| For | Developers building homes on lots pledged to a development loan |
| Decision | How much of the first construction advance is available for work |
The first advance on a new construction loan can pay the release price on a finished lot when both financing agreements allow it and the closings are coordinated. The builder needs three figures before scheduling trades: the payoff required for that lot, the amount the new facility can advance at closing and the remaining cash available for work.
Follow the money from one loan to the other
Suppose the same developer owns the subdivision and will build the home. Its development loan encumbers the lots. The new vertical construction loan will finance the house on one specified lot. The development loan holder issues written conditions for releasing that lot. The construction financing and title teams verify the parcel, permitted disbursement and required lien position before closing.
The OCC commercial real estate lending handbook describes separate development and construction facilities, including structures where the first construction draw repays the lot’s development debt. The signed agreements determine whether that approach works for your land development financing.
What remains from a $140,000 opening advance?
Assume a $400,000 vertical construction commitment permits a $140,000 advance at closing. The developer needs $110,000 to release the lot, $6,000 for agreed closing charges and $60,000 for initial site work. In this example the closing instructions allow the rest of the opening advance to pay eligible work.
| Cash movement | Amount |
|---|---|
| Opening advance | $140,000 |
| Principal paid to release this lot | ($110,000) |
| Closing charges | ($6,000) |
| Advance available for initial work | $24,000 |
| Additional cash needed for $60,000 of work | $36,000 |
The commitment still has $260,000 undrawn. Access to it depends on the next eligible milestone and the draw procedure. If the excavation contractor wants payment before that milestone, the developer needs to cover the $36,000 difference or agree to different payment dates before work starts.
How much equity carries into the home build?
The release payment reduces the old facility’s debt and uses part of the new facility’s opening advance. Counting the $110,000 again as fresh sponsor cash would overstate the builder’s contribution. Show the acquisition basis, documented development costs assigned to the lot, remaining obligations and proposed land credit separately. Confirm what the new financing recognizes.
If a separate builder is buying the lot, start with the contract purchase price. The seller’s required release is one use of the sale proceeds. The buyer may also owe funds toward the purchase beyond the release amount. Use the settlement statement for that transaction.
If you have lots ready to build, request a ground-up construction review. Tell us where the project is, how many homes you intend to start and the expected lot release and opening draw. Estimates are enough for an initial discussion.
What should be confirmed before the first trade starts?
- Match the legal lot description on the release request to the parcel in the new financing.
- Get a dated release amount and identify any interest, fees, completion conditions or approvals due in addition to principal.
- Compare the first advance and permitted uses with deposits, closing costs and contractor invoices due before the next draw.
- Have the closing and title professionals confirm how funding, recording and the start of work will be coordinated.
If you plan to sell lots together to a builder instead, model the cash left after a multi-lot release. Selling lots and refinancing retained lots into construction generate different cash flows.