construction loan funding and title insurance: best

Construction Loan Funding and Title Insurance: Best Practices in Disbursement and DocumentationDrafting Effective Future Advance, Budgeting and Draw Provisions; Lien Waivers, Title Updates and Endorsements

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WEDNESDAY, JANUARY 23, 2019

Presenting a live 90-minute webinar with interactive Q&A

Jeffrey R. Escobar, Senior Counsel, Norton Rose Fulbright US, New York

Euchung Ung, Partner, Kleinberg Kaplan Wolff & Cohen, New York

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Construction Loan Funding

Best Practices in Disbursement and Documentation

January 23, 2019

Euchung UngPartner

Kleinberg Kaplan Wolff & Cohen, P.C.212.880.9809

[email protected]


Examples of Construction Loans

• Ground-Up Construction – borrower purchases vacant land or existing developed property and demolishes the improvements, and constructs a new building on the land.

• Renovation or Refurbishment – borrower upgrades an existing developed property, or converts it to a different use, such as recladding an old office building to make it more energy efficient or turning a hotel property into a residential condominium.

• Expansion or Existing Property – borrower adds a new building to an existing property, such as adding a new outparcel building on a pad site in an existing shopping center.

• Tenant Improvements – borrower requires funds to pay for tenant improvement work or for providing tenant with a landlord allowance to perform tenant improvements.

6


Timeline

7

Time

Lender

Borrower

$ $ $ $ $

$ $ $ $ $


8

Loan Application


9

Loan Application (continued)


10



11



12



13



14



15



• Promissory Note

• Loan Agreement

• Mortgage/Deed of Trust

• Assignment of Contracts

• Guaranties

• Environmental Indemnity

• Etc.

16

Loan Documents


Diligence

• Title and Survey Review

• Environmental Report

• Soil Testing and Engineering

• Permitting and Zoning Review

• Appraisal

• Construction Budget

• Construction Schedule

• General Contractor and Development Manager Diligence

17


Zoning

• What can be built now without additional zoning

• What variances are required

• What is the timing and process for obtaining the variances

• What is the downside risk of not obtaining the variances

18


Appraisal

• What does the appraisal provide

• When can lender ask for appraisal

• What appraisal standards apply

19


Permits

• What permits are needed to start construction

• What permits are needed at each stage

• What inspection or information are needed to issue permits

• What permits are needed to close out the project and occupy the property

20


Budget

• Site Costs – purchase price for the land, brokerage commissions, legal fees, title insurance costs, conveyance taxes, borrower’s diligence costs, and costs to prepare the land for development

• Hard Costs – cost of equipment, materials, labor, decorations, furniture, fixtures and equipment, and cabling systems, etc. Depending on the lender, some of these may need to be funded by borrower.

• Soft Costs – examples include developer fees, engineering fees, architect fees, legal fees, marketing expenses, real estate taxes, finance charges, insurance premiums, permit fees, equipment rental fees.

In some jurisdictions, hard costs and soft costs are defined by statute – it is important to understand the statutory law relating to construction costs prior to drafting loan documents.

21


Construction Schedule

• Key Milestone Events

• Substantial Completion

• Final Completion

22


Key Third Party Contracts

• Lien, bankruptcy, tax and UCC searches (GC/Development Manager)

• Bonding requirements (GC/Development Manager)

• Required Insurance (GC/Development Manager/Other Professionals)

• General Contractor’s Agreement (e.g., AIA form or otherwise) or Development Management Agreement

23


Customary General Conditions for Advances:

• No lien for the work, or supply of labor, materials or services shall have been filed against the property (unless bonded over or accepted by Lender) – title bringdown

• No condition exists that constitutes a danger to or material impairment of the Property or presents a danger or hazard to the public – inspection by Lender’s consultant

• Representations and warranties of borrower continue to be true and correct – borrower’s certification

.

• Terms and conditions of loan that need to be met at that point have been met – lender’s review of files

• No default or event of default shall have occurred and be continuing – borrower’s certification and lender’s review of files.

