by Robert A. Ballinger, Attorney at Law

The CLA (construction loan agreement) is often likened to a road map or a blueprint. It should contain all the terms and conditions of the construction loan necessary to bring the project to fruition while simultaneously protecting the bank’s interests. A good construction loan agreement clearly spells out the terms and conditions under which the bank will fund construction, as well as the terms and conditions that, if not met by the borrower, entitle the bank to halt funding and implement certain remedies. The goal of the agreement is to set the guidelines that must be met in order to achieve the successful lien-free completion of the construction of the subject project.
Paramount to accomplishing that goal is having the borrower and lender agree on the definitions of terms found throughout the construction loan agreement. Without the terms clearly defined up front, differences of opinion between borrower and lender may arise during the construction period. Figuring out those differences midstream may cause delays and the project may suffer, which is something no one wants to happen.
Also, a key component to the CLA is the construction period, normally defined as the period of time between the commencement date and the completion date.
Finally, the Use of Proceeds form, or Sources and Uses of Funds statement, is an important part of construction loan underwriting that should be included in the construction loan agreement. The purpose of the Use of Proceeds form in underwriting is to identify the total costs of a project, calculate acceptable loan-to-cost parameters, and determine the sufficiency and sources of the borrower’s equity.