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Takeout Financing
Takeout financing refers to an agreement whereby a lender would provide permanent financing for a project upon the expiry of the construction loan, upon specific conditions being met.
Financing of large construction projects usually comes in two phases.
The first being financing for working capital meant for construction works. Followed by a permanent loan to replace the first loan.
Thus take-out financing would ensure that a lender would make a take-out commitment to provide funding for the second phase. Failing which, a developer can potentially suffer financial catastrophe due to the lack of cash flow.
Some of the criteria that needs to be met in order to “activate” the commitment might the a percentage of unit sale within a particular period of time, or even a target occupancy rate of signing up tenants.
While the construction loan and permanent loan is usually provided by the same lender, they can also be from different lenders at times.
In such cases, a lender offering the construction loan usually requires a borrower to secure a takeout loan before formally approving and disbursing the funds.
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