24


Sample Requirements for Final Advances:

• Certification from Lender’s Consultant and Architect that construction has been completed in a good and workmanlike manner, in accordance with law and substantially in accordance with approved Plans and Specifications

• If required by law, certificates of occupancy and other permits and releases (of prior work permits) have been issued

• Deliver to Lender final as-built Survey showing the location of the Improvements

• Deliver to Lender final affidavit from the Developer and the General Contractor

• Deliver to Lender full and complete lien releases from General Contractor and each Subcontractor

• Deliver to Lender shall final as built Plans and Specifications

• Deliver to Lender endorsement to lender’s title insurance policy.

25


Items typically required for Draw Requests:

• Hard Costs Statement - i.e., a reconciliation between the actual Hard Costs and the budgeted Hard Costs

• Soft Costs Statement - i.e., a reconciliation between the actual Soft Costs and the budgeted Soft Costs

• Cost Certification – typically from the General Contractor or Developer, or the Architect

• Payment receipts from the Developer, General Contractor and all Subcontractors

• Proof of payment of all Hard Costs and Soft Costs covered by all previous Draw Requests

• Lien Waivers from the for all sums advanced up to and including the previous Draw Request – may be final or conditional

26


Title Update and Contract Updates

Things lawyers need to keep on their calendars:

• Dates on which lender expect to receive draw requests each month to advance funds in a given month – typically lenders advance once a month

• Typical needed to get a title update in the jurisdiction

• Contract modifications with contractors – any happened? Did client waive performance at any point

• Any litigation you are handling

• Check with client and architect also

27


Additional Key Advance Items

• Percentage Work Completed

• Incorporated Property

• Third Party Certificates, Affidavits and Reports

• Retainage

28


Sample Loan Agreement Retainage Clause:

• Borrower shall (or shall cause Developer to) hold back from amounts payable to the General Contractor under the GC Agreement, and shall cause the General Contractor to hold back from amounts payable to each Subcontractor under each Trade Contract an amount (“Retainage”) with respect to the value of its work in place in respect of the Improvements, which shall not, at any time, be less than (i) [____%] of the aggregate Hard Costs theretofore incurred by Borrower with respect to the General Contractor or such Subcontractor, as the case may be, for work in place in completing construction of the first [____%] of the work to be performed by the General Contractor or such Subcontractor, as the case may be, with respect to the Improvements, as verified from time to time by Lender’s Consultant pursuant to the provisions of this Agreement, and (ii) [____%] of the aggregate Hard Costs theretofore incurred by Borrower with respect to the General Contractor or such Subcontractor, as the case maybe, for work in place in completing construction of the last [____%] of the work to be performed by the General Contractor or such Subcontractor, as the case may be, as verified from time to time by Lender’s Consultant pursuant to the provisions of this Agreement, such [____%] to be based upon the total budgeted Hard Costs for the work to be performed by the General Contractor or particular Subcontractor, as the case may be, as of the date of computation.

• Retainage will be withheld by Lender and released to Borrower upon Completion of Construction concurrently with the making of the Final Advance.

29


WAIVER AND FINAL RELEASE OF LIENKnow All Men that in consideration of the final payment (the “Final Payment”) of $[________]

(check #[________]), in hand, paid to [________], receipt of which is hereby acknowledged, and other good and valuable consideration by [________], [________] hereby forever releases and discharges [________] from any and all liability, damage, cost, injury, attorney's fees, rights, claims, demands, actions, causes of actions, lien and lien rights which [________] now has or might have against on account of furnishing labor, material or services for or incorporated into the following property:

Client/Owners: [________]Address: [________]

[________]

[________] respectfully warrants that the contract status set forth above is an accurate statement, no other sums are claimed, that all laborers, subcontractors, and suppliers employed by [________] have been paid in full all sums. With the Final Payment no such laborers, subcontractors, or suppliers is or will be entitled to claim or thereon for labor or materials furnished to or for the account of [________].

[________]

By:____________________________________Name:Title:

Date:[________]

Acknowledgments

30


Tenant Improvements

• Loan used to fund tenant improvements – additional questions arise

• Is landlord funding a work allowance under the lease and tenant is performing the work – landlord reimburses tenant?

