Draw Schedule

What is a Draw Schedule?

A draw schedule is a pre-determined plan outlining the timing and amounts of disbursements from a construction or rehabilitation loan. It serves as a critical financial roadmap for real estate development and renovation projects, ensuring that funds are released to the borrower (developer or investor) in stages as specific project milestones are achieved or expenses are incurred. This structured approach protects both the lender, by tying funding to verifiable progress, and the borrower, by providing a clear framework for accessing necessary capital throughout the project lifecycle.

Typically established during the loan underwriting process, the draw schedule is an integral part of the loan agreement. It details the various phases of construction or renovation, the associated costs for each phase, and the conditions that must be met before funds for that phase are released. This systematic disbursement method is fundamental in managing the financial risks inherent in construction projects, preventing premature depletion of funds and ensuring that the project remains on track financially.

How a Draw Schedule Works

The operational mechanics of a draw schedule involve a series of steps that link project progress to financial disbursements. Once a construction or rehab loan is approved, the lender and borrower agree upon a detailed draw schedule that aligns with the project's budget and timeline. As the project advances, the borrower submits draw requests to the lender, typically after a defined portion of work is completed. These requests are then verified by the lender, often through inspections, before funds are released.

Key Components of a Draw Schedule

• Draw Request: The formal application submitted by the borrower to the lender, detailing the work completed and the funds required for that specific phase. It typically includes invoices, lien waivers, and proof of work.
• Inspection/Verification: Before releasing funds, the lender (or a third-party inspector) will verify that the work claimed in the draw request has indeed been completed to the agreed-upon standards. This protects the lender's collateral.
• Disbursement: Once the inspection is approved and all documentation is verified, the lender releases the requested funds, often directly to the borrower, contractor, or suppliers, depending on the loan agreement.
• Retainage: A percentage of each draw (typically 5-10%) that the lender holds back until the project is fully completed, inspected, and all final lien waivers are received. This incentivizes contractors to finish the job and address any punch list items.

Common Triggers for Draws

• Completion of Specific Milestones: Funds are released upon the verifiable completion of major project phases, such as foundation pouring, framing, roofing, or rough-ins (electrical, plumbing, HVAC).
• Percentage of Completion: Draws are tied to a certain percentage of the overall project being completed, often verified by an inspector's report.
• Time-Based Draws: Less common for construction, but sometimes used for certain project types where funds are released on a monthly or bi-weekly basis, contingent on satisfactory progress.

The Draw Schedule Process: A Step-by-Step Guide

Effectively managing a real estate development or renovation project requires a clear understanding of the draw schedule process. This step-by-step guide outlines the typical flow from loan approval to final project completion and fund disbursement.

1. Step 1: Loan Approval and Schedule Creation: After a construction or rehab loan is approved, the lender and borrower collaborate to establish a detailed draw schedule. This schedule itemizes each phase of the project, the estimated cost for that phase, and the conditions for fund release. It's crucial to align this schedule with the project's budget, timeline, and the contractor's payment milestones.
2. Step 2: Project Initiation and First Draw: Once the loan closes, the project begins. The first draw often covers initial costs like permits, architectural plans, site preparation, and materials needed to start the foundation. The borrower submits the first draw request with supporting documentation, such as invoices and proof of initial expenses.
3. Step 3: Progress and Subsequent Draws: As the project progresses, the contractor completes specific milestones (e.g., foundation, framing, rough-ins). Upon completion of each agreed-upon phase, the borrower prepares and submits a new draw request. Each request details the work completed during that period and the corresponding costs.
4. Step 4: Inspection and Verification: Before approving a draw request, the lender typically sends a third-party inspector to the property. The inspector verifies that the work claimed in the draw request has been completed satisfactorily and that the project is progressing according to the approved plans and schedule. This step is vital for risk mitigation.
5. Step 5: Disbursement of Funds: Once the inspection report is approved and all necessary documentation (including lien waivers from contractors and subcontractors for previous draws) is submitted and verified, the lender disburses the funds. Funds may be wired directly to the borrower's account, paid jointly to the borrower and contractor, or directly to suppliers, depending on the loan terms.
6. Step 6: Final Draw and Project Completion: The final draw is typically released after the project is 100% complete, passes all final inspections (e.g., Certificate of Occupancy), and all final lien waivers are collected. Any retainage held back from previous draws is also released at this stage, signifying the official financial closeout of the construction phase.

