The final draw on a commercial construction loan usually includes payment of the holdback as stipulated in the loan agreement. The draw is used by the borrower to pay all remaining bills. Before releasing the final draw and disbursing the holdback, a Bank should confirm that the borrower has obtained all waivers of liens or releases from the project’s contractors, subcontractors, and suppliers. Subcontractors are required to provide affidavits of payment (if requested) if they have been paid in full [TPC §53-085] The Bank also should obtain and review the final inspection report to confirm that the project is completed and meets the building specifications. The Bank also should confirm that the builder has obtained a certificate of occupancy from the governing building authority.
In addition, final disbursement should not occur until the Bank is assured that the construction loan can be converted to a permanent loan. For loans without a takeout commitment, the Bank should satisfy itself that all conditions typically imposed by permanent lenders for that type of project have been met. If the project has a pre-committed take-out lender, the construction lender should be sure that the construction loan documents are in order so that the permanent lender can assume the security interest in the project.
A takeout or permanent lender sometimes pays off only a portion of the construction loan because the conditional requirement for the borrower to obtain full funding has not been met. One example of a conditional requirement would be that the project attain a certain level of occupancy. Before the required level of occupancy is attained, the construction lender is subordinated to the takeout lender for the remaining balance of the construction loan. After occupancy levels are attained, the construction lender is repaid in full and the lien on the property is released.
Proper loan documentation is also essential when the project is to be purchased for cash. In this instance, the construction lender issues a release and cancels the note. For condominium projects, the construction lender may also provide the funding for marketing the individual units. The lender releases the loan on a unit-by-unit basis, similar to what occurs with a residential development construction loan.
If the commercial project is comprised of leased units, the lender must ensure that its position is protected if the builder is unable to obtain extended-term funding. A Bank may require tenants to enter into subordination, attornment, and non-disturbance agreements, which protect the Bank’s interests in the leases by acknowledging the right of the Bank to assume the landlord’s position if the borrower declares bankruptcy. To ensure that the Bank has full knowledge of all provisions of the lease agreements, the Bank also should require tenants to sign an estoppel certificate, which is a statement of material facts or conditions that cannot be denied at a later date.