When it comes to doing construction and rehabilitation on a property, the process can seem daunting. Especially when it comes to the loan funding process. You have to make sure that you are making sound financial decisions, and getting the best rates. This is especially true during the rehabilitation process. Steven Taylor Taylor Equities has compiled 3 important aspects of successful rehabilitation.
Construction for your site is completed within the term of the loan. Make sure to look at the commitment letter for the term. Requisitions can happen monthly, and they should happen on a regular basis as a part of your workflow. The requisition is a request that lays out in great detail payment for materials, labor, and other construction costs.
This process is ongoing and once you have received payment for the last month’s request, you should submit another to ensure the flow of money for your project. This will make sure there are no delays in payment, or delays in completion of your project. A part of the requisition process is carrying out lender site visits to make sure the project is on schedule.
This process unfolds as follows:
- the general contractor completes an American Institute of Architects (AIA) form that is approved
- you as the borrower requests a third-party engineer to come for a site visit to confirm the work that has been completed
- the third party engineer submits a required report to the lender
- the lender remits payment less any standard holdbacks
As a part of the requisition process, the lender will engage the expertise of an engineer to review any submitted requisitions and visit the site. In addition to the engineer, the lender will also have an employee visit the site on their behalf. This will happen on a quarterly basis however, this could be more or less frequent. It really comes down to how the project is progressing.
The lender’s staff person will monitor the progress of the construction and rehabilitation process and ensure that it is being completed in accordance with the terms of your loan. They will also review the engineer’s work to check what has been submitted in the requisitions.
When construction and rehabilitations run into delays, the budget line item “construction contingency” is crucial. These delays frequently happen during the beginning of the rehabilitation process and contingency is generally 10-20 percent of the entire construction cost. The way these funds are allocated is through submitting a “change order” to pay for a certain amount of changes to the scope of work. Lenders try to ensure that there is sufficient cushion to cover these unexpected costs, but any work that goes over the contingency is paid for directly out of pocket, so it is important that you know what things cost before breaking ground.
Overall, there is a lot at stake with construction and rehabilitation, but it’s nothing you can’t handle without a firm plan and a deep understanding of the process. Steven Taylor Taylor Equities can help you out with your landlord’s needs.