Definition
A condo inventory loan finances a developer's remaining unsold units after a condominium project completes construction and receives its certificate of occupancy. At that point, the developer typically must pay off the construction loan, but individual unit closings take time to reach the necessary velocity, especially in slower sales markets or larger buildings with many units. An inventory loan is secured by a blanket lien across the pool of remaining unsold units, sized as a percentage of the units' appraised bulk or retail value, and structured with a release price mechanism so that each unit is freed from the lien as it sells and a portion of the sale proceeds pays down the loan. This allows the developer to satisfy the construction lender, avoid a forced bulk sale at a discount, and continue marketing units individually at full retail pricing over a longer sell-out period. Inventory loans are typically interest-only, with terms of one to three years, and are common for both new construction and condo conversions of existing buildings.
How It Works
Once a condo building is complete and the construction loan matures or needs to be refinanced, the developer approaches an inventory lender with a rent roll of remaining unsold units, an appraisal establishing both bulk and per-unit retail values, and a sales and marketing plan. The lender sizes the loan against a percentage of bulk value, typically lower than per-unit retail value to build in a cushion, and structures release prices for each unit, generally set above the average per-unit loan basis so the loan balance amortizes faster than the unit count declines. As units sell, the developer pays the release price to the lender from closing proceeds, and that unit's lien is removed. The lender monitors sales pace and may require minimum release price floors or a sales velocity covenant to ensure the loan continues to amortize as expected.
Example
For example, a developer completes a 40-unit condominium building with 15 units remaining unsold, valued at $12,000,000 in aggregate bulk value against a $18,000,000 aggregate retail value if sold individually. An inventory lender provides a $7,500,000 loan (62.5% of bulk value) to pay off the maturing construction loan, with release prices set at 60% of each unit's individual retail price. As units sell over the following 18 months, the developer pays down the loan with each closing, and once roughly 10 of the 15 units sell, the loan is fully repaid, releasing the remaining unsold units free and clear.
Why It Matters
Condo inventory loans prevent developers from being forced into a distressed bulk sale of remaining units at a steep discount simply because their construction loan is maturing before sell-out is complete. They give developers the runway to achieve full retail pricing on remaining units, which often represents significantly more value than a bulk disposition. Lenders and investors evaluating condo inventory financing need to understand sales absorption trends in the specific submarket, since the loan's repayment depends entirely on the pace and pricing of individual unit sales rather than a single refinance or sale event.
In depth
Release Price Mechanics
Every unit sold during the loan term triggers a release payment that pays down the loan, calculated using a release price schedule set at closing.
The specific release price structure is one of the most heavily negotiated elements of an inventory loan, since it directly affects how much cash the developer retains from each closed sale.
Some inventory loans also include a partial release mechanism for bulk sales, where an investor purchases several remaining units at once at a negotiated bulk discount, requiring a separately negotiated release price for that transaction rather than applying the standard per-unit schedule designed around individual retail sales.
- Release price is typically set at a premium to the pro rata loan balance, often 105% to 125% of the per-unit allocated loan amount
- This premium ensures the loan pays down faster than proportionally, protecting the lender as inventory, often the easiest-to-sell units, is sold off first
- Release schedules sometimes step down over time, giving the borrower relief if remaining unsold units require price cuts to move
- Minimum release price floors typically prevent a borrower from selling units at fire-sale prices without lender consent
How Lenders Monitor Ongoing Unit Sales
Inventory lenders typically require monthly or quarterly reporting on sales activity, including units under contract, closed sales, and updated pricing for remaining unsold inventory, allowing the lender to track progress against the original sellout plan and identify slowing absorption early.
Many loan agreements also include a minimum sales velocity covenant or a sweep provision that captures a larger share of proceeds from each sale if the pace of sales falls meaningfully behind the original projection, giving the lender a mechanism to respond before the loan approaches its own maturity with too much inventory remaining.
Marketing and pricing strategy changes, such as offering buyer concessions or reducing list prices to accelerate a slowing sellout, typically require lender notice or consent under most inventory loan agreements, since these changes directly affect the release prices and the pace at which the loan is expected to pay down over its term.
