Buying an underperforming property and raising its income through renovation, repairs or stronger management. Lenders call it repositioning or rehabilitation.
Value-add is an investor’s term. The OCC handbook describes the same thing as a repositioning or rehabilitation loan: a bank finances the purchase of an underperforming property that the borrower intends to improve through physical upgrades, curing deferred maintenance or improving management.
Because today’s income does not support the loan the borrower wants, the lender has to believe the plan. The handbook says a bank should examine the assumptions behind the projected income and the borrower’s track record with similar projects, review the renovation budget, and may have an engineer or architect evaluate it independently. Expect to hand over a line-item budget, a schedule, a pro forma and a list of past projects with results.
These loans are commonly written as bridge loans. The handbook notes that bridge loans usually run up to three years to allow for lease-up and stable income before permanent financing. The lender will size the loan on cost and on the as-is value now, and look to the as-stabilized value for the way out.
How it shows up in the data here
Not a field in any filing here. Banks do not report which loans fund a repositioning, and HMDA does not flag it. What you can see is who lends on the property type: multifamily lenders, investor CRE lenders and construction lenders, since heavier renovations are often booked as construction loans.
Go further
- Investor CRE lenders: Banks and credit unions that hold loans on income-producing property.
- LTV and LTC calculator: Loan to cost and loan to value on a purchase plus renovation budget.
- LTV and LTC calculator: Loan to value and loan to cost, the equity a lender will ask for, and the federal supervisory limit for the property type.
- Debt yield calculator: Cash flow over the loan. The one ratio that ignores the rate, the amortization and the cap rate.
- Investor commercial real estate loan checklist: On an investor property the rent pays the loan. The package is the evidence for the rent: who pays it, for how long, what it costs to collect, and who stands behind the borrower if it stops.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Related terms
- Bridge loan: A short-term loan that carries a newly built or newly bought commercial property until it is leased and earning enough to be sold or refinanced with a permanent loan.
- As-stabilized value: An appraiser's estimate of what a property will be worth on the future date it is projected to reach stabilized occupancy.
- As-is value: The market value of a property in its actual physical condition, use and zoning on the appraisal's effective date, with no credit for planned work.
- Lease-up: The period after a building is finished or renovated while it fills with tenants and its income climbs toward a stable level.
- Pro forma: A projection of a property's or project's future income, expenses and cash flow, built on stated assumptions and not on past results.
- Loan-to-cost ratio (LTC): The loan amount divided by the total cost of a project: the property plus all construction costs. It shows how much of the budget the lender funds.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.