What to take into your next appraisal
- Use the lower of every applicable lending constraint.
- An interest rate is not necessarily a debt-service constant.
- Reconcile net proceeds to the actual payoff at closing.
Define the lender’s underwriting case
Record eligible NOI or net cashflow, required DSCR, amortisation, interest rate, valuation basis, maximum LTV and required reserves. Construction debt may also include accrued interest, exit fees or extension charges at repayment.
OCC construction-lending guidance and Fannie Mae’s operating-statement instructions provide context for credit assessment and consistent cashflow analysis. Neither source establishes the fictional financing terms below.
Sources: Office of the Comptroller of the Currency: Commercial Real Estate Lending, version 2.0; Fannie Mae: Multifamily Underwriting Standards
Apply two limits to one fictional property
Assume $1.2m lender-underwritten annual cashflow, a $20m valuation, 65% maximum LTV, minimum 1.25 DSCR and an 8% annual debt-service constant. The constant represents annual debt service per dollar borrowed under the assumed repayment structure.
| Limit | Calculation | Maximum debt |
|---|---|---|
| LTV | $20m × 65% | $13m |
| DSCR | $1.2m ÷ 1.25 ÷ 8% | $12m |
| Binding amount | Lower of the two | $12m |
Reconcile the cash at refinance
Suppose the actual construction-loan payoff is $13.5m. Permanent-loan closing costs and required cash reserves total $300,000, leaving $11.7m net proceeds. The sponsor must provide $1.8m to complete repayment.
Do not report a $1.5m gap by comparing gross debt to the payoff while forgetting the $300,000 deductions. Conversely, do not deduct a reserve twice if it is already included in a net-proceeds quote.
Test the income constraint and the deadline
A 10% fall in underwritten cashflow to $1.08m reduces DSCR-sized debt to $10.8m with the same terms. Net proceeds become $10.5m after the assumed deductions, and the gap rises to $3m if the payoff remains $13.5m.
A delayed refinance can also increase the payoff. Three months of simple 9% interest on $13.5m adds $303,750 if no payments reduce principal. That delay case needs separate treatment from the income downside, or an explicitly combined stress.
Confirm that the take-out can actually close
The programme should include occupancy, operating-history and completion conditions, valuation timing, document delivery and construction-loan maturity. An indicative term sheet is not an unconditional source of cash.
Show the expected closing date, net proceeds, payoff and committed equity for the gap. If the gap lacks a credible source, identify the earlier decision that must change: land price, cost, leverage, retention strategy or disposition timing.
Sources and further reading
- Commercial Real Estate Lending, version 2.0 Office of the Comptroller of the Currency
- Multifamily Underwriting Standards Fannie Mae
Published by Feasly. How we prepare our guides. Suggest a correction.
