Construction loan lender questions a developer cannot answer yet

A credit committee asks the same eight things on every deal. Construction loan lender questions a developer cannot answer yet are not hostile, they are standard, and each one is answerable from documents already on your desk if somebody reads them before the meeting rather than during it.

Why the questions land badly

You send the guaranteed maximum price, the schedule and the budget. Two weeks later a list of questions arrives from someone who has never visited the site and will never meet the contractor.

The questions feel like doubt about the deal. They are not. They are the bank establishing whether the price it is lending against is a price or an estimate wearing the word guaranteed, and whether the date it is underwriting is a date or an aspiration.

The awkwardness comes from timing. The questions arrive after the contract is drafted and often after it is signed, which means the honest answer to several of them is that the document does not say. At that point the only available fix is a side letter, a reserve or a condition on the draw, all of which cost you something.

Asked before signature, the same questions are negotiating positions. Asked after, they are concessions.

There is a second reason they land badly. The person asking is not reading your project. They are reading a file next to nine other files, and they have a checklist that does not change by deal type. A question that feels like an accusation on your side of the table is a box on a form on theirs.

That is useful, because a fixed list is a list you can answer in advance.

Construction loan lender questions a developer meets, and where each answer lives

1. What is not in the price

The qualifications and assumptions page. Every exclusion is a line the lender will treat as owner cost until you prove otherwise.

2. How much of the work is bought

The procurement log. Any package priced from an estimate rather than an executed subcontract can still move, and the bank wants that figure as a percentage of the contract price.

3. Where the contingencies sit and who controls them

The contract for the contractor fund, your budget for the owner fund. The lender wants them separated, never summed.

4. What the allowances are carrying

The allowance schedule, with the figure carried against the current design for each item.

5. Whether the date is supported

The schedule, specifically the critical path and the durations behind the milestones you put in the loan documents.

6. What happens if it slips

The liquidated damages clause, the extension of time clause, and the interest reserve against the realistic completion date rather than the contract one.

7. How changes get priced

The change order clause. Markups, rates and the pricing basis, fixed before there is no competition left.

8. Who else has reviewed this

The answer the committee wants is somebody independent of the contractor and independent of you.

The four documents that answer all eight

The list above looks like eight separate exercises. It is four documents read carefully.

The qualifications and assumptions page answers question one outright and most of question four. It is usually two to four pages, it is usually read last, and it defines the boundary of the guarantee more precisely than the contract body does.

The procurement log answers question two and feeds question five. It tells you what is bought, what is estimated, and which award dates have already passed.

The schedule answers questions five and six, if you read the logic rather than the bar chart. The test is whether the durations and the sequence support the date, which is set out in testing whether the completion date is real.

The change order and contingency clauses answer questions three and seven. These are the terms that govern the price for the next two years and they are negotiable for about a week.

Question eight is answered by commissioning the reading rather than by doing it yourself, because the committee discounts a sponsor own analysis and is entitled to.

What none of the four documents does is refer to the others. The qualifications page does not say which of its exclusions has a long lead item behind it. The procurement log does not say which unbought package carries an allowance. The schedule does not say which activity depends on a decision only you can make.

Every serious finding sits in the space between two documents, which is why reading them one at a time produces a clean report and a surprise nine months later.

A worked example

A $62 million guaranteed maximum price on a multifamily project. The sponsor submits for a construction loan and the committee asks how much of the price is bought out.

The procurement log shows nine of twenty six packages executed. The nine represent $19.2 million, so 31 percent of the price is under subcontract and 69 percent is still an estimate.

The bank does not decline. It attaches a condition: no draw above 40 percent of the loan until buyout reaches 75 percent of the contract price, and a reserve of $1.8 million held against the unbought balance.

That reserve is real money sitting idle for eight months. Had the buyout position been presented up front with a package by package award schedule, the condition would more likely have been a reporting requirement rather than a cash reserve. The facts were identical. The difference was who raised them first.

The second cost is less visible. A draw ceiling at 40 percent means the sponsor funds a larger share of early construction from equity, which moves the whole return profile even if the final cost lands exactly on budget. Conditions attached to a loan are priced in cash, in timing and in flexibility, and only the first of those shows up in a term sheet.

What to do before the credit meeting

1. Print the qualifications page and write a dollar figure beside every exclusion, even a rough one.
2. Produce a procurement log showing every package as awarded or estimated, with the dollar value of each.
3. Show the two contingencies as separate lines with the controlling party named against each.
4. List the allowances with the carried figure and the current design basis for each item.
5. Identify the three longest lead items and the date each has to be released.
6. Check the interest reserve against the realistic completion date, not the contract date.
7. Fix the change order markups and rates in the contract before signature.
8. Have somebody outside the deal read all of it and write down what they find.

Every item on that list is a document you already hold. The work is reading them against each other, which is what the lender memo package exists to produce.

What we do

We produce a short memo addressed to a credit committee, written from the contract documents rather than from the marketing package. It states what the price covers, what is unbought, where the contingencies sit and what the schedule depends on, with a page reference behind each point. It does not recommend whether to lend. It gives the committee the facts in the order they ask for them, which is what the cost and change exposure assessment is built to establish. When a lender or an investment committee has to approve the position, the lender and investment committee memo sets it out in two pages.

Questions people ask