Underwriting Land and Construction Financing
Hi,
Currently doing some preliminary underwriting on a land acquisition + development. How do most people determine the interest rate to use for financing? Just something like a Prime Rate + Spread or LIBOR + Spread? Or is there something with more specific guidance such as CMHC (I'm in Canada) for project specific guidance, though that program is usually specific and purposefully is low-interest.
Prime + spread for land.
Assume a floater over SOFR. Depends what you're building and how conservative you wanna be. I wouldn't uw anything less than 700 bps spread given what's going on in the markets. Its tight and I don't see that situation changing until next year. Gonna be a long year in the capital markets.
... a 700 BP Spread?? Why are you assuming that high? Did you mean all in rate? Most lenders are going to require an interest cap on floating deals given the volatility. For reference, one of the deals we just underwrote we got quoted at SOFR+350 with a strike price at 300 - so capped all in at 6.5.
I'd say the most accurate source is going to be your lender/brokers though. Reach out to them and see if they can get you a QM with a couple different options. We just rate locked on a nice fixed rate quasi-bridge product. Share your specific parameters and let the debt people do their work - if the deal is big enough they'll hopefully find some creative solutions.
if you're in canada and building rental product, you're gonna go with CMHC financing which is priced over the CMB bond, approximately 50 - 80 bps from what i remember.
if its condo or commercial, its gonna be priced over prime.
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