A measure of supply and demand and represents a period (months or years) of time that it takes to convert vacant real estate space into stabilized occupancy. As it relates to residential Acquisition and Development (A&D) financing, the absorption period is the number of months it takes to sell off all the lots within the development.

• Cost Approach
  • The costs of what it would take to build the structure including the land value 
• Sales Comparison Approach
  • Analyzing comparable properties in the market that have recently sold (for example: price per room key for hotel, price per sq. ft. retail/office, price per unit on multi-family)
• Income Approach
  • Capitalization (Cap) Rate Method
    • Net Operating Income/Cap Rate- used when valuing income producing properties that have a stabilized income.
  • Discounted Cash Flow (DCF)
    • A valuation method that estimates the value of an investment using its expected future cash flows. DCF analysis attempts to determine the value of an investment today (Net Present Value), based on projections of how much money that investment will generate in the future. Most often used when financing the development of residential lots or the construction of residential housing where the number of units developed or constructed is equal to or greater than 5.
• Gross rent Multiplier (GRM)
  • The GRM functions as the ratio of a property’s purchase price or market value divided by gross rental income. Investors use the GRM to compare properties and determine which property may be the better investment. The lower the GRM compared to other properties, the better the investment. The lower GRM often indicates the property is generating more gross income to pay for itself faster.

The Borrower assigns (assignor) their present and future rights in the construction contract executed with the contractor to the Bank (lender). Although the contract has been assigned to the Bank, per the ACC, the Bank will not exercise its rights under the assignment agreement unless there is a default committed under the loan documents. Please note, the ACC requires the signature of the Borrower and the Contractor. It is highly recommended that this document be discussed with both parties prior to the closing to address any questions or conflicts.

In the event of a borrower default, without this assignment in place, the Bank legally could not assume the responsibilities as the Borrower under the construction contract and keep the construction moving forward.

An assignment executed by a Borrower (assignor, grantor) at loan origination that grants the Bank (lender) a continuing security interest in all rights and title to the rents generated from the property that is collateral for the loan. Like an Assignment of Construction Contract, the Bank will not exercise its rights under the Assignment of Rents unless there is a default committed under the loan documents.

The construction loan software system that Capital City Bank (CCB) utilizes for managing the draw process for all construction loans. Both the credit administration staff and lending staff have access to the Built system.

An insurance policy that insures buildings, structures, materials, equipment, and supplies on a construction site. All Parties listed on the policy are insured against damages or losses such as a fire, storms, hail, lightning, high winds, vandalism, contamination, explosions, and collision. Proof of BRI, liability and workmen’s comp insurance is required on all residential and commercial construction loans. The required coverage must be equal to or greater than the costs to build the project. The property address, amount of coverage, contractors name, CCB listed as loss payee, policy date, and expiration date are required. Construction Loan Administration (CLA) is responsible for the oversight of all Builders Risk and liability policies on all residential and commercial construction loans.

Is an official approval issued by local government that allows your Borrower or the contractor to proceed with a construction or remodeling project on the property being mortgaged. The permit is intended to ensure that the project plans comply with local standards for land use, zoning, and construction.

A CO is issued at the City or County level and serves as proof that the building structure complies with all building code requirements and specifications that were submitted when the original permit was issued. 

A written amendment to an existing construction contract after the effective date that alters the work, the contract sum, or the contract time. CCB requires that all change orders be executed by both the contractor and borrower, submitted to CLA at the time the change is requested, and funded at the Bank’s request if the modification increases the costs to complete the project.

Also known as contract bonds, are a type of surety bond that guarantees the payment, performance, or bid of a project. The most common types that lenders are likely to encounter include:

• Payment Bond
  • Issued on a project often in conjunction with a performance bond. The payment bond guarantees that all supplies, sub-contractors, and laborers used on a project will be paid by the contractor and the contractor will ensure no lien is placed on the project.
• Performance Bond
  • Issued to guarantee the performance on an obligation under a contract or other construction agreement. The bond guarantees that the job will be completed according to the specifications stated in the contract and in accordance with the proposed schedule.

The Bank highly recommends when financing a large-scale project where there is no prior experience with the contractor or the Borrower, that a payment and performance bond be required as a condition of financing the project.

