• You want to develop an apartment property that will cost $40M at t=0 (now) and another $40M at t=6 (in 6 months). The project will be completed at t=12 when you obtain the certificate of occupancy.
• The property income will be immediately stabilized (all apartments will be occupied) at the time of completion. You will receive $6M NOI at the end of the first operating year (t=24). The cap rate is 6%.
• You will finance the construction cost with the X-million dollar equity and a construction loan. You will draw $Y million at t=0 and $40M at t=6 from the lender (total loan amount is Y+40). The interest is accrued monthly (8% per annum or (8/12)% per month).
• You will pay off the construction loan at t=12 by refinancing with a permanent loan. The permanent loan will be a 7% interest-only loan with annual payments (i.e., annual compounding). The permanent lender will require 70% LTV and 1.3 DCR.
• How much equity ($X million) do you need to prepare at t=0?
• The following figure summarizes the case.

Development Phase Stabilized Operation Phase O 6 12 24 Construction Cost (80) 40M 40M Equity (X) X Construction Loan (Y+40) Y 40M Accrued Interest (8% p.a.) R Permanent Loan (7% 10) P 70% LTV and 1.3 DCR are required NOI 6M Cap Rate 6%