Two construction lenders can both quote 75% LTC on the same project and still create very different liquidity requirements for the sponsor.
The reason is simple: LTC tells you how much of total project cost the lender is ultimately willing to finance. It does not tell you when the lender will fund those dollars.
One lender may require the sponsor to contribute substantially all required equity before lender advances begin. Another may fund eligible project costs proportionally alongside the sponsor throughout construction.
The leverage can be identical. The sponsor's cash timing can be completely different.
Leverage describes how much capital the lender ultimately provides. Draw mechanics determine how much sponsor capital must be outstanding at any given point in the project.
What Equity-First Construction Funding Means
In an equity-first construction loan, the sponsor generally contributes an agreed amount of equity before the lender begins advancing its share of project costs.
Assume a $100 million project with a 75% LTC construction loan. The ultimate capital structure may be:
- $75 million lender financing
- $25 million sponsor equity
Under an equity-first structure, the sponsor may need to fund most or all of that $25 million before meaningful lender advances begin.
The sponsor is not necessarily contributing more equity overall. The difference is that the equity is deployed earlier and may remain outstanding for a longer period.
For sponsors managing multiple projects, that timing can materially affect liquidity.
What Pari Passu Construction Funding Means
In a pari passu construction funding structure, lender and sponsor capital are generally contributed proportionally as eligible project costs are incurred.
Using the same $100 million project and 75% LTC loan, the lender might fund approximately 75% of eligible draws while the sponsor contributes the remaining 25%.
The ultimate capitalization remains the same: $75 million of debt and $25 million of equity.
But instead of committing the sponsor's full equity requirement at the beginning of construction, the equity contribution is distributed over the draw period.
That can preserve sponsor liquidity longer and reduce the amount of sponsor capital outstanding during the earlier stages of the project.
Equity-First vs. Pari Passu Construction Funding
| Issue | Equity-First | Pari Passu |
|---|---|---|
| Sponsor capital | Funded first | Funded alongside lender |
| Lender funding | Begins after required equity | Funds proportionally |
| Sponsor liquidity | Front-loaded | Distributed through construction |
| Capital-at-risk timing | Earlier | More balanced |
The distinction is important because two loans with the same LTC can create materially different capital demands during construction.
Why Funding Timing Matters
The issue is not simply whether a sponsor has enough equity to close.
If required equity is front-loaded, more sponsor capital may be tied up before the project reaches major construction milestones. That can reduce liquidity available for other acquisitions, developments, reserves, or unexpected project obligations.
Pari passu funding may preserve liquidity for longer, but that does not automatically make it the superior loan.
The sponsor still needs to evaluate pricing, leverage, draw conditions, completion requirements, fees, and the lender's overall execution capability.
The real comparison is therefore not simply how much equity is required, but when that equity must be funded and how long it remains at risk.
What Happens When the Construction Budget Changes
Funding mechanics become even more important when the original construction budget stops behaving exactly as modeled.
Cost overruns may require additional sponsor capital before further lender advances are made.
Change orders can affect which costs qualify for reimbursement and when those costs become eligible for funding.
Retainage can create timing differences between work performed, contractor payment obligations, and lender reimbursement.
Contingency treatment also matters. Sponsors should understand whether contingency is funded proportionally, reserved by the lender, or effectively treated as additional sponsor exposure.
Finally, future equity requirements can arise even after the sponsor has satisfied the original contribution. A project that becomes out of balance may require additional equity before loan proceeds continue.
Equity-First Is Not Automatically Worse
An equity-first structure may still be attractive if the loan offers better pricing, stronger leverage, more certainty of execution, or more favorable terms elsewhere.
A sponsor with ample liquidity may be comfortable contributing equity earlier if the overall financing package is superior.
Likewise, pari passu funding is not automatically better simply because it spreads sponsor contributions over time.
A lender may offer more favorable draw mechanics while charging more, imposing tighter controls, or providing less flexibility elsewhere in the loan.
How Lever Capital Partners Can Help
Lever Capital Partners helps sponsors compare construction loans beyond the headline LTC.
That includes evaluating equity funding sequence, draw mechanics, sponsor liquidity requirements, contingency treatment, future equity obligations, pricing, leverage, and overall loan economics.
The objective is not simply to identify which lender offers the highest proceeds.
It is to understand how the loan actually funds and what that means for sponsor cash throughout the construction period.
Comparing construction loan structures? Reply with the project capitalization and we can help evaluate how the draw mechanics affect sponsor liquidity.