Managing Construction Lending

Managing Construction Lending

When To Use

• Underwriting or monitoring a construction loan (ground-up, renovation, or adaptive reuse)
• Reviewing a draw request for approval or flagging budget variances
• Assessing completion risk mid-project (schedule delays, cost overruns, contractor issues)
• Preparing a construction loan status report for credit committee, REIT portfolio review, or investor reporting
• Evaluating a construction-to-permanent loan conversion readiness

Inputs To Gather

• Loan documents: commitment letter, construction loan agreement, guaranty, interest reserve terms
• Project budget: hard costs, soft costs, contingency, developer fee, interest reserve line items
• Draw schedule: original schedule of values (SOV), all prior draw requests with inspector reports
• Current draw request: AIA G702/G703 or equivalent, lien waivers (conditional and unconditional), stored materials documentation
• Title update: date-down endorsement or bring-down confirming no intervening liens
• Inspection report: third-party inspector's percent-complete assessment per line item
• Permits and approvals: building permit status, TCO/CO timeline, zoning compliance [VERIFY jurisdiction-specific requirements]
• Contractor information: general contractor financials, bonding (if applicable), subcontractor list
• Insurance certificates: builder's risk, GL, workers' comp — confirm coverage amounts and expiration dates
• Market data (if relevant): comparable rents/sales, absorption rates for the project type and submarket

Workflow

1. Validate loan structure and terms

   • Confirm loan amount, LTC ratio, maturity date, extension options, and interest rate (fixed/floating, spread, floor)
   • Identify recourse vs. non-recourse structure and guarantor obligations (completion, carry, bad-boy carve-outs)
   • Note holdback provisions, retainage percentage, and any earn-out or performance-based release conditions
   • Flag any unfunded commitments, future-advance mechanics, or interest reserve burn-rate concerns

2. Analyze the project budget

   • Compare original approved budget to current budget; identify any reallocations or change orders
   • Calculate hard-cost and soft-cost contingency remaining as a percentage of total budget
   • Assess developer fee structure (deferred vs. drawn pro rata) and impact on cash flow
   • Flag line items where costs-to-date plus costs-to-complete exceed the budgeted amount

3. Process the draw request

   • Match each line item on the draw request against the SOV and inspector's percent-complete
   • Confirm retainage is withheld at the contractual rate (typically 5–10%) [VERIFY per loan agreement]
   • Verify lien waivers are current: unconditional for prior draws, conditional for the current draw
   • Check stored materials documentation (insurance, warehouse receipts, title transfer)
   • Reconcile the draw amount against the remaining loan balance and confirm the loan is not over-advanced

4. Assess completion risk

   • Compare actual percent-complete to scheduled percent-complete; quantify any time variance
   • Evaluate remaining contingency relative to project stage (contingency should not be exhausted before 75% completion)
   • Review contractor performance: change-order frequency, subcontractor turnover, quality issues noted in inspection reports
   • Identify external risks: permit delays, utility hookup timelines, weather-sensitive work remaining, supply-chain issues
   • Determine whether remaining loan proceeds (including contingency and interest reserve) are sufficient to fund project completion

5. Prepare the status report

   • Summarize loan-level metrics: outstanding balance, percent funded, remaining availability, weighted-average cost of funds
   • Present budget variance analysis (original vs. current vs. projected at completion)
   • Include a draw history table: draw number, date, amount requested, amount approved, cumulative funded
   • State completion timeline with key milestones (structural completion, MEP rough-in, finishes, TCO, CO)
   • Provide a risk rating or watchlist recommendation with supporting rationale

Output

• Construction Loan Status Report containing:
  • Loan summary (borrower, project, commitment, funded, available, maturity, extensions)
  • Budget tracker with variance columns (budgeted, drawn-to-date, remaining, projected overrun/underrun)
  • Draw approval summary for the current request (recommended amount, any holdbacks, conditions)
  • Completion risk assessment (schedule, budget, contractor, market) with risk-level indicators
  • Watchlist or escalation recommendation if applicable
  • Action items and conditions precedent for the next draw

Quality Checks

• All dollar amounts tie between the draw request, SOV, inspector report, and loan balance
• Retainage calculations are arithmetically correct and match the loan agreement rate
• Lien waiver coverage is complete — no gaps between prior conditional and current unconditional waivers
• Interest reserve burn-rate projection confirms adequacy through projected completion plus lease-up (if applicable)
• Title update confirms no mechanic's liens or other intervening encumbrances
• Insurance certificates are current and coverage amounts meet loan agreement minimums
• Budget contingency adequacy is assessed relative to project stage and remaining risk
• Any data point sourced from borrower representations rather than independent verification is marked [VERIFY]
• Jurisdiction-specific requirements (lien law notice periods, retainage statutes, permit processes) are flagged with [VERIFY]