| Decision | How much interest to carry in the build budget |
| Starting point | Dated draws, expected paydowns and the planned payoff month |
To size an interest reserve, estimate the loan balance outstanding in each period, multiply it by the annual rate and the fraction of the year outstanding, then add the periods through payoff. On a spec build, the sale closing can come months after the last contractor draw. Include that interval in your first budget.
Build the forecast from the dates money moves
Start with the amount advanced for the land or existing payoff at closing. Add each expected construction advance on its funding date. Subtract any scheduled principal repayments. A contractor may finish framing in April and receive reimbursement in May, so use the financing dates from your draw schedule. Keep contractor payment dates alongside them to see how much cash you need between draws.
For a monthly estimate, multiply the average outstanding balance by the annual rate divided by 12. For a midmonth advance, weight the balances by the number of days each is outstanding. Use the note’s day-count convention, rate resets and billing dates when you have them.
A 12-month spec build with a $2 million commitment
Suppose the annual rate is a constant 8% for this illustration. Each amount below is the assumed average balance during a three-month period. The sponsor pays interest from a separate cash reserve. There are no financed interest advances, fees or principal repayments before sale.
| Period and average balance | Interest for three months |
|---|---|
| Months 1 to 3 · $400,000 | $8,000 |
| Months 4 to 6 · $900,000 | $18,000 |
| Months 7 to 9 · $1,400,000 | $28,000 |
| Months 10 to 12 · $1,800,000 | $36,000 |
The estimated reserve is $90,000. For example, the final quarter costs $1,800,000 × 8% × 3/12 = $36,000. Using half of the $2 million commitment for a full year would produce $80,000 and leave this budget $10,000 short. A project that draws more slowly could produce a different result.
What if the buyer closes two months late?
At the same $1.8 million balance and 8% rate, two more months add $24,000. The revised estimate is $114,000. Insurance, taxes, utilities and any extension fee belong on separate budget lines. If the delay crosses maturity, confirm the extension terms separately. An interest balance alone cannot extend a loan.
If you have a site and a draft budget, ask Stonehaven to review your construction financing. Include the location, estimated first advance and expected sale month so we can discuss the part of the schedule driving your interest cost.
What changes if the loan funds its own interest?
An interest advance can increase the principal on which the next period’s interest accrues. Carry each financed interest payment into the next opening balance if the agreement provides for it. Check how much of the commitment remains for the actual build after reserving funds. Compare the interest reserve and construction contingency separately.
Once work begins, replace estimates with the statements and funded draws each month. If the expected payoff moves beyond the remaining reserve, use the interest reserve shortfall calculation to identify when cash is needed.
The OCC’s commercial real estate lending handbook describes reserve sizing in relation to disbursements, paydowns, rates and the time to sale or occupancy. It is supervisory guidance for banks. The example above uses hypothetical figures for a builder’s budget.