What is a Draw Request in Real Estate Development Projects?
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Before starting real estate development projects, a loan facility would be set up between the project developers and the financiers (lenders and investors). The process to receive portions of the loan is called a "draw request."
In this blog post, we will delve deeper into what a draw request is, how it works, its importance, the steps involved in submitting a draw request, and the challenges that may arise during the draw request process in real estate development projects. Keep reading below or watch a quick explainer video.
Definition
A draw request is a request by the project developers to the financiers for the release of a portion of the agreed loan. Typically, a draw request includes documentation of completed work, associated invoices, and other documents.
How Does a Draw Request Work?
Each organisation may have a slightly different draw request process, but the differences are subtle. Generally, a draw request would involve the following steps:
- Request
The developer submits a formal request for a portion of the loan funds to be released. This request should include the project's current status, invoices of completed work and supporting relevant documents.
- Review
The financiers review the draw request and supporting documentation, including detailed invoices and other evidence of work completion. This process could involve an on-site inspection to assess the project's progress. The financiers would entrust this responsibility to either an in-house team or engage a development monitoring surveyor to complete this process.
- Approval
If the draw request and supporting documentation are satisfactory, the lender approves releasing the requested funds.
- Disbursement
The lender disburses the funds to the developer.
- Repeat
This process continues until the project is complete or all loan funds have been disbursed. Each draw request will typically cover a specific phase or portion of the project.
Why is a draw request necessary if the loans are already agreed upon?
- Ensure appropriate use of funds
A draw request process is necessary to ensure that loan funds are used appropriately and that the project progresses as planned.
- Monitor the project progress
The process allows the lender to monitor the project's progress and release loan funds in a controlled manner.
- Identify potential issues.
The process provides an opportunity for assessing project progress and costs, identifying potential issues, and ensuring loan funds are used as intended.
What are the challenges for draw requests management?
While draw requests are essential for the construction payment process, they do come with some challenges that project developers should be aware of. Here are a few common challenges associated with drawing requests:
- Poor documentation
Poor documentation such as incomplete invoice compilation leads to the draw request being delayed or rejected. Project developers must adopt a system that allows them to provide detailed documentation of the completed work and associated costs in a timely and efficient manner.
- Disputes over completed work
There may be disputes over the completed work between financiers and project developers. This can lead to delays in the processing of draw requests and could adversely impact the project's progress. In such cases, resolving disputes as quickly as possible is essential to avoid further delays.
- Changing project scope
Construction projects often have to change scope due to unforeseen circumstances, weather conditions, or other factors. These changes can lead to changes in costs and timelines, which can impact the draw request process. Project developers must communicate any changes to the project scope and costs to ensure that all parties are on the same page.
- Funding delays
Funding delays can also be a challenge for draw requests. Lenders or funding sources may have their requirements for processing draw requests, which may cause delays. Project developers must understand the funding source's requirements and work with them to ensure the draw request is processed as quickly as possible.
How do I submit a draw request?
When submitting a request for a draw, it is important to give accurate and detailed information about the work done and the costs involved. Documents like invoices and other records of transactions between contractors and suppliers should be in order. This information will help ensure that the request to draw is handled quickly and efficiently, reducing the chance of delays.
Estabild Financing helps to combine project data into one platform, simplifying critical processes such as draw down requests.
1. Create a new draw
Make a draw plan with dates and planned amounts, or import it from Excel.
2. Select invoices for the draw
Add relevant invoices from budget accounts or import invoice files. Provide updates regarding the latest project progress.
3. Review of the completed project work
With the schedule linked to budget accounts, the information on work completed can be easily accessed for review.
4. Get draw approval and receive funds
Ensure that your team is on the same page, keeping up to date with the status of the draw requests.
