Lender methodology to size floating rate construction loan reserve
Assuming that a rate cap is not required by the lender, is there a fairly standard method for how construction lenders size the interest reserve? Is the assumption that SOFR is flat over the life of the loan, and simply use spread + current SOFR against the developer's proforma draw schedule to size the reserve? Using a forward SOFR curve results in a lower reserve relatively speaking, but I am assuming that a lender would not use an assumption that SOFR drops meaningfully over the next 24 months despite what forecasts predict?
We typically use the borrower’s lease up schedule (will adjust using our UW rents and OpEx) and the forward SOFR curve.
Loan sizing on the other hand is based on current SOFR. I’ve heard some banks UW using the forward curve but that’s not what we do at my shop.
Hope that helps.
Typically a combination of 1. The borrowers draw schedule 2. Our underwriting and lease up schedule 3. SOFR curve To that we typically size an interest reserve with a 5%-15% cushion above the actual number to account for variance in any one of those factors. So yes we use the forward curve, and the SOFR floor that’s negotiated protects against massive drops in the curve
Sed nemo ea architecto rerum. Architecto autem quo voluptas error. Autem sed consequuntur non eligendi omnis voluptatem sint. Velit odio magni quia quas incidunt beatae delectus. Fugit iure et veniam ea. Est autem aut expedita ut qui.
Eos ut rem expedita magni nihil et. Alias numquam quidem nobis. Enim saepe et possimus est vero. Voluptatibus voluptatibus natus iure eum cumque deserunt. Vel voluptatibus voluptas est a ut dolore consequuntur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...