Financing Terms help - real estate development
I have recently become involved in a real estate development deal for my company. Can someone please help clarify my question below about the rate?
The bank has approved the loan and the rates are as follows:
REPAYMENT:
- Construction & Stabilization Period: Monthly payments of interest only up to 2 years
- Permanent Financing: 60 months, monthly payments of Principal & Interest based on amortization not to exceed 25 years with a balloon payment at maturity.
RATE:
-Construction & Stabilization Period: One month LIBOR Rate Reset Monthly rounded to the nearest 1/16 percent plus 265 basis points. As of today's rate, the rate would be 2.84%, such rate to be adjusted by Bank prior to initial funding as market conditions change.
- Permanent Financing: Bank Cost of Funds + 250 basis points
- Interest to be calculated on a 360 day year
PREPAYMENT INDEMNITY: None
ORIGINATION FEE: 40 basis points
MY QUESTIONS:
1. Does the Permanent Financing mean interest rate 2.84% + 250 basis points (2.5%) = 2.84 + 2.50 = 5.34% interest rate for permanent financing??? This is my understanding. Please confirm if I am correct or wrong.
2. This is from the Commitment Letter for the construction loan. After construction finishes, does this mean there will be new terms for the Permanent Loan, and we will negotiate new rates for Permanent Financing???
If what I assume above is correct, we will be shopping for other banks for the Permanent Loan after construction is finished since 5.34% interest rate is high.
Please help. Thanks.
It's kind of a poorly worded term sheet. Generally when people talk about bank cost of funds they're talking about the cost of funds index (COFI) for the 11th District or the 1-year Treasury. The term sheet is very non-specific. Our term sheets usually say something like "1 year LIBOR + 2.85%". The 1-year Treasury is currently 0.12%. So your permanent rate would be 2.72% if going off the Treasury. I'd be shocked if the term sheet didn't specify a floor interest rate of, say, 4.5%, for example.
It sounds like you've already negotiated the terms of the permanent loan. 5-year, fully amortizing on a 25-year amortization schedule with COFI (or 1-year Treasury) + 250 bps with no prepayment penalty.
No that is incorrect. Construction period will be L + 265 bps, so 2.80% currently based on WSJ 30-Day LIBOR rate. I haven't seen an interest rate stated as bank's cost of funds plus a spread, so it could be floating or fixed. I'm assuming it's floating here, otherwise a fixed % would usually be stated if it was fixed. Whether fixed or floating, mini-perm financing will be at banks cost of funds (probably just slightly higher than LIBOR if floating) + 250 bps. Looks like the bank is adding 15 bps during construction for construction risk.
No. You're spelling out right now what the rate and terms will be for the mini-perm. It's 2 years, interest-only followed by 5-year mini-perm. Also states rates and amort.
Edit: DCD beat me to it. That's what I get for trying to surf WSO and work at the same time haha
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