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.