Financing the Construction Project
How does construction project lending work?
Paying for a construction project often requires a construction loan. Obtaining a construction loan is complicated and requires more steps than getting a residential mortgage. In exchange for financing construction, the borrower, builders, and bank all work together to ensure that a project is successfully completed.
Fulfilling the requirements of a construction loan can be complicated and often requires reviewing, negotiating, and organizing hundreds of pages of documents. At Volpe Law, LLC, our team of Colorado construction attorneys is committed to helping you manage the construction loan and construction contracting process.
The Lender's Role In The Construction Process
The majority of construction projects are financed by a bank or other lending institution that puts up the funding to complete the project. Construction loans are riskier for lenders than other kinds of loans because there may be no structure to secure the debt—if the project fails early on, the bank might not recoup its money.
For that reason, construction loans come with some exceptional and onerous requirements.
First, most lenders require borrowers to cover at least 20% of the initial cost of the loan, and they usually charge a much higher interest rate than they would for a traditional mortgage. Furthermore, in addition to a security instrument on the land to be developed, the lender might require personal guarantees and substantial assignments of rights in case of project failure. Construction loans will typically involve a promissory note, deed of trust, various guarantees, assignments, bonds, and finance statements, among other things.
Second, the money for the construction project is disbursed in stages so that the lender can be sure the project is progressing as planned. The bank may have appraisers and inspectors check the progress of the work and verify that it is on schedule before disbursing additional funds. The construction loan documents will often give the bank substantial rights to the property and management of the project if the need arises for the bank to protect its investment.
Payment And Disbursement Schedule
Lenders release funds for construction projects according to an agreed-upon payment and disbursement schedule. But it's not automatic: Typically, the terms of the loan dictate that funding will be released only after the project manager or owner submits draw requests showing that certain milestones have been completed. This schedule must be reviewed, understood, and incorporated into the construction contract between the contractor and owner.
Draw requests generally include documents like invoices and receipts for materials and labor. They may also include a schedule of values showing what work the crews have completed and what they have left to do; change orders indicating any modifications to the construction plan; and lien waivers from contractors. Because mechanic's liens are the contractors' primary means of ensuring they are paid, a lien waiver acts as a receipt of payment for any work performed, ensuring no more payment disputes will arise as to the prior work completed.
Get Help Negotiating Construction Lending and Payment Issues
Negotiating a construction loan and complying with all of its requirements can be a difficult and time-consuming process. Let the attorneys at Volpe Law, LLC, assist you in staying on top of your legal obligations. Contact us online or call today to learn more about how we can help.