CREFW-Fall2015

21 / 48

CRE Finance World Autumn 2015
19
construction lending risks related to contractual, budget,
design and scheduling matters. On behalf of the lender, the
construction loan administrator is responsible for monitoring
the project budget including all designated sources and uses.
Additional responsibilities include managing any reserves that
are provided to cover shortfalls, coordinating the on-going due
diligence services (including inspections and title updates),
reviewing disbursement documentation, and providing detailed
client reporting on the status of the project and fundings. The
construction loan administrator provides the financial oversight
and risk management, and coordinates with the project-inspecting
engineer and the design professionals who conduct the physical
construction oversight.
Third-party construction loan administrators are typically engaged
prior to closing, at which time they complete a document and
budget review, participate in closing activities and attend the initial
planning meeting. Post-closing services include construction and
budget monitoring and rebalancing, disbursement administration,
title management, loan servicing, and reporting.
As part of the pre-closing services, the construction loan
administrator will review the lender term sheet, initial loan
documents, title administration process, line item budget of total
costs and other supporting materials, and follow up with the
inspecting engineer with respect to the plans and specifications,
construction contract and supporting schedules. The construction
loan administrator will typically participate in a preliminary meeting
among the development team, which may include the general
contractor, project architect, borrower representative, inspecting
engineer and business representatives of the lender. The primary
goals of this initial planning meeting are to establish and review
disbursement procedures, draw backup, and communication
contacts for the project. The loan administrator will also typically
participate in the loan closing process.
After the loan closes and construction commences, the loan
administrator’s activities intensify. In monitoring the project budget,
the loan administrator provides a summary of budget revisions and
reallocations, or summary notation of any budget discrepancies
or out-of-balance situations, as well as a change order summary
addressing related questions or concerns, such as budget
adequacy, timing or other issues. This budget analysis process
refers to an evaluation of the adequacy of the complete hard and
soft cost budget.
Financial controls are an important component of the construction
loan administrator’s responsibilities. The loan administrator reports
on funding status, including allocation of approved, eligible costs
for equity and loan proceeds, and other sources of funds (e.g.,
grants, reserves, tenant reimbursables), highlighting the current
disbursement request amount, previous amounts disbursed and
amount remaining to be funded. The loan administrator coordinates
with the inspecting engineer with respect to the hard cost draw
request with physical on-site validation of the work in place to
document the loan draw process and construction progress
towards completion.
On a regular basis during construction, the loan administrator makes
a recommendation of the amount of funds eligible for disbursement
and related items requiring follow up. A disbursement summary
is provided to the lender, which may include a list of exceptions
to pre-established guidelines such as funding restrictions or
document requirements. Typically, this review of disbursement
requests and funding is performed once a month.
Loan administrators with banking affiliates can provide additional
financial controls through treasury and cash management
services specific to the project needs. During construction, the
loan administrator can issue direct or dual-payment checks to the
general contractor and approved vendors from escrowed loan or
equity funds. For condominium projects, residential sales deposits
can be tracked unit-by-unit with detailed accounting of earnest
money, upgrades, customizations and interest. Commercial lockbox
accounts can be established with effective cash distribution
waterfall accounting.
Maintaining the title administration process is an important
part of the loan administrator’s on-going responsibilities. This
activity includes coordinating the request for title searches and
bringdowns prior to each funding, and obtaining the written
endorsement to evidence the updated title coverage. As part
of this process, the loan administrator manages interim exception
documents and identifies options for resolving open issues.
One of the construction loan administrator’s most important
functions is to review project performance by monitoring project
leasing or sales activity. Residential project information includes
review of purchase agreements, adherence to prequalified sales
criteria, requests for variances or concessions, and unit closing
and release detail. Commercial leasing is monitored for adherence
Risk Management and Loan Administration for the Next Generation of Commercial Construction Lenders
“Third party construction loan administrators provide
an efficient and effective means of risk management
and project financial oversight for lenders who do not
have the in-house resources and capabilities to offer
construction loans.”