Construction Lending: Key Issues for Negotiation and Documentation

Mastering Conditions to Advances, Loan Balancing, Payment and Completion Guaranties, Retainage, and HVCRE Equity Requirements

Recording of a 90-minute CLE webinar with Q&A

Conducted on Thursday, April 27, 2017
Recorded event now available

This CLE webinar will provide lender’s counsel with guidance in negotiating and documenting construction loans, including provisions for making loan advances, budgeting and loan balancing, payment and completion guaranties, pre-leasing requirements, and retainage and project completion. The panel will also discuss best due diligence practices and how to document certain construction loans for exemption from HVCRE classification.


Construction loans are inherently more fraught with risk than standard income property loans. Additional risks include design defects by architects and engineers, inaccurate budgeting, unanticipated costs and delays, misapplication of construction draws, contractor liens, labor and contract disputes, force majeure, and the failure of contractors and subcontractors to complete the project to specifications. Lender’s counsel must be able to negotiate and document construction loans that adequately address these risks.

Construction loan documents should provide detailed conditions for making loan advances, budgeting and loan balancing, payment and completion guaranties, pre-leasing requirements, retainage of funds pending project completion, and more. Due diligence is an important aspect of the construction loan process as plans and specs, budgets, and the construction schedule will figure heavily into the terms of the construction loan agreement.

Payment and completion guaranties are critical components of a construction loan agreement, and will likely be heavily negotiated by the borrower as to limitation of liability, calculation of damages and other matters. Bank lenders will also be concerned with the treatment of the construction loan as an HVCRE asset, and if possible will want to document that the borrower has met the equity funding requirements for exemption from HVCRE treatment.

Listen as our authoritative panel discusses the key provisions in the construction loan agreement, payment and completion guaranties, and other loan documents, with a focus on those items most frequently subject to negotiation. The panel will also review construction loan due diligence, the current HVCRE regulations affecting banks, and how some loans may be properly documented to avoid or limit the period of HVCRE classification.


  1. Parties involved in a construction loan
  2. Construction loan risks
    1. Misapplication of construction draws; liens filed by contractors; delays caused by labor and contract disputes; force majeure
    2. Cost overruns due to deficient plans and specs, inaccurate budgets, increases in costs
  3. Due diligence—zoning and permitting, budget review, plans and specs, evaluation of borrower and contractor
  4. Construction loan documents—key issues
    1. Equity funding requirements and HVCRE
    2. Payment and completion guaranties
    3. Conditions to advances
    4. Project modifications
    5. Loan balancing and use of contigency
    6. Pre-leasing and pre-sales
    7. Stored materials
    8. Retainage—release on completion


The panel will review these and other key issues:

  • What additional risks and concerns arise in construction lending as opposed standard commercial property loans?
  • What are the key provisions in construction loan documents and the key points of negotiation?
  • How do the payment and completion guaranties address construction risks and how do they vary?
  • Can bank lenders avoid having construction loans classified as HVCRE assets? How should that be documented?


Lauren E. Anderson
Hillis Clark Martin & Peterson, Seattle

Ms. Anderson offers extensive knowledge of the lending process in transactions ranging from basic commercial and industrial loans to syndicated construction loans with mezzanine financing. Recent engagements include representing a bank in connection with four loan transactions totaling $47 million for the construction of major retail centers as well the lead lender with respect to a $25 million loan for development of 25 apartment buildings.

Lisa Berden, Member
Dorn Berden, Southfield, Mich.

Ms. Berden’s practice merges the traditional areas of leasing, acquisition, financing, construction and development of commercial projects. She has significant experience in layering financial tools for projects to promote their long-term success. This includes representing both developers and lenders in traditional lending and tax credit financing transactions, including new markets tax credits and historic tax credits. Ms. Berden has been involved with over $200 million in tax credit financing transactions.

Heather M. Dorn, Member
Dorn Berden, Troy, Mich.

With over 20 years of experience, Ms. Dorn focuses her practice in the areas of corporate, business and real estate law. She represents and works with business owners, developers, private and institutional investors, nonprofit organizations, and asset management firms. In addition to advising her clients on business matters, Ms. Dorn handles contract negotiations, due diligence review, structured finance deals, and complex litigation matters.


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