Hawthorne Land (HL) seeks out a new property and places it under contract. In this case, it’s 100 acres of land outside of Houston. The purchase price is $1M, which comes out to $10K per acre.
HL’s plan is to subdivide the property into ten 10-acre ranchettes and sell each one for $280K. That’s a cumulative projected sales price of $2.8M.
Because the total projected sales price is $2.8M, Hawthorne Income Fund (the fund, HIF) will lend the lesser of 65% of that amount or the purchase price. The lesser is the purchase price, so it lends $1M to HL upon purchase, secured by a first lien against the property.
Over the coming weeks and months, HL makes improvements to the ranchettes, and HIF issues additional loan funds, also secured by a first lien against the property.
Eventually, HL makes a total of $400K in improvements, and HIF will have loaned an additional $400K against the property, thus taking the total loan amount up to $1.4M. This comes out to a $140K loan against each ranchette.