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Colorado Real Estate Journal – Proceed with Caution When Using Condo Unit Deposits

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. To decrease their cost of capital and to help fill their capital stack, developers may consider applying these types of deposits toward the cost of construction prior to the closing of the sale of the applicable condominium units. That developer also likely would expect that those applied deposits will count toward 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. 

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