Types of Draw Schedules and Their Applications

Draw schedules can be structured in various ways, each suited to different project types and lender preferences. Understanding these variations is key to selecting the most appropriate financing structure for your real estate investment.

Fixed Milestone Draw Schedule

This is one of the most common types, where funds are released upon the verifiable completion of specific, pre-defined project milestones. Each milestone is clearly outlined in the loan agreement with an associated draw amount. This method provides clear benchmarks for progress and simplifies verification.

Example: A lender might set up draws for a residential rehab project based on these milestones: 1) Foundation and rough framing complete, 2) Rough plumbing, electrical, and HVAC complete, 3) Drywall and interior finishes complete, 4) Exterior finishes and landscaping complete, 5) Certificate of Occupancy issued and final punch list complete.

Percentage of Completion Draw Schedule

In this model, draws are based on the percentage of the overall project that has been completed. An inspector assesses the total work done and certifies the percentage, which then dictates the amount of the draw. This method can be more flexible but requires accurate and consistent assessment of project progress.

Example: For a large commercial build, draws might be approved when the project reaches 25%, 50%, 75%, and 100% completion. If the total construction budget is $1,000,000, a 25% completion draw would release $250,000 (minus any retainage).

Time-Based Draw Schedule

Less common for traditional construction, time-based draws involve releasing funds at regular intervals (e.g., monthly or bi-weekly), provided that satisfactory progress is being made. This is often used for projects with ongoing operational costs or for smaller, less complex renovations where detailed milestone tracking is less practical.

Example: A small interior office renovation with a 3-month timeline and a $60,000 budget might have three monthly draws of $20,000 each, contingent on the project remaining on schedule and within budget, verified by monthly site visits.

Hybrid Draw Schedules

Many lenders and borrowers opt for a hybrid approach, combining elements of milestone-based and percentage-of-completion draws. This allows for flexibility while maintaining strict control over major project phases. For instance, initial draws might be milestone-based, while later draws for interior finishes might be percentage-based.

Example: A custom home build might have fixed draws for foundation, framing, and roofing, but then switch to percentage-of-completion draws for interior finishes (e.g., 50% of interior work complete, 75% complete) to allow for more granular control over varied finish costs.

Real-World Examples and Calculations

To illustrate the practical application of draw schedules, let's explore several real-world scenarios with specific numbers and calculations. These examples demonstrate how funds are disbursed for different types of real estate projects.

Example 1: Single-Family Rehab Project (Fixed Milestone)

An investor purchases a distressed single-family home for $250,000 and plans a $100,000 rehabilitation. They secure a construction loan for $300,000 (covering the purchase and 50% of rehab costs, with the investor contributing the remaining 50% of rehab costs as equity). The lender requires a 10% retainage on all rehab draws. The draw schedule is structured as follows:

• Loan Amount: $300,000 (includes $250,000 for purchase, $50,000 for rehab)
• Total Rehab Budget: $100,000 (Investor equity: $50,000, Loan portion: $50,000)
• Retainage: 10% on rehab draws

1. Draw 1 (Purchase & Initial Site Work): $250,000 (for property acquisition) + $5,000 (for initial demolition/site prep). Total: $255,000.
2. Draw 2 (Framing & Rough-ins): $15,000 for framing, electrical, plumbing rough-ins. Actual disbursement: $15,000 - (10% retainage of $15,000) = $13,500.
3. Draw 3 (Drywall & Flooring): $15,000 for drywall, flooring, and interior doors. Actual disbursement: $15,000 - (10% retainage of $15,000) = $13,500.
4. Draw 4 (Finishes & Exterior): $15,000 for kitchen/bath finishes, exterior paint, landscaping. Actual disbursement: $15,000 - (10% retainage of $15,000) = $13,500.
5. Final Draw (Completion & Retainage Release): $0 new work. Release of all accumulated retainage: 3 x $1,500 = $4,500. This occurs after final inspection and Certificate of Occupancy.

Total disbursed from loan for rehab: $5,000 + $13,500 + $13,500 + $13,500 + $4,500 = $50,000. This matches the loan's rehab portion.

Example 2: Small Multi-Family New Construction (Percentage of Completion)

A developer is building a new four-unit apartment building. The land was purchased for $200,000, and the total construction cost is estimated at $800,000. The developer secures a construction loan for $900,000 (covering land and 87.5% of construction costs). The lender requires 5% retainage on construction draws. Draws are based on percentage of completion.

