When prospecting Builders as new clients for new home construction loans and lines of credit, consider the following: 

• Membership in local builders associations
• Membership in local residential realtors association
• Participation in Sponsorships and/or volunteer in builder sponsored events such as local Parade of Homes, Golf Tournaments, and Home and Garden Shows
• Review third party reports such as:
  • Weekly CDI Report 
    • List of new construction loans originated by builders in Atlanta, GA (northern arc).
  • Money Market Trends Report for Florida markets
    • Provides monthly sales information by builder and trends in the local housing market including new home sales, # of sales by subdivision, and average sales price.
• Review the online residential permits issued to builders in the community. 
• Review land use permits applied for online to identify land developers, builders, and new projects being permitted in your market.
• Visit subdivisions where homes are under construction and identify the realtor marketing the property and builders who are actively building within the subdivision. 
   

Prior to the origination of a construction loan, the builder constructing the new home financed by CCB is required to be approved by the Construction Loan Administration (CLA) Department. Click here for a list of Accepted Builders.

On GLOC's or A&D loans, builder approval requests are approved by both CLA and the Credit Committee.

Required documentation to be submitted for builder approval includes:

• Builder Data Sheet
• Contractor Verification
• Contractor License
• Proof of Liability Insurance
• Resume to show builder experience 

CLA pulls a business credit report to verify payment trends are satisfactory and that there are no outstanding liens or judgments. It is critically important in land development financing, that both your borrower and the designated site contractor have documented and verifiable experience in this line of work. 

Prior to requesting a loan or line of credit for a builder, lenders should do the following:

• Perform site visits to inspect the contractor's prior builds to determine construction quality,
• Review the local Clerk of the Courts website, CDI (Atlanta), or other third party reports that track unpaid liens, 
• Check Silverlake and contact CLA to determine if we have any history with the builder, 
• Review Metro Market Trends (FL), CDI (Atlanta) or other reports that show sales activity by builder to confirm market acceptance of the builder’s product, 
• Obtain from the builder a list of lenders who currently service the builder's financing needs where you can clearly define what is creating the financing need that is being requested of you! 

Possible reasons for a GLOC or A &D loan request include:

• Builder is replacing a current lender 
• Increase in builder’s sales volume
• Client is developing or building in a new subdivision or market.

When considering an A&D loan in a location where the lender is less familiar, development activity in the area is limited, the site is out of market, and/or the loan request has some size to it, obtaining a feasibility study is highly recommended. 

A feasibility study will address market feasibility (lot prices, demand, supply, absorption rates for lots), include a cost and cash flow analysis, identify the market demographics, and provide current industry trends.

Land Acquisition Only 

• Loan amount restricted to the lesser of 65% of cost or appraisal.
• Loan to cost requirements requires our borrower to provide a minimum of 35% on the land acquisition request.

A&D

• Loan amount restricted to 75% of the value of the project based on an as developed value. 
• Loan to cost requirements require our borrower to provide minimum of 25% equity upfront.
   

The loan structure requires the origination of a draw down line of credit, with floating rate financing tied to a specific margin (1% or higher) above the JP Morgan/Chase Prime Rate. Floor rates are established at origination and renewal. Refer to the Bank Rates on netinterest for the most up to date information. 

Maturity dates are established based on the size of the project run from 12-30 months on average. Loan fee requirements could vary pending a final loan decision, typically a 1% fee on the initial $1MM advanced and .50% on any amounts funded above that threshold. Interest is billed monthly and assessed on the amount of funds advanced under the line at the time of billing. 

A&D loans are managed by CLA. The funding of these lines is administered in the form of draws. The amount of the draw to be funded is established based on a review of the inspections that are performed on site by bank approved inspectors. Unlike residential construction loans where draws are funded based on a percentage of completion schedule, A&D loan draws are funded utilizing an AIA Schedule of Values (see Schedules tab). On A&D projects, the loan amount and the number of subcontractors involved is typically larger which results in higher costs per line item. As such, the use of an AIA Schedule of Completion is a more desirable funding schedule.

