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?
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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
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