Draw
A periodic disbursement from the lender to the borrower from the construction loan proceeds to cover costs incurred during the development process. Common costs include materials, contractors or subcontractors, or any other vendor invoices in a given period during the development process. Typically, draws are monthly.
Putting ‘Draw’ in Context
Silver Star Development is embarking on a ground-up development of a luxury hotel in Las Vegas, NV, known as The Star Elite Hotel and Resort. The project will feature 300 rooms, a full-service spa, multiple restaurants, and a rooftop pool deck, aiming to attract both high-end tourists and business travelers. The total project cost is estimated at $100 million and will take 24 months to complete. To fund the construction, Silver Star Development secured a $65 million construction loan, with the remaining capital coming from equity partners.
As construction begins, the developer incurs various costs each month, including payments to contractors, materials for the building structure, and vendor invoices for specialized work like plumbing and electrical systems. Instead of receiving the full loan amount upfront, Silver Star Development accesses the loan through monthly draws. These draws are periodic disbursements from the lender, which are used to cover expenses as they arise throughout the development process.
For example, in month five, after completing the foundation and beginning structural framing, the general contractor submits a bill for $4 million for labor and materials. Silver Star Development compiles these expenses, along with additional costs for subcontractors and materials, and submits a draw request to the lender for a total of $5.5 million. The lender verifies that the work has been completed to date and disburses the requested amount from the loan proceeds.
This draw process continues on a monthly basis, ensuring that Silver Star Development can fund construction costs without having to front the capital from its own reserves. By the time the project reaches completion, the developer will have taken multiple draws totaling $65 million, corresponding to the loan’s total amount.
In this context, “Draw” refers to the method by which Silver Star Development systematically accesses loan funds to meet ongoing construction costs, ensuring liquidity throughout the development of The Star Elite Hotel and Resort.
Frequently Asked Questions about Construction Loan Draws in Real Estate Development
What is a “Draw” in a construction loan?
A draw is a periodic disbursement from the lender to the borrower from the construction loan proceeds to cover development costs incurred. These typically include payments for materials, contractors, and vendor invoices.
How frequently are construction loan draws made?
Draws are typically processed on a monthly basis, aligned with the construction schedule and billing cycles of contractors and vendors.
What expenses can be covered by a draw?
Common expenses include labor, materials, subcontractor fees, and vendor invoices for ongoing construction work. For example, foundation work, framing, plumbing, and electrical systems.
How does a developer request a draw?
The developer compiles eligible expenses and submits a formal draw request to the lender. The lender verifies work progress and cost documentation before disbursing funds.
Why are draws used instead of disbursing the full loan upfront?
Draws ensure that loan proceeds are only used for verified construction costs as incurred. This approach minimizes lender risk and aligns loan disbursements with actual project progress.
What happens at the end of the draw process?
At project completion, the total of all monthly draws will typically equal the full construction loan amount. For example, Silver Star Development accessed $65 million in draws by the end of their hotel project.
Click here to get this CRE Glossary in an eBook (PDF) format.