Acquisition development and construction financing sequences

Acquisition, development, and construction financing should be modeled as a sequence of cash movements and collateral changes. A lender’s total commitment is only one number in that sequence. The borrower also needs to know how much retires existing debt, how much funds new work, when equity must enter, and what conditions permit each phase to proceed.

The practical decision is whether the entire development path is funded through its next dependable repayment event. A loan that closes the land acquisition may leave horizontal work unresolved. A later construction commitment may appear sufficient until the borrower deducts the payoff of the land loan.

Separate project cost from financing turnover

The OCC’s commercial real estate lending handbook distinguishes land acquisition, land development, and construction lending. That distinction is useful when organizing the financing sequence; it does not prescribe a universal advance rate or borrower equity requirement.

Consider a hypothetical project with $4 million of land cost, $3 million of horizontal development, $12 million of vertical construction, and $3 million of soft costs. Total project cost is $22 million. Assume all interest, fees, and contingencies needed for this base example are included within the stated categories; an actual budget must identify them individually.

The land is initially purchased with a $3 million land loan and $1 million of sponsor equity. Later, a new development and construction facility commits $14 million, including the amount needed to repay the land loan. The new facility therefore provides only $11 million for the remaining $18 million of project cost. The sponsor must contribute another $7 million, for total project equity of $8 million.

Adding the original $3 million land loan to the new $14 million commitment would overstate permanent project funding. The new facility retires the old loan; it does not leave both amounts available for construction.

Build a phase-by-phase funding schedule

Assume the hypothetical facility permits the following allocation. These are negotiated scenario assumptions, not a description of standard lender draw rules.

The $3 million payoff is a financing use, not a second land acquisition cost. The new project work totals $18 million. This distinction allows the draw schedule to reconcile with both the $22 million project budget and the $14 million loan commitment.

The table also exposes timing. If the lender instead requires all additional equity before further advances, the sponsor needs the $7 million earlier. If advances reimburse paid invoices, the sponsor may need temporary cash beyond its ultimate equity contribution. Show those timing requirements in a monthly schedule rather than assuming the table’s aggregate allocation guarantees liquidity.

Add the conditions between phases

For each transition, identify the evidence that permits the next advance. Potential review items include approved plans, permits, contracts, inspections, lien documentation, completion of infrastructure, and satisfaction of stated borrower obligations. The actual loan documents and lender process determine which are required.

Assign a responsible party and required date to each item. A permit expected next month is not equivalent to an issued permit required for this month’s draw.

Distinguish undrawn commitment from excess capacity

At a hypothetical midpoint, assume $8 million of the $14 million facility has been funded. The undrawn balance is $6 million. Remaining base-project costs are $8 million, supported by that $6 million and $2 million of still-unfunded sponsor equity.

A newly identified $1 million overrun increases remaining costs to $9 million. The undrawn commitment is still $6 million. The project now needs $3 million of additional sponsor cash rather than the previously planned $2 million, creating a $1 million incremental gap.

The undrawn balance was already allocated to completing the base project. It was not an unused contingency. Before reallocating any reserve, determine whether the lender permits it and whether the original reserve purpose remains funded. A transfer can conceal a future shortfall rather than eliminate it.

Track collateral movement with cash movement

If the business plan includes selling a parcel, financing a completed phase separately, or transferring infrastructure, place that event beside the expected draw and payoff. Obtain the applicable release or consent requirements and model the resulting reduction in loan proceeds or collateral support.

A parcel sale can generate cash while also requiring a loan paydown. Count only the amount remaining after the actual modeled release obligation as available for later construction. Do not use gross sales proceeds as project equity while leaving the associated debt unchanged.

Maintain one reconciled financing record

The working file should reconcile project costs, financing uses, cumulative funded debt, undrawn commitments, sponsor contributions, and restricted reserves. Every revision should show which assumption changed and which later phase it affects.

The original artifact is the funding-and-collateral transition schedule. It makes the borrower answer a concrete question at every phase: what cash is available, what must be paid first, and what evidence permits the next advance? A credible ADC plan funds the sequence, including the handoffs between lenders and phases, rather than merely balancing the final project budget.