Major building projects typically cost millions of dollars to complete and they won’t start making any money until sometime after the construction has been finished. In order to finance these large-scale projects, a funding agreement needs to be in place between the people or company who needs the construction done and the financial institution(s) who will be providing the capital for the project.
These agreements are necessary to get the loan because of the complexity of the work being done and the amount of money involved. A good funding agreement will include many different elements, including the following essential details.
The purpose clause will identify what the money is going to be used for. It is not enough to simply say that the financing is to be used for ‘an office building located at X location.’ Instead, financial institutions will need to know how much is used for each major area. Some examples of what can be identified in this clause would include payments for licensing, architect fees, equipment costs, employment costs, and more.
For many funding agreements, the funds will only be made available as they are needed. Financial institutions may approve a total loan for $100 million, for example, but release it in phases. The drawdown requirements list out these phases and any requirements that need to be met in order to get the funds. A simple example of this is requiring proof that all licensing, inspections, and regulatory approvals must be met before the financiers will release the funds to purchase the supplies needed to begin the actual construction.
While all loans have detailed instructions on how and when the money must be paid back, large construction loans will often have much more complex repayment details. Since the project won’t generate any revenue until it is completed, there might not be any payments necessary until that point. The agreement may also dramatically reduce the payment amounts up to a certain date, and then have them increase once revenue is being generated.
Events of Default
While most construction projects get completed without issue, there are times when it becomes impossible to continue with the construction. This typically leads to a default on the financing. The funding agreement will lay out how this will be dealt with based on the cause of the default.
Some examples of things that should be covered under this element of the funding agreement would include what happens if the project is not completed on time, if the project sponsors or investors fail to meet their obligations, if government action is taken that disrupts the construction, if there is an employment strike, or if there is a terrorist attack. These are just a few examples, and the specifics in an agreement should be tailored to the risks of a project.
Get Help with Your Funding Agreement
Funding agreements can get very complicated. Making sure they are written up properly so that all the necessary information is in them is very important. Having an attorney available to write up the agreement, or review a proposed agreement, can help avoid issues with the project. Contact Florida Construction Law Group to speak with an attorney with experience in this area.