The review of a construction contract and approval of the contractor will be added as a workflow within Abrigo. The contract must be reviewed by the lender and CLA and the contractor approved by credit administration or CLA prior to closing a commercial or residential construction loan. The 4 most widely used commercial construction contracts are:

• Lump-Sum Contracts
  • The project scope and costs are established upfront. Any changes post effective date would require change orders.
• Cost-Plus-Fee Contracts
  • The contract doesn’t define the scope or fixed costs up front. The contractor bills the owner as work is completed plus a fixed fee. The use of cost-plus contracts is prohibited at CCB. The inability for the Bank to verify the sufficiency of the Loans in Process (LIP) to ensure project completion, significantly elevates the Bank’s credit risk.
• Guaranteed Maximum Price (GMP) Contracts
  • Most often used with design-build. The contractor must absorb any costs that exceed the GMP unless the owner modifies the scope of the project.
• Unit-Price Contracts
  • Often used on projects where the scope isn’t measurable until the work is performed. The pricing is quantified on a per unit basis.

Note: Please note that the contractor’s use of a Lump-Sum or GMP construction contract is required by CCB.

The subject agreement is a tri-party agreement executed by the Borrower, Contractor, and Bank on all commercial construction loans. The purpose of the CCLRA is to outline the terms and conditions by which CCB will disburse funds for draw requests during the construction process. The agreement is detailed and addresses critical information regarding the Bank’s construction funding process including:

• Inspection requirements and fees, 
• Retainage requirements, 
• Change order policies, 
• Survey requirements, 
• Insurance requirements, 
• Notice to owners and lien policies,
• Disbursement options, 
• Notice of Commencement, and 
• The Loans in Process (LIP) account.

Lenders are encouraged to review the CCLRA with the Borrower and contractor prior to closing. Due to the agreement being tri-party, the borrower, contractor, and their legal representatives may have questions or concerns regarding this agreement. Why? The borrower and contractor could voice concerns that the verbiage within the CCLRA is contradictory with language in the construction contract. If this occurs, it is helpful to remind all parties that the construction contract is between the borrower and the contractor. CCB will not be a party to the terms of the construction contract unless there is a loan default. If a default occurs, the Assignment of Construction Contract enables the bank to step in and take decision making role as it relates to the construction contract.

CLA handles the builder/contractor approval process, the construction funding process (draws), monitors Notice to Owners (NTOs) and liens, verifies and tracks builders risk insurance coverage, and quotes construction loan payoffs and lot release amounts as collateral is being released from the Bank’s mortgage.

• Draw Down Construction Line
  • Funds can only be drawn and fully funded one time from the line for one specific real estate project.
• Guidance Line of Credit
  • These facilities are originated for larger reputable homebuilders located within the CCB footprint and originated in line amounts of no less than $750,000. The line features a revolving endorsement which enables the builder to close multiple construction loans secured by multiple real estate parcels during the term of the loan. See Builder Finance Lending for more detailed information on this loan type.

A project contingency (hard costs) for construction is a specific amount of money, usually a percentage of the total cost, that is set aside in case any unforeseen or extra costs arise during the construction process. Developers will also include soft costs contingency in their budgets when submitting to the Bank for review. When calculating the LIP for a construction loan closing, the amount of money allocated for the hard cost contingency should be included in the calculation.

The contractor shall give to the owner and Bank (if financed) a Final Payment Affidavit that states all work to be performed under the construction contract has been fully completed, and all lienors under the direct contract have been paid in full, except those listed on the affidavit as not being paid in full and the amount’s they are still owed. CCB will not fund the final draw including retainage without receiving an executed Final Payment Affidavit.

The Bank will require any sub-contractor, who is 1) performing work on a construction project and 2) has filed a Notice to Owner on a CCB financed construction project, to execute and provide the Bank with an interim affidavit (lien waiver or release) stating that the (sub) has been paid on the project up to the date of the previous pay period.

The date certified by the architect when the work is sufficiently complete in accordance with the contract documents, the CO has been issued, and the owner may occupy the property for the use for which it is intended.

A project delivery method where the owner hires a single firm or company to handle both the design and construction of the building.

Developers typically earn a percentage of the profits of the real estate projects that they develop. Developer fees are typically 5-10% of total project costs. When financing new construction, in most cases, CCB will allow the developer fee to be counted toward the borrower equity requirement, if the borrower and developer are related entities.

The Development Order (DO) is the order the City or County issues once the plans or requests for development have been approved. Most activity involving new construction, additions, renovations, demolitions, lot clearing, signs, trees, and other site improvements, including accessory structures, require a DO. CCB lenders are required to obtain a copy of the development order prior to closing on any land development or construction loans.

A construction draw schedule is a financial schedule used by contractors to identify specific completion points or milestones of a construction job.  The schedule allows the Bank to see the progress, hire an inspector to validate the progress and then release funds to the contractor to keep the project moving forward. 

