Condominium development: reconcile presales to unit-release debt repayment

Condominium construction debt is repaid through completed unit closings, not through a reservation count alone. A useful financing model connects each contract’s status, buyer conditions, deposit treatment, expected closing date and required lender release payment. It should also show the unsold or failed-closing units that remain after the first wave of sales.

OCC’s construction-underwriting discussion cautions that presales may not become completed sales and emphasizes reviewing whether commitments and deposits are substantive. The actual project’s contracts, applicable law and lender requirements determine the evidence needed. OCC, Commercial Real Estate Lending, Preleasing discussion

Use a unit-by-unit contract ledger

Separate reservations, executed contracts, contracts with unresolved conditions, closing-ready contracts and completed sales. Record buyer financing conditions, cancellation rights, deposit amount and location, required completion evidence and the scheduled closing. Have counsel interpret contract enforceability and deposit use under the applicable jurisdiction.

A deposit in escrow may help document commitment but may not be available for construction or debt service. If it is credited against the purchase price at closing, do not count both the full sale price and the deposit as separate revenue. Track who holds the cash and when it becomes available under the actual documents.

Also include the project-wide obligations that remain after individual closings: unfinished work, common elements, warranties, reserves and unsold-unit carrying costs. Their treatment depends on the actual project and documents.

Hypothetical eight-unit sellout

Assume eight units are expected to sell for $500,000 each, a $4 million gross sellout. Construction principal outstanding at the beginning of the sale period is $2.8 million. Selling costs are 5% of each price, and the hypothetical lender requires a $400,000 principal release payment for each unit until the loan is repaid. Any final principal payment is capped at the outstanding balance; interest and other payoff costs are modeled separately.

Each full-price closing yields $475,000 after selling costs. While the $400,000 release applies, $75,000 remains in the project. After seven closings, the $2.8 million principal is repaid and cumulative residual cash from those sales is $525,000. The eighth closing contributes another $475,000 before remaining project obligations.

The $1 million is not project profit. It is cash after selling costs and this principal repayment, before unreimbursed equity, interest, taxes, remaining construction and other obligations. The example begins after construction funding has occurred.

Reconcile deposits to the closing statement

Suppose six buyers each deposited $50,000 into escrow and all six close at the original $500,000 price. The $300,000 of deposits plus $2.7 million of additional buyer funds equals $3 million of gross purchase price. It does not equal $3.3 million. After $150,000 of selling costs and $2.4 million of principal release payments, residual cash is the same $450,000 shown in the table.

If deposits were previously released and spent under a legally permitted arrangement, the closing cash available would be different even though total sales consideration is unchanged. Reconcile prior use explicitly and obtain the appropriate legal and lender review before assuming deposits can fund construction.

Stress failed closings and price reductions

Assume only four of six scheduled buyers close on time. Those four closings leave $1.2 million of principal outstanding. If the other four units take three additional months to sell, and aggregate project interest and holding cost is $18,000 monthly during that interval, the delay consumes $54,000. This entered carry amount must be supported by an actual debt and operating schedule.

Now assume one delayed unit sells for $420,000. After 5% selling costs, net proceeds are $399,000, which is $1,000 below the stipulated $400,000 release requirement while that requirement still applies. The closing needs an additional cash source or an approved release modification. A positive projected total sellout does not automatically permit a particular unit closing with insufficient release proceeds.

Manage repayment as a sequence

Update the ledger after each closing, price amendment or cancellation. Reconcile actual principal, accrued interest, remaining construction, undrawn funds and available cash. Do not distribute residual sale proceeds merely because the first units closed above their allocated costs; later units and common obligations may still require funding.

The debt request should present contract quality, closing readiness and release mechanics together. That gives the investor and adviser a realistic repayment calendar and exposes where a failed buyer, delayed completion or lower price creates a specific cash requirement before the construction loan matures.