Articles Posted in Construction Loans (for Borrowers and Lenders)

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On July 31, 2017, the Federal Transit Administration (FTA) published a notice of proposed rulemaking in the Federal Register, for a proposed regulation that would establish new, experimental procedures to encourage use of public-private partnerships (P3s), joint developments and other private investment mechanisms in surface transportation capital projects. The rulemaking is linked to a statutory provision in the Moving Ahead for Progress in the 21st Century Act, which requires FTA to identify provisions at 49 U.S.C. chapter 53 and any regulations or practices thereunder that impede greater use of P3s and private investment. Potential private investors in public transportation infrastructure projects, as well as local and state transportation agencies that may be considering mechanisms of private funding, should be aware of the proposed new procedures. Public comments on the proposal are due September 29, 2017.

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iStock-157310650-money-construction-264x300Most construction loans contemplate multiple advances or disbursements of funds at various stages of the construction project. The construction loan agreement will set forth the conditions that the borrower must satisfy to receive each advance of funds. Given that a construction loan concerns an active construction project, there is a risk that a lender could lose its lien priority in an advance (secured by the insured mortgage) to a mechanic’s lien. This post addresses how a title insurance policy and endorsements can insure against such a risk. Continue reading

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Stored materials present a potentially serious point of tension between lenders and borrowers in the negotiation of a construction loan agreement. In construction lending, the term “stored materials” refers to the materials and items that are purchased in advance of their use and incorporation into the project. Those materials will need to be stored either on the project site or in a warehouse or other location “off-site.” Many lenders are wary about allowing funds to be used for stored materials because of the risk of loss off-site and, accordingly, may place conditions on the use of such funds. However, the borrower, usually through its general contractor, needs to purchase materials “in advance” to keep construction moving smoothly. For example, it would be completely impractical to require the general contractor to purchase the windows of a high-rise on a daily, as-needed basis.

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As any builder will tell you, it is impossible to know with certainty the exact amount a project is going to cost. Variables affecting the cost run the gamut from labor and material costs to delays for unforeseen conditions, weather or other causes. The longer a project is expected to take, the more uncertain the project’s costs become. For this reason, contingencies are included in budgets by all parties involved: owners, contractors, subcontractors and, occasionally, lenders. Ideally, these contingencies will allow the project to absorb delays and other unexpected events without the owner being forced to contribute additional equity (and “balance the loan”) at the time. The owner will desire maximum flexibility over the re-allocation of the contingency(ies) to line items that will then be funded by the lender—while the lender will want to “control” the use of contingency line items to the extent possible.

With this in mind, let’s look at some of the competing motivations at play and “typical” loan agreement provisions regarding the use (or re-allocation) of contingency(ies) to other line items in the Project Budget.

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