Modelling Loan Refinancing - Development

Hi all,

First time poster but long term lurker here. Appreciate all the help this site (and you guys) have given me over the years.

I have a scenario where I'm modelling a ground up development for a resi-led scheme. It's all good up until the point of the debt modelling. 

Theres essentially two loans I have to model, a construction loan for the build (LTC) and an exit loan (LTV) presumably on refinance. So far I have worked out the draws (including equity) but I'm struggling to visualise/model how exaclty the second LTV loan will take out the first loan.

Any help would be much appreciated. Thanks in advance. 

JP_RE

 

 

Comments (9)

 
Feb 20, 2021 - 8:45pm

So you structure the below line items in the model, after NOI of course.

Construction loan, draws,interest,repayment, refinance loan, payment, repayment, applicable prepayment penalty's.

After that is NEt cash flow. You tie the refinance date/period to when you get a 1.0-1.2 dscr, you also have to make your construction loan term equal to when you have enough cash flow to take out the construction loan .

 
Feb 21, 2021 - 4:10am

Thanks Shervin.

So currently the way I have it structured is I've calculated the net cash flows for the project, than the funds required and than the draws, equity>debt. My model assumes NOI will be generated upon construction completion. Ive been asked to model a 20- year hold. 

Can I than take the grown rent from year 21 and capitalise this at an exit yield to work out the capital value. Doing this the refinancing loan is 60% LTV. So essentially at project completion the construction loan would be taken out and the refi factored in till the end of the hold period?

This is the bit I'm confused about. 

 

 

 

 

 
  • Investment Analyst in PE - Other
Feb 21, 2021 - 8:25am

I would take the trailing 12 month NOI of the month you are paying down the construction loan, use a market cap rate on that NOI to come to your stabilized property value. Then you can calculate 60% of that value to get your loan amount.

 
Feb 21, 2021 - 9:15am

Thanks Investment Analyst. 

 

Apologies if this a stupid question but this is the first time I'm doing this. Once what you've suggested is done, how is the construction loan taken out exactly? Is the refinance loan treated almost as a cash inflow which pays of the construction loan? And then the refinance loan runs till the end of the exit period till its paid off? Below are the headings I'm using to model the interest payments. 

 

Debt Brought Forward

Draw

Interest Due

Interest Paid

Fees Due

Fees Paid

Debt Repayment

Debt Carried Forward

 

Thanks again. 

 
Feb 21, 2021 - 8:16pm

Not OP, but yes the refinance proceeds will be a cash inflow that pays off the existing construction loan. In practice, as you're closing the permanent loan you would provide title with a copy of a payoff letter from the construction lender and they would act as a middle man and facilitate the loan payoff for you. Any excess dollars from the new loan would be cash returned to the developer.

Array
 
Feb 21, 2021 - 8:42pm

use the forward 12 months(as said below) to calculate your loan NOI.  Most banks will take-out consturciotn financing if you approach 1x-1.1x of the proforma dscr, and maybe even structure an hold back for proceeds.  This will all depend on your construction loan timing.  Clearly, you don't want to be paying interest on the culmulative loan balance while you are cash flowing.

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