CCB utilizes 2 schedules:

• A1A Application for Payment (G702) (G703)
  • AIA billing form or pay application with the contract sum broken down into a schedule of values. This draw schedule is preferred when funding commercial construction projects and residential A&D.
• Percentage of Completion
  • The predominant draw schedule used for funding 1-4 family residential construction.

A legal instrument that grants property access to people or organizations who otherwise hold no ownership interest in your borrower’s land.  The most common easement is a utility easement, which would allow gas, water, and phone companies to go onto the property to repair or maintain any infrastructure. The 6 primary categories of easements are:

• Utility Easement
  • Utility easement gives the utility company the right to use your property for the particular purpose of maintaining the utility lines or installing the utility lines on your property. 
• Private Easement
  • Grants land use to certain private individuals with no transfer of legal ownership. (For example: Gives your neighbor access to your driveway)
• Easement by Necessity
  • Because your neighbor has no other option but to drive on your road to get in and out of his own home, you cannot legally deny him that access.
• Easement Appurtenant
  • If you bought a beach house where the only path to a public beach ran through your property, an easement appurtenant may dictate that you permit your next-door neighbors to use that walkway. (Typically permanent)
• Easement by Prescription
  • This type of easement comes into effect when one party has used the other’s property for a particular purpose over an extended period, with or without permission. 
• Easement in Gross
  • A right allowing an individual or an entity to use someone else's land/property. For Example: Like the private easement where you give your neighbor access to your driveway with no transfer of legal ownership. However, if your neighbor sells their home, the easement in place doesn’t automatically transfer to the new owner. (It is not permanent)

Most easements of record are affirmative easements which allows the holder of the easement the right to do something related to a property. However, on occasion, the title policy may refer to a negative easement. A negative easement is a promise not to do something with a certain piece of property, such as not building a structure more than one story high or not blocking a mountain view by constructing a fence.

Lending staff are required to review the easements cited on Schedule B of the title commitment and confirm that none of the language could compromise the Bank’s collateral position. The bank requires on any larger commercial and residential construction loans that all title work be reviewed by Bank counsel. Refer to the Title Insurance article for more information.

An ERP is required for development or construction activities to prevent flooding, protect the water quality of Florida's lakes and streams from stormwater pollution, and protect wetlands and other surface waters. This type of permit is required if a development in Florida involves any of the following construction activities:

• Dredging and filling in wetlands or surface waters
• Constructing flood protection facilities
• Providing stormwater containment and treatment
• Site grading
• Building dams or reservoirs
• Other activities affecting state waters

CCB lenders who are financing land development and commercial construction projects in FL are required to obtain a copy of the ERP from the borrower prior to closing.

Environmental permits issued in Georgia are issued by the Environmental Protection Division (EPD) of the Georgia Department of Natural Resources and should be obtained prior to closing.

Fee simple is a legal term used in real estate that means full and irrevocable ownership of land and any buildings on that land. Fee simple is the highest form of ownership without any limitations or restrictions other than local zoning ordinances. 

In architecture and building engineering, a floor plan is a technical drawing to scale, showing a view from above, of the relationships between rooms, spaces, traffic patterns, and other physical features at 1 level of a structure. 

Flood certification is a process used to determine whether the property falls under a flood zone that is published by Federal Emergency Management Agency (FEMA). A flood certification should be obtained on any improved property CCB is financing. In addition, certifications should be obtained on real estate projects that are proposed construction.

A future advance is a clause in a mortgage that allows the borrower to receive additional funds after the loan is initially disbursed. Please note, when originating future advance loans, credit committee approval is required if the borrower’s aggregate debt with CCB exceeds the lender’s lending limit. In addition, with a future advance, an update to the title work is required along with a modification of mortgage.

From time to time the lender or Credit Administration will require the borrower to fund an interest reserve at closing. An interest reserve account is a credit enhancement considering the construction project is non-income producing while under construction or in lease up. The interest reserve amount should be identified on the HUD and collected at closing. The interest costs during construction are funded from the Bank controlled interest reserve account by Construction Loan Administration as the interest comes due.

The ownership interest that the landlord or lessor maintains in a property under a lease with the rights of use being conveyed or granted to a tenant or lessee.

When closing construction loans, the Bank requires that the funds needed to complete the project per the contract be identified on the HUD as LIP funds and collected at closing. LIP monies are most often funded from loan proceeds and the equity required from the Borrower. The Bank’s credit risk is mitigated when lending staff ensure that the money needed to fund the construction contract and the interest costs are collected at closing.

