Georgia Construction, Bond & Lien Law Blog

The Lender’s Perspective on Construction Projects

Posted in Construction Lending by Blue Blog on the February 12th, 2015

As our long-time readers know, Mark Cobb is adjunct faculty at Thomas University.  Currently, he is leading a class on construction law and business, and one of his students is today’s guest blogger.  Frederick Cruess is a business administration major and a champion athlete.  Frederick write about the lender’s role on construction projects.

Georgia Construction Lending Issues

by Federick Cruess

 
The art of lending by definition is quite simple, it is the providing of funds temporarily, with the expectation of repayment along with interest. The true concept of lending may be slightly harder to grasp because it is a more abstract than just a concrete definition. The biggest concern of a lender is to make sure that the loans are used to improve the property and that they keep the security interest a priority over the interest of others. Also the lender does not want to have their loan construed by a third party.

Commercial banks are the most common type of construction based lenders. This is because they have the staff necessary to underwrite the borrower’s abilities and the financial backing to make the necessary loan. Other types of lenders are pension funds, life insurance companies, or government entities, all of which actively participate in construction lending. The last type of lender is called a mezzanine lender, which is a person that makes a loan to a project owner but is not secured by the actual project itself.

The terms of a loan are often very complex, so they usually separated into a detached agreement, called a construction loan or building loan agreement. The loan agreement usually contains the conditions of the initial closing. It is also important for the lender to approve the borrower’s agreement, and go over it with their contractor and architect. Doing so will help to provide the scope of the maximum fees, construction costs and the schedule of the construction, all of which are provided by the borrower’s agreement. The lender may also want the contractor and the architect to enter into agreements with the lender and borrower, consenting to the desired assignments.

A promissory note, is basically a note of promise that the borrower will pay the principal amount, or the amount of the loan, back to the lender along with any incurring costs or interest. Interest accrued on the principal amount may be variable or fixed, depending on the lender’s agreement with the borrower. A mortgage, also known as a deed of trust, is giving the lender interest in the property that is being improved as security of the debt owed. Leases, security agreements, and contract rights are some of the other documents that secure repayment on construction loans.

After the lender has evaluated all the other participants involved in the agreement, to make sure that they are fully capable and have the financial resources to complete the project, it is essential that the lender gets documentation that allows them to take the position of the borrower if there is some default, and finish the project. The lender may also have the right to sue the participants if they do not carry out their respective duties, for intentional or negligent impairment of the lender’s security interest. The lender will also have rights under payments and performance bonds if it has been named obligee.

There are many types of defaults that can occur with construction contracts, whether it be from things such as financial failure, running behind schedule, or even some environmental factors. An intelligent lender is going to make sure they’re prepared for unforeseeable circumstances, and negotiate work outs so that they will receive the amount owed. In the case of a default the lender does not want to necessarily impair its security but instead, negotiate a way to continue the project, even if it means extending the maturity date.

In conclusion, the lender’s largest responsibility is to ensure that they make all of their money back, plus the additional interest and fees. They must keep their interest priority over all else and ensure that the project runs as smoothly as possible. The idea of a lender may seem quite simple, but the complexity is sometimes too subtle to see on the surface. Rest assured, to be a profitable lender, one must be very clever and intelligent.

The thoughts and expressions contained in this blog post are the responsibility of the author and do not necessarily reflect the options of the Georgia Construction Lien & Bond Blog or the Cobb Law Group.

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