Loans for large commercial real estate projects are typically split into multiple phases: property acquisition, horizontal improvements, vertical construction, and bridge loans to “bridge the gap” toward longer-term financing.
For more than two years, Enact Partners has been offering qualified borrowers an innovative type of construction loan that acts like a line of credit. We call this loan type a “Revolving Construction Loan” and it can be a game changer, providing qualified borrowers much-needed liquidity at different stages of their projects.
What Are Revolving Loans?
Revolving loans are a type of financing that allows borrowers to access funds up to a specified limit, repay the borrowed amount, and then borrow again as needed without needing to go through additional loan approvals. This flexible borrowing and repayment structure is particularly advantageous for construction projects, which often have varying cash flow needs at different stages.
Because the single loan covers an entire project, it saves borrowers time, lending fees, and the need to go through loan approval processes multiple times during a project’s life cycle.
Additional benefits include fewer and lower title fees, and a reduced risk of issues with title coverage when dealing with future lenders. Continuous title coverage minimizes the risk of broken priority in the repayment order of loans, often associated with starting construction before a construction loan is in place.
How Revolving Loans Work
Revolving loans are similar to home equity lines of credit. While all loans are different and Enact Partners tailors its lending to the specific needs of borrowers, in general, here is how our revolving loans work for developers who have multiple units in a project that will be built in stages.
Initial Approval—Enact Partners approves a maximum loan amount based on a project’s scope, potential, and the borrower’s creditworthiness.
Draws—The borrower can draw funds from the approved amount as needed, typically in phases corresponding to specific project milestones. For example, if the borrower was building a residential subdivision, milestones might include the pouring of a foundation or the building of a roof on one or more homes.
Repayment—As the project progresses and units are sold or additional capital is secured, the borrower repays the already drawn amounts. With our residential subdivision example, the builder might construct five spec homes at a time, market them, and repay the drawn amount once they sell.
Re-draw—Once the current draw is repaid, the borrower can then draw additional funds up to the credit limit, providing ongoing access to capital throughout the project’s duration. In our example, once five spec homes were sold and the current draw repaid, the borrower could draw funds for another five spec homes, and so on.
Benefits of Revolving Construction Loans
Revolving loans are attractive to developers for several reasons:
They’re Flexible—Unlike traditional loans, which provide a lump sum that must be repaid over a fixed period, revolving loans allow developers to draw and repay funds as needed based on achieving project milestones.
Cost Efficiency—Borrowers only pay interest on the funds they actually use as the project progresses, rather than the total approved amount. This can result in significant savings, especially for projects that don’t require the full loan amount to be distributed upfront.
Reduced Paperwork—With milestone-based draws, the approval process for each draw is simplified. Developers need only provide evidence that specific milestones have been met (such as photos of completed work) and proof of payment to contractors, which reduces the administrative burden.
Improved Cash Flow Management—The ability to re-draw funds as they get repaid helps developers ensure they have access to the necessary capital at each stage of the project.
Revolving Loans in Action
Here’s how Enact Partners worked with one developer:
Scenario—An experienced real estate developer came to Enact Partners with a plan to develop new residential housing in Central Valley CA. As planned, the large project would entail several phases of construction. The developer was seeking flexible financing to manage cash flow requirements, particularly for the horizontal construction phase (roads, utilities) followed by vertical construction (homes).
Solution—Enact Partners worked with the borrower to tailor a revolving construction loan specific to the project, which featured the building of 91 single family homes. This allowed the developer to draw funds on up to 30 units at a time, with disbursements once foundations were poured and insulation installed.
Outcome—The developer successfully completed horizontal improvements and vertical construction, using the revolving loan to manage cash flow along the way. By only paying interest on the funds actually drawn at a given time, the developer saved on financing costs and paid no new loan fees for each new phase. While the limit on the Revolver was approximately $5.5 million, the borrower was able to recycle the same funds for all 91 homes, totaling well over $16 million.
Is a Revolving Loan Right for You?
Revolving loans provide a flexible and cost-effective financing solution for construction projects, allowing developers to manage cash flow more efficiently and respond to changing financial needs throughout a project’s lifecycle. At Enact Partners, we believe strongly in providing access to capital in ways that align with borrower needs. In this way, we help developers and real estate investors realize their visions by empowering them to complete their projects on time and with lower financing fees.
Contact Us About Your Borrowing or Investing Needs
(760) 516-7776 | [email protected] | www.enactpartners.com