• Do lease provisions for tenant deliveries match up with loan provisions?

• If landlord is performing the work, does tenant have right to approve work?

• Will tenant need to pay for any portion of the work?

31


Examples of where other Agreements where Construction Draw Provisions would apply:

• Mezzanine Loans

• Development Agreements

• LLC Operating Agreements or Partnership Agreements

32


33

80

20

80

10

10

80

20

20

Lexington Park Avenue Madison


34

80

20 20

20

Lexington

20

20

20


35

Park Avenue

80

10

10

80

1010

10

2.5 20

2.5 20

2.5 20

2.5 20


36

20

40

Madison

20

40

80

20

20


This material is provided for general informational and educational purposes only. The information contained in this material is subject to change without notice. The presenters undertake no obligation to update this material.

37

Construction Loans & Title Insurance Issues:Key Considerations & Concepts a Real Estate Professional Should

Understand to Avoid Title Insurance Pitfalls for Construction Loans

Jeffrey Escobar, Senior Counsel, Norton Rose Fulbright, [email protected]

January 23, 2019

Webinar Goals

• Discussion of the Basics Under a Loan Title Policy – What’s the difference, anyway?

• Establishing Priority of the Construction Mortgage & Keeping it that Way: Will My Loan Policy Insure Priority?

• The Effects of a Mechanic’s Liens Under a Loan Policy : Understanding the Risks & Will My Policy Respond?

39

Construction Loan Title Policy:

What does it Insure, exactly?

• A loan policy of title insurance insures four key interests:

• That the mortgaging borrower possesses vested title to the real property being offered as security/collateral for the repayment of the subject loan;

• That the mortgaging borrower has the vested right and authority to encumber or hypothecate a mortgage lien on the real property being offered as security/collateral for the repayment of the subject loan; and

• That the mortgage lien in favor of the insured lender has first lien priority.

• That upon term of the construction loan, the priority of all prior disbursed amounts are insured and title is brought forward.

40

Compare: Insured Coverage Under

Owner’s Extended Title Policy

41

• Insured owner hold unencumbered, vested title interest in property.

• Mis-execution of title instruments

• Forgery, fraud and duress

• Defective recording of title instruments

• Restrictive covenants

• Lien on title due to a pre-existing deed of trust, judgment, tax or special assessment

• Title becomes unmarketable after date of policy

• Lack of right of access to and from land

• Coverage of all surveyed encumbrances of record

How Do Title Companies Insure and

Mitigate Against Title Risk?

42

• Performing search and diligence of land records.

• Extensive review of any and all land records affecting the collateralized real property

• Does not necessarily have to be a recorded instrument, may come from any source available to title company.

• Establish clear (or sometimes unclear) chain of title.

• Does the mortgagor’s vested right travel?

• Are there gaps in mortgagor’s vested rights?

• Determine “Hidden” Risks

• Errors or Omissions in Records

• Fraudulent Impersonation or Forgery

• Mechanics Liens

• Identify Encumbrances, Liens, Record Defects and Other Clouds of Title

• Unsatisfied Liens & Mortgages

• Burdening Easements

• Leases

• Rights-of-ways

• Future Interests

• Land Use Restrictions

• Unsubordinated Interests

• Unpaid taxes

• Tax liens against current or past vested real estate interest holders

• Mechanics liens by contractors

• Court Actions

Unique Risks When Insuring Title for a

Construction Loan Mortgage

43

• Entirety of the mortgaged/construction loan amount may not be immediately insured.

• Periodic disbursements of loan proceeds after initial closing and after initial date of policy pose significant risk.

• Increasing amount of indebtedness to be insured with each disbursement.

• Presents unique circumstances requiring special considerations due to significant and ongoing risk for title insurers.

• Due to unique risks, higher level of scrutiny and review by title insurers and their underwriters

• Risk of mechanics liens throughout construction pose significant risk to the insured interest of the first lien priority status of the insured lender’s lien.

• Construction loan coming to term: what happens next?

