A take-out buyer is one whom generally buys real estate from a land developer of new construction projects. In brief, developers will sometimes seek a take-out buyer for their new construction projects. This in turn helps the developer receive the necessary construction loans to complete the planned project.
Construction loans with a take-out component, refer to short-term financing of real estate construction projects followed by long term financing called a “take-out” loan. This “take-out” loan is only issued upon the completion of all improvements. Construction loans normally work together with take-out loans.
An example of this type of interim financing would be;
1. A land developer gets a construction loan to build a new neighborhood shopping center.
2. When the shopping center is complete, an investor/buyer “takes-out” a loan from a lender to purchase
the newly constructed shopping center.
3. The building developer then uses all or part of the shopping centers closing sale proceeds towards
paying off the construction loan debt in full.
Disbursements for take-out loans are contingent upon the total completion of a construction project. Money received from the sale of a new project will need to be applied towards the outstanding construction loan. Any and all money left over after the construction loans and closing costs are paid, is the developers fee or profit for building the newly constructed shopping center.
It’s a win-win project for both the developer and take-out buyer. The developer will have a good idea of what the projects profit will be at the closing sale and the take-out buyer will have a brand new property with new long-term, tenant lease contracts already in place.
So, sometimes locating brokers who work with land and real estate developers can benefit an investor tremendously. Many times an investor will have a higher probability in securing debt financing for a new real estate development project due to the new tenant lease(s) that will be in place. In other words when the construction project is complete there will be a new tenant or several new tenants in the case of a shopping center. Most commercial lease terms are at minimum five years, with some as long as 99 years. But for this article lets go with the industry standard for smaller neighborhood centers. These lease will provide a solid tenant base, in whose business models and financial statements have been reviewed for lease acceptance. This process of lease approvals will also give the banks the underwriting strength they need to fund an investors loan. Thanks for reading!