Drawdown

[edit] Introduction

In relation to property development finance, the term 'drawdown' can have numerous meanings, including a portion of the funding - or drawdown - received incrementally over the duration of the project. Under this definition, a drawdown on financing (such as a loan) may be taken in stages to finance a project. The incremental distribution of funds is sometimes referred to as a progressive drawdown.

In some instances, drawdown may refer to the initiation of a transaction - or drawdown - under a loan agreement. Under this definition, funds can become available (or are officially borrowed) on a drawdown date. It can also be an amount of money - or drawdown - borrowed for a specific purpose. This usage is considered informal and is not traditionally used in the context of property development financing.

When not associated with financial matters, drawdown may refer to the controlled reduction of fluids or pressure wells, reservoirs and so on.

[edit] Drawdown and cash flow

The incremental distribution of funds is sometimes referred to as a progressive drawdown. While a progressive drawdown provides resources as needed, the success of this approach may require careful planning to ensure cash is distributed at the appropriate stages based on the progress of the project.

If drawdown is dictated by a schedule provided by the funder, this may present issues during times when increased spending is necessary, but money is not available. There may also be periods when less money is required, and an unsuitable drawdown schedule will result in the unnecessary release of funding.

With a progressive drawdown, it is possible to lower interest payments when compared to situations where the entire amount is borrowed at the start of the project. However, if too much of a progressive drawdown is taken too quickly, this can result in the accrual of additional interest.

The agreed interest rate and drawdown facilities should be provided in the funding or loan contract. Interest rates might be fixed, variable and/or capped. Drawdown facilities (often on a quarterly basis) need to be more than sufficient and timed to meet monthly valuations. Often developers will base residual value calculations on drawing down all construction and professional payments by the two thirds stage of the project to avoid any risk of defaulting on payments.

Careful planning cannot always anticipate emergency situations that may have an impact on the progress of a project and the allocation of resources. In these instances, drawdown contingency management measures should be considered. One consideration may be the creation of a contingency drawdown curve which can be updated regularly for revised forecasting.

[edit] Drawdown requirements

There is some general information that is typically part of financing arrangements that have drawdown agreements. This may include a specific time period for transactions (depending on agreed upon conditions) referred to as a conditions precedent.

A conditions precedent is used to safeguard funds. It requires that certain events take place in order for the contract to be valid. It may also require the submission of certain documentation, including:

• Official documents (such as project agreements) for borrowers and those providing security.
• Proof of authorisations (documents power and capacity) for borrowers and those providing security.
• Licences and consents evidence.

[edit] Related articles on Designing Buildings Wiki

• Cash flow in construction.
• Funding options.
• Interim certificates in construction contracts.
• Milestone payment.
• Residual valuation of land.
• Right to payment.