In practice, do lenders allow monthly distributions to occur after stabilization (when interest coverage is achieved) but prior to payoff/perm loan takeout? Or does any cash flow after interest go to an escrow account of some sort and only get released at payoff/end of term?
Also, can someone please clarify how borrowers and lenders draw the line in regards to when interest can be capitalized (self funded by the loan facility) and when the borrower must start to pay? Or is the pro forma just an educated guess identifying when coverage could potentially occur and the month it actually happens triggers no further capitalization of payments?
Also, how are TI/LC costs handled in the loan docs? Will a reserve have to be set up? Thank you
Bump
Construction draws can still occur after stabilization for certain items. It really just depends on what the proceeds are used for. For example, if a developer fee is approved by the lender it is quite often only released after project completion and after stabilization. TILC funds are typically held back for some property types and are released as needed, sometimes after debt service coverage hurdles are met that would trigger loan payments to be made by the borrower.
Large phased projects are also a good example of a scenario where monthly draws might be expected after the borrower begins making payments from cash flow of the property. The property might already meet a 1.0x and the last phase needs to be built out.
Many lenders require the borrower begin making payments when a project achieves a 1.0x DSCR or when the interest reserve is depleted, whichever comes first. The proforma is just a projection, but payments from the borrower begin when monthly DSCR hurdles are actually met.
LC and TI really varies by deal...can be just basic draw funding and/or capitalized in the budget etc.
Shoogspot answered the others accurately and succinctly imo so no need to expand there
Any excess cash flow after debt service typically serves as cash collateral until the property surpasses some dscr/debt yield tests, which gets negotiated into loan docs. This cash is released once the property has sufficient CF to meet the tests, or at loan payoff. There are times when stabilization won't mean covering debt service, or whatever tests were put into place.
Lenders project a lease-up schedule and size interest shortfalls based on the schedule and that is the amount that will get capitalized. Lender will prob have a more conservative lease-up schedule, meaning more cap interest.
Reserves versus future funding TI/LC/Reserves/Whatever is a point of negotiation. Strong operator's with a good project will prob get future funding. Bad ones will not.
What are TI and LC?
tenant improvements and leasing commissions
Cupiditate soluta consequatur eos aut blanditiis. Tempora et incidunt maxime temporibus. Assumenda sint rerum id dolor pariatur et expedita.
Sed molestiae ducimus quas placeat asperiores quis asperiores autem. Architecto sint inventore cumque sit soluta. Error ullam aliquam praesentium molestias. Id neque et est consequatur. Temporibus repellendus minus atque quia dolor autem. Cupiditate labore accusantium rerum quia et.
Sed porro ea numquam consequatur dolorum sit quaerat. Quidem hic cupiditate sed corrupti. Ad libero consequuntur a ullam iusto enim dolore aliquam. Quos at totam perspiciatis dolor non repellendus.
Fuga maxime officia quasi et accusantium. Qui eum quas illum repudiandae voluptas qui quia quia. Qui voluptatem fuga dolor velit neque.
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...