Worked Scenario: Release Prices Across a Sellout
For example, an inventory loan of $7,500,000 covers 15 remaining units with an average per-unit loan allocation of $500,000 and a release price set at 115% of that allocation, or $575,000 per unit.
As the developer closes sales over the following 12 months, each closing generates a $575,000 release payment to the lender regardless of the actual sale price, which might range from $650,000 for a premium top-floor unit to $500,000 for a smaller unit sold at a late-stage discount. After 10 units close, the loan balance has been reduced by $5,750,000, well ahead of the pro rata two-thirds mark, leaving a smaller remaining balance against the final 5 units.
If sales instead slow meaningfully in year two, with only 3 additional units closing rather than the pace assumed at closing, the developer would likely need to negotiate a maturity extension, a reduction in per-unit release prices to spur sales, or an infusion of additional capital to address the remaining loan balance before the inventory loan's term expires.
Negotiating Release Price Premiums
Developers negotiating an inventory loan should push for a release price premium calibrated to actual expected sale prices per unit rather than a flat percentage across dissimilar units, since a flat premium can leave very little cash from the sale of a smaller or lower-priced unit after the release payment.
It also helps to negotiate a release price schedule that steps down for the final few units, since these are often the hardest to sell and may require price concessions the developer needs room to make without triggering a covenant default under the loan.
Developers should also negotiate how the loan treats units taken off the sales market and converted to rental use instead, since a unit generating rental income rather than a sale may need to be excluded from the loan's collateral pool or refinanced separately, depending on how the original loan agreement defines eligible collateral.
Tax Considerations for Remaining Inventory
Developers holding unsold condo inventory should discuss dealer versus investor tax treatment with their accountant, since units sold to third-party buyers are typically treated as ordinary income to a developer classified as a dealer, taxed at higher rates than long-term capital gains.
The timing of unit sales across tax years, and whether any units are converted to rental use rather than sold, can also affect depreciation eligibility and overall tax strategy, making this an area where tax planning should begin well before the inventory loan's maturity approaches.
Developers should also discuss with their accountant how the inventory loan's interest expense is treated for tax purposes during the holding period, since interest on a loan securing property held for sale as inventory is generally treated differently than interest on a loan securing a long-term investment property, affecting both timing and character of the deduction.
H Equities
H Equities provides condo inventory financing to help developers bridge from construction completion through individual unit sell-out without accepting a discounted bulk disposition. Learn more
Frequently Asked Questions
How is a condo inventory loan different from a construction loan?
A construction loan funds the building of the project in draws tied to construction progress. A condo inventory loan is issued after construction is complete, secured by finished, unsold units, and is repaid as individual units sell rather than through a single takeout event.
What is a release price?
A release price is the amount the developer must pay the lender from each unit's sale proceeds to remove that unit from the loan's collateral pool. Release prices are typically set above the average per-unit loan basis so the loan balance shrinks faster than the number of remaining units.
What happens if sales are slower than projected?
Slow sales absorption is the primary risk in condo inventory lending. Loan documents often include sales velocity covenants, and if the pace falls short, the developer may need to adjust pricing, contribute additional capital, or negotiate a loan extension with the lender.
Related Terms
Bridge Loan in Commercial Real Estate
A short-term loan (typically 6-36 months) used to "bridge" the gap between acquiring or repositioning a property and securing permanent financing.
Non-Recourse Loan
A loan where the lender's only recourse in default is the mortgaged property itself, without a personal guarantee against the borrower's other assets.
Loan-to-Cost (LTC) Ratio
A ratio comparing the loan amount to the total cost of acquiring and completing a project, used to size construction and value-add financing.
Construction Completion Financing
Capital provided to finish a partially built or stalled construction project, often after the original construction lender or general contractor has been unable to continue.
Sponsor in Commercial Real Estate
The individual or company that sources, structures, manages, and operates a commercial real estate investment, also known as the general partner (GP) or operator.