Construction Loans: 7 Key Negotiation Points for Texas Developers and Contractors
Securing construction financing is often the last green light before mobilization, yet poorly drafted loan terms can sink a project faster any schedule delay. Below are seven high-leverage issues developers and contractors should raise—early and often—when negotiating loan documents and payment terms.
1. Draw Schedule Mechanics
Construction loans disburse in tranches, not lump sums. The draw schedule should:
track objective milestones you can document (e.g., “slab poured and inspected,” not “substantial completion of foundation”);
set clear timeframes for the lender’s inspection and funding; and
require the lender to identify any deficiency in writing within a fixed window.
Some scholarly studies show that tighter monitoring and predictable draw procedures reduce loss severity when projects stall. Negotiate language that treats undisputed work as “deemed approved” if the lender stays silent beyond the review period.
2. Interest Reserve and Carry Costs
Loans often include an interest reserve that pays debt service while work progresses. Make sure:
the reserve lasts at least 10–15% beyond the scheduled completion date, and
unspent reserve dollars may be reallocated to labor or materials if the project stays on time.
Under-funded reserves force contractors to float carrying costs, cutting into liquidity during the riskiest phase of construction.
3. Contingency and Change-Order Funding
Materials spikes and scope creep are inevitable. A well-drafted loan agreement should:
mandate a standalone contingency line (typically 5–10% of hard costs) that can be tapped for approved changes;
allow contractor-initiated change orders that are owner-accepted to be funded without amending the entire budget; and
prohibit the lender from unreasonably withholding consent when changes are required by code or unforeseeable conditions.
Failure to earmark contingency capital is a primary driver of cost overruns that lead to default.
4. Loan Balancing and Re-margin Calls
Many loan agreements let the lender call for “balancing” if the remaining undrawn commitment plus equity is insufficient to finish the job. Developers should insist that:
any re-margin calculation exclude retainage already earned but not released; and
the lender’s right to halt draws is limited to bona fide funding shortfalls verified by an independent cost-to-complete analysis.
Contractors should similarly insist make sure their contracts clearly state that they have no obligation to cover funding gaps.
Historic commentary warns that aggressive loan-balancing clauses shift completion risk onto contractors who never signed up to finance the project.
5. Mechanics’ Lien Subordination and Priority
Texas lien law gives original contractors strong security rights, but most loan documents require lien waivers or subordination agreements. Watch for provisions that:
waive constitutional or statutory lien rights outright (generally void under Texas Property Code §53.286);
subordinate payment claims to future lender advances; or
condition payment on the owner securing title endorsements beneficial only to the lender.
Scholars caution that lenders already enjoy priority through earlier recordation, and further subordination can leave contractors unsecured if the deal collapses.
6. Lender Step-In and Cure Rights
If the owner defaults, the lender may “step in” to assume the contract. Contractors should negotiate:
a cure period for unpaid applications before suspension rights kick in;
confirmation that step-in does not waive outstanding claims or delay damages; and
a requirement that the lender post replacement security (letter of credit or payment bond) equivalent to retainage and open change orders.
Properly drafted step-in clauses preserve project momentum while protecting contractors against uncompensated work.
7. Completion Guaranties and Liquidated Damages
Some lenders demand contractor or subcontractor guaranties that the project will finish on time and on budget. Before accepting, confirm that:
the guaranty is limited to defined “guaranty triggers” (e.g., abandonment, fraud);
liability caps at a negotiated dollar amount or percentage of the contract; and
liquidated-damages align with realistic float and weather allowances.
Unlimited completion guaranties skew risk allocation and can upend a contractor’s balance sheet during market downturns
Final Takeaway
Construction loans are as much risk instruments as they are funding vehicles. Developers and contractors who secure predictable draw procedures, adequate contingencies, balanced lien protections, and reasonable guaranty terms can dramatically improve project cash flow and reduce the chance of litigation when the market shifts. Bring these issues to the table—and into the loan documents—before the first concrete truck ever rolls onto site.
Need help negotiating a construction loan or reviewing a step-in clause? Reach out to Elkhoury Law—solid contracts pour the foundation for profitable projects.
