Hey Everyone,
I work at a small MF shop and have had this question on my mind for the last few months. Im definitely no Leveraged Finance expert but do know my way around the basics of credit, debt & capital markets in general.
If i'm modeling a development project and am projecting a two year construction term to begin in two years (after entitlements),
Is it more common to take the 5Y (no 4Y swap rate on Chatham), 1mo swap rate and apply it as a static interest rate over the whole two years 4.068% + 600bps = 10.068%
or assuming the entitlements begin today, would you take the 1 Mo swap rate from today until construction complete, applying the spread throughout?
The projected rate for the two year project beginning in two years would be 9.56%
Now I know 50bps of difference isnt going to make or break the project, Id just like some insight to how you guys do it at your firms. The end goal is to be able to explain to a layman contributing to a friends & family Co-GP position
Not sure if I understand the question or scenarios here. Not a multifamily or construction expert here but assuming financing is the same and a couple of construction financing deals under my belt. As far as I have seen, SWAPS and Treasuries are the main indexes for fixed-rate or perm debt plus spread (e.g. T+250). Construction loans and floating rate loans are based primarily on SOFR (e.g. S+300), unless it's a big project for a mega fund that a LifeCo could finance and do construction-to-perm. The way a construction loan works is you draw funds (lender releases funds) throughout the project upon reaching milestones. Throughout the project, you don't have payments and the interest payments accrue and you will have to pay upon completion of the project (COO) or maturity of the loan. This is called interest carry or carried interest. I have also seen loans where you do pay the interest throughout according to the SOFR forward curve. Hope this helps on the understanding.
Ay you got any more of dem construction loans that don't pay current interest? wot in da unicorn dust carnation is dis
OP: just download the latest SOFR curve and model your spread over the monthly loan balance. ez pz
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