What Does Borrowing Base Mean in Real Estate?
What Does "Borrowing Base" Mean?
In real estate, the term "borrowing base" refers to the value of secured assets that a lender uses to determine the maximum loan amount that they are willing to extend to a borrower. It typically consists of the appraised value of the real estate properties that are being used as collateral for a loan. This base ensures that the amount lent is appropriately secured by real assets whose market value has been independently verified.
Here’s how it works:
- Appraisal: The real estate properties are appraised to determine their current market value.
- Adjustments: Lenders often apply a discount to the appraised values to account for potential market fluctuations and to ensure a margin of safety. This discounted value constitutes the borrowing base.
- Credit Limit: The borrowing base then serves as a key determinant in establishing the credit limit for the borrower. This means the borrower can only borrow up to a certain percentage of the value of their secured assets.
Borrowing base calculations are common in real estate financing, particularly for developments, construction projects, or large commercial real estate loans.