Because of our long-standing relationship in the commercial banking community, Thompson & Thompson is active in obtaining and negotiating construction and end (or term) loans from commercial lenders for our clients.

The Construction Loan Agreement ("CLA") is but one of the key documents (and remember, the CLA is a negotiated document) in any construction lending package offered by a commercial lender. Accompanying the CLA will be: a construction loan promissory note and a mortgage taking a security interest in the construction property.

There are eleven (11) key elements of a typical business Construction Loan Agreement:

1.   Description of the construction project (including a legal description of the property).

2.   Description of the construction loan terms and conditions, loan amount and interest.

3.  Commitment of the lender to make an end (or term) loan.   Here is where the lender must commit to an end (or term) loan upon completion of construction. The term of the end loan, e.g., 5 years. the payment (or amortization) term, e.g., 10-20 years, and the interest rate or interest rate formula will be stated.

4.   Lender's Fees.   This provision sets forth all lender fees, e.g., a fee may be requested for converting the construction loan to an end loan. Such a fee is, however, negotiable.

5.   Security.   Here the lender will identify the security it will take in consideration of providing a construction loan. This provision will typically include: borrower's personal property, personal guarantees and possible additional collateral.

6.   Budget and Construction Terms.   This provision will typically state a construction completion date, a construction budget, change order procedure and requirements for advances.

7.   Additional Affirmative Covenants (Promises).   Here is where the lender may require reporting of accounting information, proof of environmental compliance, personal financial statements of guarantors, etc.

8.   Additional Negative Covenants.   This provision may require compliance with minimum tangible net worth, maximum ratio of total liabilities to tangible net worth, minimum debt service coverage ratio, et al.

9.   Representations & Warranties.   Here the borrower makes certain representations or warranties to the lender, e.g., that there are no suits or legal proceedings, that all permits and licenses have been obtained, etc.

10.   Events of Default.   The principal event of default is nonpayment of the loan.

11.   Remedies Upon Default.   The principal remedy is the lender's right to take possession of the project.