Top Adding - Real Estate

Last week I discussed the financing of the purchase of a residential lot for development with a woman who, with her husband, wanted to build a custom home. As always happens when discussing fi

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

nancing, the conversation turned to interest rates and loan structures. When I described the going rate for a fully indexed land loan on a residential lot, she darn nearly fainted!

She splutt

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

red: “Wha … How could rates possibly be so high?!? My home loan is at 6% and you are telling me that a lender wants over 10% for a land loan? That is ridiculous!”

Well, not really.

I under

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

tood her confusion, but she was comparing apples to oranges. From an investor’s standpoint, land is a great investment for a number of reasons: “They” are not making any more of it (except po

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

sibly in Dubai), you can put your hands on it (it is “real”), no one can pick it up and take it away without a mounting a stupendous effort, and eventually it will be worth more than you paid f

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

r it (in most cases). However, when we look at land from a lender’s perspective, it is leaves a lot to be desired.

When making a loan, the lender’s primary objective is to get paid all of its

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

interest and principal. The lender relies on the borrower to fulfill his obligations under the note, but asks for some “insurance.” That insurance comes in the form of a lien on a real proper

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

y, called “securing” the loan, and is the lender’s last resort in the event the borrower can’t pay off his loan. The loan is made to the borrower, not the property. It is secured by the prope

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

ty in the event the borrower defaults on the loan. So a lender looks for the best security that it can find to ensure that it will be paid back.

Commercial real estate makes great security fo

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

a lender because it produces income that can make the loan payments until the property is sold, in the event the borrower defaults. Homes are also great security because there is usually an a

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

tive market in which to sell one and a borrower is likely to do everything he can to keep his primary residence. Even owner-occupied business property is a good bet for a combination of the re

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

asons above.

Not so, land.

Land, for all of its potential value, just sits there. No one lives on it, no one works on it, tumbleweeds roll across it, and unless it is used as a parking lot o

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

a swap meet, it produces no income. Add to these challenges the reality that the process for converting land into income producing or residential property takes a great deal of effort, specia

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

ized knowledge, and time. Most lenders really do not like these characteristics in their security and thus, don’t lend on land.

As a result, when faced with taking land as security for a note

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

those lenders who do make loans on land do a couple of things to mitigate their risk. The first is that they usually reduce the loan to value significantly. The more equity you have in the l

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

nd, the bigger the discount they can offer to a buyer when selling it and the safer they feel in making the loan. Note that this was not the case in my opening example. That particular lender

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

had a specialized program that would have loaned up to 90% of the value of a finished lot, but it was for residential, owner-occupied development.

The second thing a lender does is increase it

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

rate of return to match the perceived risk of disposing of the property in the event of a default. If a lender gets 12% to 14% on its money for a land loan, it receives its invested dollars f

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

ster, even though we call them “interest.” This reduces the lender’s exposure faster and provides a risk-adjusted return when the loan is paid off.

So the next time you contemplate financing

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

ome land, just remember that your lender will be looking at it from a vastly different set of circumstances than you. Done that way, you probably won’t cough loudly when he quotes you the rate

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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