CPACE Lender Can Fund Large Construction Loans in Multiple Tranches

One of the usual challenges of using CPACE for a construction project is the problem of negative arbitrage. Unlike a construction loan from a bank where the interest only starts accruing on funds as they’re drawn down over time, CPACE loans are typically fully funded at closing. This means that interest on the total loan amount accrues day one, even though funds are used for construction over time. This creates a mismatch between the cost of capital due to the duration of compounding and the utility of capital.

Additionally, CPACE loans fund that full amount of interest from loan proceeds at closing as an interest reserve or capitalized interest expense (same thing really). This adds significant financing cost to the deal and increases the total CPACE loan amount at closing.

We’re working with a very large CPACE lender that has created a clever solution to this problem - multi-tranche funding. On large CPACE construction loans they can divide funding up over multiple tranches. As the duration of each tranche gets shorter and shorter, the overall duration of interest compounding is much lower. This reduces the total amount of interest paid over time and better matches the deployment of loan proceeds to when it will actually be used to fund construction costs.

They can do this for larger loans, ideally $100M+. For example, they recently closed a $130M+ construction loan for a large hospitality development that was split into five tranches. This is a clever solution to one of the traditional challenges of bringing CPACE to construction financing.

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Nathan Whigham
President
CA DRE Broker License: 01793655

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