Last week Rabbet sponsored the Mortgage Banker’s Association’s “Bank CRE Lending Report & CREF Ecosystem Outlook”. During which a panelist from a major US bank purported that construction lending is... Read More
Lenders: Be Mindful of the Documentation You’re Requiring
The terms “construction” and “loan” often evoke images of endless paperwork. Combine the two, and that paperwork can amount to a small forest. Significant documentation will always be a part of construction finance. It has to be. There’s a lot at stake, after all.
Here’s where things can get complicated: each party has their own goals with their own to-do lists. Their priorities often mean administrative tasks like paperwork can be pushed to the side or transferred from person to person. This issue then gets compounded if a team is trying to round up, say, all the receipts and invoices related to a project’s exterior and interior finishes from multiple vendors. These documents might have been sent to various personnel on the job site, and in multiple forms. One project manager may have a few emailed invoices, while another has photographed receipts texted to their phone. There may even be a worker or two who was given handwritten receipts to turn in as they were the only ones around when the subcontractor finished their work that day.
Emails, texts and handwritten documents are a recipe for project disaster as these documents are stored across multiple avenues and, oftentimes, with various individuals. Of course, these documents are essential to ensuring aspects of a project were completed correctly – on time and on budget. This often leaves project personnel scrambling at the last minute when documents are due and funds hang in the balance. As you can imagine, pulling people off a project to track down documents that might have been sent three months ago (if you can even remember where they were sent) is not ideal. Chances are, these people have better things to do. Like complete the project.
Lenders understand how tedious paperwork can be in construction finance, but that doesn’t make the requirement any less essential. The key to managing this onslaught of paperwork is to get organized. That starts by creating a concise schedule of what paperwork is due from which party and when.
Let’s start by breaking this down into digestible project components.
Every loan begins with an application. A typical loan application may require documentation concerning the developer’s:
- Current financial statements
- Tax returns
- Limited partnership agreement
- Tax and insurance deposits
Lenders need confirmation that the developer does, in fact, own the land or the property they tend to develop. Documents surrounding a property title may include:
- Tax certificates
- Financing statements
- Property survey
- A copy of the lender’s title insurance
The lender needs to know this site is free and clear for construction, which may include documents like:
- Government ordinances noting the property is zoned for its use
- Letters confirming the availability of utilities
- Approved subdivision plan
- Plans and specifications for the construction work
- Building permits
- Reports concerning water pollution abatement, geotech/soils and flood hazards
Naturally, clear terms must be agreed upon before funds can be secured and work can commence. These agreements will require items like:
- Consents and certificates from contractors, architects and engineers
- Contractor’s payment and performance bond
- Proof of insurance regarding contractor’s general liability, workers’ compensation and automobile
- Budget and cost breakdown for the project
Now that we’re ready to proceed with the loan, the lender and borrower must supply documents that include:
- A construction loan agreement
- Promissory note
- Deed of trust
- Environmental indemnity agreement
- Payment guarantee
- Performance guarantee
- Assignment of plans and construction contract
Securing financing is one thing; getting your vendors paid is another. For draw requests, lenders will typically require:
- Invoices and receipts
- Lien waivers
- Change orders
- Schedule of values
Naturally, every project is different and this is far from an exhaustive list of documents a lender may require during the construction loan process. This list does, however, illustrate how easy it is for important documents to get misplaced or overlooked, and for deadlines to pass.
Creating a detailed schedule that outlines who is responsible for supplying certain documentation and when those items are due can cut down on some of these headaches, but this can only take you so far. It doesn’t eliminate the paperwork or organizational problems that may still arise even after a borrower or contractor has been handed a clearly defined document schedule.
To eliminate these problems, savvy lenders turn to automation. Utilizing intelligent software to request, store and organize all your files in one streamlined location eliminates the grunt work associated with complex document delivery. Tools that leverage machine learning and automation not only allow all project personnel to instantly upload any relevant document they receive (and in any format!), but they act as accountability partners by sending alerts if documents are late, incomplete or illegible. This can save lenders countless hours when they’re reviewing submittals, trying to determine if anything is missing and, if it is, who is responsible for that documentation.
Construction loan management software can simplify this work for you, even pinpointing which personnel was assigned that task so you know exactly where to go if questions or concerns do arise – and we know they do from time to time. The construction loan process isn’t likely to get less complex any time soon. In fact, many lenders are requiring more documentation to determine creditworthiness, confirm reserves and minimize their risk in the age of COVID-19.
A smart software solution is ideal at managing the mountains of paperwork that are required for construction loans today. Rabbet was designed for these exact tasks. Our platform allows you to stay on top of your project finances by centralizing documents, digitizing the data, and automatically scanning for errors. . Tired of manual data entry and reconciliation? See how Rabbet can help Schedule a demo today.