Sources and Uses – Funding CRE Projects

The Sources and Uses indicate where the funding for a commercial real estate project will come from and how that capital will be used. 

Sources of capital include debt and equity.  Uses include project costs such as acquisition costs, hard & soft construction costs, financing costs, and any operating shortfall. 

Example: 

We are acquiring a 50-unit apartment complex for $15,000,000.  This is a value-add project with a renovation budget of $1,000,000 in hard costs and $200,000 in soft costs.  The plan is to renovate 5 units per month, for a total renovation period of 10 months including the lease-up.  Note that we do have some operating shortfall during Months 1 through 9.  To finance this project, we secured a senior loan of $9,750,000 (65% LTPP) at a 6.50% interest rate.  Additionally, to increase leverage and fund the renovation budget we also secured a mezzanine loan of $1,200,000 (8% LTPP) at a 13.50% interest rate.  Including financing costs and operating shortfall, the total project costs is $16,669,945 (65.7% LTC).  The senior debt will fund first and then equity, which both will fund the acquisition costs and financing costs.  Then the mezzanine debt will fund thereafter, taking care of the renovation budget and operating shortfall.

Having a clear breakdown of a project’s sources and uses will help investors understand capital needs.  Lenders will also want to see this before moving forward with a project that requires more heavy lifting such as a value-add or development deal.