Over the last decade, Florida’s rapid population growth has inspired a whole new generation of commercial real estate developers. Development on new construction projects can be a big risk for the unprepared. If you have questions about this, my team and I are here to help.
Let’s talk about the process of a construction loan. Before your loan is approved, you will need to have your architectural plans and drawings in place, as well as a contractor agreement with cost estimates. Once you’ve accepted a bid, your loan can then be approved. Once approved and your project is underway, your contractor will request draws (releases of funds) from the loan to cover the cost of employees, subcontractors, and materials for work that has already been completed on the project. These draw requests must be examined by the borrower and the bank to verify that all the work has been completed and the materials have been purchased.
In my role as the CEO of a community bank, it is common for me to visit construction sites at various points of completion to verify progress. Over the years I have developed a level of expertise in the field of local construction that makes me a helpful advisor to clients. This advisory role is often filled by caring bankers who have a shared interest and is critical in new construction projects to ensure your money is being handled properly.
The careful management of your funds will ensure that you have enough money to complete the project. There are almost always surprises that pop up in the construction process that require additional funds for materials or services, and if you’re not careful there may not be enough funds remaining to cover those expenses.
Consider an investor who secures a $2 million loan to build an office building. He gets a bid from a contractor for $2 million and is off to the races. After the first 6 weeks, it becomes clear that this project will not come in within the budget, and eventually (after the entirety of the loan is released) the project needs another $300,000 to complete. If the borrower doesn’t have that money in cash he’ll be unable to complete the project, the office building won’t generate any income, and it will not sell for what he put into it.
You can see how important it is to have had an advisor reviewing the process and holding all parties accountable to the goals set forth on day one. Some large banks hire third-party companies who verify progress, and we would do this too if a project was beyond our expertise. In the long run, oversight like this protects the buyer and the bank.
Whether you’re a new investor or an experienced one, having a second set of eyes to review draw requests and verify expenditures may mean the difference between project success or failure. Any financial institution worth partnering with will provide this service and more.
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