Construction Loan with Take-out

Definition:
The combination of short-term financing of the construction loan followed by long-term financing called a take-out loan.

Examples:
A developer receives $2,000,000 in financing from a lender in order to construct a mini-development of 10 residential homes. The cost per home in this case is $200,000 per home. Upon completion of the 10 residential homes the developer proceeds to sell each home for $500,000, creating a $300,000 from each home, or $3,000,000 total.

Depending on the contract with the lender, a developer will generally either pay the lender a) $200,000 in each instance a home is sold or b) the initial $2,000,000 in revenue of the first four homes sold.

Construction Loan with Take-out financing consists of a 2-step process. The first is a short-term loan that covers the construction of the property. The second is a long-term loan, commonly referred to a take-out loan, that is comes into play upon the completion of the construction.

This type of financing is most common between a developer, a builder and the eventual buyer of the properties being built. The construction loan is given to the developer by a lender to build a group of residential homes.
The developer then uses any and all money needed from the loan to finish the construction of the homes. A buyer who is interested in purchasing a completed home receives a take-out loan from the lender to purchase the new home. The developer, who in this case acts as the seller, uses the money in the sale of the home to pay off the construction loan.

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