Real estate industry

Forward Rate Lock / A solution for real estate developers?

By Stuart Gelb, CEO, The Liquidity Source

A mortgage rate lock is an agreement between the borrower and the lender that allows borrowers
at to block in an interest assess. If you’re looking to borrow, here are some key things you should
to know:

Facts: Over the past three decades, inflation has been relatively low in the US economy. Inflation
has averaged over 1-1/2 percent over the past decade.

Problem: With inflation at 8.5%, the Fed changes interest rates to slow the economy
down. Why is this a problem for developers in construction today? When the
developer will borrow funds on a specific project, rates are usually variable and
change monthly at much higher rates. With the additional labor and material costs, this
significantly increase the cost of the project.

Most construction projects last 24 months or more and only when stabilized can they get
their permanent financing based on the 10-year cash position at that time. This price today
is unknown and expected to be much higher. Major Effects on Loan Size, DSCR
(debt service coverage ratios), the annual cost of the loan, and will have a negative effect on all
ratios. Return on debt, Cash flow, Cap rate, ROI (return on investment), ROE (return on equity), LTV
(loan to value), IRR calculations. At certain levels unknown to the investor/developer today, the
the actual project may not be cost effective to execute and will not be known at the time of receipt
construction loan.

The solution: Forward rate locks that are put in place with swaps Banks can use these derivatives to
securely lock in rates for their customers. There are very few banks that practice “forward rate locks” today in
construction. This gives the developer the ability to lock in the forward rate on the
permanent financing upon closing of their construction loan. Typically the lock is in place for 8
years after construction 2 years comes after completion and stabilization. At a minimum, one
can calculate financing costs and be reassured that the deal makes sense.

About the source of liquidity
The Liquidity Source is a trusted trade finance advisory service. We sit with
our clients and discuss their challenges and wish list before finding the institution that is best for them
their needs. We use creative thinking because every situation is unique. We work with banks
partners to find the right source of funding. In today’s market characterized by uncertainty, volatility and
change, you may need a trade finance partner, an expert to help you mitigate
risk.

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