Construction Lenders: Keep Your Priorities Straight!

The financial crisis has left a plethora of abandoned construction projects riddled with mechanic’s liens and burdened by mortgages that are deep under water. At the same time, New York State courts have sustained a triple-whammy: enormous existing caseloads, a barrage of foreclosure actions and deep recessionary cutbacks that have drastically winnowed already scarce resources. Under the heading, “desperate times call for creative measures,” rather than commencing a foreclosure action, taking a number and then taking a loss somewhere far down the road, increasing numbers of construction lenders are attempting to salvage value by modifying the terms of their loans to developers, either formally in a writing or, perhaps, informally, by performance (and such informal changes may occur more frequently in the private lender context). Examples of the kinds of modifications being made include changes to the contemplated use of the project, decreasing the loan amount, increasing the borrower’s consideration for the loan, changing the equity or retainage percentages or easing bonding requirements.

Modifying the terms of a building loan may make great business sense in today’s environment, but not if it means the construction lender sacrifices the priority of its building loan mortgage lien over those of later-filed mechanic’s liens. That is precisely what can happen if the modification is “material,” but no filing is made with the County Clerk within 10 days. Pursuant to N.Y. Lien Law §22, for a building loan mortgage lien to have priority over later-filed mechanic’s liens with respect to advances made prior to the filing of the mechanic’s liens, not only must a building loan contract satisfying the statute’s requirements have been filed with the County Clerk, but additional filings must be made within 10 days of any material modifications to the contract’s terms. If not, the construction lender’s lien will lose priority with respect to all advances made on the building loan—whether before or after the modification—a result to be avoided at all costs.

Summary of Lien Priorities