The key to an efficient construction loan process: a checklist
With the recent uptick in multi-family construction, developments within the Madison market have been advancing at a steady pace. The construction process on projects such as these involves a dizzying array of steps and procedures in a highly dynamic environment. Effective communication is critical to ensuring the process moves smoothly. However, coordinating communications between the various engineers, contractors, and other players can be an extraordinarily complex task.
Yet project managers are able to accomplish this with a relatively simple tool – a checklist.
The commercial construction lending process is a different and, in many ways, less complex undertaking, but recent enhancements to OCC oversight require considerably more information to be gathered, coordinated, and managed than ever before. In order for the process to move forward and borrowers and lenders to stay on task, all parties should work together to develop a detailed checklist outlining the steps in the loan process, the information that borrowers will need to provide, and a prioritized timeline for accomplishing these tasks.
Naturally, each development project will have unique and specific details that can only be identified in conjunction with your bank. Nevertheless, I have developed the following checklist overview, outlining common steps and information requirements that most borrowers will encounter.
- Appraisal: The appraisal can take anywhere from 30 to 60 days to receive and review, so it should be ordered as soon as possible. Often the bank will order the appraisal from an “approved appraiser.” Many financial institutions share the same approved appraisers, and as long as the bank has engaged the appraiser, the appraisal can likely be shared with another bank through a redirecting process. This can be helpful in the event that the bank ordering the appraisal is not ultimately granted the business.
- Budget review: The bank will review the project’s plans, specifications, and budget. The goal is to be certain the project can be successfully built for the amount indicated in the borrower’s budget. In many cases, the bank will retain trained professionals on a third-party basis to complete this review, so this information should be communicated to the bank in a timely fashion.
- Retaining key third parties: At this point, the borrower should retain other third-party professionals. They would include legal counsel, preparers of a Phase I environmental report (and the Phase II report, if applicable), a geotechnical engineer (to develop the soil condition report), a title services company, and licensed surveyors, among others.
- Tenant and lease documentation: As the process moves forward, the bank will request available tenant and lease information, such as a current rent roll, tenant leases, and tenant estoppels certificates and lease subordination agreements.
- Insurance and Zoning Information: Further into the process, items such as a flood hazard determination review and various insurance certificates (including builder’s risk insurance for new construction) will be requested. A zoning endorsement or zoning letter will also be collected.
- Personal financial information: In addition to project-specific details, the borrower and/or guarantors of the loan will be expected to provide key personal financial data. This information will include a current personal financial statement, tax returns (including any applicable Schedule K-1 forms), and a recent credit report. Particularly important will be a global cash flow statement that offers operating financial information on other projects owned by the borrower/guarantor.
- Construction information: Finally, the bank will want a variety of detailed information pertaining to the construction, including the development agreement, the general contractor’s contract, applicable subcontractors’ contracts, and building permits. The borrower will also need to map out the final project budget in a draw request, detailing the allocation of loan proceeds throughout the construction process.
This is a continuum, not a linear process. Many of the checklist items will be collected and processed simultaneously. But, while the checklist may seem formidable in its entirety, by breaking it down into easily achievable pieces, borrowers and their lenders can create an efficient process that leads to a successful and timely closing.
Michael Finn is a senior vice president and market manager for commercial real estate for Associated Banc-Corp in Wisconsin and has more than 30 years of experience in the financial services industry.
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