Modifying Construction Loan Title Policy

Through Endorsements

• The standard loan title policy can modified by the issuance of endorsements

• Endorsement availability and pricing can vary per jurisdiction

• Endorsements typically are used to do the following:

• Remove or modify exceptions

• Modify standard coverage being provided

• Provide the insured lender additional comfort re matters that a title agent is comfortable underwriting (e.g., access, survey, and contiguity)

• Facilitate the assignment of the insured mortgage

• Facilitate the draw process

44

Standard Construction Loan Endorsement

Requirements of Lenders

45

• ALTA 3.2 (Zoning Land Under Development)

• ALTA 6 (Variable Rate Mortgage)

• ALTA 8.2 (Commercial Environmental Protection Lien)

• ALTA 9.7 (Restrictions, Encroachments, Minerals)

• ALTA 17 (Access and Entry)

• ALTA 17.2 (Utility Access)

• ALTA 18.1 (Multiple Tax Parcel - Easements)

• ALTA 19 (Contiguity –Multiple Parcels)

• ALTA 22 (Location)

• ALTA 24 (Doing Business)

• ALTA 25 (Same as Survey)

• ALTA 26 (Subdivision)

• ALTA 27 (Usury)

• ALTA 28.3 (Easement Damage Land Under Development)

• ALTA 32 (Construction Loan – Loss of Priority)/ALTA 33 (Disbursement)

Compare: Construction Loan Endorsement Requirements

of Lenders for Renewable Energy Projects

46

• Zoning – Land Under Development (ALTA 3.2-06) or Completed Structure (ALTA 3.1-06) (if applicable to Project)

• Variable Rate Mortgage -- (ALTA 6-06)

• Commercial Environmental Protection Lien (ALTA 8.2-06)

• Restrictions, Encroachments, Minerals (ALTA 9-06)

• Covenants, Conditions and Restrictions – Loan Policy (ALTA 9.3-06 Modified for Energy Project)

• Aggregation -- Loan Policy (ALTA 12-06) or Aggregation -State Limits - Loan Policy (ALTA 12.1-06) (as applicable to Project)

• Access and Entry (ALTA 17-06)

• Utility Access (ALTA 17.2-06)

• Zoning – Land Under Development (ALTA 3.2-06) or Completed Structure (ALTA 3.1-06) (if applicable to Project)

• Variable Rate Mortgage -- (ALTA 6-06)

• Commercial Environmental Protection Lien (ALTA 8.2-06)

• Restrictions, Encroachments, Minerals (ALTA 9-06)

• Covenants, Conditions and Restrictions – Loan Policy (ALTA 9.3-06 Modified for Energy Project)

• Aggregation -- Loan Policy (ALTA 12-06) or Aggregation -State Limits - Loan Policy (ALTA 12.1-06) (as applicable to Project)

• Access and Entry (ALTA 17-06)

• Utility Access (ALTA 17.2-06)



47

• Waiver/Deletion of Arbitration, Mechanic's and Materialmen's Liens General Exceptions

• Severable Improvements (ALTA 31-06)

• Minerals and Other Subsurface Substances Described Improvements (ALTA 35.2-06)

• Minerals and Other Subsurface Substances – Land Under Development (35.3-06)

• Energy Project - Leasehold/Easement-Lender’s (ALTA 36.1-06)

• Energy Project – Covenants, Conditions and Restriction – Land Under Development – Lender’s (ALTA 36.5-06)

• Energy Project - Encroachments (ALTA 36.6-06)

• Assignment of Rents or Leases (ALTA 37-06)

• Mortgage Tax (ALTA 38-06)

• Policy Authentication (ALTA 39-06)

• Water - Buildings (ALTA 41-06)

• Water - Improvements (ALTA 41.1-06, modified so as to "Improvements" are to include energy generating facilities and elements of the Project) or (ALTA 41.2-06)

• Damage Oil and Gas Leases (CLTA Form 100.23-06) (or state equivalent if available)

• Right of Reverter (CLTA 100.12) (or state equivalent if available)



*Endorsement requirements under a loan policy can and will vary depending on the nature of the project, status of construction and point in lending, lender concerns, state of title and whether certain exceptions are required to be modified or coverage be obtained.

**Understanding the nature of the current state of title is key to understanding what title endorsements will be required by a lender for the project to be financeable.

