How does the construction draw process work in commercial real estate construction lending?
The construction draw process in commercial real estate construction lending typically involves several steps and parties, including the borrower, lender, construction manager, and inspectors. Here is a general overview of how the process works:
Loan Agreement: The borrower and lender first enter into a loan agreement that outlines the terms of the construction loan, including the loan amount, interest rate, repayment schedule, and conditions for releasing construction draws.
Construction Budget: The borrower develops a detailed construction budget that breaks down the total cost of the project by line item, such as labor, materials, and equipment.
Construction Schedule: The borrower also creates a construction schedule that outlines the timeline for completing each phase of the project and when construction draws will be requested.
Inspection and Approval: During construction, the borrower requests a draw from the lender when a specific phase of the project is completed. The lender sends an inspector to the site to verify that the work has been completed according to the construction schedule and budget.
Payment: If the inspector approves the work, the lender releases funds to the borrower to pay for the completed phase of the project. The borrower then pays contractors and suppliers for their work and materials.
Repeat: The borrower repeats steps 4 and 5 for each subsequent construction draw until the project is complete.
Throughout the construction draw process, the construction manager also plays a critical role in overseeing the construction work and ensuring that it meets the lender's and borrower's requirements. They coordinate with the borrower, lender, and inspectors to ensure that construction draws are requested and approved on schedule.
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