Building a Solid Construction Loan

Building a Solid Construction Loan

Finally, the construction loan you’ve been working on for the past month — meeting with the client, gathering all the information and documents, understanding all the details, getting it blessed by your senior lender to proceed and finally underwritten — was approved.

You’re done, right?  No, not really, and you know that.

There are many more layers to a construction loan compared to other types of commercial loans. Once approved, as a loan officer, you still need to work closely with your credit and documentation departments to make sure all the necessary information is provided and completed by all the parties involved, including the client, title company, attorney, general contractor and appraiser, just to get to the closing.

So, you closed the loan, now you’re done, right?  No, not at all. One of the most critical aspects of a construction loan now begins … the construction loan draw process.

The loan officer at this point tends to think his/her hard work is done, but that’s wrong. It’s easy to fall into that trap given the amount of time between each draw and the time needed to process a draw when a request is received. However, stuff happens!  Unexpected costs appear, the loan goes out of balance, no more contingency funds are available, and sub-contractors are not providing waivers, all of which will need immediate attention. So, tackling and resolving them quickly is required.

Having a competent construction draw department or, at a minimum, a solid and adhered-to set of construction draw procedures for your credit administration team is required to make sure construction projects are completed without significant additional cost to both the client and the bank.  In construction lending, perfection is unrealistic. Sometimes, the best you can do is to limit and manage around the unexpected events, not prevent them. No matter the size of the project, issues will arise. This point alone is why you need to have a dedicated person and/or department to champion each draw when it’s initiated.

An experienced client who has previously received construction loans will understand the process and costs involved with construction lending, including the loan rate and fees that are charged by the bank. But that experienced client will also expect the process to be handled correctly and expeditiously. Issues like figuring out where the loan is out of balance, securing notary signatures, or resolving inspection report issues are examples of why it’s critical to have a dedicated department/individual for loan draws. A credit analyst handling loan draws while juggling underwriting for new and maturing loans may drop the ball, which can delay the draw process or, worse, lead to an out-of-balance construction loan or mechanic’s liens being filed. Having a dedicated department and/or individual (with back-up) may also be warranted, based on the volume of construction loans.

A construction log for each loan should be maintained with important loan information including, but not limited to, the approved loan amount, project address, loan account number, current balance, last draw date and amount, title escrow number, and title officer contact information. Both the draw procedures and the construction log are critical to demonstrating to the regulators and management that the bank has a sound understanding of its construction loan process, and its construction loan portfolio, at all times.

Creating and keeping an ancillary file (apart from the credit and collateral files) for each construction loan improves the administration of the loan, which will then improve processing time. Documents that should be in the ancillary file include: a copy of the approval, all sworn statements, date down endorsements, inspection reports, and other customary forms to be completed, along with wire transfer instructions for title company and all wire history.

Once you work through all these phases, you will be a lot closer to “done” and a successfully executed construction loan.

Here at Artisan Advisors, we have the experience and skills to review your construction loan process from loan approval through documentation, draws, date downs, and project completion.  Let us provide your institution with a fresh, third-party review of your process so that you can make construction loans with confidence.

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