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Construction financing is used to fund the construction of renewable projects prior to such projects obtaining long-term financing. Because construction loans are disbursed during a high-risk phase of a project, these loans carry different terms, pricing and conditions than subsequent longer term financing facilities. Negotiating construction loan agreement terms and provisions are therefore crucial in mitigating risk from both a Lender’s and a Borrower’s perspective. Parties negotiating construction loan agreements typically focus on these ten common areas:

  1. Definitions
  2. Lending Mechanics
  3. Interest
  4. Prepayments
  5. Collateral
  6. Conditions Precedent
  7. Representations and Warranties
  8. Affirmative and Negative Covenants
  9. Events of Default
  10. Lender Remedies

Each area is described in further detail below.


Certain definitions in the construction loan agreement are often highly negotiated.  Key definitions include Change of Control, Debt Sizing, Material Adverse Effect, Maturity Dates, Project Costs and Revenues, and Required Lenders.

Lending Mechanics

It is important for construction loan agreements to provide specific information on how the credit facility works, such as debt sizing parameters, the repayment dates for both principal and interest, and a roadmap to security interests, including the scope and termination of the security interests (for example, project-level security dropping away at the conversion of a financing from a construction to a term loan facility).


The interest provisions provide detail on capitalized interest and the term of the interest rate. For example, the available options for Term SOFR, Daily Simple SOFR, Base Rate / ABR are important to clarify early on, while the credit spread adjustment, and any additional information on interest rate hedging, such as its timing of the hedging are critical to confirm.


Prepayment provisions typically provide for the ability to make (a) optional prepayments and any related additional fees or costs, and (b) mandatory prepayments for the loss of PPAs or for solar resource impairment events (such as shading) or other permanent revenue reductions.


The description of security interests should describe the collateral for the loan, such as the project level collateral (including security interests in real property such as mortgages), account collateral, and pledge of borrower party membership interests.

Conditions Precedent

The conditions precedent specific to borrowing include the project construction status and diligence items, such as construction budget and timeline. If term loans are also contemplated in the same loan document, conditions precedent to term conversion typically address project completion deliverables such as a substantial completion certificate.

Representations and Warranties

Representations and warranties are borrower statements made at credit events, including the closing, funding and conversion. Examples of representations and warranties for borrower entities and related entities include no default and compliance with laws and regulation, while business related statements include conduct of business and taxes, and project related statements include permits and project documents.

Affirmative and Negative Covenants

Affirmative Covenants within construction agreements are promises to do something that reinforces contract compliance, such as reporting, the delivery of financial statements, and providing construction budgets and schedules. Negative covenants are promises to avoid actions to weaken commitments to the contract, such as not incurring liens, not making distributions without meeting various conditions, not amending or entering into project documents without lender consents, and not selling assets.

Events of Default

Events of immediate default include principal non-payment, the breach of negative covenants and certain affirmative covenants, and bankruptcy. Events of default with cure periods include interest non-payment, the breach of various project documents, the breach of certain affirmative covenants, and project-related defaults such as the loss of a permit or the loss of QF status. Borrowers may be allowed to cure events of default depending on the specific event of default (e.g., correcting the breach of material contract).

Lender Remedies

Lenders should also address potential events of default through various means within construction loan agreements, including provisions for no further loans, acceleration, exercising rights and remedies under collateral documents during and/or after construction, real property foreclosure, and remedies subject to a tax equity interparty agreement.

For more information on the top construction loan provisions, click here.