Excerpt from: Commercial Real Estate Loan Tips
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| November 22, 2005 | | Value-Added Means That the Property Will Be Improved By More Than the Loan Amount | Mezzanine lenders and commercial mortgage lenders that make renovation loans on commercial real estate will often use the expression value-added.
A value-added deal is one where the commercial property is improved using the proceeds of the loan. If the project is well-conceived, the value of the commercial property will increase by more than the amount of money spent improving it. In other words, the property may increase in value by $700,000 after an investment in renovations of only $400,000.
Value-added lenders will often base their loan-to-value calculation on the anticipated value of the property after the renovation is done. Suppose a run down property is only worth $10 million today, and the borrower owes $8 million on his first mortgage. A valued-added lender may make a $3 million mezzaine loan on the project (110% LTV!) if the anticipated value of the property is $15 million upon completion and leasing.
In contrast, a purchase money deal is one where the proceeds of the loan are used to actually buy the property. A refinance or cash-out deal is one where the borrower already owns the commercial property. The borrower is merely pulling cash out of the deal for other purposes, such as to pay his taxes or to make an investment in another piece of property.
Another example of a value-added deal is where the borrower buys a run-down independent hotel, fixes it up, and then flags the hotel (obtains a national hotel franchise like Holiday Inn or Best Western).
You can find hundreds of commercial mortgage lenders for valued-added commercial real estate deals using C-Loans.com.
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