One way for a Bank to minimize commercial construction lending risk is to fund the construction loan after or at the same time that the developer’s equity contributions have been provided. Such “stage-funding” agreements allow a Bank to disburse loan funds to coincide with equity contributions at agreed-upon-intervals during the construction, marketing, and management phases of the project.
Stage funding agreements are common in syndicated commercial real estate projects. Syndicated arrangements often permit the developer to receive equity contributions from investors throughout the life of the project. If the project relies upon a syndication of investors, the Bank should assess the likelihood that the syndication will be able to raise the necessary equity.