How Construction Loans Work
Construction loans fund eligible project costs through draws and charge interest on the balance actually advanced.
What the analysis measures
The facility commitment is not the opening debt balance. Borrowers submit draw requests against certified eligible costs while equity and lender funding follow an agreed sequence.
Calculation framework
Interest is calculated on opening debt plus the timing of the current draw. Fees, minimum interest, unused fees and capitalised interest must be modelled according to the term sheet.
Underwriting review
Monitor LTC, cost-to-complete, budget contingency, maturity and the path to repayment or permanent refinancing. A nominal commitment can be insufficient when interest is inside the cap.
How to use the result
Use a monthly draw schedule and reconcile every opening balance, draw, interest item, repayment and closing balance. The final balance must match the modelled payoff.