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Construction loans are typically provided by local and regional banks. Other sources include money center banks, Pension Funds, Insurance Companies, and Credit Companies.
Construction loans typically require some level of recourse, including a personal guaranty of completion and repayment, though recourse may be capped. Interest rates are set as a credit spread over Prime or LIBOR; a floating rate of interest facilitates efficient incremental draws and re-payment flexibility.
Derivatives and hedging products are often employed to control floating rate exposure. Terms are matched to the construction period – generally 2-3 years – and may include extensions and the option of convert to a “mini-perm” (usually priced over swaps).
Construction lenders prefer significant cash equity, but in some cases will accept imputed land equity to offset contribution requirements.
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