Natick Investment Project

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Current Funding Status:

Tranche A: 75k/400k Committed

Tranche B: 0/450k Committed

LTV & Risk Exposure Roadmap

This page is dedicated to the establishment of data driven risk profile analysis based on LTV and LTC metrics so prospective investors may better evaluate this investment offering.

Traditionally, the LTV (Loan to Value) and LTC (Loan to Cost) ratios are used as key metrics for evaluating the viability of a construction based investment, whereby the aggregate borrowed amount is pitted against both the Future Finished Value (projected) of the collateral, and the Total Estimated Cost (grounded) to finish the project. In order to paint a picture of utmost clarity, we shall first explore how the risk profile of this investment stack up to industry standards, then explore why the industry standard method of calculation was rejected for this project and how our custom LTV projections establish a much more conservative as well as realistic risk profile for your evaluation.

For a list of all foreseeable risk vectors associated with this investment and other risk management mechanics, please visit the Risk Management Page of this website.

I. Industry Standard LTV and LTC

  • As the Projected Finished Value (1.7-1.9 million) and the total aggregate investment amount (850K) are both known, we will unpack the industry LTC first.
  • According to HomeLight, a tract home in Massachusetts costs around 280/SF to build excluding land cost, while a custom home costs around 350/SF. since this project targets a sub-lux to lux specification, a conservative cost anchor for this project is thus 320/SF. When multiplied by the targeted 4200 SF finished living space, we arrive at a conservative cost to build of 1.35 million without the acquisition cost.
  • Coincidentally, since the estimated bare land cost for the property in question is around 550k, we actually arrive at the targeted sale price of 1.8-1.9 million which is also the projected Future Finished Value, indicating that the numeric anchors used are both reasonable and plausible.
  • With the aggregate investment amount of 850k pitted against both the grounded project total cost and projected future finished value of 1.8 million, we arrive at the LTV and LTC ratio of 47%.
  • To further make the case of just how this project really compares to industry standards, even if we tried to diminish the Future Finished Value by using the lowest possible standard of construction at 200/SF building cost anchor and 450k bare land cost, arriving at a total project cost of 1.3 million, we would still have a LTV and LTC ratio of only 65%.
  • In other words, this investment has been de-risked to an extreme degree compared to the industry standard, especially for the Tranche A Investors. To understand how this is possible, please visit the Economic Context page of this website.

Industry Standard for LTV and LTC risk acceptance thresholds:

  • Favorable and low risk: 65%-75%, generally with 7%-10% per annum returns for Senior lien holders, 12%-15% for Junior lien holders.
  • Acceptable and moderate risk: up to 80%-85%, generally with 11%-13% per annum returns for Senior lien holders, 15%-20% for Junior lien holders.
  • Unacceptable and high risk: above 85%
  • This investment offering: 47% (average scenario) – 65% (extreme worst case scenario), with 12% per annum returns for Senior lien holders and 17% IRR for Junior lien holders.

II. A More Honest LTV Calculation

The goal is to provide prospective investors an accurate and realistic metric, against which the viability of This investment offering can be effectively evaluated. Given the fact that:

  • A future projection based TLV is inherently optimistic thus potentially misleading;
  • A total cost based LTC cannot capture investment risk curve in real time;
  • A component based LTC calculation often produces messy, unpredictable and even unreliable results.
  • This project is strictly non-recourse and adequate collateral value MUST exist before capital exposure.

It was concluded that a novel and non-standard method of calculation must be used for this project to calculate LTV ratio:

  • That a known aggregate draw amount at the start of each project progress milestone (the greatest possible capital exposure amount at a given project Stage),
  • is pitted against the estimated collateral value then existing at the time of the most recent draw, BEFORE any additional value is created by said draw.

Since the Contract is designed so that no new draws could take place unless and until certain collateral value exists or certain progress milestone is proven to be completed, the resulting LTV ratio is the most conservative possible for each of the 9 project draw points, accounting for the scenario that I would abandon the project right after a fresh draw without completing any new work to increase the collateral value.