Note: It is highly recommended that lenders make periodic visits to the site throughout the development process, monitor any changes to the contract status of the collateral, stay informed on market conditions, and monitor for any changes made to the original plans and specs.
 

Repayment of the A&D loan is achieved through principal reductions made to the loan as lots are sold. Repayment can occur on a one time basis if the entire subdivision is sold to a single buyer with a specified closing date.  Most A&D loans don’t have a single buyer with a one-time take down schedule. Usually A&D Loans are originated to a builder/developer who has an existing relationship with the Bank. The borrower will subdivide the property (the A&D) and utilize their existing GLOC with the Bank for building homes (presold or spec) on the subdivided lots. The builder will take down lots over the loan term, sequentially pay down the A&D from lot release amounts, and fund the construction of the homes under the GLOC.  

Note: All required release amounts or payoffs are to be quoted and managed by CLA.

Collect the required permits prior to closing to include:

• Development Order that shows approval from the local permitting authority
• Environmental Permit
• Preliminary plat (confirm consistency with plans and specs approved in underwriting)
• Prepare a lot release schedule (see Schedules tab)  
  • The release schedule should identify lot and block # and specify the required lot release amount. 
  • The release schedule should accompany the documents submitted by the lender to CLA at origination for monitoring purposes. 
  • The lots within a proposed development can vary in size, as such, you could have multiple release prices to collect over the loan term.
• Obtain the necessary documents from borrower to obtain contractor approval from CLA.
• Obtain all final plans and specs associated with the development.
• Obtain any contracts associated with the site contractor, major subs and buyer’s on presold subdivisions. 
  • The contract associated with the site development must be a Guaranteed Maximum Price Contract (GMPC). 
  • The acceptance of Cost plus Contracts are highly discouraged and will require approval from Credit Administration.
• Confirm that your Loans in Process (LIP) account is adequate.
  • When originating an A&D loan, a LIP line item should be recorded on the closing statement, in an amount of money sufficient to fund the completion of the improvements within the subdivision (per your costs breakdown and construction contract). 
  • If the loan is approved with an interest reserve requirement, the LIP should specifically disclose the amount in the LIP that will be allocated to the interest reserve. 
  • CLA needs to have that information available for monitoring purposes.
• Equity Requirements: 
  • When closing, if the borrower has a required equity requirement per the loan approval, and the equity requirement is being provided through other sources besides the equity in the land, the lender is responsible for documenting the equity provided by the borrower by submitting previously paid invoices (often pre-closing soft costs) or bringing cash to closing to supplement the LIP account. 
  • The practice of borrowers providing equity post loan origination is prohibited per CCB credit policy on A&D loans. 
• Title Commitments:
  • Issued title commitments and surveys on all A&D loans should be reviewed by Bank counsel prior to closing for accuracy. 
  • The title endorsements at a minimum should include the following: 
    • Survey endorsement
    • Variable rate endorsement
    • Environmental endorsement. 
  • If the A&D loan has a revolving feature (most don’t) you need to obtain a revolving endorsement. In Florida, a Florida Form 9 endorsement is required on all real estate loans closed.
• Special Provisions:
  • Insure that the special provisions required per the loan approval are accurately disclosed in your promissory note.
     

The following are possible complications that can arise with your A&D loan:

• Cost overruns 
  • Often avoidable when using Guaranteed Maximum Price Contract (GMPC) 
• Delays in development due to weather conditions 
  • You want to understand any penalties placed on your client for delays if the development is presold
• Borrower default or Site Contractor default
  • All contracts are assignable to CCB at closing. 
  • In the event of default, the assignability enables the Bank to hire a contractor to step in and complete the work if necessary.
• Single buyer of lots defaults on contract
• Changes in market conditions related to residential housing industry could impact lot values, absorption rates, and sales activity 
• Environmental Conditions (usually soil related) that could require the development to be re-permitted
   

Loan to value (LTV) restrictions are subject to change so always refer to current credit policies or your final credit approval. 

