Release Clause

A release clause is a provision in a development loan contract that allows the borrower to release part of the developed lots from being held as as security by the lender.

This means that at the point of loan closing, the development might be fully collateralized by the loan.

And that the amount and value of secured assets fall over time, potentially reaching it’s minimum towards the end of the construction works.

The release of security increases the risks borne by the lender. It also negatively affects their bottom line due to opportunity cost from the interest revenue that would have been collected should the loan agreement remain unchanged.

For these reasons, lenders can often be very reluctant to allow release clauses to be inserted into their lending contracts.

Otherwise, they would deter borrowers from activating release clauses with hefty penalty fees.

For example, loan might be approved, accepted and disbursed for $200,000 to develop 10 lots in a parcel of land. Logically speaking, each lot will then be tagged to $20,000 of the loan. But a release clause might require the developer to pay a release fee of $25,000 per lot.

Because of the structure and mechanism that make up these types of loans, release clauses are usually only observed in huge construction financing projects.