Case: Phased project sells collateral before infrastructure is complete

Hypothetical phased development. A project originally has an $18 million budget supported by a $12 million construction commitment and $6 million of equity. At the decision date, $10 million has been spent: $6 million debt and $4 million equity. Remaining work costs $8 million, including $2 million of shared infrastructure serving both the parcel proposed for sale and the retained project.

The developer has $2 million of equity still committed, and $6 million of the loan is undrawn. It proposes selling one parcel for $3 million before the infrastructure is finished. The question is how that sale affects completion funding, not simply whether the sale price exceeds the lender’s release price.

Reconcile the sale-day uses

Assume selling costs are $100,000. The lender requires a $2.7 million principal paydown to release the parcel and a $1.5 million funded reserve for shared infrastructure. These are separate invented conditions. The reserve finances part of the already-counted $2 million infrastructure budget; it is not an additional $1.5 million construction cost.

The sale does not yield a free $200,000 distribution. That residual is allocated to the reserve, and another $1.3 million must arrive at the same closing. The developer can use part of its remaining $2 million equity commitment only if that capital is actually available at that date and permitted for this use.

The OCC construction-administration discussion provides context for following remaining work, available funds and collateral releases. It does not set this release price or shared-work reserve. Actual easements, development agreements and completion obligations require separate legal and engineering review.

Keep the nonrevolving loan accounting straight

Before the sale, funded principal is $6 million and total commitment is $12 million, leaving $6 million undrawn. Assume the nonrevolving agreement permanently reduces total commitment dollar for dollar with the $2.7 million release payment.

After payment, principal is $3.3 million and commitment is $9.3 million. Remaining advance availability is still $6 million. The paydown does not create another $2.7 million of borrowing capacity. Treating the facility as revolving would incorrectly show $8.7 million available against a commitment that no longer exists.

With $1.3 million of the remaining equity placed into the reserve, $700,000 remains unallocated. Completion sources are $1.5 million reserve, $6 million undrawn loan and $700,000 remaining equity: $8.2 million against $8 million of remaining cost. The $200,000 difference is the net sale residual retained in the project.

Apply the retained-project credit test separately

Now assume the lender also re-underwrites the retained collateral and caps the remaining total commitment at $8.5 million. This is an additional stipulated condition, not a consequence that every release produces. The funded balance remains $3.3 million after the release payment, so undrawn availability falls to $5.2 million.

The completion plan now has $1.5 million in the infrastructure reserve, $5.2 million undrawn debt and $700,000 remaining equity, totaling $7.4 million. Against $8 million cost, the project needs $600,000 more capital. The $800,000 reduction in loan availability exceeds the sale’s $200,000 net project contribution by exactly that amount.

This is why approval should analyze both the release payment and the retained project’s funding limit. A parcel can be released at an agreed price while the remaining development still becomes underfunded under the other conditions.

Test the date of the existing equity commitment

Suppose only $1 million of the $2 million remaining equity is available on the sale date; the other $1 million is contractually callable later. Even before the retained-project retest, the sale-day reserve deposit needs $1.3 million, creating a $300,000 timing shortfall.

That timing shortfall and the $600,000 revised completion gap are different measurements. Do not automatically add them as permanent cost: some early funding can be repaid or substituted when the later committed equity arrives. Build a dated schedule showing the peak amount outstanding and the eventual total contribution under the actual funding terms.

Likewise, the infrastructure reserve is not unrestricted money for unrelated retained-building costs. Confirm how and when it releases and who must complete the work if the parcel is sold. A funded reserve without enforceable completion and access arrangements may not resolve the underlying execution risk.

Make the release decision conditional on the whole project

The approval package should contain the sale settlement, principal/commitment roll-forward, retained-collateral underwriting, shared-infrastructure scope, reserve conditions and remaining equity call schedule. Identify whether sale obligations change the remaining budget, timeline or lender control.

Under the first assumed release structure, the project retains $200,000 of additional completion funding but must accelerate $1.3 million of equity into the reserve. Under the lower retained commitment, it also needs $600,000 more total capital. The sale should proceed only if the corresponding dated plan is funded. Reducing debt is beneficial only when the remaining property can still reach completion with the sources actually available.