If implemented correctly, a lender literally will capture market share.  And a borrower can save time and money by closing two loans at one time.  However, it has unique due diligence and documentation provisions, which are different from a construction to perm loan covering a home.

In this post and in future posts, we’ll look at a few of these elements and provisions.  Understanding these should help you as you jump into offering or accepting a construction to permanent loan.  And, don’t forget to address or include the “lessons learned” over the past 4 years into the equation!

Some of the unique elements of a construction to perm loan:

• Survey requirements
  • initial survey
  • foundation survey during construction
  • as-built survey as a conversion (and/or as a final advance condition)
• Title insurance requirements,  such as:
  • mechanics and material mans coverage
  • pending disbursement or down dates on draws
• Casualty and liability insurance requirements
  • builders risk coverage
  • evidence of coverage by contractor(s)
• Credit enhancement covering construction risk, such as:
  • Full liability of borrower until rental, loan to value and\or debt service coverage thresholds
  • Guaranty of sponsor: full payment\performance v. completion; and then merely bad-boy events; (one issue: does completion guaranty include merely shell or also tenant improvements?) (another issue: what are the requirements or conditions to migrating the guaranty from a 100% of the loan and project to merely covering bad-boy events?)
  • Letter of credit until rental, loan to value and\or debt service coverage thresholds (another issue: how to handle letters of credit from tenants?)

I’ll cover more in future posts.