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Applying Condominium Unit Escrow Deposits Towards Construction Costs: Proceed with Caution

While residential condominium development still has not reached its pre-Great Recession levels, it is growing (albeit slowly). This type of project presents an interesting source of capital for developers in the form of earnest money deposits by condominium unit purchasers while the condominium project is under construction (“Deposits”). To decrease their cost of capital and to help fill their capital stack, a developer may consider applying Deposits toward the cost of construction prior to the closing of the sale of the applicable condominium units. That developer would also likely expect that those applied Deposits will count towards the developer’s equity for purposes of obtaining a construction loan. Developers and their construction lenders considering this application of Deposits should proceed with caution because it might be against the law, irrespective of what the underlying purchase and sale agreement says. It could result in a purchaser’s right to cancel the purchase contract and developer liability for damages and attorney’s fees, and possibly even punitive damages.

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