To those with experience on the construction/bridge lending side: I'm curious as to the different ways you go about sizing your interest reserve? This varies deal by deal... and as someone from the debt brokerage side with a focus on transitional assets, how we capitalize this in our package & underwriting is often challenged.
Depending on the sponsor and how wide we are going to the market, we'll often just do a back-of-the-napkin calc based on an assumed all-in rate (don't even bother w/ a forward LIBOR curve typically) along with an assumption re: timing of construction/what percentage funded the project will be at a given time (somewhere in the 65%-75% range depending on the leverage).
Ultimately, we don't find it a good use of time to build out a draw schedule and get to an total interest figure that way...especially b/c we know a lender is going to size there's in various different ways. So... I just think it would be an interesting conversation to have. Thoughts?
To those on the development side: would love to hear your thoughts as well.
It takes like no time to do a draw schedule with a libor curve. Like 30 mins.
To BOE it, what you do is take the TPC and months of the project until lease up, but let's be real you either get a loan for 24 mos or 36 mos. You multiple the loan ltv size, iterative, by the amount of months divided by 12 times the average all in interest rate. If you have to buy a cap this would be easier. then you multiply by .60, assuming that your loan balance will be outstanding for a little over half the time it is drawn. I have not had much push back on the wholisic method minus a small interest reserve when i calc it the "long way". It depends how far you are in a project and how many pre development costs you have already spend. You are 100% CDs, then they should size pretty correctly off your model.
Fair. I guess more accurately I'd say that we'll typically put together an OM without having a draw schedule provided from the sponsor- likely just a budget.
Thanks for the input on the calc.
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