A construction commitment can contain funding the borrower cannot draw before a leasing condition is met. This case identifies the shell-completion cash gap when an expected industrial prelease remains unresolved.
Hypothetical 60,000-square-foot industrial development. Total project cost is $12 million: $10.5 million for the shell and other costs through delivery, plus $1.5 million of tenant improvements and leasing costs. A construction facility commits $7.8 million, and the developer contributes $4.2 million.
The commitment permits only $4.8 million of advances before a defined leasing condition is met. The remaining $3 million requires lender-approved executed leases covering at least 50% of the building, together with all other draw conditions. The precise definition is an invented loan term, not a standard industrial lending rule.
The developer expected one 30,000-square-foot tenant to sign before the condition constrained construction. Instead, negotiations continue while the shell work consumes cash. The issue is the difference between a total commitment and the portion currently available.
Reconcile the position when the leasing delay appears
Assume $8.4 million has been spent by the end of month six. The full $4.2 million equity was contributed first, followed by $4.2 million of loan advances. No project cash remains unspent, and there is no other committed source. Of the $4.8 million prelease advance limit, only $600,000 remains available.
| Funding/completion measure at month six | Amount |
|---|---|
| Total cost incurred and paid | $8,400,000 |
| Funded debt | $4,200,000 |
| Equity already spent | $4,200,000 |
| Remaining shell/delivery cost: $10.5m − $8.4m | $2,100,000 |
| Remaining advance availability before qualifying prelease | $600,000 |
| Shell-completion gap before that condition is satisfied | $1,500,000 |
| Additional future TI/leasing budget | $1,500,000 |
The developer still has $3.6 million of nominal undrawn commitment: $600,000 currently permitted plus $3 million conditional. Only the first portion can be treated as available under the assumed terms. A construction budget showing “$3.6 million undrawn versus $3.6 million remaining cost” would conceal the immediate condition failure.
The OCC construction-monitoring discussion connects leasing progress and remaining funds with the ability to complete and repay a project. It does not require this particular two-stage commitment or 50% threshold.
Test the lease document against the actual trigger
Suppose the original 30,000-square-foot prospect has signed only a nonbinding letter of intent. Under the fictional loan definition, it supplies zero qualifying executed area. The prospect may be commercially promising, but its square footage cannot be used to certify compliance with an executed-lease requirement.
A second prospect offers an executed 24,000-square-foot lease acceptable in all other respects. That covers 40% of the building, leaving 6,000 square feet to reach the 30,000-square-foot threshold. A stronger tenant, longer term or higher rent may support a request for changed terms, but none changes the percentage requirement automatically.
| Leasing state | Qualifying area under stipulated definition | Result |
|---|---|---|
| 30,000 sq ft nonbinding letter of intent | 0 sq ft | Condition not met |
| Approved executed lease for 24,000 sq ft | 24,000 sq ft /40% | Condition not met |
| Approved executed leases totaling 30,000 sq ft | 30,000 sq ft /50% | Area condition met; other draw conditions remain |
The loan may also define permitted tenant credit, commencement conditions, rent levels or cancellation rights. This case holds those resolved only in the final row. Counsel and the approving lender must assess the actual documents; a leasing broker’s “signed” status is not a substitute for that acceptance.
Compare ways to fund the shell
If the developer contributes $1.5 million more now, the remaining $600,000 permitted debt can complete the stipulated $2.1 million shell work. The $1.5 million TI/leasing budget still needs a source. The additional contribution does not automatically authorize later reimbursement from the conditional $3 million tranche.
If a qualifying lease is obtained in time and the full $3 million tranche becomes available, the existing $600,000 plus $3 million can fund all $3.6 million remaining base costs. If another equity source already paid $1.5 million, only $1.5 million of the remaining TI/leasing cost would still need funding, absent a permitted reimbursement. Reconcile actual uses before drawing the full commitment.
A negotiated amendment could alter the condition or advance limit. The lender would need to approve its revised risk, value, cash flow and other terms. The developer should not spend against the requested amendment before it is effective. It may also require more equity, reserves, fees or a changed repayment plan.
Why deferring tenant improvements does not solve this gap
The $1.5 million TI budget is already outside the $2.1 million needed to finish the shell. Deferring it again does not reduce the shell shortfall. The developer must identify which invoices can actually be postponed without preventing the agreed delivery or impairing the project.
A lower-cost shell design also needs an updated leaseability and valuation analysis. Removing a feature essential to the prospective tenant could save cost while making the prelease less likely. Treat the construction and leasing plans as connected constraints rather than independent spreadsheet tabs.
Fix the decision before authorizing the next work package
Obtain a current cost-to-complete, the exact prelease condition, the remaining permitted advance amount and the dates of unavoidable contractor payments. Present the lender with the lease evidence as it exists, explicitly distinguishing signed agreements from negotiations. Ask for a dated decision on any proposed amendment.
The developer should commit the next shell work only against a credible $1.5 million gap solution or an effective change that releases the conditional funding on time. The full $7.8 million commitment is real in this example, but its availability is conditional. The financing failure arises from that dependency, not from a mathematical error in the total project budget.
Sources and evidence
- OCC — Commercial Real Estate Lending, version 2.0Monitoring Commercial Construction Projects and Disbursement Processes, printed pp.46–48 · Checked 2026-10-21 · Bank supervisory context. March 2022 publication, with March 20, 2025 reputation-risk edits. All case amounts, thresholds and contractual conditions are invented teaching assumptions.
Source dates and applicability matter. Report an error or a changed source.