# Equity first pari passu and construction funding sequences

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Status: Published
Publisher: Jaken Finance Group

Two construction loans can require the same total borrower equity while requiring very different amounts on the first funding date. Compare the funding sequence with the sponsor's actual cash-delivery schedule, including costs the lender will not finance. A total equity commitment is insufficient if part of it arrives after the contract requires payment.

The [OCC construction budget and equity discussion](https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) provides context for evaluating project funding. The sequences below are hypothetical contract mechanics. No lender is assumed to require either structure, and no prior land contribution or paid cost receives equity credit unless expressly accepted.

## Fix the same budget and commitment for both cases

Assume total project cost of $6 million. The hypothetical lender accepts $5 million of eligible costs and excludes $1 million of other required costs. Debt commitment is 70% of eligible cost, or $3.5 million. Borrower funding totals $2.5 million: $1.5 million toward eligible costs plus the full $1 million excluded amount.

The project pays eligible costs of $1 million, $2 million and $2 million at three successive stages. Excluded costs are $600,000, $200,000 and $200,000 at those same stages. Interest, fees and operating carry are assumed already included within the stated cost categories; the example does not calculate interest differences between funding orders.

## Compare the cash calls, not only total leverage

Under the hypothetical equity-first sequence, the borrower pays the first $1.5 million of eligible costs before debt advances. Under the pari-passu sequence, the borrower pays 30% and lender 70% of each eligible cost. Excluded costs remain entirely borrower-funded in both.

| Stage | Eligible cost | Excluded cost | Equity-first borrower cash | Equity-first debt | Pari-passu borrower cash | Pari-passu debt |
|---|---:|---:|---:|---:|---:|---:|
| 1 | $1,000,000 | $600,000 | $1,600,000 | $0 | $900,000 | $700,000 |
| 2 | $2,000,000 | $200,000 | $700,000 | $1,500,000 | $800,000 | $1,400,000 |
| 3 | $2,000,000 | $200,000 | $200,000 | $2,000,000 | $800,000 | $1,400,000 |
| Total | $5,000,000 | $1,000,000 | $2,500,000 | $3,500,000 | $2,500,000 | $3,500,000 |

Both structures finance the same total cost with the same debt and equity. The first-stage borrower requirement differs by $700,000. A statement that the investor has committed $2.5 million does not show whether either schedule is executable.

## Place equity sources on the same dates

Assume $1 million is available before stage 1, another $800,000 becomes available before stage 2 and $700,000 before stage 3. These amounts total the required $2.5 million, but they are not all available initially.

The equity-first structure has a $600,000 stage 1 gap. Later contributions do not fund the earlier payment. The pari-passu structure uses $900,000 at stage 1, leaving $100,000. Adding $800,000 before stage 2 gives $900,000, of which $800,000 is used, again leaving $100,000. Adding $700,000 before stage 3 gives the required $800,000. It fits the stated cash schedule with no ending buffer.

The lack of a buffer remains a separate concern. An additional $100,000 required before stage 3 would create a gap even in the pari-passu case. This is a funding-feasibility result, not a recommendation that the lender should accept that sequence.

## Verify what counts toward the equity requirement

Suppose the sponsor has already paid $400,000 of eligible design and site costs before stage 1. If the lender recognizes them toward the $1.5 million equity-first requirement, the remaining eligible-equity hurdle may be $1.1 million under the actual terms. But the schedule must also remove those paid costs from future uses if they were included there.

Do not claim $400,000 of prior equity credit while leaving the same invoices fully unpaid in the stage budget. Conversely, a documented expenditure may be recognized as equity without being reimbursed in cash. Keep recognition, reimbursement and actual bank balances separate.

Land appreciation, affiliate fees and uncommitted investor promises may receive different treatment. Obtain the lender's accepted definition and supporting evidence rather than assuming every contribution in an internal budget counts equally.

## Connect the sequence to draw conditions

Even under pari-passu funding, the lender may reimburse after evidence and inspection rather than pay simultaneously with the contractor. The borrower may need temporary cash beyond its permanent equity share. Model that payment lag separately; the table assumes the stage's accepted debt arrives when needed.

If funding conditions fail, undrawn commitment is not unrestricted cash. The package should show the evidence required at each stage, who accepts it and the fallback if a draw is delayed. A change in funding order must be documented, not inferred from one accommodating advance.

The final comparison should include total equity, first-stage equity, dated sources, excluded costs, prior-cost recognition and any reimbursement gap. That makes the funding order a concrete cash-delivery decision rather than a label attached to the same headline loan percentage.


## Source references
- [OCC — Commercial Real Estate Lending](https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf) — Printed pages 33–35: Project Costs, Budget and Equity · Checked 2026-10-21 · Source date / context Version 2.0 March 2022; reputation-risk references removed March 2025 · Bank supervisory context; actual eligible budget and equity recognition require the lender’s terms.