Investor advisory memorandum

Executive summary
This memorandum provides an assessment of construction financing options for a project in Iceland, structured with USD 8 million in debt against USD 20 million in equity — a loan-to-value ratio of approximately 28.6%. It evaluates local ISK-denominated financing against USD alternatives, and examines the currency risk dimension in the context of the project’s revenue model.

The project intends to price and invoice its revenues in US dollars, a practice that is both legal and well-established in Iceland’s international-facing commercial sector. Eleven Deplar Farm — a high-end lodge on the Troll Peninsula — is among the clearest examples: with per-room rates from $4,200 per night and full property buyouts up to $66,590 per night, it operates entirely within Icelandic law. Iceland’s Foreign Exchange Act does not prohibit commercial invoicing in foreign currencies; it governs currency exchange intermediaries, which is a separate matter entirely.

This revenue model is consequential for the financing decision: a project that earns in USD and services debt in USD carries no meaningful currency mismatch. The analysis therefore focuses squarely on the cost of capital across three realistic structures, and identifies the optimal approach given the project’s conservative leverage profile.

1. The Rate environment

Iceland
Iceland’s central bank raised its key policy rate to 8.00% in August 2026 — its third consecutive increase — in response to inflation running persistently above the 2.5% target. This is not specific to any one lender — it reflects the structural cost of local-currency lending in a small, inflation-sensitive economy in a tightening cycle. Commercial lenders price construction risk on top of that elevated base, applying spreads of 400–500 basis points, which produces all-in construction lending rates of 12–13% for projects of this type.

United States
The US Federal Reserve’s policy rate currently sits at approximately 5.25–5.50%. In a deeper and more competitive lending market, well-capitalised commercial construction loans price in the 6.0–8.75% range, with the lower end accessible to borrowers with strong equity coverage. A project with 28.6% LTV — well below the 75% ceiling that US lenders typically apply — would realistically attract offers in the 6.5–8.0% range.

The rate gap — roughly 4 to 6.5 percentage points — is structural, not incidental. It reflects Iceland’s inflation premium, not project risk.

2. Financing structures

Three credible structures exist for this project. Their suitability is assessed below.

Option A — Standard ISK Construction Loan (12–13%)

A local bank’s offer is executable without additional structuring on, and carries no counterparty search risk. However, for a project with USD revenues, taking on ISK debt at 12–13% introduces a currency mismatch: if the ISK strengthens against the USD, the USD cost of servicing ISK debt increases. The project would be paying Iceland’s inflation premium on debt that carries none of the local-currency revenue upside that would justify that premium.

Assessment: Easy to execute, but poorly matched to a USD revenue model — and the most expensive of the three options.

Option B — FX-Indexed ISK Loan (USD-Linked)

Both Íslandsbanki and Landsbankinn offer loan products denominated in ISK but indexed to a foreign currency — specifically designed for borrowers whose income is in foreign exchange. The principal and interest payments track the USD/ISK exchange rate: if ISK weakens, the ISK amount owed rises, but the borrower’s USD revenues cover it proportionally. The LTV ceiling for such products is 70%; at 28.6%, this project qualifies comfortably. Effective rates are lower than standard ISK construction loans, as the lender prices USD credit risk rather than ISK inflation risk — estimated in the range of 8–10% for this type of exposure.

This structure achieves most of the natural hedge benefit within the Icelandic banking system, and preserves the option to refinance into standard ISK debt if local rates fall as the current tightening cycle reverses.

Assessment: A credible middle path — better rate, better currency match, fully local execution.

Option C — USD-denominated Construction facility (international lender)

The structurally cleanest solution. A USD facility from an international bank with Nordic or European exposure — or a USD commercial loan negotiated directly with one of the Icelandic majors — would align debt and revenues in the same currency with no residual FX step at each payment date. USD construction lending for a 28.6% LTV project with a demonstrable USD revenue model is realistically priced at 7–8% all-in in the current market.

The constraint is execution: US commercial banks do not lend against Icelandic collateral as a rule. A USD facility requires either an Icelandic institution willing to structure a USD commercial loan (less common but negotiable) or an international lender. This adds lead time, legal complexity, and potentially arrangement fees — costs that partially offset the rate saving.

Assessment: 0ptimal structure for a USD revenue project; requires the right counterparty and but you may already have that in place..

3. Annual cost comparison — USD 8 Million loan

Over a typical 24–30 month construction period, the saving from accessing USD-rate financing rather than standard ISK debt amounts to approximately USD 560,000–1,000,000 — material at this project scale.

4. Risks worth considering

Even with USD revenues eliminating the primary currency mismatch, several risks merit careful attention.

Revenue coverage. USD pricing holds cleanly where the entire customer or tenant base is international and transacts in dollars. If the project carries any domestic Icelandic revenue component — local tenants, domestic buyers, local commercial agreements — that portion creates a partial mismatch that should be sized and assessed separately.

FX-indexed loans still involve ISK transactions. Under Option B, payments are made in ISK, requiring conversion of USD revenues at the prevailing rate on each payment date. In stable conditions this is operationally minor; in a volatile month it introduces noise. This is manageable, but it is not a perfect match.

USD facility execution risk.    A USD facility may take longer to arrange and requires a lender with both the appetite and the legal framework to lend against Icelandic collateral. If the construction timeline is tight, execution risk in securing the right lender is a real consideration.

Iceland’s rate cycle may turn sooner than expected. The central bank’s current tightening is a response to cyclical inflation. If price pressures ease through 2026–2027 as anticipated, ISK lending rates could fall to 9–10% within 18 months. A borrower locked into a USD facility at 7.5% would then hold a modest advantage; one who chose the FX-indexed ISK option would have the flexibility to refinance domestically at a lower rate without any currency conversion.

Tax and regulatory administration. Iceland’s VAT (currently 24% on most services) is assessed in ISK at the exchange rate on the invoice date, regardless of the invoicing currency. Revenue reporting and tax filings remain in ISK. This is standard practice for internationally-priced businesses in Iceland, but it adds a layer of administrative complexity compared to a fully domestic operation.

5. Conclusion and recommendation

At 28.6% LTV, this project is conservatively financed and well-positioned to negotiate from strength in any lender conversation. The USD revenue model — legally sound and commercially established in the Icelandic market — removes currency risk from the equation, reducing the decision to a straightforward cost-of-capital question.

Recommended approach, in order of preference:

1. Pursue a USD-denominated construction facility from an international bank or negotiate a USD commercial loan with one of the Icelandic majors (Arion, Landsbankinn, Íslandsbanki). The project’s low LTV and USD revenue model constitute a strong credit case. Target an all-in rate of 7–8%, representing an annual saving of USD 280,000–400,000 relative to the ISK baseline.
2. If a USD facility proves structurally difficult to arrange within the project timeline, negotiate an FX-indexed (USD-linked) ISK loan with one of the Icelandic banks. This achieves most of the natural hedge at a substantially lower rate than standard ISK construction debt, and preserves refinancing flexibility as Iceland’s rate cycle normalises.
3. Avoid standard ISK construction debt at 12–13% for a USD-revenue project. Doing so means paying Iceland’s inflation premium on debt that is not matched to local-currency revenues — an unnecessary cost given the alternatives available.

The project’s equity depth is its strongest negotiating asset. Use it accordingly.