There can be more than one reason for securing condo inventory loans, but the most common one is to inject funds into the project to keep the cash flow on track.
By definition, condo inventory is like any other type of finished good inventory in that there needs to be a completed product to sell or near completed product.
Sometimes, near the end of a condo project where the basic exit strategy for paying out the construction loan is through the sale of condominium units, the condo registration gets delayed causing the inflow of proceeds from condo sales to also be delayed.
With the condo units in a sufficiently complete state to qualify for condo registration, the construction risk has basically been eliminated so incremental mortgage financing can be made available in many cases to provide more capital to the project.
The additional capital is typically used to pay the ongoing monthly costs of the project which are mostly construction loan interest. There may also be some amount of trade payables outstanding that were expected to be retired by the first wave of condo sales proceeds, but are now getting older with suppliers demanding payment as the initial condo sales are waiting to be completed.
In fairly rare cases where the registration delay is considerable, the construction lender may demand repayment of the construction loan which could also potentially be paid out by a larger condo inventory loan.
As long as there is cash flow available to service the monthly interest costs, the construction mortgage holder will likely be more than happy to collect additional interest so long as the funds are not required for reinvestment right away into another project.
When additional funds are secured, the lender will also want to have clear disclosure as to how the funds are applied to make sure the capital is used within the current project and not diverted to another development. If trade payables are outstanding, a condo inventory financing group may even go so far as to require that the outstanding accounts be paid directly by the lender during the mortgage disbursement process to assure that everyone is paid up so there will be minimal chance of a supplier dispute against the project.