Does the holdback math on a typical gut rehab draw schedule actually work, or is the borrower funding the gap
Here is a term sheet structure worth working through, because the cash requirement it implies is larger than it looks. Take the construction side of a heavy rehab: 240k purchase money at 80 percent LTC, plus a 210k rehab facility funded in draws. Draws in arrears against completed line items, third party inspection at each draw for 350, five draws budgeted. Ten percent retainage is held on every draw and released at certificate of occupancy. Interest accrues on the drawn balance only. Twelve month term, two three month extensions at a point each. The first problem. If 10 percent of every draw is held back, then across 210k of budget the borrower is 21k short of what the budget says the work costs, for the whole project, until CO. A typical GC contract pays the contractor on completion of each phase. So somebody is funding that 21k gap, and on most of these it is the borrower. The second problem. Draws in arrears means work has to be done before it is paid. Materials for a gut get ordered and paid before they are installed. On a 210k budget where maybe 40 percent is material, that is 84k of purchase orders sitting ahead of the first reimbursement. So the real cash requirement is more than 20 percent of purchase plus a contingency. It is that plus 21k of retainage plus whatever the material float peaks at. The question for the room: is that reading correct, do borrowers negotiate the retainage down, or does the GC carry the float?
