John owns a 20-acre parcel of land in Smallville. Bob is a developer that wants to build a subdivision in Smallville. He offers John $1,000 for a 30-day option to purchase the land for $1 million. John agrees. Clara is John's sister and has a valid

Question

right of first refusal on the same land. Bob has been told by his bank that the bank will provide a construction loan for the development. What rights did Bob legally obtain when he purchased his option? What effect will Clara's rights have on Bob's option? Explain the three types of loans?construction, gap, and take-financing?that could be involved to complete the development. Discuss fully.

Answer 1

Bob has the right to purchase the land for the stated price subject to Clara's right of first refusal. Clara has the right to purchase the land for the price offered to John if she so desires. Construction loans generally have a term slightly longer than the estimated construction period. Upon completion of construction, the developer obtains either permanent (take-out) financing or interim (gap) financing and repays the construction lender. If the construction loan comes due before the permanent financing is available, the developer obtains gap financing to pay off the loan. This financing is provided by someone other than the construction lender and is more long term. A take-out commitment is an agreement by a lender to replace the construction loan with a permanent loan, usually after certain conditions, such as the timely completion of the project, have been met.