An Overview of Funding Agreements

Between the cost of materials, personnel salaries, and miscellaneous expenses (both planned and unplanned), most construction projects cost millions of dollars to carry out. To acquire the necessary capital, the parties in charge of the project usually need to approach a financial institution, which will draw up a funding agreement for the amount required.

Many of the provisions of a project funding agreement are similar to those in a regular loan agreement, with those listed below being of special importance.

Purpose Clause

Funding agreements typically state that the money must be used for a specific purpose. The reason is that the lender has agreed to provide funds for a particular project, and if the loan is used for something different, its risk profile could change. Description of intended use cannot be general, as in “funds will be used to erect an apartment building in Midtown.” Instead, the agreement must specify how much will be used to purchase raw materials, engage contractors, etc.

Drawdown Requirements and Date

Funding agreements generally specify a time period during which withdrawals and drawdowns can be made, subject to conditions precedent to the making of the agreement and to the withdrawing of each loan facility.  Examples of such conditions could include:

1) Providing a copy of the project agreement

2) Evidence of all authorizations showing that the borrower and lender have the position and authority to enter into the funding agreement

3) Evidence that all licenses and permissions necessary for the project have been obtained

4) The drawdown date is the date on which the lender provides the funds to the borrower. There may be a single date in the agreement if all the money is being given at once, or several dates if the loan is provided in installments.

Repayment Information

Repayment terms for construction funding agreements indicate when and how the money must be paid back. Loans for large, multi-phase projects tend to have complex repayment conditions. For example, during construction, the money will be drawn down and the repayment postponed, either by rolling up interest pending commencement of operating revenue or allowing the borrower to make extra drawdowns to cover the interest payments. Any minimum payments should be sufficient to ensure that, in the worst case scenario, the loan can be paid off in full within the maximum term.

Events of Default

Events of default trigger the lender’s right to cancel the agreement, call in the loan, and exercise their rights under the security documents. The events, which must be specified in the funding agreement, may include:

1) Financial default

2) Failure to perform certain obligations

3) Breaches of representations and warranties

Funding agreements can be complex, and if they are not written up correctly, project financing may be jeopardized. The construction law attorneys at Rosen Law, PLLC can review a tentative agreement or draw up a new one that is legally valid and meets the needs of your upcoming project. For more information or to schedule a consultation, please call (516) 437-3400 today.

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