The Construction Process from a Bank's Perspective

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By nbkc bank

Construction projects are exciting, watching something literally grow from the ground up in a matter of months. Rarely do people stop to think about everything that’s truly involved: purchasing land, pulling permits, drawing up blueprints and budgets, organizing and funding contractors, finding end purchasers, closing, and starting all over with another piece of land. Even more misconceived is the bank’s integral, hands-on involvement in the process. With construction projects, banks are involved more than one realizes. Banks not only approve the loan requests and draw up loan documentation, but they also release funds throughout the physical construction phase.

As the project progresses, the borrower or builder needs to pay the contractors for the work performed and supplies purchased. The borrower collects the invoices as work is completed and cuts checks for payment to the contractors who performed work. Before the borrower releases funds to the contractors, they submit draw requests to the bank, typically on a monthly basis. This allows the borrower to use the bank’s money instead of their own cash supply. These draw requests include the borrower’s name, loan number, amount of the total draw, and a breakout of all of the invoices that need to be paid, along with a copy of the check that will be issued for payment to the contractors, indicating to which budget category (foundation, roof, appliances, landscaping, etc.) the expenses need to be allocated.

Proof of lien waiver must also be included in the request and is an important piece of the puzzle that must be verified. A lien waiver protects the borrower and the bank from any legal claims where a contractor states they were not paid for work performed on a specific project. These claims, called mechanics’ liens, can become first liens on the property and hinder the borrower and bank when the borrower sells the property. 

After the bank receives the draw requests, the requests are processed.  The bank verifies that the address on the invoices matches the subject property address to ensure the expense is allocated to the correct property. Additionally, the bank verifies the expenses are within budget and that a lien waiver was provided or is in process for the expense. 

Typically, a site inspection is conducted by the bank to verify that the items being paid for by the builder to the contractors have actually been completed on the project. The bank uses an internal employee or hires a professional service to conduct the inspection. The inspections include an assessment of what work has been completed on the project and photos to verify that the work was finished. When the inspection is completed, the outcome is verified against the expenses assessed towards the project. If these are all in line, the bank funds the draw request to the builder’s checking account and alerts the builder that they are free to release the checks for payment to the contractors. This process typically takes one to two business days. If the inspection and costs are out of line, the inspection and budget are reviewed by the bank and borrower. In this case, the draw process may take longer than two days. 

In scenarios where the project cost is more than $1 million, there is additional risk involved. The bank may take more steps to protect themselves and the borrower, and the process may take longer. A title search may be completed to ensure no mechanics liens exist, and professional inspections may be conducted more often to ensure the project is progressing as anticipated.

For more information on construction loans, contact a commercial lender at National Bank Of Kansas City