Underwriting Construction Loans
Can anyone provide, or point me in the direction of an article, that breaks down the specifics of a construction loan? Right now I underwrite primarily value-add office, retail and multifamily, our capital doesn't do ground up construction. I would like to know the basics of underwriting construction loans and how it varies from underwriting already improved buildings.
Shouldn't be too complicated...all the construction loan deals I have done, the developer locks down financing at XX% loan to total project cost with land marked to market (increasingly lower at 40-55% in this environment). have to fund 100% of your equity to the deal before drawing on the loan to cover monthly expenses which trail actual expenditures by 30 days. Rates are typically fixed spread over 30 day LIBOR, I/O. Depending on the size of the facility, you will have to pay a broker fee if used to source the debt (35-50 bps), and if the deal is syndicated by a bank (larger facilities over 100M) you will prob have to pay an admin fee at closing of 75 bps to 100 bps.
Some other items to be aware of--capitalized interest and operating deficits. Each construction lender typically sets aside 'allocations' for the borrower that include TI/LC/Capitalized Interest/Operating Deficit Pre-Coverage pools of cash to fund these as they occur over the construction loan term. Usually these are included in your TDC (total development cost) and the lender will size the loan according to the LTC% utilizing these allocations included within said TDC.
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