It’s all about mitigating lender’s risk…

48

What’s it Going to Cost?:

“The Biggest Racket in the Industry”

• Title costs are tied to

• The Amount of the Policy‒ Owner’s Policy: Issued at acquisition closing in the amount of

the purchase price

‒ Loan Policy: Issued in the maximum amount of indebtedness and liability decreases as the loan is paid

• Endorsements‒ Price can vary per jurisdiction

‒ Some states standardize endorsement costs

‒ Lender’s and Borrower’s counsels should be involved

‒ What does that endorsement get you and is it necessary given the coverage/cost?

• Future loan increases: Be wary of local rules

49

Mechanics Lien Considerations for

Commercial Construction Projects

50

• Availability of mechanic’s lien coverage is generally determined on a transaction specific basis with guidance and approval from the title insurer

• One should be prepared to request and obtain additional information from the borrower in order to evaluate the availability of such coverage.

• Additional time should be expected when mechanic’s lien coverage is requested to properly underwrite the transaction.

• Communicate as soon as possible that the transaction involves construction and the lender is requesting mechanics’ lien coverage.

What is a Mechanic’s Lien?

• Creates a security interest and secures priority of payment of the price or value of work performed and materials furnished in erecting or repairing a building or other structure vis-à-vis statute.

• Attaches to the land as well as buildings and improvements erected thereon.

• Encumbers real property at the time a notice of lien is filed.

• No need for judicial approval prior to filing a mechanic’s lien.

• Challenges to the constitutionality of the lien law based upon a claim of deprivation of property without due process of law have been rejected. (Warren’s Weed NY real property, Mechanic’s liens, Section 1.03).

• May be foreclosed pursuant to the provisions of the RPAPL. (Section 43 NYS Lien Law).

• A mechanic’s lien creates an interest in realty, but not an estate interest therein. Title, use and possession including the right to alienate remains with the real property owner.

51

To Lien or Not to Lien: What is the Purpose?

• Mechanic’s liens are a creature and creation of statute, did not originally exist at common law.

• Every state has a body of law creating and governing mechanic’s liens rights.

• Enacted to protect parties who provided and performed labor and/or furnished materials in connection with the improvement of real property (i.e. contractors, subcontractors and suppliers).

− Specifically, to statutorily protect those who may not have any legal relation to the owner of real estate (i.e. through privity of contract, such as subcontractors or material vendors who contract with a General Contractor or Construction Manager) from being unpaid for such labor and/or materials.

− Whether a legal relation to the owner of improved real estate exists or not, any party who provided and performed labor and/or furnished materials in connection with the improvement of real property may have a right to file a Mechanic’s Liens (as provided for in a state’s statute).

• Although the mechanics of each state’s mechanic’s liens statutes might differ, common fundamentals throughout and are common in each.

52

How Long Will Title be Clouded by a Mechanic’s Lien?

• Lien Law Section 17, duration of the mechanic’s lien: a mechanic’s lien shall remain a lien on the subject premises for one (1) year from the date it is filed and perfected in the County Clerk’s office.

− Lien is valid for one year;

− Within the one year, lienor must either foreclose on lien or file an extension of lien for another 1 year (extension as a matter of right, can be filed and extended at any point either during the initial term or during the extension period by lienor – even if extension period was not yet effective by filing);

− Lienor may file an extension of lien for another year by court order (New York courts historically grant such extensions with little to no need for a showing or basis to do so).

− Any further extensions must be obtained by court order, through showing of either material hardship or extraordinary reasons for maintaining lien.

− If a single family dwelling, any extension of lien must be obtained by court order.

• Even if the lien effectively expires, encumbrance still shows up on property.

53

Mechanic’s Liens: Clouding Title and

Why is it Relevant?

• If a mechanic’s lien is filed and foreclosed upon, a lender could lose its lien priority in an advance of loan proceeds if the contractor’s work began before the advance was disbursed.

• NY Lien Law Section 13(1): all liens shall be on a parity (Except as set forth in Section 56; and except that in all cases laborers for daily or weekly wages shall have preference over all other claimants under this article)

• Title companies do not usually escrow for mechanic’s liens due to this provision.

