Sold unit proceeds and take out mortgages on rental properties will be used to pay off the construction financing.
Occupancy units considered as inventory can include:
When there are delays in selling units or signing up renters for take out mortgage qualification, construction inventory financing can be required.
The most common of these three is residential condo inventory financing, but for all three the financing need and lender requirement can be very similar.
This also demonstrates another slice of construction financing and how each slice can be very lender and use specific. For instance, some may call a construction inventory loan a bridge loan, which it basically is. But the main difference between this type of bridge financing and our previously defined construction bridge loan is 1) the specific types of construction projects that are being financed, and 2) the level of overall project completion.
For construction inventory financing, the real estate offered as security needs to be finished or virtually finished units of inventory that are in or very near to be in a selling or renting position.
In the condo market, its not uncommon for projects to complete construction, but still not have the condo registration in place that allows each unit to be sold under a unique title. During the interim period when the owner or developer is waiting for condo registration, additional funds can be required to continue to cash flow the project. In some cases, the construction mortgage may have to be paid out if the registration process is taking an excessive amount of time.
Additional funds are required to pay the operating costs and service the existing debt of the project and in some cases, clean up some of the outstanding trade payables that may be outstanding.
From a lender point of view, incremental funds can be advanced against the property due to the state of completion and elimination of almost all of the building process risk.
This is different from a construction bridge loan where the project 1) may not have any inventory units that are easily resold, and 2) still has actual construction work to complete before the project can be finished and be in a position to apply for an occupancy permit.
If you’re a owner, builder, or developer that have a completed build for resale or rent of an occupancy unit of some type, but have not yet been able to arrange a sale or tenant, then a construction inventory loan is something you may need to consider if cash flow has become constrained. If this is the case, I suggest you give me a call so I can quickly assess your situation and requirement and provide you with relevant options to consider.