When financing the construction of a new subdivision or the acquisition of multiple residential or commercial lots, the lender should prepare a lot release schedule that provides the following: 

• Borrower Name
• Loan Number 
• Date of Release
• Subdivision Name
• Detailed list of lots by lot number and lettered block, and 
• The amount of money required to be paid to the Bank per lot (lot release amount) to release the lot from the mortgage. 

Note: The LRS is particularly important when you have multiple phases to a development, more than one takedown, and different lot sizes with varying release amounts.

Once a release amount is requested, it is the responsibility of CLA to quote the release amount and update the schedule to document the date of release and the amount of money collected. The proper tracking of partial releases is critical to the Bank ensuring that we can document what collateral remains under our mortgage at any given time and what the bank’s loan to value position is.

Refer to Builder Finance Lending for an example of a lot release schedule. 

Required to be completed and signed by the Borrower and Bank when originating a loan to finance a new construction start or a new lot acquisition that is being brought under a builder guidance line of credit.

Under Florida Construction Lien Law Statute 713, a NOC is a form publicly filed in county records to signify that a construction project is beginning. The form is prepared by the closing agent and contains information identifying the parties involved with the project, such as the property owner, the contractor, the lender, and the surety, if any. The NOC is required to obtain a building permit if the project contract sum exceeds $2,500. In addition, the NOC must be posted on the jobsite. NOCs in Florida automatically expire 12 months from the initial filing date.

Critically important to the Bank, if a NOC was filed prior to the Bank’s loan closing and the recording of the Bank’s mortgage, it is imperative that a new Notice of Commencement be filed at closing and the prior NOC be terminated. If that process doesn’t occur, then the Bank runs the risk of its mortgage being inferior to any monies unpaid to sub-contractors that performed work under the prior NOC.

To minimize this type of risk to the Bank, Lenders should perform visits to construction sites prior to closing to ensure that work hasn’t commenced prior to your closing. If work has commenced, follow the proper protocol, and make sure the closing agent takes the necessary steps to protect the Bank’s collateral interest and collateral position.

An owner terminates a notice of commencement by executing, swearing to, and recording a notice of termination. A NOT is recorded per Florida statute when one of the following two events occurs:

1. Construction completion or 
2. Construction ceases before completion and all lienors have been paid in full.

 A Notice of Termination is effective to terminate the notice of commencement at the later of 30 days after recording of the notice of termination. However, most title insurance companies will waive the 30 day waiting requirement upon receipt of a signed affidavit from all subs (performing work on the project) stating that they have been paid for all work performed up until the date the Notice of Termination.

An NTO is a written notice prescribed by Florida Statute (713.06) that officially advises the owner of a construction project that the sender, usually a subcontractor or supplier not dealing directly with the owner, is looking to the owner to be sure the sender is paid before payment is made to the contractor on the job. The statute requires that a Notice to Owner be served on the owner not later than 45 days from the date of first labor, services, or materials delivered to the job site as a prerequisite to secure the sender’s right to lien the property in the event the sender is not properly paid for work done at the property. 

CLA assumes the responsibility of clearing NTO’s on construction projects financed by CCB.

Planned unit development or “master planned community” is an area of land that is planned and developed as a single entity or in approved stages with uses and structures substantially related to the character of the entire development, or a self-contained development in which the subdivision and zoning controls are applied to the project rather than to individual lots.

A plat is a map of a particular neighborhood, subdivision, or tract of land, detailing where the original surveyor established property lines and separated each parcel or lot. Useful information a plat provides includes:

• Dimensions of a lot
• Directional positioning of a property
• Public and private roads
• Easements on the land
• Location of utilities and important infrastructure like sewer systems and water lines
• Notable environmental features located on or near the property

There are several types of plats. The most widely used plats are detailed as follows:

• Boundary Plat 
  • Generally used when assembling multiple parcels of land, tracts, or lots into a single parcel for development purposes. This type of plat primarily shows the boundary lines.
• Preliminary Plat
  • A drawing of a proposed subdivision showing the general layout of streets and alleys, lots, blocks, and other elements of a subdivision consistent with the requirements of the local permitting authority. The preliminary plat shall furnish a basis for the approval or disapproval of the general layout of a subdivision. The Bank will require the borrower to submit the approved preliminary plat prior to closing on a Residential A&D loan.
• Final Plat 
  • A final plat legally establishes the division of property into separate parcels or tracts. A final plat shows lot boundaries, street dedications, easements, and any other divisions of land. The final plat is a recorded document and must be received and approved by the Bank on a Residential A&D loan prior to the contractor and borrower receiving the final draw. 
• Replat
  • A replat serves to vacate, partition, or reconfigure lots or easements within a recorded existing subdivision to increase or decrease the number of lots.

