Budgeted three days for draw reimbursement. It ran ten. $32,000.

Heavy rehab, 1920s four square split into three units, all-in budget $1.1 million with $780,000 of it eventually drawn. Bridge loan through a broker at 65 percent of total cost, rate 11.5 percent interest only, twelve month term with one six month extension at half a point.

The term sheet said draws are funded following satisfactory inspection. That's the whole clause. Nobody asked what follows means. I assumed three to five business days because that's what my last two lenders did. This lender's actual practice was inspection ordered within five business days of request, then funding within ten business days of inspection clearing. So call it thirteen to fifteen business days from my request to money in the account, which is three calendar weeks in a bad month.

My general contractor's terms were net 14 on materials and weekly on labor. He floated the first draw cycle, floated the second one badly, and pulled two of his four crews off my job in week nine to go do work for someone who paid on time. I don't blame him. From that point I was running a job with half the labor I had scheduled and the timeline went from seven months to ten and a half.

The arithmetic. Roughly 3.5 extra months of carry on an average drawn balance around $700,000 at 11.5 percent is about $23,500. Extension fee at half a point on the committed $1.1 million was $5,500. Add about $3,000 of extra insurance and utilities on an empty building. Call it $32,000 against a projected profit of $118,000, so I still made money and I still consider it a loss because it was avoidable with one question.

The broker's role in this is the part I keep turning over. He knew this lender, had closed with them before, and either did not know the draw turnaround or did not think it mattered enough to mention. When I raised it in month three he said all the bridge lenders are slow right now. Maybe true, and I could have priced it in if I'd known.

What I would do differently. Ask for the draw turnaround in business days in writing before signing, ask who orders the inspection and how, and ask the contractor to confirm he can float that cycle before I hire him. If a broker cannot answer the draw question from memory, he has not actually operated with that lender.

Answer

3dmitri_v6CapitalPRO6

The clause you want in the term sheet before you sign is five specific things, and every one of them is a number or a name rather than an adjective.

Draw turnaround stated in business days, split into two figures: days from your request to inspection performed, and days from inspection clearing to funds released. One combined number lets the lender count the two stages separately when it suits them.

Who orders and pays for the inspection, and whether it's a third party inspector or an internal draw desk. If it's a third party in a market with few inspectors, the calendar is theirs and not the lender's.

Whether interest accrues on the committed amount or the advanced balance, which is what @quill was asking. Both exist in the market. On your deal the difference between the two, on a $1.1 million commitment versus a $700,000 average balance at 11.5 percent, is roughly $38,000 over ten months. That single line can be larger than the fee you're negotiating.

The final holdback percentage and what triggers its release. Ten percent held to certificate of occupancy is common and it lands right when you are most stretched.

The extension trigger and fee, in writing, including whether it is at the lender's discretion or yours on satisfaction of conditions. Yours conditioned on performance is worth real money. Discretionary is worth nothing until they say yes.

On the broker question, I would separate two failures. Not knowing the turnaround is a competence problem. Saying all the bridge lenders are slow right now, in month three, when you were raising a specific operational question, is the answer of someone protecting a lender relationship. Ask the draw questions before the term sheet is signed, when the broker still needs you to sign it.

6 replies

3brandonlee36Passive

The contractor pulling crews is the mechanism nobody models. My portfolio is small and even on a $40,000 turn the trades vote with their feet when payment goes slow. @harrow was your GC on a fixed price contract? Because if he was, three extra months of his overhead is coming out of his pocket too and he had every reason to reprioritize.

1diane_kowalskiPassivePRO9

Satisfactory inspection with no timeline attached is doing a lot of work in that sentence. I've been reading loan documents for land as practice and the clauses with no number in them are always the ones that bite.

1tashaford30PB2APRO7

@harrow when you say average drawn balance of $700,000, does the lender charge interest on the full committed amount or only on what's advanced? I've seen both mentioned and I don't understand which is standard.

0priya_n21PO1C

@quill I think it varies by lender, which is sort of the theme of this whole thread. Some charge on the full commitment from day one, which would have made @harrow's number a good deal worse.

2joe_delgado5AP4CPRO6

I run thin and fast and this is the exact thing that nearly killed me twice. What I do now is keep a working reserve equal to two full draw cycles of the job, in cash, separate from the deal. On a $780,000 draw budget over seven months that's maybe $110,000 sitting there doing nothing, which hurts. It hurts less than losing crews. @harrow the broker being vague about turnaround is bad, but the reserve is the thing that makes the turnaround survivable no matter what he told you.

Budgeted three days for draw reimbursement. It ran ten. $32,000.

6 replies