Chirayuthchai TraisaengsatheanStrategic Finance for Property Development

Project Loan: LTC, LTV, Drawdown, Grace, Sculpted Repayment

Key terms of a project loan, with examples of drawdown, release price and sculpted repayment

Key takeaways

  • LTC caps the loan against cost, while LTV caps it against value. Banks usually apply whichever gives the lower facility.
  • The grace period must cover construction time plus a buffer and must end after transfer proceeds start coming in, rather than relying on a standard figure.
  • Sculpted repayment adjusts principal to cash flow. In the example, DSCR stays constant at 1.25x, whereas equal instalments give a minimum of 0.89x.

Four types of loan by project stage

The figures are illustrative reference ranges. Actual terms depend on the bank, the borrower and market conditions.

FeatureLand LoanConstruction LoanPost-FinanceBridge
ObjectiveBuying landDevelopment and constructionRefinancing or asset holdingBridge between facilities
CeilingLTV 50–65%LTC 65–75%LTV 70–80%Case by case
Tenor2–5 years3–6 years7–15 years6–18 months
PriceMLR + 1–3%MLR + 1–2.5%MLR + 0.5–1.5%MLR + 2–4%
RepaymentInterest only, with principal repaid at maturityPartial release on transferPrincipal and interest instalmentsSingle lump-sum repayment
SecurityFirst-ranking mortgageLand, buildings and assignment of right to receive paymentsAssets and incomeCase by case

LTC vs LTV

LTC = loan ÷ project cost

LTV = loan ÷ collateral value

Example Cost THB 1,000 m, appraised value on completion THB 1,100 m, LTC cap 70% and LTV cap 60%

Facility under LTC 70% × 1,000THB 700 m
Facility under LTV 60% × 1,100THB 660 m
Facility availableTHB 660 m

The remaining THB 340 m of cost must come from equity and Presale.

LTV caps commonly seen in projects are around 60–70%, and some banks may go up to 80% in certain cases. Income-producing assets usually get a higher cap than projects under construction. State the valuation basis clearly: whether it is current value or value on completion.

Drawdown against progress

Construction loans are drawn against progress, following the S-curve instalments, and the conditions must be met every time.

  • Progress certificate from a QS or engineer
  • Contractor invoices
  • Compliance certificate confirming there is no event of default
  • Latest financial statements
  • Presale report against target
  • Insurance policies still in force

Example Facility THB 300 m, drawn in 6 tranches, retention 5%, interest 7.5% p.a.

PeriodMonthCumulative % of workDrawdown (THB m)RetentionNet disbursementCumulative
1615%45.002.2542.7545.00
2830%45.002.2542.7590.00
31050%60.003.0057.00150.00
41265%45.002.2542.75195.00
51580%45.002.2542.75240.00
618100%60.003.0057.00300.00
Total300.0015.00285.00

Retention of THB 15 m is withheld until practical completion. Interest during construction is calculated on the cumulative drawn balance; up to month 18 it comes to about THB 11.7 m. If the loan is carried to month 24, it becomes about THB 23.0 m. A 6-month delay therefore costs almost as much as the interest for the entire construction period.

Retention in a construction contract is money the owner withholds from the contractor. In some facilities, the bank also delays drawing this portion. Check clearly who holds it and which balance interest is calculated on.

Grace Period

Banks usually open negotiations at 18 months and can often move up to 24 months, but the right figure should come from the project programme.

Minimum grace period = construction time + delay buffer + time from completion to first transfer proceeds

A project whose time from first drawdown to completion exceeds the grace period must pay principal before transfer proceeds arrive. If this problem is not spotted in the term sheet, it will surface when it is hardest to fix. Projects that take several years should negotiate repayment tied to transfers rather than a fixed term.

Release price for sales projects

For projects sold to buyers, the loan is usually not repaid in fixed instalments. Instead, the mortgage is released unit by unit on transfer, and part of the proceeds is repaid to the bank.

Example Loan THB 600 m, total sales revenue THB 1,000 m, and the bank asks for release at 120% of the debt proportion

Release rate = (600 ÷ 1,000) × 120% = 72% of the transfer proceeds of each unit

Debt is cleared when sales reach = 600 ÷ (72% × 1,000) = 83.3% of revenue

Before that point, the developer gets back only 28% of transfer proceeds, so it must set aside enough for tax, fees, selling expenses and remaining works.

Sculpted Repayment

Projects with operating income, such as hotels, should sculpt principal to cash flow rather than repay equal amounts every year.

Debt service in the period = CFADS for the period ÷ target DSCR

Example Debt THB 500 m, 5-year tenor, interest 7%. The DSCR that repays the debt exactly is PV of CFADS 623.8 ÷ debt 500 = 1.25x. Units are THB million.

YearCFADSDebt serviceInterestPrincipalOutstanding debtDSCR SculptedDSCR with equal principal
112096.235.061.2438.81.25x0.89x
2160128.330.797.5341.31.25x1.25x
3200160.323.9136.4204.91.25x1.65x
4180144.314.3129.974.91.25x1.58x
510080.25.274.90.01.25x0.93x

Same debt, same project, but equal principal repayments of THB 100 m a year would breach the covenant in the first and last years.

Multi-facility and term sheet conditions

Example Facility split for a mid-sized project

FacilityObjectiveTHB m
A. Land LoanBuying land200
B. Project LoanConstruction and development750
C. Working CapitalOperating costs50
D. Standby L/CPerformance Bond50
Total1,050

Facility D is a commitment, not cash. In a sources & uses table it should therefore not be counted as spendable money. The cash from this facility is THB 1,000 m.

TopicFirst offer seenPossible negotiating range
PriceMLR + 2.5%MLR + 1.5–2.0%
Tenor3 years4–5 years
LTC60%65–70%
Upfront Fee1.0%0.5–0.75%
Commitment Fee0.5% p.a.0.25–0.375%
Prepayment Fee2%1% after year 2
DSCR Covenant1.50x1.25–1.35x
Grace Period18 months24 months

Interest during construction (IDC) is part of the cost that must be funded. Include it in the budget from the start, and check whether the facility covers IDC or it must be paid in cash.

Interest rate hedging

ToolsHow it worksConsiderations
Interest Rate SwapSwap floating interest for fixedSuits long-term debt, but has a cost if closed out early
Interest Rate CapCap the interest ratePay the premium upfront and still benefit when interest rates fall
CollarBuy a cap and sell a floorReduces the premium but gives up the benefit when interest rates fall below the floor