Construction lending covenant

Abstract

Construction lending covenant

Polkhovskaya T.Y., Romensky A.V.

Construction lending risks define a special operations procedure for lender. The most important measure to construction lending risk minimization are the covenants (information and financial). The information covenants are used for minimization the hidden information (pre-contractual opportunism), and financial covenants (positive and negative) – for minimization the hidden action (post-contractual opportunism). Institutionalization of covenants as a relevant control and supervision procedure allow to reduce information asymmetry and make the construction lending process less risky and more predictable for concerned parties (agent and principal).

Keywords: real estate financing, default risk, construction loans, credit capacity, debt, financial covenant