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Construction Loans

Construction loans are short term loans to pay for materials, labor, and other costs associated with construction. To be approved for a construction loan, you must provide the lender with a letter of approval showing how the construction loan will be paid off with a permanent loan at the completion of construction.

Construction loans can be obtained by using equity in other real estate or projects.

Construction Loan Documents and Process

• Executive summary highlighting the scope of the project and the experience of you and your team. Contact us for help writing an executive/project summary.
• Construction costs breakdown including hard costs, soft costs, and land value.  A line by line construction budget will be required. Contact us for help preparing a construction cost breakdown. See more explanation below.
• Construction draw schedule. Contact us for help preparing a draw schedule.
• Land value – what you paid for it and when, what you own on it and what it’s current worth is. Contact us for help determining land value.
• Zoning of the land and how far you are with obtaining entitlements. Contact us for help understanding entitlements.
• Construction Permit.
• Site plan, floor plans and elevation drawings.
• A resume or website for your general contractor and architect, highlighting the projects they have built and their qualifications.
• Management profile for the party that will manage the project/property.
• Bio’s or resumes for yourself and other key principals showing multifamily ownership and construction experience.
• You and your partner’s personal financial statements
• 4 Year Pro forma showing the projected net operating income from day one of lease up through the first 4 years of operations. Contact us for help preparing a proforma.
• Pro-forma rent roll for rental properties. Contact us for a sample proforma rent roll.
• Permanent loan commitment for the project when completed.

Commercial construction loans are not structured like traditional loans. Unlike loans you may be more familiar with, you will not receive the full loan amount as a lump sum and pay it off plus interest over time.

Commercial construction loans are distributed through a draw schedule.  

Draw Schedule: The lender and borrower work together to create a plan for the loan to be distributed over the course of the project. As milestones are reached, partial amounts of the loan will be dispersed to the borrower. Ex: The first draw from the loan will be used for clearing and developing the land. The next might happen when the foundation is poured, the building is framed, and so on.

What is a construction draw?

A construction loan draw-schedule is a detailed payment plan for the construction project. The project costs are broken down by trade and scheduled for payments upon completion.

A draw request is submitted to the lender, requesting funds to be released for documented, completed work.  See Sample Draw Request

The draw amounts are based on the estimated cost breakdown for each work phase. See sample Cost Breakdown.

Draws usually require a lien waiver. Lien waivers are often used in the construction industry throughout phases of projects when draws for labor or materials are requested by the contractor.

What Is a Lien Waiver?

A lien waiver is a formal, legally binding document stating that the contractor, subcontractor, or supplier has received payment for the agreed upon service or materials and therefore waives any rights to file a mechanic's lien on the property. A mechanic’s lien is a lien document filed in public records and attached to the project property to show a payment is owed. A lien waiver is similar to a receipt and can prevent a mechanic's lien from being filed.

Draws usually require a lien waiver. Lien waivers are often used in the construction industry throughout phases of projects when draws for labor or materials are requested by the contractor.

What Is a Lien Waiver?

A lien waiver is a formal, legally binding document stating that the contractor, subcontractor, or supplier has received payment for the agreed upon service or materials and therefore waives any rights to file a mechanic's lien on the property. A mechanic’s lien is a lien document filed in public records and attached to the project property to show a payment is owed. A lien waiver is similar to a receipt and can prevent a mechanic's lien from being filed.

Inspectors: Lenders typically require an inspector to confirm that the work is completed at each milestone before releasing the next partial amount of the loan. This process will continue until the full amount of the loan has been distributed.

Final draw upon certification of completion.

Interest: You only pay interest on the portion of the loan proceeds you’ve received. If the total cost of your new construction or renovation is $500,000, but the lender has only given you $100,000, you will only owe interest on $100,000.

Contact us today for information on any aspect of construction lending and we will help you through the process!

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