Retainage is the withholding of a portion of the funds that are due to a contractor or subcontractor until the construction project is finished and the requirements for the final draw have been met. (See CCLRA located in netinterest/Construction Loan Administration). Retainage is meant to serve as a financial incentive and an assurance that the contractor will complete the project in a satisfactory manner. CCB requires a 10% retainage on all commercial construction financed projects and 5% on all 1-4 family residential construction financed projects. Any exceptions made to the policy must be approved by Credit Administration. The retainage amount is calculated utilizing the construction contract or hard costs associated with the project and typically excludes any soft costs.

A statement furnished by the contractor to the architect or engineer reflecting the portions of the contract sum allotted for the various parts of the work and used as the basis for reviewing the contractor's applications for progress payments.

Per the Federal Emergency Management Agency (FEMA), a SFHA is defined as the area that will be inundated by the flood event having a 1-percent chance of being equaled or exceeded in any given year. The 1-percent annual chance flood is also referred to as the base flood or 100-year flood. Clients who own improved real estate located in a SFHA are required to obtain flood insurance. 

The labeled zones for properties located in SHFA’s include:

• Zone A
• Zone AO
• Zone AH
• Zones A1-A30
• Zone AE
• Zone A99
• Zone V
• Zone VE
• Zones V1-V30.

Improved real estate located in Zones B and X are considered to have minimal to a moderate chance of a flood event and are located outside of the SHFA.

A land survey maps out the shape and boundaries of a piece of land. It’s an exact drawing of the dimensions of the parcel, as well as any physical features, both natural and manufactured. The most widely used surveys CCB lenders will require or will encounter are listed below. Please note that any surveys required by the Bank must be certified to Capital City Bank, the title agent or attorney, the title company, and the Borrower.

• Boundary Survey
  • A surveyor combines field research and record research to identify and confirm a parcel’s corners and boundary lines per state law. Boundary surveys may include easement lines—right(s) of others over the property; encumbrance on the property—and encroachments which are all important.
    • A boundary survey is commonly requested when purchasing and financing a residential lot.
• Mortgage Survey
  • A survey that determines land boundaries and building locations. Mortgage surveys are required by title companies and lending institutions when they provide financing to show that there are no structures encroaching on the property and that the position of structures is generally within zoning and building code requirements.
• ALTA Survey
  • Developers, builders, real estate firms, and lenders use ALTA surveys to identify improvements, right-of-way, easements, boundaries, and restrictions on a piece of land. This comprehensive survey documents all the characteristics of a site and follows strict national standards established by the American Land Title Association (ALTA) and National Society of Professional Surveyors (NSPS) to ensure lenders receive consistent information.
• Topographic Survey
  • A survey often requested by engineers, developers, or government agencies, that uses aerial and/or ground-based methods to document natural and man-made features on property like elevations, contours, streams, trees, utilities, and building structures.
• As Built Survey 
  • Commonly used in new commercial construction. A survey that is performed after a construction project is completed, confirming that the structures, utilities, and roadways proposed were built in the proper locations authorized in the Site Plan.
• Foundation Survey
  • A survey conducted to collect the positional data on a foundation that has been poured and is cured. This type of survey is obtained to ensure that the foundation was poured in the location authorized per the site plan. When financing new commercial or residential construction, CCB requires a foundation survey prior to funding the initial construction draw.

Note: Due to there being differences in the permitting requirements, the survey requirement is waived on 1-4 family residential construction loans originated within the Northern Arc. In lieu of obtaining surveys, however, the Borrower is required to sign A No Survey Acknowledgement and Hold Harmless Agreement which releases CCB from any liability if the borrower were to incur any negative consequences from not obtaining a survey.

• Elevation Certificate
  • A survey performed when a parcel of land is located within a flood hazard area (SFHA) per the FEMA maps. The surveyor will determine the elevations for the finished floor, garage, accessory structures, and adjacent building grades. This information is then put on a flood elevation certificate to determine the amount of insurance coverage needed and costs, as determined by an insurance agent. 
• Subdivision Plat
  • As previously discussed under preliminary and final plats, a survey of a parcel of land indicating the creation of new lot/parcel lines, retention ponds, and roads. Bankers will rely on these survey’s when financing proposed residential and commercial subdivisions.
• Wetlands Delineation Survey
  • A survey that is completed to mark the boundary of the wetlands on a parcel of land for the purposes of federal, state, and local regulations. The boundary of the wetlands is determined by observing the soil colors, vegetation, erosion patterns or scour marks, hydrology, and morphology. The presence of wetlands can have a significant impact on project costs and the allowable density within a development and are most used by developers, engineers, and permitting authorities.