Preparing for Your Construction and Development Loan Proposal
Construction and development lending is one of the highest-risk forms of commercial credit. With many moving parts and variables, these loans demand the sharpest skills from a bank’s most experienced lending and credit teams. Many banks avoid construction lending altogether due to its complexities, risk profile, and the intensive resources required for underwriting and administration.
I spent nearly 25 years structuring construction and development loans at my former banking institution. Quite frankly, we became highly skilled in this area—not only because of our commitment to serving the sector, but also because of a strong, well-defined credit culture. While challenges were inevitable, the program proved consistently successful and profitable, delivering solid returns while attracting valuable business relationships. Over time, we became a go-to institution for contractors, developers, and real estate investors.
Whether you’re undertaking ground-up construction, a major renovation, or a subdivision development, banks will require a well-prepared proposal that demonstrates project feasibility, financial strength, and the sponsor’s ability to deliver on time and within budget. If you are:
A subcontractor or general contractor venturing into development,
A developer building your portfolio, or
A business owner renovating or expanding your facilities,
…this article will guide you in preparing a structured proposal to enhance your chances of approval.
Step 1: Choose the Right Bank
Not all lenders engage in construction lending, and those that do often have specific limitations. Align yourself with a bank whose appetite, expertise, and portfolio align with your project type and strategic objectives.
Step 2: Prepare for Rigorous Underwriting
Construction loan underwriting is more demanding than other commercial lending because of the complexities and risks involved. Expect a detailed, time-intensive review that examines every aspect of your financial and project profile.
Step 3: Demonstrate Commitment & Capability
Lenders need confidence that you have the financial resources, professional team, and organizational capacity to complete the project successfully. Your ability to demonstrate both commitment and competency is critical.
1. The Loan Evaluation Process
Banks generally follow a disciplined process:
Initial Review & Due Diligence – The bank gathers project details such as scope, location, property type, costs, and timelines to determine feasibility and fit within its lending criteria. If favorable, a term sheet is issued outlining proposed terms and conditions.
Detailed Underwriting – Upon acceptance of the term sheet, full underwriting begins. This includes reviewing borrower financials, the project budget, repayment sources, and collateral value. Third-party reports—appraisals, environmental assessments, and project cost and plan reviews—are ordered.
Credit Approval – A completed package is presented to the bank’s credit committee for approval, ensuring compliance with risk and regulatory standards.
Loan Closing & Disbursement – If approved, a loan commitment is issued. Closing involves executing all legal documents. Funds are then disbursed on a draw schedule tied to project milestones, subject to inspections and cost verification.
2. Key Driving Factors in Underwriting
Banks rely on credit fundamentals, including:
Borrower Financial Strength – Liquidity, net worth, credit history, and prior experience are critical. Lenders also analyze global cash flow across affiliated entities and related investments.
Project Feasibility – A realistic budget, credible cost estimates, market demand analysis, and reliable pro forma financials are evaluated to demonstrate economic viability.
Repayment Ability – Primary repayment is through permanent financing or project sales. Banks also assess pre-leases, pre-sales, or absorption rates, with exit strategies clearly defined. Permanent loans are underwritten to minimum Debt Service Coverage Ratios (usually 1.25x or higher).
Collateral Value – Banks require appraisals of “as-is,” “as-completed,” and “as-stabilized” values to support the loan amount. The loan-to-value (LTV) and loan-to-cost (LTC) ratios must fall within policy limits. Collateral typically includes a first mortgage lien, assignments of contracts, leases, rents, and personal guarantees of key principals and investors.
Equity Contribution – Borrowers are expected to inject 20–35% of project costs, with higher equity often required for riskier projects such as special-use or highly speculative properties. A meaningful equity stake demonstrates commitment and reduces risk to the bank.
3. Required Documentation
A strong loan package accelerates review and demonstrates professionalism. Typical requirements include:
Financial Information
Personal & business financial statements (within 90 days)
Tax returns (3 years)
Schedule of real estate owned
Bank statements verifying liquidity and available cash for equity infusion
Project Information
Project overview
Type – residential, commercial, mixed-use, industrial/warehouse
Scope – new construction, renovation, or expansion
Ownership structure – who owns the project (LLC, joint-venture, individual, etc) and who are the key principals and stakeholders
Land/site details
Land Acquisition Cost - Purchase price or existing land equity value.
Site Conditions - Environmental factors, topography, and utility/water/sewer access.
Zoning & Permits - Zoning approvals, site plan approvals, status of building permits, Board of Health and other required municipal approvals.
Building Plans and Specifications prepared by architect/engineer.
Site Plan and Surveys confirming property boundaries and layout, location of proposed structures and improvements, easements, ingress-egress, etc.
