In the following video, I record my screen and narrative my steps as I build a basic construction draw schedule. I’ve also included the template and completed worksheets from this Watch Me Build exercise.
Basic Construction Financing & Draw schedules: A Conceptual Overview
A standard draw schedule with a basic capital stack of debt and equity works as follows:
- The development budget is created and projected out over the anticipated time of the project.
- A Loan-to-Cost (“LTC”) ratio is applied to the development budget to size the amount of debt.
- The remaining budget that is not covered by the debt will be covered by equity.
- Equity first. At the beginning of the project, equity is spent first until the required equity balance is depleted.
- Then debt. When the required amount of equity has been spent, the lender will begin to disburse funds as additional costs are incurred over time.
- Then interest reserve. Interest is then charged every period on the cumulative debt balance and is normally capitalized and added to the balance creating a budget line item referred to as an interest reserve.
Note: This is the challenging part of draw schedules that creates an iterative problem. How does a lender loan money based on a LTC ratio from a budget if the interest reserve is not calculated until the debt begins to be disbursed, but the debt is being disbursed based on a LTC ratio based on the budget? To put it another way, how does a lender loan money against the construction costs including the interest reserve, when the interest reserve is not calculated until debt begins to be disbursed after the equity has been spent? If this is unfamiliar or confusing to you, I discuss this topic and how to resolve at length in this following post:
Watch Me Build Video: Construction Draw Schedule
This video will walk you step-by-step through the process and you can download both the blank and completed templates below to follow along.
Links to Posts Mentioned in The Video
- My true LTC in construction draw schedule blog post shows you how to mitigate a common error seen in development underwriting.
- Check out my Condo Development Model, a comprehensive cash flow pro forma for modeling for sale condo developments.
A Note on Circular References and Why I Try To Avoid Them
This draw schedule, like others I have included in models shared on this site, is built without using circular references. Circular references are often used in excel to solve for iterative problems such as an interest reserve calculation. I try to avoid using them as there is a chance that the calculations may be inaccurate and it is also harder for the user or a third party to understand the intuition behind what the model is doing.
This is because circular references are inherently saying that the value in cell X, for example, is being resolved by the value in cell Y; and the value in cell Y is also being resolved by the value in cell X. Circular references can also have cell X ten formulas removed from cell Y in a chain of formulas referencing different cells, increasing the chance for error and confusion.
Download the Source Files for this Watch Me Build Exercise
To make these files accessible to everyone, they are offered on a “Pay What You’re Able” basis with no minimum (enter $0 if you’d like) or maximum (your support helps keep the content coming – similar real estate training exercises sell for $100 – $300+). Just enter a price together with an email address to send the download link to, and then click ‘Continue’. If you have any questions about our “Pay What You’re Able” program or why we offer our models on this basis, please reach out to either Mike or Spencer.
- Merged template and completed worksheets
- Updated header
- Added version tab
- Initial release