What is a 'Construction Loan Note (CLN)'

A construction loan note (CLN) is a debt obligation used for the funding of construction projects such as housing developments. In most cases, the note-issuers repay the note obligation by issuing a longer-term bond. The proceeds from the bond pay back the debts on the note.

A construction loan note (CLN) is a specific type of loan note, which appears commonly at the municipal level. For example, a large city might use a construction loan note to finance a civic or housing project.

BREAKING DOWN 'Construction Loan Note (CLN)'

Extended from one party to another, the construction loan note (CLN) is itself a type of promissory note. The note enables a payee to receive payments over a set period. Payments frequently include interest and end with the satisfaction of the loan. A loan note is a legally binding agreement which can be drawn up by either of the contracted parties and is valid until the loan is paid in full.

As a financial instrument, a promissory note contains all the terms of the debt. It has a written promise by one party, such as the note's issuer or maker, to pay another party, such as the note's payee, a definite sum of money. Like the promissory, the construction loan note (CLN), will list the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature.

Promissory notes occur most commonly with funding sources outside banking institutions, such as an individual or company. It falls between an IOU and loan contract regarding its rigidity. A promissory note includes a specific promise to pay, and the steps required to do so. A loan contract, on the other hand, states the lender’s right to recourse if the borrower defaults.

Building Better Cities with Construction Loan Notes

If a city experiences a boom in population, it may need to build additional housing quickly. The project can get underway when the municipality issues a construction loan note to the builders. Cash flow from the note allows for construction to start rapidly. The city will then issue a long-term municipal bond to repay the construction loan note.  

A municipal bond is a debt security issued by a state or municipality. Cities use municipal bonds to finance public projects and capital expenditures. These public projects can range from the city housing in the above example to the construction of highways, bridges or schools. Municipal bonds are exempt from federal taxes and most state and local taxes.

RELATED TERMS
  1. Promissory Note

    A promissory note is a financial instrument that contains a written ...
  2. Note

    A note is a financial security that generally has a longer term ...
  3. Loan Note

    A loan note is an extended form of an IOU from one party to another ...
  4. Municipal Note

    A municipal note is debt issued by state and local governments ...
  5. Construction Mortgage

    A construction mortgage is a type of real estate financing that ...
  6. End Loan

    A permanent, long-term loan used to pay off a short-term construction ...
Related Articles
  1. Personal Finance

    Getting A Mortgage When Building Your Own Home

    It's much harder to get a loan when you're building a home, not moving into one. Here's where to look and what to expect.
  2. Insights

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.
  3. Personal Finance

    Should You Lend Money to Family or Friends?

    Find out how loaning cash to help family or friends can put a strain on your relationship and your bank account. Learn how to make family loans safer.
  4. Investing

    What Is A Municipal Bond?

    A municipal bond is a debt instrument used by a city, state, county or other local government authority to raise money for a project. Municipal bonds, often called munis, are considered a debt ...
  5. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  6. Retirement

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
  7. Investing

    Municipal Bonds Vs. Money Market Funds

    Municipal bonds are a loan from you to a state or local government or authority; money market funds are a type of mutual fund.
  8. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  9. Investing

    The Basics Of Municipal Bonds

    Investing in municipal bonds may offer a tax-free income stream, but such bonds are not without risks. Check out types of bonds and the risk factors of muni-bond.
  10. Personal Finance

    Benefits of Federal Direct Loans

    Federal Direct Loans are the most popular federal student loans. This list of benefits will explain why.
RELATED FAQS
  1. How do construction loans work?

    Construction loans are obtained either by the prospective home owner or the actual builder. There are two types of construction ... Read Answer >>
  2. What is the difference between a bill of exchange and a promissory note?

    Learn what bills of exchange and promissory notes are, along with notation of the primary differences between these two documents. Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center