What to take into your next appraisal
- Count contracts, receivables and cash independently.
- Track restricted deposits outside freely available liquidity.
- Apply cancellation and settlement timing to individual cohorts.
Do not fund construction with a contract total
A signed contract can support market evidence or satisfy a lender's presales test without producing immediately usable cash. The lender may require unconditional contracts, a minimum deposit, acceptable buyer concentration or legal review. The model should show the contractual requirement rather than assuming every reservation qualifies.
OCC guidance includes presale requirements and minimum unit-release requirements among relevant construction-lending controls. Those requirements are transaction-specific. Escrow rules and consumer protections also vary by jurisdiction and should be sourced separately.
Sources: Office of the Comptroller of the Currency: Commercial Real Estate Lending, version 2.0
Trace ten hypothetical presales
Ten units are contracted at 500,000 each, creating 5 million of contracted gross value. Buyers pay a 10% deposit, producing 500,000 cash. Assume all deposits are restricted until settlement and there are no other instalments. The remaining receivable is 4.5 million and unrestricted cash available for construction is zero.
If eight units settle this quarter, new settlement cash is 3.6 million and 400,000 of their deposits is released. Those eight units therefore generate 4 million of total usable settlement proceeds before selling costs and debt repayment. The remaining 100,000 deposit balance stays restricted for the two unsettled units.
| Measure | At presale | After eight settlements |
|---|---|---|
| Contracted value | 5,000,000 | 5,000,000 |
| Cumulative buyer cash | 500,000 | 4,100,000 |
| Remaining buyer receivable | 4,500,000 | 900,000 |
| Restricted deposit balance | 500,000 | 100,000 |
| Cumulative released cash | 0 | 4,000,000 |
Apply the settlement proceeds in the correct order
If the lender requires 300,000 principal repayment for each settled unit, the eight settlements sweep 2.4 million to debt. Only 1.6 million remains before other closing costs and project liabilities. Do not count the 400,000 released deposit a second time as an additional sale above the eight units' 4 million price.
A minimum release price may differ from a percentage of proceeds. Model the actual rule, including whether repayment reduces future borrowing availability. A non-revolving construction loan may have no redraw capacity even when its outstanding balance falls.
Give defaults a full cash and inventory treatment
For a cancelled contract, remove the unit from contracted inventory, account for any legally payable refund, reverse the unpaid contractual receivable and decide when the unit can be marketed again. Deposit forfeiture cannot be assumed without the applicable contractual and legal basis.
Separate a delayed buyer from a cancelled buyer. A delay changes cash timing and finance cost; cancellation may also change selling costs, resale price and completion inventory. Apply those consequences once, with a record of which cohort they affect.
Reconcile the three registers every month
The unit register should roll from opening available units through new contracts, cancellations and settlements. The receivables register should roll from invoices and instalments to collections and adjustments. The bank and escrow registers should explain where the collected cash is held and what may be released.
Present contracted revenue, collected cash and available cash as separate totals. That simple distinction prevents a high presales percentage from concealing a funding shortfall. It also gives lenders and investors a clear explanation when reported sales growth does not translate into liquidity.
Sources and further reading
- Commercial Real Estate Lending, version 2.0 Office of the Comptroller of the Currency
Published by Feasly. How we prepare our guides. Suggest a correction.
