language in order to learn, I teach the same way.  Haha!




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Topics: commercial loans, last dollar