• If there is a lien filed at the time of a closing for say $ 10,000 and title company

escrows for same, and a new mechanic’s lien is then filed for $ 1,000,000 after the

closing, the $ 1,000,000 mechanic’s lien will have the same priority as the $10,000

mechanic’s lien

• If the title company cannot collect from the seller or owner of the premises the title

company may be stuck with a $ 1,000,000 claim to cover the discharging of said $

1,000,000 mechanic’s lien

• While the Lien Law’s purpose is to protect parties who do work to and supply materials to premises it can also subordinate the interests of the parties purchasing or providing funds to the owner of the premises to that of the mechanic’s lien holders.

54

Standard Construction Loan

Title Policy Coverage

55

ALTA 2006 Loan Policy of Title Insurance

COVERED RISKS

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B, AND THE CONDITIONS, The Company, insures as of Date of Policy and, to the extent stated in Covered Risks 11, 13, and 14, after Date of Policy against loss or damage, not exceeding the Amount of Insurance, sustained of incurred by the Insured by reason of:

****

11. The lack of priority of the lien of the Insured Mortgage upon the Title (a) as security for each and every advance of proceeds of the loan secured by the Insured Mortgage over any statutory lien for services, labor or material arising from construction of an improvement or work related to the Land when the improvement or work is either (i) contracted for or commenced on or before Date of Policy; or (ii) contracted for, commenced, or continued after Date of Policy if the construction is financed, in whole or in part, by proceeds of the loan secured by the Insured Mortgage that the Insured has advanced or is obligated on Date of Policy to advance

Standard Construction Loan Title Policy

Coverage: the Mechanic’s Lien Exception

56

ALTA 2006 Loan Policy of Title Insurance

THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B

*****

• Standard Mechanics’ Lien Exception:

“Item _____. Any lien or right to a lien for service, labor or materialsheretofore or hereafter furnished, imposed by law and not shown by thepublic record.”

**By virtue of deleting the above exception, mechanics’ coverage is afforded to the insured lender

Scope of Mechanic’s Lien Coverage

Under a Loan Title Policy

57

• Certain endorsements extend coverage against a loss of priority of the insured mortgage to future mechanic’s liens when there is limited or no priority for the mortgage lien over future mechanic’s liens • ALTA Series 32 Endorsement – 32, 32.1, 32.2 • ALTA 33

• Title insurance can confirm that the draw process will not create additional risk of loss of priority • Must remove the standard mechanic’s lien exception from

Schedule B, Part 1 • Add the above endorsements

• Pending Disbursements Clause

Must Establish Priority of the Construction

Mortgage to Obtain Mechanic’s Lien Coverage

58

• CRITICAL to establish priority so there is no impairment or loss of the security of the insured mortgage.

• MUST obtain properly executed Non-Start Affidavits from the owner and contractor stating that no work has been performed and no labor or materials have been supplied to the land to be insured.

• NECESSARY to allow visual inspection and confirmation that work has not commenced.

• PROMPT recordation essential to protect the interests of the insured.



59

• If you cannot establish priority of your construction mortgage, be prepared to satisfy any and all additional underwriting requirements and a delay of closing.

• Mechanics’ and Materialmen’s Lien Indemnity Agreement‒ Individual

‒ Business Entity with Guarantors

• Business Entity without Guarantors

• Sworn Construction Statement as to payment of work

• Owners and Contractors Affidavit and Agreement

• Full or Partial Lien Waiver from General Contractor of Subcontractors

• Subordination Agreement

• Contractor’s Affidavit and Release

• In some instances an Escrow and Indemnity Agreement may be necessary.

• Bond naming title insurer as obligee

• Financial Statements of Owner, Principal or General Contractor



60

• Be prepared that mechanic’s lien coverage will most likely not be available.

• Be willing to take an exception to previously commenced work or supplied materials.

• Remain open to offering a bond for those amounts at risk.

