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.