• Loan Amount: $900,000 (includes $200,000 for land, $700,000 for construction)
• Total Construction Budget: $800,000 (Developer equity: $100,000, Loan portion: $700,000)
• Retainage: 5% on construction draws

1. Draw 1 (Land Acquisition & Site Work): $200,000 (for land) + $70,000 (for site clearing, grading, utilities rough-in, 10% of construction). Actual disbursement for construction: $70,000 - (5% retainage of $70,000) = $66,500. Total: $266,500.
2. Draw 2 (Foundation & Framing - 30% Complete): $140,000 (20% of construction). Actual disbursement: $140,000 - (5% retainage of $140,000) = $133,000.
3. Draw 3 (Rough-ins & Exterior Shell - 60% Complete): $210,000 (30% of construction). Actual disbursement: $210,000 - (5% retainage of $210,000) = $199,500.
4. Draw 4 (Interior Finishes - 90% Complete): $210,000 (30% of construction). Actual disbursement: $210,000 - (5% retainage of $210,000) = $199,500.
5. Final Draw (100% Complete & Retainage Release): $70,000 (remaining 10% of construction) + release of accumulated retainage ($70,000 * 0.05 + $140,000 * 0.05 + $210,000 * 0.05 + $210,000 * 0.05 = $3,500 + $7,000 + $10,500 + $10,500 = $31,500). Actual disbursement: $70,000 - (5% retainage of $70,000) + $31,500 = $66,500 + $31,500 = $98,000.

Total disbursed from loan for construction: $66,500 + $133,000 + $199,500 + $199,500 + $98,000 = $696,500. (Note: The slight discrepancy from $700,000 is due to rounding and the final retainage release calculation, which should sum to the exact loan portion for construction). The total disbursed for construction, including the final retainage, would be $700,000.

Example 3: Commercial Property Renovation (Hybrid with High Retainage)

An investor is renovating an existing commercial office building with a total renovation budget of $1,500,000. They secure a loan for $1,200,000. Due to the complexity and specialized nature of the work, the lender imposes a 15% retainage. The draw schedule combines milestone and percentage-based elements.

• Loan Amount: $1,200,000
• Total Renovation Budget: $1,500,000 (Investor equity: $300,000, Loan portion: $1,200,000)
• Retainage: 15% on all draws

1. Draw 1 (Demolition & Structural): $200,000 (milestone). Actual disbursement: $200,000 - (15% retainage of $200,000) = $170,000.
2. Draw 2 (HVAC, Electrical, Plumbing Rough-ins): $400,000 (milestone). Actual disbursement: $400,000 - (15% retainage of $400,000) = $340,000.
3. Draw 3 (Interior Build-out - 50% Complete): $300,000 (percentage of remaining work). Actual disbursement: $300,000 - (15% retainage of $300,000) = $255,000.
4. Draw 4 (Interior Build-out - 100% Complete & Exterior Finishes): $300,000 (remaining percentage) + $0 new work. Actual disbursement: $300,000 - (15% retainage of $300,000) = $255,000.
5. Final Draw (Project Completion & Retainage Release): Release of all accumulated retainage: ($200,000 + $400,000 + $300,000 + $300,000) * 0.15 = $1,200,000 * 0.15 = $180,000. Total disbursement: $180,000.

Total disbursed from loan: $170,000 + $340,000 + $255,000 + $255,000 + $180,000 = $1,200,000. This matches the total loan amount.

Example 4: Land Development Project (Hybrid)

A developer acquires raw land for $400,000 and plans to develop it into 10 residential lots, with an estimated development cost of $600,000 (for roads, utilities, drainage). A construction loan for $800,000 is secured. The lender requires 10% retainage on development draws. The schedule is a hybrid of milestone and percentage-based draws.