III. LTV Roadmap

This section details the exact risk profile description and calculation for each stage of the project using our custom LTV calculation method. Each deadline listed here represent a project default trigger condition, failing which shall result in full project unwind unless otherwise agreed upon by all Lenders.

In-depth numeric and mechanics expansion can be found under the Capital Funding & Deployment section of this website, and under Article VII of the Loan Commitment and Escrow Agreement.

Of the aggregate investment amount of $850,000.00

Stage 1 draw/release ($360k), hard deadline of 30 days following Stage 1 full funding.

Contractually tied to property acquisition and Senior lien attachment, a Massachusetts real estate attorney is engaged for the Closing as well as the role of Collateral Agent, who is contract bound to record the Tranche A Lender Mortgage as Senior priority against the property purchased.

The assessed value of the property secured is roughly 750k, however, due to the dilapidated nature of the existing structure, no sane buyer would pay such a price for a structure that must be torn down and rebuilt, as such, a negative value is actually imposed at this stage to account for the cost of removing the old structure, dragging the collateral value down to about 550k, together with the 25k collateral reserve, the LTV ratio at this draw point is roughly 62% for all Tranche A Lenders. ($360 drawn/$575k x 100)

Stage 2 draw/release ($40k), hard deadline of 6 months following Closing.

Contractually tied to the issuance of Demolition permit, which is issued only when all other construction permits are already approved (the town doesn’t need a building torn down without a new construction permit already in place). the estimated time to reach this step is unknown, but generally between 2-5 months after initial plan submission.

The total released amount at this draw point is 400k, completing the full Tranche A draws. The estimated collateral value is actually about 50k higher at this point due to the pre-requisite for the demo permit already fulfilled, which is full asbestos certification (the most costly part of a full demo), thus allowing for a demolition with completely predictable and controlled cost.

Together with the 25k collateral reserve, the total collateral at this draw point is around 650k, with the LTV ratio of 64% for Tranche A Lenders principal only (400k/650k), 68% including interest;

Stage 3 draw/release (75k), hard deadline of 10 months following Closing.

This is the first release for Tranche B, contractually tied to proof of municipal foundation footing inspection passed, with the realistic target of 2-3 months after demo permit issuance or 6-8 months after closing. The Tranche B mortgage is officially recorded as of this Stage 3 release as Junior priority lien.

Total released amount is 475k at this draw point, with the estimated collateral reaching around 650k given the finished demolition, excavation, site works and footing forms, together with the 25k reserve, the LTV for Tranche A Lenders is around 59% principal only, 63% with interest. For Tranche B lenders, the LTV is around 70%.

Stage 4 draw/release (85k), hard deadline of 14 months following Closing.

Contractually tied to proof of municipal basement slab inspection passed, with the realistic target of 3-5 months after demo permit issuance or 8-11 months after closing.

Total released amount is 560k at this draw point, with the estimated collateral reaching around 780k given the finished footing, finished foundation/basement walls (pre-requisite for basement slab inspection), finished underground utility works, finished site drainage system, and slab insulation systems, together with the 25k reserve, the LTV for Tranche A Lenders is around 52% principal only, 56% with interest. For Tranche B lenders, the LTV is around 70% principal only, 75% with interest.

For Tranche B Lenders, this is actually the only window of peak risk throughout the entire project.

Stage 5 draw/release (85k), hard deadline of 18 months following Closing.

Contractually tied to proof of building envelope completion, with independent inspector confirming that all exterior framing, finished roof, exterior sheathing, all windows, and exterior doors completed, targeted at 12-15 months after closing, Total released amount is 645k at this draw point, with the property value expected to reach 950k, together with the 25k reserve, the LTV at this draw point for Tranche A Lenders is 42% principal only, 47% with interest. For Tranche B lenders, the LTV at this draw point is 67% principal only, 72% with interest.

Stage 6 draw/release (50k), hard deadline of 22 months following Closing.

Contractually tied to proof of all rough trade inspections being passed (plumbing, electrical, gas, mechanical), targeted at 15-18 months after closing, at which point the total released amount is 695k, with the property value expected to reach around 1.1 million, the LTV at point of draw for Tranche A Lenders is 37% principal only, 42% with interest. For Tranche B lenders, the LTV at this draw point is 63% principal only, 68% with interest.

