Construction Loan Funding and Title Insurance: Best Practices in Disbursement and Documentation

Drafting Effective Future Advance, Budgeting and Draw Provisions; Lien Waivers, Title Updates and Endorsements

Recording of a 90-minute CLE webinar with Q&A


Conducted on Tuesday, September 12, 2017

Recorded event now available

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Program Materials

This CLE webinar will examine the mechanics of construction loan funding and the interplay of construction advances with title insurance through the life of a construction loan. The panel will discuss drafting of budgeting and construction draw provisions, and best practices for preserving the lender's lien priority and title insurance protection for future advances.

Description

In construction loans, the lender advances a small portion (or none) of the loan at closing, since the proceeds are intended to fund the costs of construction as they are incurred. The conditions for advancing funds are often complex, in part because there are three participants—the lender, the borrower and the contractor—and in part because actual costs may vary from the construction budget.

Most construction loan agreements provide for shifting cost savings for one item to another item in the budget. Construction budgets will usually incorporate “contingency” to be applied by the borrower to pay for cost overruns for items in the budget, subject to certain conditions. Documents must provide for retainage for unforeseen costs to ensure completion of the project.

A construction loan is unique for title insurance purposes because disbursements are made post-closing, and a property increases in value with each disbursement. Title insurance must be in place to cover the loan amount as it is funded.

Counsel to the lender must structure the loan to ensure the priority of advances and procure title insurance (including appropriate endorsements at closing) consistent with that priority. In addition, the borrower will typically need to obtain lien waivers or lien subordinations as disbursements are made.

Listen as our authoritative panel discusses the construction loan funding process and the need for increasing title insurance coverage as funds are disbursed. The panel will discuss budgeting and construction draw provisions in loan agreements, future advance clauses and other practices for preserving the senior position of the mortgage over mechanic’s liens, and the title endorsements that should be obtained at closing.

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Outline

  1. Construction loans
    1. Budgeting—adjustments, retainage
    2. Draw procedures
  2. Mechanics liens—lien waivers, lien subordinations
  3. Title coverage and construction endorsements
  4. Future advance clause, title updates
  5. Survey coverage
  6. Owner’s policy

Benefits

The panel will review these and other key issues:

  • What issues must be considered in drafting construction draw provisions?
  • How do construction draw provisions address variations from the construction budget?
  • How does title insurance for a construction loan differ from title insurance for a permanent loan?
  • What is the purpose of lien waivers or subordinations required with construction draws, and what are the standard forms?

Faculty

Peter G. Freeman
Peter G. Freeman

Partner
Pillsbury Winthrop Shaw Pittman

Mr. Freeman represents lenders, developers, private equity funds and real estate investment trusts (REITs) in...  |  Read More

Euchung Ung
Euchung Ung

Partner
Kleinberg Kaplan Wolff & Cohen

Mr. Ung primarily represents real estate investors, owners and lenders in partnership, LLC and joint venture...  |  Read More

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