The main factor that drives a construction project is the finance. Huge finances are required at the beginning of any construction project. Benefits of the investment made for a construction facility occurs only over the long term use of the facility. Therefore, cost are incurred prior to receiving benefits. This require the owner of the facility to have adequate capital resources to finance the project. Thus, proper attention is to be paid to project financing. Hence, having adequate capital is of major concern to all the stakeholders involved in a project, especially general contractor and material suppliers.
Financial institutions and individuals may lend construction loans to the owner for the construction of any facility. The main concern for these lenders is to be repaid of their money lent and therefore, an underwriting of a loan usually focuses on this aspect.
Construction loans are paid as short term loans and it increase with the progress of the construction. The construction loan is repaid shortly after the completion of the construction. For a typical $1 million-plus property, construction time is between nine and twenty one months and therefore loan payment period would be somewhere between twelve to twenty four months allowing the flexibility in payment period due to unforeseen conditions of weather, material delivery delays, labor problems etc.
A Construction lender’s perspective
A loan is a short term high risk, high yielding investment. Therefore, to mitigate risk, strict procedures are required to be followed to establish a reasonable relationship between outstanding loan balance and value of the collateral. The borrower (owner) is required to provide a takeout commitment issue...
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...es who comprise the investment committee are presented with the investment committee memos that will contain the strengths and weaknesses in the deal. The investment committee possesses the ultimate authority of approval of the deal. Upon approval, the underwriter then formulates the credit approval package which include all financial analysis from start to finish, all of the market analysis conducted, guarantor analysis, and owner/developer sponsorship analysis.
• Derived from the credit approval package will then be the issuance of the structured bank terms that the bank is willing to extend towards the owner/developer for their projects. The bank terms will discuss: leverage, pricing (for J.P. Morgan Chase equals L+2.25), fees associated with services, the payment guarantor, and the recourse and guarantee that will be associated with that construction project.
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