Construction lending provides a developer with funds to build improvements and time to lease or sell the space built. A Bank must properly assess the developer’s ability to complete the construction project within specified cost and time limits. When evaluating the likelihood that a proposed construction project will be successful, a Bank should assess of the following risks:
•The project is not completed by the agreed take-out date which voids a permanent funding commitment.
•Cost overruns occur and the cost exceeds the take-out commitment or sale price.
•Inclement weather, material or labor shortages, or substandard work that must be redone to pass inspection, or delayed in completion, increased interest expense, causes the total cost of the project to exceed the original budget.
•The completed project is an economic failure, because of among other things, deteriorating credit strength and softening demand due to an economic downturn or over supply.
•Progress payments are diverted by the developer and suppliers and subcontractors file mechanics’ liens for non-payment of debts.
•Changes in tax legislation, zoning and/or environmental regulation can adversely affect the value of the project.
•The general contractor files for bankruptcy before completing the project.
•Labor disputes occur or a major supplier or subcontractor fails to deliver goods and services.
•There is an uninsured destruction of completed work or work in process.