Companion to: Real Estate Decoded Chapter 36 (Construction Lending) - Workbook tab 08_Capital_Stack
Inputs
Outputs
Max loan via LTC constraint
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Max loan via LTV constraint
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Binding constraint
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Maximum construction loan
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Sponsor equity required
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Estimated interest carry (capitalized)
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Total funded loan (incl. interest reserve)
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How to read this tool: Construction loans size against TWO constraints: LTC (loan-to-cost, max 65-70% typical) AND LTV (loan-to-stabilized-value, max 55-65% typical). The lender takes the LOWER of the two. The construction-period interest is capitalized into the loan principal (interest reserve), funded from the same loan. The sponsor often must personally guarantee completion.
What this tool is for
Construction lending is structurally different from acquisition lending. The lender is funding draws against work-in-place, with monthly inspection draws by an independent monitor. Sponsor recourse for completion is standard. The HVCRE regulatory category amplifies capital requirements on construction loans with insufficient sponsor equity. This tool sizes the maximum loan.
Benchmarks the practitioner watches
- Bank construction loan LTC: 60-70%
- Bank construction loan LTV (stabilized): 55-65%
- Debt-fund construction LTC: 70-80% with higher pricing
- Construction loan pricing: SOFR + 250-400 bps for bank, +500-700 for debt fund
- Interest reserve: capitalized 65-75% of full carry depending on draw schedule
Common mistakes
- Sizing to maximum LTC without checking the LTV constraint
- Underestimating interest carry - missed reserves trigger sponsor-equity calls during construction
- Missing completion-guaranty exposure on sponsor balance sheet (full recourse for completion)
- Underwriting at completion-LTV using optimistic stabilized cap rate
Educational reference only. Not investment, tax, legal, or real-estate advice. Confirm market-specific cap rates, lender terms, and tax overlay with your own advisors before acting.