Construction draws are a critical but often overlooked part of construction lending. A smooth draw process ensures consistent access to cash, keeping materials flowing and workers working.

Introduction

Construction draws are a critical but often overlooked part of construction lending. A smooth draw process ensures consistent access to cash, keeping materials flowing and workers working. Additionally, most lenders charge fees for every draw, potentially adding 1% or more to the cost of a loan over the course of a project. Understanding how draws are handled by lenders, which is often not discussed during the loan selling and underwriting process, can prevent complications.

What is a Draw

A construction draw, or draw request, is a request for payment submitted by a contractor or builder to a lender during a construction project. As work progresses through various phases—such as foundation or framing—the builder submits a draw request to cover the costs of completed work. This request typically includes a detailed breakdown of completed work, usually based on the initial budget submitted to the lender. The lender reviews and inspects the work before releasing funds. The number of draws needed can vary from one to over twenty, depending on the project's complexity and debt involved.

Fees Associated with Draws

Most lenders charge a fee for each draw request, ranging from $100 to over $500, depending on the location and scope of the project. Single and multi-family residences up to four units generally incur the basic fee, while larger projects may have higher or custom-quoted fees. These fees cover the cost of site inspections and back-office processing, as draws are typically handled manually and are labor-intensive.

Requesting a Draw

Advanced lenders may provide an online form for draw requests, but many use a spreadsheet with the project budget and columns for each draw request. Altering this spreadsheet can delay funding, so accuracy is crucial. Loan documents should be reviewed to understand draw parameters, such as the policy on paying only for completed work and the need for lien waivers and receipts for large purchases.

The Inspection Process

Upon receiving a draw request, the lender sends the tracking spreadsheet to an inspection company, which schedules a site visit. Different inspectors may visit the site, requiring the borrower to repeatedly explain the project. Inspectors often lack construction experience, which can lead to misunderstandings and conservative funding cuts. Accurate funding requests and maintaining a steady draw request cadence can mitigate these issues.

Handling Funding Cuts from Inspectors

If a funding request is cut, an incident is filed with the inspection company to review the cut. Dispute resolution can take up to four weeks. This delay is often outside the lender's control, as they rely on third-party inspection companies.

Reallocating Budgets

Loan documents will specify if budget reallocations are allowed. Not many lenders permit reallocations, and those that do usually allow it only once due to the back-office burden. Reallocations can also trigger loan modifications or extensions, incurring additional fees.

Approval and Payment Process

Once the lender receives an inspection report, it may need multiple approvals, especially for large requests. The approval process involves various investors and wholesale banks with different funding guidelines. Upon approval, the lender initiates a wire or ACH transfer. Borrowers should ensure the lender has the correct banking information to avoid delays.

The Draw Process Timeline

The draw process generally involves:

• 1 day to submit and review the draw request.

• 2-7 days for the inspector to visit the site and write the report.

• 1 day for the inspection company to review the report and send it to the lender.

• 2-27 days for any dispute resolution.

• 1-3 days for payments to clear.

Efficient lenders can turn around funds in about 7 days, but 14-30 days is more realistic. This timeline does not account for weekends and holidays.

Borrowers should regularly check their budget balances with their lender. Advanced lenders may offer online or mobile tools for real-time updates.

Summary and Key Tips

The speed and effectiveness of a lender's draw process significantly impact the project and borrower-lender relationship. Key points to consider include:

• Understanding draw and wire fees.

• Knowing the draw request process (online portal, spreadsheet, mobile app).

• Reviewing any draw process documentation or videos from the lender.

• Familiarizing with reimbursement rules and policies.

• Identifying inspection companies and their turnaround times.

• Understanding the dispute process.

• Knowing if budget reallocations are allowed and if they involve loan modifications.

• Understanding the approval process and any involved parties.

Lenders vary in their draw management sophistication. Large lenders often have slower turnaround times due to manual processes and operational challenges. Smaller and mid-sized lenders may use modern technology platforms like Sitewire for a more efficient and borrower-friendly process.

About the Author

Corey Landon is a seasoned real estate investor and former head of draw operations for a major lender. With over 20 years of experience in real estate finance and development, Corey provides insights from both the borrower and lender perspectives.For a list of Sitewire-powered lenders committed to a fast, accurate draw process, contact Sitewire Support at Sitewire Support.‍