Construction Loan Interest

[Anonymous]

Spencer, I watched your video on creating a dynamic construction draw schedule. Would the same principles apply to modeling construction loan interest after construction, but before you convert to permanent financing?

For example, have a cell called “Post Construction Interest Start Month” and have the cell equal your “end month” +1. Then also have an assumption cell called “Post construction interest end month.”

Then do the same formula to calculate amount of post construction interest on the outstanding balance of the loan before converting to perm.

Also is there a resource where I can review options for not drawing in a straight line. Right now I have manual inputs by the % for each month of construction, but that is inefficient when adjusting construction length and post construction period before converting to permanent financing.

Thank you for your help.

Matt Kreiser

[Spencer Burton]

Hi Matt,

Thanks for the question. It sounds like your questions will be fully answered in Michael’s development cash flow course and the construction interest portion of our course on Real Estate Debt.

With that said, allow me to quickly offer an answer to both questions.

I model construction debt timing somewhat independent of development cash flow timing. I first model budget cash flows (i.e. uses of capital) and then model debt and equity (i.e. sources of capital). In modeling sources of capital, I build a cumulative loan draw (i.e. construction loan balance) line from which I calculate monthly construction interest. Once construction ends, the construction loan balance only grows by interest and operating shortfall. At some point, operating income is sufficient to cover operating expenses and monthly interest (i.e. breakeven), at which point the loan balance becomes static (i.e. stops growing). Depending on the type of model, whether merchant build (i.e. sell at stabilization) or build to core (i.e. refinance at stabilization), I add an assumption for either a permanent debt funding month or property sell month. I use that assumed month to model a payoff of the construction loan.

In terms of if there is a resource where you can review options for not drawing in a straight line. Absolutely. Michael teaches this in in-depth his development cash flow modeling course. Additionally, here are resources directly from the blog side of the site:

S-Curve Forecasting in Real Estate Development (Updated Sep 2021)

Watch Me Build A Construction Draw Schedule (Updated Jan 2020)

Let me know if you have any other questions on this subject.

Thanks again!

Spencer

[Anonymous]

Hi Spencer,

Thank you for your prompt reply. Looking forward to Michael’s development cash flow course and the construction interest portion of the Real Estate Debt course. Also thank you for the additional resources. All very helpful.

Thanks again,

Matt

[Author]

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