Construction Disbursement Agreement

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Even for those who have made their careers as a commercial lender, the payment of construction takes an introduction. Before we explain how it works, we want to explain how this fits into the commercial credit process for construction loans. The lender`s interest in the borrower`s success is common sense. Serving the borrower well is the mission of most lenders. The borrower and lender have a common interest in a cheque and balance of funds paid to the construction company; both in terms of timely payment and the management of the loan`s product. Several companies play a key role in the completion of commercial real estate projects. The involvement of lenders in the interests of construction companies and title insurance is less intuitive. Their interests are coordinated because the lender`s investment is protected by real estate security. Lenders must ensure that no construction company linked to the project has a reason to introduce a pawn fee – a kind of pawn that can take over the lender`s mortgage position in many countries – on the basis of the payment of funds in the construction process. In this sense, the interests of lenders must also be reconciled with those of the title insurance company.

When issuing a title policy, the insurance company also wants to ensure that no pawn fee is higher than that of the lender`s mortgage. The disbursement process begins with the conclusion of loans, where three parties – the lender, the borrower and the corporation – sign a payment agreement in which each party`s responsibilities are linked to the documentation, the manner and timing of the funds. There may be a first payment or « drawing » at closing to pay for pre-development costs such as engineering, architecture or soil control. Once construction has begun, usually at advance-agreed intervals , (no more than every month), a general contractor will file a draw application with the lender, borrower and securities company, with the corresponding documents supporting his request for funds. The work payment coordinator with your counterparty will verify the documentation of the subscription application, ensure that the proceeds of the loan are paid periodically on the basis of each draw request for the payment of the contractors, and will withdraw the pledge fee from the General Contractor for the payments made.