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]