Founder of accredev | Tech-powered CRE analyst 🏢. Better underwriting 📈. Faster fundraising ⏩. Stronger returns 💵. Supercharge your FP&A while saving $50K / year 🪙.
50 basis points can make quite a difference in a commercial real estate development. Assume a $40 million, 6.5% rate construction loan that is drawn over a 24 month period for a multifamily apartment build. The loan balance is $0 in month 0, $20 million in month 12, and $40 in month 24. The average loan balance over two years is therefore $20 million. Over two years, the project will incur $2,600,000 in interest costs. ($20M average balance * 6.5% * 2 years = $2,600,000) After a 50 bps reduction, this interest cost will drop from $2,600,000 to $2,400,000. The $200,000 savings could be theoretically be used to add an entire extra apartment unit. But more practically, because the design is probably set in stone, the $200,000 can instead be "used" to simply reduce the equity and debt requirements of the project while projecting the exact same set of revenues. To the extent the rate reduction doesn't cause any immediate compression in cap rates or increases in development costs (which of course they will eventually in theory if not in practice), the rate reduction is purely accretive to the project. Now cut rates a few more times, and we can see how a lot of sidelined projects with marginal returns are about to re-enter feasibility. Should be an interest next 12 months! #commercialrealestate #realestatedevelopment #realestatefinance
