Capitalized Interest for Water Plant
Capitalized Interest for Water Plant
(OP)
OK, so this really isn't specific to water plants, but I didn't know where else to put it. Been doing this calculation and now second guessing the correct way.
When you're building a water plant, let's say it takes 3 years to build it, so you want to borrow enough to cover the total project costs, and three years of capitalized interest. I think my mind is playing tricks on me, as I can't get my head around how that should be figured, and I've been doing it with a spreadsheet for a few years.
My current thought is that I should just figure the project amount, incurring interest for three years, and making no payments during that three years which would be:
I = (P(1+i)^N)-P
Where i is the interest rate, N is three (representing three years), P is the project cost, and I is capitalized interest.
You would then add this capitalized interest to the construction cost, then the loan would actually be amortized over 37 years (after construction is completed).
You've essentially borrowed the construction costs and three years of interest from the lender, then paid it back in 37 years, I think this is correct...any takers?
When you're building a water plant, let's say it takes 3 years to build it, so you want to borrow enough to cover the total project costs, and three years of capitalized interest. I think my mind is playing tricks on me, as I can't get my head around how that should be figured, and I've been doing it with a spreadsheet for a few years.
My current thought is that I should just figure the project amount, incurring interest for three years, and making no payments during that three years which would be:
I = (P(1+i)^N)-P
Where i is the interest rate, N is three (representing three years), P is the project cost, and I is capitalized interest.
You would then add this capitalized interest to the construction cost, then the loan would actually be amortized over 37 years (after construction is completed).
You've essentially borrowed the construction costs and three years of interest from the lender, then paid it back in 37 years, I think this is correct...any takers?





RE: Capitalized Interest for Water Plant
Because you pay the interest each year (why you capitalize it), you won't compound the interest like your calculation does.
You only need to borrow an extra:
I = N * P * i
At the end of each of the first 3 years you will pay the interest and end up with the same principal you started with at the beginning of year 1.
RE: Capitalized Interest for Water Plant
RE: Capitalized Interest for Water Plant
The construction time for a water treatment plant is more likely 12-14 months.
It is reasonable to figure the payments to the Contractor would start in the 4th month of construction. The disbursements to the Contractor would then cover 90% of the toal project cost for the next 6 months or about 15% per month. The final month (12th month would be the balance (about 10%)
The cost of engineering would be paid in advance, so that cost (say 10%) would be financed for maybe 1-2 years.
The first loan repayment occurs at the end of the first year that you borrowed the money.
RE: Capitalized Interest for Water Plant
RE: Capitalized Interest for Water Plant
RE: Capitalized Interest for Water Plant
RE: Capitalized Interest for Water Plant
Instead of paying each month during construction, almost all construction loans in the United States have extra funds borrowed right away and stored in a locked account known as an "interest reserve". Each month the monthly payments are taken from the account so that the borrower does not have to start paying out of pocket until the project is completed.
http://en.wikipedia.org/wiki/Construction_loan
RE: Capitalized Interest for Water Plant
If you are getting money from the State revolving loan program:
The loan is given out basically as a line of credit.
If you have a construction loan as CVG is referring to:
It is basically a line of credit as well, except you only pay the interest (not the capital) during the construction phase until the project is finished. At the project completion, you roll the construction loan over into a new loan.
If you get a loan from the state revolving loan program, then your interest costs are covered because you raise the user rates before the project begins.
To answer your question about the budget, it will depend on how sophisticated your client is and what the interest rate you have, and also the value of the project.
Right now, the stimulus program is giving out 0% loans. Last year, the State revolving loan program was giving out 4% loans. So that loan rate will not be much of a factor in the budget.
On the other hand, I read recently that Harley Davidson borrowed $300 M from Warren Buffet at 15%. That is a big hit to the budget.
I recall a real estate professor stating that the interest costs during construction will eventually kill the mega skyscraper projects. You would have to start moving clients into the building on the first floor before the top of the building is completed.
RE: Capitalized Interest for Water Plant
I don't know if this project is private or municipal. If private, you typically pay as you borrow.
If municipal and bonds are sold, many times the bonds are sold up front so you start your payments for the full amount right off the bat. Some institutions have interim financing however, that lets you pay as you borrow and then after the project is complete, the bonds are sold.
Best solution is to check with your lender.
RE: Capitalized Interest for Water Plant