Top 50 Terms and Acronyms in Construction Finance and Construction Lending

Top 50 Terms and Acronyms in Construction Finance and Construction Lending

These terms are essential for understanding the financial mechanics of construction projects and their successful execution:

1. 1. Amortization
      The process of repaying a loan through scheduled principal and interest payments over time.
   2. Appraisal
      A professional valuation of the property to determine its current or future market value.
   3. Balance Sheet
      A financial statement listing a borrower’s assets, liabilities, and equity.
   4. Balloon Payment
      A large, final payment due at the end of a loan term.
   5. Bridge Loan
      A short-term loan that provides financing until permanent funding is secured.
   6. Budget Overrun
      When actual project expenses exceed the approved budget due to unforeseen costs.
   7. Capital Expenditure (CapEx)
      Funds used for long-term physical improvements or repairs to a property.
   8. Capital Stack
      The hierarchy of funding sources, including senior debt, mezzanine financing, and equity.
   9. Certificate of Occupancy (CO)
      A document proving the building meets local codes and is ready for use.
   10. Change Order
       A formal request to modify the original construction plans or scope.
   11. Collateral
       Assets pledged as security for loan repayment, such as the construction property.
   12. Construction Escrow
       A secure account that holds funds, which are released as construction milestones are completed.
   13. Contingency Reserve
       Funds allocated in a budget to cover unexpected costs during construction.
   14. Cost Overrun
       The amount by which construction expenses exceed the original budget.
   15. Cost to Complete
       The estimated remaining costs to finish the construction project.
   16. Debt Service
       The total loan payments required over a specific period, including interest and principal.
   17. Debt Service Coverage Ratio (DSCR)
       A ratio that measures cash flow available to cover loan payments.
   18. Developer Fee
       A fee paid to the developer for managing and coordinating the project.
   19. Disbursement
       The release of loan funds to contractors or suppliers as work progresses.
   20. Draw Request
       A formal request for funds based on completed construction milestones.
   21. Draw Schedule
       A timeline outlining when and how loan funds will be disbursed during construction.
   22. Equity Contribution
       The borrower’s cash investment or ownership stake in a construction project.
   23. Exit Strategy
       A plan for repaying the construction loan, typically through refinancing or property sale.
   24. Feasibility Study
       An analysis assessing a project’s financial, environmental, and market viability.
   25. Final Inspection
       A review of the completed project to confirm compliance with plans and building codes.
   26. General Contractor (GC)
       The primary contractor responsible for overseeing the construction process.
   27. Hard Costs
       Direct construction expenses, such as labor, materials, and equipment.
   28. Interest Carry
       Loan interest payments made during the construction phase of a project.
   29. Interest Reserve
       Funds built into a loan to cover interest payments until project completion.
   30. Lien Waiver
       A document that releases a contractor’s right to file a lien for unpaid work.
   31. Loan Commitment
       A formal offer from a lender to provide construction financing.
   32. Loan Covenant
       Conditions borrowers must meet during the loan term, such as maintaining financial ratios.
   33. Loan-to-Cost (LTC)
       A ratio comparing the loan amount to total project costs.
   34. Loan-to-Value (LTV)
       A ratio comparing the loan amount to the property’s appraised value.
   35. Mezzanine Financing
       Subordinate debt that bridges the gap between senior loans and equity funding.
   36. Milestone
       Key project benchmarks that trigger loan fund disbursement.
   37. Operating Expenses (OpEx)
       Costs associated with running and maintaining a property after completion.
   38. Owner’s Contingency
       Funds set aside by the owner to address unexpected project costs.
   39. Payment Application
       A formal invoice from a contractor requesting payment for completed work.
   40. Performance Bond
       A guarantee ensuring the contractor will complete the project as specified.
   41. Predevelopment Costs
       Expenses incurred before construction begins, such as permits and design fees.
   42. Pre-Leasing
       Leasing units or spaces before the building is completed.
   43. Principal Balance
       The remaining loan amount that excludes interest.
   44. Punch List
       A list of minor construction tasks that must be completed before final approval.
   45. Retainage
       A portion of the contractor’s payment withheld until project completion.
   46. Soft Costs
       Indirect project expenses, including permits, design fees, and legal costs.
   47. Subordination Agreement
       A legal agreement establishing the priority of loans or liens.
   48. Takeout Financing
       Long-term financing that replaces a short-term construction loan.
   49. Underwriting
       The process of evaluating a project’s risk, borrower qualifications, and financial feasibility.
   50. Zoning Approval
       Official authorization ensuring the project complies with local zoning laws and ordinances.