Development project with an assumed 24 month construction period followed by 6 months of lease up. So assuming the perm loan refinance occurs after 36 months.
Assuming a current debt fund execution, I am hearing most lenders will require a rate cap purchase. So my question is assuming I priced the rate cap for 36 months to cover through refinance, is that cost being paid upfront at the same time loan is finalized (i.e. same month that lender origination fee is modeled as being paid)?
Also, when pricing the rate cap (I am using Chatham's website), should I be calculating the cost using current SOFR as my cap strike price?
Yes that cap is paid up front which helps size the interest reserve at closing, with the cap in place.
Chatham will price the cost for you and is based on their internal model which forecasts using the forward curve
Cost for the cap up front and then if the interest rate is above the cap during your hold, you’ll get cash into your account 30 days after the interest payment. One of the things most people don’t realize is you’re still paying the full interest payment, you’re just getting cash back 30 days later.
Also check with Chatham to make sure you have the right model. You can’t just say the cap strike is 4.75% and then when Libor plus spread is above that, you top out the interest rate at 4.75%. There’s a formula you need to adhere to which is based on your construction cost curve.
Thank you for the feedback.
As far as the cap strike price, if lender is pricing at 600 over SOFR (stretch senior debt fund quote), and if SOFR is currently 4.3%, then if the cap strike is 4.3% doesn't that mean that my all in interest rate would be maximum 10.3% over the life of the rate cap?
Cap strike is not the all in rate, just the benchmark, right?
Yes - cap strike is related to the benchmark, not all-in rate.
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