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.
| Feature | Land Loan | Construction Loan | Post-Finance | Bridge |
|---|---|---|---|---|
| Objective | Buying land | Development and construction | Refinancing or asset holding | Bridge between facilities |
| Ceiling | LTV 50–65% | LTC 65–75% | LTV 70–80% | Case by case |
| Tenor | 2–5 years | 3–6 years | 7–15 years | 6–18 months |
| Price | MLR + 1–3% | MLR + 1–2.5% | MLR + 0.5–1.5% | MLR + 2–4% |
| Repayment | Interest only, with principal repaid at maturity | Partial release on transfer | Principal and interest instalments | Single lump-sum repayment |
| Security | First-ranking mortgage | Land, buildings and assignment of right to receive payments | Assets and income | Case 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% × 1,000 | THB 700 m |
| Facility under LTV 60% × 1,100 | THB 660 m |
| Facility available | THB 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.
| Period | Month | Cumulative % of work | Drawdown (THB m) | Retention | Net disbursement | Cumulative |
|---|---|---|---|---|---|---|
| 1 | 6 | 15% | 45.00 | 2.25 | 42.75 | 45.00 |
| 2 | 8 | 30% | 45.00 | 2.25 | 42.75 | 90.00 |
| 3 | 10 | 50% | 60.00 | 3.00 | 57.00 | 150.00 |
| 4 | 12 | 65% | 45.00 | 2.25 | 42.75 | 195.00 |
| 5 | 15 | 80% | 45.00 | 2.25 | 42.75 | 240.00 |
| 6 | 18 | 100% | 60.00 | 3.00 | 57.00 | 300.00 |
| Total | 300.00 | 15.00 | 285.00 |
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.
| Year | CFADS | Debt service | Interest | Principal | Outstanding debt | DSCR Sculpted | DSCR with equal principal |
|---|---|---|---|---|---|---|---|
| 1 | 120 | 96.2 | 35.0 | 61.2 | 438.8 | 1.25x | 0.89x |
| 2 | 160 | 128.3 | 30.7 | 97.5 | 341.3 | 1.25x | 1.25x |
| 3 | 200 | 160.3 | 23.9 | 136.4 | 204.9 | 1.25x | 1.65x |
| 4 | 180 | 144.3 | 14.3 | 129.9 | 74.9 | 1.25x | 1.58x |
| 5 | 100 | 80.2 | 5.2 | 74.9 | 0.0 | 1.25x | 0.93x |
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
| Facility | Objective | THB m |
|---|---|---|
| A. Land Loan | Buying land | 200 |
| B. Project Loan | Construction and development | 750 |
| C. Working Capital | Operating costs | 50 |
| D. Standby L/C | Performance Bond | 50 |
| Total | 1,050 |
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.
| Topic | First offer seen | Possible negotiating range |
|---|---|---|
| Price | MLR + 2.5% | MLR + 1.5–2.0% |
| Tenor | 3 years | 4–5 years |
| LTC | 60% | 65–70% |
| Upfront Fee | 1.0% | 0.5–0.75% |
| Commitment Fee | 0.5% p.a. | 0.25–0.375% |
| Prepayment Fee | 2% | 1% after year 2 |
| DSCR Covenant | 1.50x | 1.25–1.35x |
| Grace Period | 18 months | 24 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
| Tools | How it works | Considerations |
|---|---|---|
| Interest Rate Swap | Swap floating interest for fixed | Suits long-term debt, but has a cost if closed out early |
| Interest Rate Cap | Cap the interest rate | Pay the premium upfront and still benefit when interest rates fall |
| Collar | Buy a cap and sell a floor | Reduces the premium but gives up the benefit when interest rates fall below the floor |