The typical LTV requirements on GLOC's are:

• 80% on construction starts that are presold 
• 75% on spec homes 

On higher priced homes where the loan amount exceeds $1 million, the equity requirements are higher and the loan to cost and loan to value ratio requirements more restrictive. The loan to cost should not exceed 90% of builders cost including the lot costs.  

Note: If the lot that is being built on was acquired within 12 months of the closing of the construction loan, the lower of the original cost or the current appraised value should be used in your cost analysis.

The loan structure requires the origination of a revolving line of credit, with floating rate financing tied to a specific margin (1% or higher) above the JP Morgan/Chase Prime Rate. Floor rates are established at origination so refer to your latest rate sheet for the most up to date rate information. Maturity dates are established at one year from line origination. Loan fee requirements could vary pending a final loan decision, but typically would be established at an amount of a 1% per construction start or 1% per lot advance funded under the line of credit.

Note: At renewal, if you determine that your borrower is not utilizing the line of credit you should 1) assess if there is a need to keep the line open and 2) if renewing, collect the 1% fee in full when closing on the renewal rather than per start. This ensures that CCB gets paid for having the line open and encourages the builder to utilize the line during the renewal period. GLOC’s carry high servicing costs, as such the Bank should be compensated accordingly.
 

GLOC’s have a revolving endorsement feature that enables a builder to originate multiple construction loans under a master line of credit. A master line of credit will be assigned a loan number for tracking purposes.  The construction loans originated under a construction line are called construction starts and any lot loans originated under a construction line are called lot advances or lot loans.

Construction starts and lot loans are assigned their own individual loan numbers and will have individual loan closings and individual payoff calculations when originating or paying off the loan.  It is critical that a lender and assistant when funding a new construction start or advancing funds for a new lot calculate the aggregate amount advanced under the guidance line to verify funds are available. The Bank assumes additional risk when a GLOC is overfunded. Remember, your title insurance only protects the Bank up to the master line amount. Moreover, your personal or corporate guaranty protects the Bank up to an amount equal to the master line amount.

For accounting purposes, the calculation of the aggregate amount advanced under a line at any one time is equal to the aggregate amount that is originated in construction starts plus aggregate amount originated on individual lot loans added together. For example: If we have a $1M line and two construction starts are outstanding under the line with each having a high credit of $250K and a lot loan was funded for $60K, then there would be $560K drawn on the line and $440K available. It doesn’t matter how much money is drawn at any one time on and individual construction start, you always account for the high credit available on each of the construction starts.

To originate a GLOC a minimum of one property must be mortgaged and insured at the initial closing. At the initial closing, the title policy, doc stamps, and intangible taxes are paid on an amount equal to the high credit available on the master line ($1MM in our example above). As new properties are brought in under the line, the title agent or attorney will issue an endorsement to the title policy, modify the mortgage and collect the fees assessed for modifying the title policy and mortgage.  However, no additional doc stamps or intangible tax will be assessed on starts or lots brought under line during the course of the loan unless the line is increased to an amount that exceeds the original $1MM.

During the loan term, property can be added to the mortgage by way of modifications and title endorsements to the original mortgage and property can be released from the mortgage by way of partial releases to the mortgage. The modification of any mortgage under an existing GLOC is to be closed by the title agent or attorney who wrote the initial title policy and who closed the original line. Failure to comply with this requirement will result in your borrower having to pay higher title insurance costs, doc stamps, and intangible taxes than necessary. The only exception to this is when the borrower or Bank determines that the existing title agent or attorney is no longer acceptable, then a new agent or attorney will be hired, the old line retired, and a new line will be originated with the borrower paying closing costs as if the line was brand new.
 

Loan and lot payoffs are to be quoted by Construction Loan Administration to ensures that all principal, interest, monitoring and inspection fees are properly quoted/collected and the Construction Loan Administration software system is properly updated.

Lenders must include the following in the Abrigo Credit Memo when originating/renewing a GLOC: