Key Construction Loan Management Terms

One of the main problems we’ve encountered in our work is the general lack of familiarity and understanding of basic construction loan terms. To be honest, we understand why the uninitiated could get confused when faced with a broad body of cryptic terms such as retainage or holdback provisions.

To cut through the noise, we’ve put together a list of most common terms in construction loan management, ordered alphabetically for your convenience.

Before we get into the thick of things, let’s begin by defining construction loans.

What is a construction loan?

A construction loan (AKA building loan, development plan, construction mortgage) is a short-term loan, most commonly concluded in three years or under, intended to finance the construction of developments, both residential and commercial. This type of loan is designed to cover the total cost of building construction and often the land development itself. There are many types of construction loans, but the most common ones are land development loans (intended for the purchase of land and lot development for further construction or sale), commercial real estate construction loans, and residential construction loans.

Now that we know the necessary context lets get into the details. Here’s a list of key terms in construction loan management, accompanied by brief explanations.

• 3rd Party Inspection Report: A review of the progress of construction work conducted to ensure the project is progressing per the construction plan and within the defined budget and timeline. Check out this blog post for what to review within a third-party inspection report.
• Budget: Typically a spreadsheet detailing the progress of individual elements within the project and their accompanying costs. Budgets can also be called a schedule of values.
• Cash Equity Over Time Report: A breakdown of equity contributions and requirements per loan over a specified period, to ensure compliance with loan equity requirements.
• Certificate of Occupancy: A document certifying a completed construction project’s compliance with all relevant codes and regulations, and proclaiming it suitable for occupancy.
• Change Order: A document that defines any modifications to the original plans, stating the nature of the change, its cost, and any changes to the previous time frame, and serving as a supplement to the original contract.
• Construction-to-Permanent Mortgage (AKA CP loan): A type of loan that converts a construction loan into a permanent mortgage upon the completion of the construction project.
• Draw: A single installment in the process of disbursement of construction loan funds.
• Draw Disbursement: The process of advancing the approved funds, which can be done by several methods, such as ACH transfer, check by mail, or off-system payments.
• Draw Request: An aggregation of documents (invoices, receipts, change orders, lien releases, budgets) necessary for the planning of the installments in the disbursement of loaned funds.
• Draw Processing Report: A detailed overview of all activities related to construction draws over a specific period, including approval dates, processing duration, fund withdrawal dates, etc.
• Holdback Provisions: A portion of the loan held back by the lender via an escrow account intended for specific projects, usually home improvements.
• Interest Reserves: A specific segment of borrowed funds intended for the payment of loan interest to the lender.
• Interest Reserves Report: A breakdown of interest activity, including the used and remaining amount of funds in the reserves account and their relations to the overall loan funds.
• Invoices and Receipts: Documents indicating the costs for the services of contractors and suppliers.
• Lien release: An agreement meant to ensure that the contractor is paid in full and on time.
• Lien Releases Report: Tracks the status of conditional and unconditional lien releases by every individual invoice resulting from the project over a specified timeframe.
• Liquidated Damages: An agreement that defines the amount of compensation paid to an injured party in case of a breach of contract.
• Loan Origination: The full scope of procedures in the process of obtaining a loan, from loan application to the final disbursement of funds.
• Loan Payments by Division Report: A breakdown of all draw requests sorted by project and type of cost over a specified period, intended to prevent any fraudulent activity.
• Portfolio Overview Report: An overview of portfolio status that contains data such as pending draws, outstanding loans, total loan commitments, etc.
• Practical Completion (AKA substantial completion): formal completion of all works defined by the contract and certified by the contract administrator.
• Project Level Report: A breakdown of crucial project elements gathered for decision making, timeline maintenance, and risk mitigation.
• Retainage: A percentage of funds withheld by the lender with each draw as a precaution against various risks to the funded project.
• Retainage Report: An overview of the retainage status and withheld funds for every line item.
• Stored materials: Construction materials occasionally included in the draw request relating to the period of purchase and delivery.

Now that you have key terms defined, head to the blog to learn more about each of these topics.