Navigating Costs, Benchmarks, and Risk Mitigation
Source: Senior Housing Lender
• • Higher Risk: Lenders fund an asset that doesn't exist yet.
• • Interest-Only: Payments are typically interest-only during the build phase.
• • Variable Rates: Most construction loans are floating, tied to a benchmark index.
• • SOFR (Secured Overnight Financing Rate): The modern standard replacing LIBOR.
• • Prime Rate: Often used for smaller, community bank construction loans.
• • TreasuryYields: Used for long-term 'Construction-to-Perm' fixed products.
• • Formula: [Benchmark Index] + [Lender Spread] =Your Rate.
• • Typical Spreads: Ranges from 2.5% to 5.0% depending on the project type.
• • Example: SOFR (5.3%) + Spread (3.0%) = 8.3% Total Interest Rate.
• • LTC (Loan-to-Cost): Higher leverage usually means a higher rate.
• • Asset Class: Multifamily is often priced lower than hospitality or retail.
• • Sponsor Strength: Experience and liquidity of the developer.
• • Origination Fees: Usually 1% to 2% of the total loan amount.
• • Exit Fees: Some lenders charge a fee when the loan is paid off.
• • Draw Fees: Costs associated with inspections during the construction draws.
• • Recourse Loans: Lower rates because the borrower personally guarantees the debt.
• • Non-Recourse: Higher rates because the lender's only collateral is the property.
• • Choice: Developers balance personal risk against the cost of the loan.
• • One-Close: Automatically converts to a permanent mortgage after completion.
• • Advantage: Locks in long-term rates early and reduces closing costs.
• • Disadvantage: Often carries a higher initial rate for the convenience.
• • Interest Rate Caps: Buying insurance to prevent the rate from exceeding a limit.
• • Interest Reserves: Pre-funding a portion of the interest to ensure liquidity.
• • Early Refinancing: Moving to perm debt as soon as 'Certificate of Occupancy' is hit.