Developers out there, do you always use positive NOI prior to lender coverage being met to offset interest carry in your models? What about if you’re pre-coverage and can not only cover interest for the month but a portion of TI/LC’s as well? Do you model this income as a Source?
Lenders, do you give the sponsor credit for NOI offsetting interest carry each month or view it as non-guaranteed income and thus size your interest reserve based on 0 income dollars going against interest carry pre-coverage ratio?
Before NOI is sufficient to cover debt service I always use it to offset interest reserve (which is capitalized)
Initial TI/LCs on first gen space during construction is in the budget just like hard and soft costs.
Yes, it's standard for the offset from a Developer/Investor modeling perspective. I think it's important to point it out to everyone involved because a lot of times it gets glossed over.
I had a bank construction lender allow 50% of the total NOI projected during that offset period apply for sizing the upfront interest reserve.
Other larger institutions that are investors and lenders have allowed 100% but the equity sponsorship was rock solid and so there wasn't any concern about someone not having the money to finish, something that a small bank and small local developer might have to worry about.
You covered my concern exactly. Thanks
I've also seen LPs/lenders force sponsors to guarantee the interim income, so YMMV
it depends on the lender, that interim NOI is not guaranteed as the asset isn't stabilized yet, so you should ideally build in a toggle when you run the book for raising the construction loan, some lenders will allow for it and others wont give credit for interim NOI during lease-up to stabilization. This is how I always do it.
I’ve since learned most lenders won’t count the income on speculative leases, even though equity investors typically will.
Yeah we just closed a '$500MM condo/mf/retail syndicate and the sr lender and the b note sub lender both rejected the interim cash flows to be conservative, and so we had to fund increased equity. The way we built the model is that we still recognize the cash flows, it just sweeps the debt so essentially the debt draws and is repaid in the same month...
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