Hi all
I'm currently working as a research analyst and I am teaching myself how to model in the hope of making an internal move to a Corp finance role and pere in the future.
I've been leaning through the biws courses and I'm now at a stage where I understand the basic concepts and I've been creating models based on IMs that I have access to.
Although I understand the basic principles, I'm still trying to figure a few things out and I was wondering if anyone would be able to help me out with the following questions please.
Rolled up interest : I understand how to deal with rolled up (or capitalised) interest in a development model since you have no cash flow until you complete your building. However, what happens in acquisition and refurbishment model, more specifically how you handle the acquisition debt. Do you pay interest before refurbishment, but once acquisition starts, do you roll up interest until your refurb is complete?
Ammo : a similar question. In a development model, I understand you pay ammo once the building is complete. In a refurb model, do you pay ammo on your acquisition debt before refurb, stop during refurb, and repay post refurb?
Any help would be much appreciated!
Thanks.
Generally speaking a lender on an Acq loan with a hold back for light rehab/refurb will collect full P+I beginning day 1. The entire loan is funded as purchase money with simple hold back terms. A ground up deal is a true fund control scenario where interest is adjusted based on draws throughout the construction term and usually has reserves built in.
Hope that helps.
Thanks Pacnumber - what do you mean by full p+i? I'm not up to scratch with all my terminology. Am I correct in assuming you mean principal and interest?
Yep, P+I just means principle and interest.
On those ground up deals interest is usually paid on an I/O basis...Interest only. Not fully amortized. If it's a construction to perm loan then interest will be fully amortized once built and stabilized.
Thanks Pacnumber, appreciate the help. So if we were to take the following scenarios, am I correct in my understanding of how you should take into account P&I?
Acquisition & refurb:
Acquisition debt: P & I from day 1- no rolling up of interest
Refurb debt: Only released when refurb is due to start (is this what you mean by hold back) and any interest is rolled up during the refurb phase. Once the refurb phase has finished, full P&I is paid.
Construction:
Acquisition debt: Roll up interest until construction is finished & cash flow begins* Once cash flow has begun (or cash flow is stabilised) you pay interest. The loan isn't amortised therefore you don't pay amo through the life of the acquisition debt amount.
Construction debt: Roll up interest until construction is finished & cash flow begins* . Then P & I until sale of property.
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