# Case: Construction conversion delayed by occupancy evidence

Canonical: https://commercialdebtadvisory.com/cases/construction-conversion-delayed-by-occupancy-evidence/
Status: Published
Publisher: Jaken Finance Group

**Hypothetical construction-to-term conversion.** A 100-unit apartment project receives the required completion documentation in June. Its construction loan has a $10 million funded balance and a September 30 maturity. The documents provide a potential term conversion, subject to the specific conditions invented below. Physical completion alone does not make the conversion effective.

Assume the lender requires at least 90% occupied units and 1.25× coverage of $800,000 annual term debt service for three consecutive monthly testing dates. It also requires satisfactory reporting and other conditions, held resolved for this isolated example. This is not a statement of any agency's stabilization requirements.

## Distinguish the three occupancy counts

In June, 95 units have signed leases, 92 are occupied and only 84 are paying the full modeled rent. Eight occupied units are in a contractual concession period; three signed units have not yet taken occupancy. The units are assumed identical at $1,500 monthly rent, and no other collection loss is included.

The reporting should retain all three counts. “95% leased” does not mean 95 units currently produce cash, while “92% occupied” still includes the eight free-rent units. The lender's invented physical occupancy condition is met in June, but its cash-flow condition must be calculated separately.

The [OCC income and construction-monitoring discussion](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) supplies context for comparing actual rent and leasing terms with the forecast. It does not define the conversion test used here. Actual documents might use economic occupancy, accrued rent, trailing collections or different periods, so the model must be changed to match them.

## Apply one stated cash-flow convention at each testing date

For simplicity, annualize full-paying units at their current monthly rent. Add $60,000 of annual recurring other income, deduct $650,000 operating expenses and a $30,000 recurring capital provision. This is a lender-accepted convention stipulated solely for the example; it is not a claim that one month can always establish stabilized income.

**Annual sizing cash flow = paying units × $1,500 ×12 + $60,000 − $650,000 − $30,000.**

Assume occupied units stay at 92 from June through October. Paying units rise to 88 in July and 92 in August as the existing concessions expire. There are no new concessions, move-outs or expense changes.

| Monthly test | Occupied units | Full-paying units | Annualized sizing cash flow | Coverage of $800k service | Both numerical tests pass? |
|---|---:|---:|---:|---:|---|
| June | 92 | 84 | $892,000 | **1.115×** | No |
| July | 92 | 88 | $964,000 | **1.205×** | No |
| August | 92 | 92 | $1,036,000 | **1.295×** | Yes—first month |
| September | 92 | 92 | $1,036,000 | **1.295×** | Yes—second month |
| October | 92 | 92 | $1,036,000 | **1.295×** | Yes—third month |

The earliest modeled satisfaction of the consecutive-month condition is **October 31**, after the September 30 maturity. Even if the lender accepted each report immediately, the stated condition would not be satisfied in time. Any reporting or approval lag could move the effective date later.

## Solve the rent threshold without confusing it with the timing test

Coverage of 1.25× on $800,000 annual service requires $1 million of accepted cash flow. Solving the cash-flow equation gives **90 full-paying units**. Ninety occupied units would not be sufficient if some were still receiving concessions under this convention.

The property reaches 92 paying units in August, so it exceeds the numerical threshold by two units. Losing three paying units, without another offset, would reduce the count to 89 and fail the monthly coverage test. A rolling compliance schedule should therefore track whether the sequence continues rather than treating the first passing month as final approval.

A higher rent or lower expense could change the threshold, but only if supported and accepted. Removing the $30,000 capital provision from the spreadsheet without changing the agreed definition would not be a valid cure.

## A principal paydown addresses a different condition

Suppose the owner asks whether it could convert earlier by reducing principal. If the term loan uses an 8% annual debt-service constant, June's $892,000 cash flow at 1.25× supports **$8.92 million**. Reducing the $10 million balance to that level would require **$1.08 million** before other costs.

That paydown can solve the June coverage arithmetic under a resized payment. It does not, by itself, satisfy the original three-consecutive-month history condition. Earlier conversion would still require the lender to accept an effective change or another applicable route under the actual documents. The case does not assume such approval.

Similarly, the completion certificate, a signed lease or a projected October rent roll cannot substitute for evidence expressly required on earlier testing dates. Keep the physical, financial and documentary gates separate in the conversion checklist.

## Fund the time between maturity and qualification

The owner must obtain a documented extension or another executable repayment path before September 30. Assume construction interest is 9% nominal annual, paid monthly on the unchanged $10 million principal. One additional month costs $75,000 of interest before extension fees or other uses. Actual property cash can offset that cost only if available and permitted under the loan's cash-management terms.

The correct decision record identifies the first qualifying month, the earliest possible conversion date, the current maturity and the capital needed for any approved interim structure. The project appears successful in June by completion and leased-unit counts, yet its contractual financing transition remains unresolved. Recognizing that distinction early gives the owner time to secure a funded path instead of discovering the mismatch at maturity.


## Source references
- [OCC — Commercial Real Estate Lending, version 2.0](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) — Monitoring Commercial Construction Projects, printed pp.46–47; Income-Generating Capacity, pp.42–43 · Checked 2026-10-21 · Bank supervisory context. March 2022 publication, with March 20, 2025 reputation-risk edits. All case amounts, thresholds and contractual conditions are invented teaching assumptions.