Acquisition, Development, and Construction Loan (ADC) – Definition

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Acquisition, Development, and Construction (ADC) loan Definition

An Acquisition Development and Construction loan, or ADC Loan, is a loan which covers the acquisition, development and the construction aspects of a project. Developers use it in purchasing a parcel of land, installing the utility and the street services and then in constructing buildings.

A Little More on What is an ADC Loan

ADC credits are typically used in purchasing real estate and then making improvements on the units necessary to create a completed site. A part of the loan is generally for acquiring undeveloped land and then making improvements on it. These improvements may include road constructions and sewer developments, etc. There are also sufficient reserves.

In conventional acquisition and development loans, full funds for the project are not provided. Sometimes the developer is also required to make significant initial contributions, which are usually in cash. Other times developers may decide to use collateral like mortgages, and in this case, the ADC loans are approved even though the proportion of funds provided usually is lower than usual.

The size of funds to be lent depend on the location of the land, the area, regional economy as well as the political situation that surrounds the area. Sometimes the developers make changes to the land partitions before they decide to request the ADC loans.

These loans are only secured by real estate, and so real estate must be acquired and developed. The primary considerations of the lender apart from the land are:

  • The cost to be incurred when quickly selling the land if the project fails;
  • The likelihood of the plan developers quitting the program;
  • The availability of a guarantee of an additional loan;
  • The balance between the flow of cash and the developers

The lenders also consider the exit strategy of the developer. This is because the lenders are willing to take on the risk of a project if only the developer can prove the sustainability and profitability of that development project. Therefore new developers or the developers entering a new field should come up with a plan that is viable and detailed to convince the creditors about the project time and profitability.

Due to the complexity and high risk of land development, conventional ADC loans have many provisions that protect lenders, and this may affect a developer’s opportunities and risks. Because of this reason, developers usually work with lawyers who have experience in ADC financing to help them gain an advantage in this field.

As an illustration, if the property being developed is not sold, the loan contract requires the developer to accept the loan and pay the minimum payment before the lender sells the developed part without interfering with the lender. The developers faced with this type of debt have to understand their future obligations and how this loan affects their ability to sell the completed parts of the project.

References for Acquired Needs Theory

Academic Research on the Acquired Needs Theory

“Heads I win, tails you lose”: Deregulation, crime, and the crisis in the savings and loan industry, Calavita, K., & Pontell, H. N. (1990). Crime & Delinquency, 36(3), 309-341. This is a study examining the fraud in the savings and loan industry by categorizing three types of savings and loan crime and then tracing them back to the competitive pressures brought about by deregulation in the early 1980s inside the context of a federally protected and insured industry.

Integrating research on markets for space and capital, Fisher, J. D. (1992). Real Estate Economics, 20(2), 161-180.In this article, the importance of recognizing that two interrelated real estate markets exist is discussed. These markets are the market for tenant space and the market for investment capital.

Federal financial guarantees and the occasional market pricing of default risk: evidence from insured deposits, Cook, D. O., & Spellman, L. J. (1991). Journal of Banking & Finance, 15(6), 1113-1130. This paper uses a sample data of FSLIC’s guaranteed obligations from the late 1980s to develop a two-date state preference model demonstrating that the investor’s valuation of third-party secured debt depends mostly on the financial condition of the guarantor.

The Savings and Loan Debacle of the 1980s: White‐Collar Crime or Risky Business? Black, W. K., Calavita, K., & Pontell, H. N. (1995). Law & Policy, 17(1), 23-55. This paper examines the role played by white-collar crime in the savings and loan crisis and then it demonstrates how deductive reasoning is utilized to distinguish white-collar crimes and ordinary business transactions to aid in resolving long-standing methodological dilemmas that confront white-collar criminologists.

Empirical analysis of the average asset correlation for real estate investment trusts, Lopez, J. A. (2009). Quantitative Finance, 9(2), 217-229. This paper examines the asset correlation parameter using the portfolios of various U.S. publicly-traded real estate investment trusts (REITs) as a proxy for commercial real estate lending more generally.

The liability crisis in the US and its impact on accounting, Sheetz, W. P. (1993). Accounting Horizons, 7, 88-88. This study investigates whether the liability crisis that faces the public accounting profession in the US is related to audit or accounting principle failures.

Identifying a well-founded market analysis, Myers, D., & Mitchell, P. S. (1993). The Appraisal Journal, 61(4), 500. This study focuses on finding a market analysis that is well-founded and considers all aspects.

The impact of the New Basel Capital Accord on real estate developers, Pastiche, C., & Bone-Winkel, S. (2006). Journal of property investment & finance, 24(1), 7-26. In this paper, one of the impacts of the New Basel Capital Accord is that the availability and price of the debt capital will be adjusted according to risk and will depend on the amount that regulatory equity banks will have to hold in reserve for a credit engagement.

Acquisition, Development, and Construction Loans: Some Implications of Equity Financing, Grogan, D. E. (1987). This paper investigates the effects resulting from the dramatic changes in recent years of savings and loan institutions as a result of deregulation in the early 1980s.

The savings and loan debacle: The culmination of three decades of conflicting regulation, deregulation, and re-regulation, Margavio, G. W. (1993). Accounting Historians Journal, 20(1), 1-32. This article illustrates that the difficulties leading to the crisis were caused by the historical development of the regulatory environment of the savings and loan industry.

The liability crisis: Audit failures or accounting principles failures? Schuetze, W. P. (1993). Journal of Economics & Management Strategy, 2(3), 411-417. An investigation is carried out in this paper to determine if the liability crisis facing the public accounting profession in the US is more related to audit or accounting principle failures.

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