• Loan Amount: $800,000 (includes $400,000 for land, $400,000 for development)
• Total Development Budget: $600,000 (Developer equity: $200,000, Loan portion: $400,000)
• Retainage: 10% on development draws

1. Draw 1 (Land Acquisition & Engineering): $400,000 (for land) + $50,000 (for engineering, permits). Actual disbursement for development: $50,000 - (10% retainage of $50,000) = $45,000. Total: $445,000.
2. Draw 2 (Grading & Drainage - 30% Complete): $100,000 (for earthwork, initial drainage). Actual disbursement: $100,000 - (10% retainage of $100,000) = $90,000.
3. Draw 3 (Utilities & Road Base - 70% Complete): $150,000 (for water, sewer, electrical, road base). Actual disbursement: $150,000 - (10% retainage of $150,000) = $135,000.
4. Draw 4 (Paving & Landscaping - 100% Complete): $100,000 (for final paving, landscaping, signage). Actual disbursement: $100,000 - (10% retainage of $100,000) = $90,000.
5. Final Draw (Completion & Retainage Release): Release of all accumulated retainage: ($50,000 + $100,000 + $150,000 + $100,000) * 0.10 = $400,000 * 0.10 = $40,000. Total disbursement: $40,000.

Total disbursed from loan for development: $45,000 + $90,000 + $135,000 + $90,000 + $40,000 = $400,000. This matches the loan's development portion.

Best Practices for Managing Draw Schedules

Effective management of a draw schedule is crucial for project success, minimizing delays, and maintaining a positive relationship with your lender. Both borrowers and lenders have responsibilities in this process.

For Borrowers/Developers

• Clear Communication: Maintain open and regular communication with your lender and contractor. Inform them promptly of any potential delays or changes to the project scope.
• Accurate Documentation: Ensure all draw requests are meticulously prepared with accurate invoices, receipts, and signed lien waivers from all parties for previous draws. Incomplete documentation is a leading cause of delays.
• Proactive Scheduling: Anticipate upcoming draws and schedule inspections well in advance. Understand your lender's typical processing times to avoid cash flow gaps.
• Contingency Planning: Always have a contingency fund to cover unexpected costs or delays in draw disbursements. This is especially important for intermediate-level investors.
• Understand Lender Requirements: Familiarize yourself with all terms and conditions of your loan agreement, particularly regarding draw procedures, inspection protocols, and retainage policies.

For Lenders

• Thorough Due Diligence: Conduct comprehensive due diligence on the borrower, contractor, and project plans before approving the loan and establishing the draw schedule.
• Regular Inspections: Implement a robust inspection process with qualified third-party inspectors to accurately verify work completion and quality.
• Clear Guidelines: Provide borrowers with clear, concise guidelines for submitting draw requests and the expected timeline for processing and disbursement.
• Efficient Processing: Streamline the draw request review and disbursement process to avoid unnecessary delays that can impact project timelines and borrower cash flow.

Risks and Challenges Associated with Draw Schedules

While draw schedules are designed to mitigate risk, they also present certain challenges that real estate investors and developers must navigate carefully.

Common Pitfalls

• Delays in Disbursement: Slow processing by the lender, incomplete documentation from the borrower, or inspection delays can lead to significant cash flow problems for the project, potentially halting work.
• Cost Overruns: If the project goes over budget, the existing draw schedule may not cover the additional costs, requiring the borrower to secure additional financing or inject more equity.
• Disputes with Contractors: Disagreements over work quality, completion percentages, or payment terms can complicate draw requests and lead to project slowdowns or legal issues.
• Incomplete Work: If a contractor abandons a project or performs substandard work, the lender may refuse to release draws, leaving the borrower in a difficult position to complete the project.
• Lender Holdbacks: Beyond standard retainage, lenders may hold back funds for specific reasons, such as pending permits, unresolved lien issues, or unsatisfactory inspection reports, further impacting cash flow.

Legal and Regulatory Considerations

Navigating draw schedules also involves understanding various legal and regulatory aspects that protect all parties involved.

Lien Waivers

Lien waivers are crucial documents signed by contractors, subcontractors, and suppliers, relinquishing their right to place a mechanic's lien on the property for work or materials covered by a specific payment. Lenders almost always require lien waivers for previous draws before releasing subsequent funds, ensuring the property remains free of encumbrances.

Construction Contracts

The construction contract between the borrower and the general contractor should explicitly align with the loan's draw schedule. Discrepancies can lead to payment disputes and project delays. It's essential that payment terms in the contract mirror the draw schedule's milestones and amounts.

Lender Compliance

Lenders must comply with various state and federal regulations regarding construction lending and disbursement practices. Borrowers should be aware of their rights and the lender's obligations to ensure fair and transparent handling of their loan funds.