Are you considering building your own building or doing a major renovation to your current building? If so, this article provides insight on the process of working with a bank to fund your project.
When providing funds to support construction financing, the bank assumes the risk associated with the customer’s ability to successfully complete a proposed project on time and within budget. To monitor each project’s progress, costs and loan disbursements, the bank has an established construction loan administration process. This process is essential to effectively controlling construction risk and providing the client, contractor and bank with a predictable and smooth process.
The construction budget is one of the most critical elements in determining project feasibility. The client should provide a detailed line-item budget that is carefully reviewed by a qualified individual to determine if the budget is appropriate and reasonable. The bank may also perform a plan and cost review for any significant and/or complex construction project. Budget overruns can result in total costs that exceed the property’s value when completed and are typically caused by inaccurate budgets, increases in costs, delays in construction progress and subcontractor management.
Construction budgets typically categorize expenses as hard and soft costs. Hard costs generally include on-site improvements and building construction as well as other reasonable and customary costs paid to construct or improve a project, including general contractor’s fees and other expenses such as bonding and contractor insurance. Soft costs typically include interest and other development costs such as fees related to predevelopment expenses. The budget should also include a contingency to fund anticipated overruns.
To ensure everyone is on the same page, the bank will schedule a pre-construction meeting with the customer, contractor and bank to discuss the construction disbursement process. There are also documents required from your bank, some of these depend upon the size and complexity of the project.
- Signed construction contract
- Construction schedule
- Estimated construction draw schedule
- All municipal approvals through phase of funding
- List of sub-contractors
- All applicable permits through phase of funding
- Utilities agreements (if applicable)
- Executed financial security agreement for bank and municipality (if applicable)
- Executed land development agreement for borrower and municipality (if applicable)
- Construction Budget
- Loan Budget
Construction Advance Requests
Draw requests are submitted on a monthly basis for work in place. Draws must be submitted in an AIA or equivalent format. When site work is required by the municipality, it is considered escrowed site work and cannot be released to the Borrower without the written authorization of the municipality. Typically, the municipality requires a Letter of Credit. This will be determined in the Township Escrow Agreement. Escrowed site work requires a formal release letter from the municipality prior to the release of funds. Retainage cannot be disbursed without a Waiver of Liens.
As a general rule, any advances from a construction loan are made after completion of and bank receipt of, the written inspection report with photographs. It is generally expected that the inspection process will take 5 business days or less once all required supporting information is received, and the advance is expected within this 5 business day period.
Construction funds will not be released without the authorization of the customer. The Borrower submitting the draw request to the bank constitutes an authorization to fund. If the contractor submits the draw to the bank directly, independent confirmation of the Borrower’s authorization must be obtained.
As outlined, there are many moving parts as you work through a construction project. Univest is an experienced construction lender ready to help you with your next project. If you’re thinking of building and/ or renovating, please reach out to a Univest Relationship Manager early in the process. They stand ready, willing, and able to help you through the process.
Univest Bank and Trust Co. is an Equal Opportunity and SBA Preferred Lender.