How is construction finance drawn on a modular project?

A construction loan is not paid out in one sum. It is drawn in stages as the building progresses, and interest runs on what has been drawn.

On a conventional project that progress is easy to see, because it happens on the land the lender holds as security. On a modular project a large part of it happens somewhere else.

How a conventional drawdown works

The builder submits a progress claim for work completed. The lender's quantity surveyor inspects the site, confirms the work is in place and the value is fair, and the lender releases the funds.

The lender is comfortable because each dollar drawn is matched by work fixed to the land. If the project stopped, that work would still be there.

Why modular changes the picture

In Hybrid Volumetric Modular, the modules are built and fitted out in a factory while the site is prepared. By the time they are delivered, much of the value of the building already exists, but none of it is on the secured land yet.

A financier will want three things settled before that is comfortable: how work in the factory is verified, who owns a module once it has been paid for, and how it is protected until it is installed.

Inspecting work in the factory

The simplest answer to verification is to let the quantity surveyor see it. Factory inspections can sit alongside site inspections, with progress claimed against defined stages of fabrication.

A factory build also produces a written quality record for each module, as described in [factory quality control and tolerances](/blog/factory-quality-control-and-tolerances). That record gives the surveyor evidence of what has been completed and checked, beyond what can be seen on the day.

Ownership of a paid module

The contract sets out when ownership of a module passes to the client. Clear terms on that point, with each module identified to its project, are what let a lender treat off-site work as part of its security.

The same terms matter if a site is delayed and finished modules have to wait, which is the situation covered in [module storage when a site is not ready](/blog/module-storage-when-a-site-is-not-ready).

Insurance from the factory to the site

A module is exposed to different risks in the factory, on the road and on site. The cover for each stage, and who holds it, should be confirmed with the financier rather than assumed.

That chain of cover is part of the wider picture in [insurance and risk in modular delivery](/blog/insurance-and-risk-in-modular-delivery).

The shorter drawdown

There is a clear benefit on the other side. When site preparation and fabrication run in parallel, the programme can be reduced by up to 60 percent, and the drawdown period shortens with it.

Fewer months of drawn funds means fewer months of interest, and the project reaches completion and income-producing status sooner. The effect of that on a feasibility is set out in [how Hybrid Volumetric Modular changes a development feasibility](/blog/how-hvm-changes-a-development-feasibility).

Settle it before the facility is signed

The drawdown structure is easiest to agree before the loan is documented. That means a programme showing fabrication and site works side by side, a clear set of claim stages, defined terms on ownership and insurance, and one accountable party answering for all of it.

A lender who sees that at the start has fewer questions to price, and the project starts on terms that suit how it will actually be built.

MADEmodular / MADEbetter.

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