Stage 7 draw/release (50k), hard deadline of 25 months following Closing.

Contractually tied to proof of all rough building inspections being passed (rough framing, insulation), targeted at 17-20 months after closing, at which point the total released amount is 745k, with the property value expected to reach around 1.2 million, the LTV at point of draw for Tranche A Lenders is 33% principal only, 39% with interest. For Tranche B lenders, the LTV at this draw point is 62% principal only, 67% with interest.

Stage 8 draw/release (50k), hard deadline of 28 months following Closing.

Contractually tied to proof of 90% of interior wall and ceiling painting above grade completed, targeted at 20-24 months after closing. Total of 795k is released as of this draw point, while the property value should reach around 1.3 million, the LTV at point of draw for Tranche A Lenders is 30% principal only, 37% with interest. For Tranche B lenders, the LTV at draw point is 62% principal only, 67% with interest.

Stage 9 draw/release (55k), hard deadline of 32 months following Closing.

Contractually tied to proof of 90% of interior floor and tile works completed (roughly 2/3 of all interior finishing), targeted at 24-28 months after closing. Total of 850k is released as of this draw point, while the property value should reach well in excess of 1.4 million, the LTV at point of draw for Tranche A Lenders is 28% principal only, 36% with interest. For Tranche B lenders, the LTV at draw point is 60% principal only, 66% with interest.

IV. Final Risk Profile Analysis:

LTV and LTC Summary:

  • When measured against industry standard, the LTV and LTC of this project stands at 47% using current market conditions as anchor.
  • With corresponding, industry norm risk-adjusted return at 7%-10% for Tranche A Senior Lien holders, and 12%-15% for Tranche B Junior Lien holders.
  • When measured using our custom calculation method:
  • Between 28-64% for Tranche A Lenders and 60-70% for Tranche B Lenders principal only.
    Between 36-68% for Tranche A Lenders and 66-75% for Tranche B Lenders with all interest accounted for.
  • With 12% risk-adjusted returns for Tranche A Senior lien holders, and 16-18% risk-adjusted returns for Tranche B Junior lien holders.
  • Expected peak capital risk exposure with interest accounted for is capped at 68% for Tranche A Lenders and 75% for Tranche B Lenders, in either case expected to last no more than 4 months each.

Risk Profile Characterization:

Given the above data:

  • Tranche A investment is characterized by an extreme low risk profile with slightly above average risk-adjusted returns, supported by Senior lien status and very favorable real time risk curve.
  • Tranche B investment is characterized by a low-tier risk profile but with risk-adjusted returns comparable to a mid-tier risk profile, supported by 9-stage progress-gated capital draws, and favorable real time risk curve.

Other Risk Vectors:

We shall next address the foreseeable potential risks associated with this investment and their management solutions as made possible by the project structure:

  • Borrower execution failure by any reason – project simply defaults due to deadline based mechanical triggers, full unwind follows and the custom LTV ratios calculated for each project stage realized.
  • Total or partial loss of collateral value – Contractually controlled collateral insurance when over $50,000.00, minimal impact on investor positions.
  • Borrower resists default and recovery – near impossible under the Contract due to its binary, mechanical nature, and the pre-executed Deed in Lieu that names the Agent as default title holder; Borrower also lacks incentive to resist due to the non-recourse nature of this investment, capping his own downside.
  • Third party lien against the collateral – unlikely due to the in house crew and self execution nature of this project, subs will be hired when and IF necessary, not otherwise.
  • Runaway or unpredictable default soft cost – near impossible under the Contract, as default procedures are contractually defined and agent enforced, thus default soft costs are capped.
  • Future market value shift to the downside – possible, and certainly beyond anyone’s control, in such an scenario the project can withstand a housing market drawdown of around 30% – 45% before your investment principal is at risk, with Tranche A Lenders more insulated than the Tranche B Lenders. Such a scenario however, would represent a repeat of the 2008 crisis whereby no investment offering similar returns can be truly safe, and is the sole remaining risk for this investment offering.

Ready to Learn More?

for a more concrete and in depth view of the risk management process for this investment offering, please visit:

Risk management