Lenders offering construction loans are keenly aware of the risks that they may face when funding new construction—budget overruns, mechanic’s liens, delays in labor or materials, local political opposition, and changing market conditions, to name a few. Perhaps less obvious are the dangers posed by poor loan administration, which can expose lenders to litigation and, in some circumstances, injunctive relief in favor of the borrower. The challenge presented to lenders in the construction financing context, and as the case law discussed herein indicates, is balancing the need for frequent communications with the borrower against the risk of such communications becoming discoverable in court proceedings and used against the lender if the relationship deteriorates. Further, a construction lender’s course of dealing, established by such communications, may offer unique remedies to which borrowers are entitled in the construction loan context.
Unlike traditional commercial mortgage loans in which loan proceeds are advanced in full at closing and lenders retain few affirmative obligations throughout the term, construction lenders provide loan funds in a series of advances as building progresses and, whether personally or by way of a third party construction consultant, take an active supervisory role in the progress of construction as disbursement requests are reviewed and approved for lender funding. The combination of a construction lender’s sense of how a project is progressing, joined with the market data readily available to them, may give such a construction lender an early indication that a particular project faces unforeseen construction challenges or market changes that threaten the economic viability of the final project. Nearly all construction loan documents entitle a lender to cease funding loan disbursements in circumstances where project delays or change orders have changed the construction budget until such time as the borrower has ‘balanced’ the loan with an infusion of additional equity equal to the shortfall.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.
For questions call 1-877-256-2472 or contact us at [email protected]
