You are trying to finance a construction project. The builder has quoted a cost of $135 million. The project will take the builder 18 months to complete. The builder will expect payment according the following spending curve:
Citibank has agreed to fund the project. They will make a construction loan facility available. The facility will be for 80% of the project cost. The interest rate on the funds will be 8.75%, however, interest will not be paid during the construction period. Instead, interest will accrue and be capitalized on the project company’s balance sheet. At the end of the construction period, there will be other financing which will repay the outstanding amount of the construction loan.
Also, the bank will charge a 1.00% commitment fee on any undrawn amounts. Assuming that the loan is drawn pro-rata (ie. all drawdowns will coincide with payments by the equity), how much is the loan amount and what is the total amount of interest during construction?