General Contractor Agreement and contractor qualifications– resume and summary of past projects to illustrate experience and competency.
Appraisal, Environmental (Phase I as applicable) and Cost and Plan Review Reports – ordered by the bank at cost to the Borrower.
Additional Supporting Items as applicable – engineering studies, soil testing, etc.
Market & Financial Feasibility
Market Demand Analysis: Rental demand, sales comps, leasing or selling absorption rates.
Pro Forma Financials: Projected revenues, operating expenses, and net operating income (NOI).
Project Return Metrics: Expected return on investment (ROI) and internal rate of return (IRR).
Construction Budget & Costs
Hard Costs: Land, site work, building, and utilities.
Soft Costs: Architectural, engineering, legal and professional, interest and bank fees, closing costs, and marketing.
Contingency Reserves: (1) Typically 5 – 10% of total hard costs for unexpected expenses (overruns, change orders), (2) Loan Interest Reserve for duration of construction term.
Project Timeline & Development Schedule
Start & Completion Dates - Expected milestones for groundbreaking and phases of construction.
Draw Schedule - Phased disbursement of funds based on completion of construction phases.
Project Completion - Submission of final as-built survey and Certificate of Occupancy.
Additional Supporting Documentation
Signed leases or LOIs (for pre-leased projects)
Sales contracts or reservations (for pre-sold units)
Developer track record & team credentials – architects, engineers, G/C and project manager
AIA G702 and G703 Forms. Banks typically disburse construction loan funds on a draw schedule rather than releasing the entire amount upfront. To request these draws, the contractor or developer/sponsor must provide detailed documentation of work completed and costs incurred. For most projects, AIA G702 and AIA G703 Forms are used. These are industry standard documents banks and their construction inspecting agents rely on to determine when and how much of funds are authorized for disbursement. The G702 Form is the application and certificate for payment – essentially the cover sheet for the draw request summarizing the contractor’s request for payment. The G703 Form is the detailed backup for the G702, providing a line-item breakdown of each category of work, and includes work completed to date, current draw request, and the remaining balance to complete the project, taking into account change orders and cost overruns.
Banks place great reliance on these Forms throughout the construction phase. I strongly recommend that borrowers provide these documents at the earliest opportunity, to ensure greater accuracy in evaluating the project’s cost structure during underwriting and with the appraisal process. Bank’s use this data to ascertain the project’s sources and uses of funds, and for loan structuring.
Bonding. When banks finance a construction project, they are primarily concerned with completion risk — ensuring the project gets finished on time, within budget, and to specifications. Surety bonds provide an added layer of security for the lender and project owner by transferring some of that risk to a third-party surety company.
For large, complex projects or public and municipal projects, the lender will likely require performance and payment bonds. For smaller projects, the lender’s bonding requirements will be predicated on the nature of the project (building single or smaller multi-family structures for example likely will not require bonding), the strength of the developer and/or contractor, and lender’s risk appetite.
Bonding provides lenders with assurance that the project will be completed and free of liens, protecting their loan collateral. It’s a safety net for both the project owner and the bank.
Final Thoughts
Construction lending involves a wide range of risk factors. Among the most significant are:
Project feasibility
Shifts in market and economic conditions
Sponsor/borrower creditworthiness and financial strength
Completion and performance risks
Budget overruns and cost escalations
Additional considerations include weather delays (in construction, time = money), permitting challenges, labor shortages, and contractor or vendor disputes. Disputes often lead to Mechanic’s Liens—an issue I have encountered many times in practice. These liens typically must be bonded before the bank will continue funding, otherwise the project may be disrupted or even halted.
For builders, developers, and property owners, it is essential to anticipate these potential pitfalls. Missteps can cause substantial financial harm to both borrower and lender. Yet, when properly planned and managed, real estate development serves as a powerful economic driver and can generate significant financial rewards.
In summary, a bank looks at who the borrower is, what the project is, how realistic the costs and schedule are, and whether the finished asset will generate enough value and cash flow to repay the loan. Controls like conservative LTC/LTV, strong guarantees, bonded contractors, adequate contingencies, and pre-leasing help mitigate these risks.
Preparation is everything in construction lending. Lenders must be assured that your project is feasible, financially sound, and backed by a capable team. By understanding the bank’s evaluation process, addressing underwriting priorities, and providing thorough documentation, you can improve your approval odds and shorten the timeline.
At Premier Credit Insight & Solutions, LLC, we specialize in helping developers, builders, and investors craft loan proposals that meet bank standards, as well as assisting you with making the right banking connection. If you’re preparing for your next project and want expert guidance in structuring your financing package, we’re here to help.
