Construction to Permanent Loan on the Return: Tips on Due Diligence and Loan Documents (part 1)

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Credit seems to be more available for commercial real estate.  For example, I know of one commercial real estate lender working on a construction to permanent loan program.  This type of lending blends two types of loans: a construction loan to build the project and a term loan to finance it once the project hits certain targets.

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.

Topics:  Casualty Insurance, Construction Contracts, Construction to Permanent Loan Program, Due Diligence, Letter of Credit, Loans, Surveys, Title Insurance

Published In: Administrative Agency Updates, General Business Updates, Construction Updates, Finance & Banking Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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