Condominium presales can materially strengthen a development financing request, but “presales equal equity” is too simplistic. A lender will distinguish between executed sales contracts, buyer deposits, deposits that are actually available to fund construction, future closing proceeds and sponsor equity already invested in the project.
A Presale Is Evidence of Demand
At a minimum, qualified presales can demonstrate market acceptance. They help support projected absorption, pricing and exit velocity. For a condominium lender, that can reduce uncertainty about how quickly units may convert into repayment proceeds after completion.
The quality of the presale matters. A fully executed contract with a meaningful non-refundable deposit generally carries more weight than a reservation, letter of intent or contract with broad cancellation rights.
Deposits Are Not Automatically Spendable Equity
Buyer deposits may be held in escrow and may not be available for project costs. State law, the purchase contract, condominium documents and lender requirements can all restrict how deposits are handled. Therefore, a sponsor should not assume that every dollar of buyer deposits reduces the required cash equity dollar-for-dollar.
Where deposits can be released into the project under applicable law and documentation, a lender may consider that availability in the broader capital structure. Even then, the lender will typically focus on the conditions for release and the risk that contracts terminate or buyers fail to close.
Future Closing Proceeds Can Support the Exit
Even when presale deposits cannot fund construction, contracted sales can still strengthen the repayment story. A lender can model expected unit closing proceeds, release prices and the pace at which the loan balance is expected to decline.
This is especially important when a development is financed with a master construction loan and individual units are released as they close or refinance. The release schedule must be structured so the lender’s collateral coverage improves as inventory is sold.
What a Lender Will Usually Review
- Number of units under executed contract.
- Purchase prices and deposit percentages.
- Whether deposits are refundable or non-refundable.
- Where deposits are held and when they may be released.
- Buyer concentration and related-party sales.
- Outside sales versus sponsor-retained inventory.
- Construction completion timing and expected closing dates.
- Release prices required to pay down the construction loan.
- Local legal requirements governing deposits and presales.
The Better Question
Rather than asking whether presales “count as equity,” the better question is: How do the presales improve the project’s capitalization, demand profile and repayment certainty? Depending on the transaction, they may support one or more of those areas even if the lender does not treat them as pure sponsor equity.
Because condominium deposit laws and contract structures vary by jurisdiction, sponsors should also confirm the treatment of deposits with qualified legal counsel.
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