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The simplest payment structure is a stage or milestone payment, wherein the buyer makes a payment upon the yard satisfactorily completing a given stage of construction. If a builder specifies a first instalment that is significantly more and disproportionate to remaining stage payments, it may indicate that the shipyard is short on cash to start the build. As with all build contacts, all milestones should be defined using very specific language.
A well-known marine surveyor says the engine milestone should indicate that the shaft line and temporary alignment is in for the engines and gear boxes. Often there is open deck space as engines are laid in the engine room but not bolted down or aligned, which isn't in the true spirit of milestone completion. Under a milestone payment plan, the vessel usually remains an asset of the yard until final payment is made and title is transferred. If there is a problem mid-construction e.
That is why a buyer should build into the shipyard contract the right to the aforementioned first secured interest and accompanying lien against the vessel, for all amounts that have been paid to date. Such a lien must be 'perfected' legally with the aid of an experienced marine attorney.
It establishes the priority of the buyer's claim over all other claims against the shipyard's assets. He pushed to have his client's yacht launched, and it did the day before that yard declared bankruptcy. The yard issued a builder's certificate to the client, who now owned the vessel and was in a better position than other third parties left unprotected. No-one else but you in the milestone decides if the shipyard is paid.
Is the hull done? Is the deck done? Very simple. Attorney Stephen Hanemann, a partner with Kean Miller, likes the percentage progressive payment; a variation of the typical stage payment plan with more payments for smaller amounts. Payment is made upon the percentage of completion instead of a weakly defined 'milestone'. This gives the yacht owner more flexibility as well as the time value of money, as he may earn interest on funds not yet paid to the yard.
Job files must be complete and verified by an independent third party. A payment is made if the vessel is, for instance, 13 per cent complete versus saying the engines are set with vague criteria as to what constitutes the engines being set.
The world turns on letters of credit LCs , but normally for small, shipped items, not megayachts. A solvent yard can use the buyer's LC as a form of collateral to obtain its own construction financing from its regular lender. There are two types of LCs: documentary and standby. Documentary LCs require that proper documents be shown to be paid and standby LCs pay when the window opens with the bank.
LCs only work well if the conditions for draws and final payment are well detailed with someone experienced in construction and contracts not a banker or attorney determining if the yard has met requirements. In either case, the LC is irrevocable and its terms should be very precise. Otherwise, an LC can be an open chequebook to pay when the yard deems necessary.
The issuing bank is bound to make payment for the client and will do so if the LC's terms are ambiguous. A yacht owner, who prefers to remain anonymous, said the LC absolutely protects the yacht owner, not just by minimizing risk, but by eliminating risk completely.
Those statements are made with the caveat that the LC is prepared by an attorney specializing in financial instruments with properly defined trigger terms stated within. The issuing bank makes payment for the yacht owner whose funds are earning interest in that bank, so the yacht owner's funds are not at risk. The funds are not released until the terms of the LC are met and the buyer receives the yacht. Every LC should be tailored to a particular contract and some provide interim draws or delivery draws.
In some recent examples, stage payments and LCs have been combined to advance capital to the builder with a nominal payment of 15 to 20 per cent. This compromise increases the LC's liquidity for the builder. Before the LC is issued, triggers or key objectives should be met with all essential requirements upfront, as items left out can not simply be added at a later date. Depending on the type of construction loan, the borrower might be able to convert the construction loan to a traditional mortgage once the home is built, or they might be required to get a separate mortgage designed to pay off the construction loan.
Construction-to-permanent loans provide the funds to build the dwelling and for your permanent mortgage as well, explains Bossi. In other words, with a construction-to-permanent loan, you borrow money to pay for the cost of building your home , and once the house is complete and you move in, the loan is converted to a permanent mortgage.
The benefit of this approach is that you have only one set of closing costs to pay, reducing your overall fees. Once it becomes a permanent mortgage � typically with a loan term of 15 to 30 years � then you make payments that cover both interest and the principal. At that time, you can opt for a fixed-rate or adjustable-rate mortgage. A construction-only loan provides the funds necessary to complete the building of the property, but the borrower is responsible for either paying the loan in full at maturity typically one year or less or obtaining a mortgage to secure permanent financing, says Bossi.
The funds from these construction loans are disbursed based upon the percentage of the project completed, and the borrower is only responsible for interest payments on the money drawn. Construction loan rates are almost always tied to the prime rate plus a margin. Additionally, they might have a higher rate than traditional mortgages. Construction-only loans can ultimately be costlier if you will need a permanent mortgage because you complete two separate transactions and pay two sets of fees.
Another consideration is that your financial situation might worsen during the construction process. If you lose your job or face some other hardship, you might not be able to qualify for a mortgage later on � and might not be able to move into your new house.
HELOCs are typically the most affordable way to borrow a large sum of money because of their low interest rates. Another strong option in the current low mortgage rate environment is a cash-out refinance , whereby a homeowner would take out a new mortgage at a higher amount than their current loan and receive that overage in a lump sum. With any of these options, the lender generally does not require disclosure of how the homeowner will use the funds.
The homeowner manages the budget, the plan and the payments. Meanwhile, using a construction loan to finance a renovation is a more thorough process.
Unlike with other forms of financing, the lender will evaluate the builder, review the budget and oversee the draw schedule, and overall manage the process. Owner-builder loans are construction or construction-only loans where the borrower also acts in the capacity of the home builder.
Lenders that do typically only allow it if the borrower is a licensed builder by trade. A construction loan is used during the building phase and is repaid once the construction is completed. A borrower will then have their regular mortgage to pay off, also known as the end loan. Before you choose a construction loan, talk to your contractor and discuss the timeline of building the home and if other factors could slow down the job, such as inclement weather.
Decide if you want to go through the loan process once or twice. Consider how much the closing costs and other fees of obtaining more than one loan will add to the project. In that case, a construction-to-permanent loan can make sense in order to avoid multiple closings.
If you already have a home, though, you might be able to use the proceeds to pay down the loan. In that case, a stand-alone construction loan might be a better choice. At first glance, getting approval for a construction loan appears similar to the process of obtaining a mortgage. However, it does come with a few more requirements. A property appraisal will also be obtained to support the value of the collateral, says Bossi.
Check several lenders to obtain details about their specific programs and procedures. If you have trouble finding a lender willing to work with you, check out smaller regional banks or credit unions. How We Make Money.
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