Mechanic’s Lien Coverage Afforded Under ALTA

32 Series Construction Loan Endorsements

61

• Used in situations where there is limited or no priority for the lien of the insured mortgage over later filed mechanic’s liens and where the agent will be reviewing draw request and disbursement records whether or not the title agent is acting as the disbursement agent.

• Deletes Covered Risk 11(a), which insures against loss caused by the lack of priority of the mortgage over a mechanic’s lien that resulted from work financed by the mortgage that arises before or after the Date of Policy

• Paragraph 3 of each endorsement adds coverage for construction loan advances but this coverage is subject to

• Limitations in the endorsement

• Limitations in the policy jacket

• Listed title exceptions

• Insures the construction loan advance will not invalidate the mortgage

• Insures priority of the mortgage over encumbrances missed by the title insurer

Mechanic’s Lien Coverage Afforded Under

ALTA 32 Series Endorsements

62

• “The lack of priority of the lien of the Insured Mortgage, as security for each Construction Loan Advance made on or before the Date of Coverage over any Mechanic's Lien, if notice of the Mechanic's Lien is not filed or recorded in the Public Records, but only to the extent that the charges for the services, labor, materials or equipment for which the Mechanic's Lien is claimed were designated for payment in the documents supporting a Construction Loan Advance disbursed by or on behalf of the Insured on or before Date of Coverage.”



63

• ALTA 32.1 • Similar to the ALTA 32 but narrower

• Insures against the diversion of funds only if the title insurer paid the contractor directly or gave lender written approval to pay the contractor

• ALTA 32.2

• Does not require the title insurer or the borrower (with the title insurer’s written approval) to pay the contractor, unlike ALTA 32 and ALTA 32.1

• Like the ALTA 32.1, it only covers payments made directly to a contractor (i.e. excludes payments to a general contractor, which then pay subcontractors)

• Generally not accepted by lenders but may be necessary if the title insurer has concerns about the sponsor

Expect to be and be Prepared to be Reviewed by

Underwriting for Mechanic’s Lien Coverage

• Analysis of the proposed project (Apartment Complex, Office Building, Poultry House, Shopping Center)

• The construction contract (fixed price or cost plus)

• The construction budget

• Construction Loan Agreement

• Obligatory or Optional Advancements

• Disbursement Controls

• Monitoring of project completion percentages

• Frequency of Draw Requests

• Non-start affidavits from the borrower and contractors

64

Expect to be and be Prepared to be Reviewed by

Underwriting for Mechanic’s Lien Coverage

• Copy of subordination from the general contractor to the lender

• Appraised amount of the project.

• Reputation and experience of general contractor.

• Determination of who will be collecting lien waivers as construction progresses.

• Recent financial statements of the borrower and any other indemnitors.

• Payment and Performance Bond

• Determination if lender requires issuance of date down endorsement prior to each funding of construction draw

65



66

• Used in conjunction with the ALTA 32 series endorsements as a date down endorsement for construction disbursements.

• Advances the Date of Coverage up to the date of disbursement, but does not change the Date of the Policy

• Requires the inclusion of any new title matters and exceptions identified in a title search performed in connection with the issuance of the endorsement, including mechanic’s liens

• Prudent lenders will disburse construction funds only upon receipt of a clean ALTA 33

Pending Construction Disbursement

Coverage: Can You Get it?

• Every Commitment should contain the following pending disbursement clause:

• NOTE: Pending disbursement of the full proceeds of the loan secured by the Mortgage insured, this policy insures only to the extent of the amount actually disbursed without knowledge of any intervening lien or interest, but increases as each disbursement is made, up to the face amount of the policy.

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Pending Construction Disbursement

Coverage: Can You Get it?

• Added at the end of Schedule B, Part I

• Provides that, pending disbursement of the full proceeds of the loan, the policy insures lien priority only to the extent of the amount actually disbursed, up to the full amount of the policy

• Allows for the policy coverage to increase as disbursements are made

• Requires that title is examined at the time of each disbursement so that new liens can be identified and discharged or subordinated before the disbursement

• Usually known as a “Date Down” or “Down Endorsement”.

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Questions??Jeffrey R. Escobar, New [email protected]

212.408.5320 (direct)

207.952.2592 (mobile)

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