Construction Loan Modifications and Workouts: Key Considerations for Lenders and Distressed Borrowers

Description

The COVID-19 pandemic has caused supply chain disruption, construction delays, and in some instances, the shutdown of ongoing projects. The result may increase carrying costs for developers, extend timelines for completion, and require changes in building plans or design. All of these factors have ramifications for the construction loan and the financial health of the borrower. Construction lenders must be able to respond to a default scenario or with a loan modification that facilitates completion of the project and eventual repayment of the loan.

Threshold questions include whether a project has lost value and the ability of contractors, subcontractors, architects, and suppliers to perform under the construction contract. Parties must identify whether insurance coverage is available to cover losses associated with disruptions caused by the pandemic, the disbursement obligations of the lender under the loan agreement, and the financial condition of the borrower and guarantors.

Construction loan modifications present particular problems for lenders. All interested loan parties, including loan servicers and participants, must consent to changes. Determining the status of title and any competing liens may be problematic, as title offices may have a backlog due to government-mandated closures. State law may require the lender to file a notice of modification to protect its lien priority. Further issues may arise on the site if the pandemic continues to impact contractors and suppliers.

Listen as our authoritative panel discusses construction loan issues resulting from COVID-19 economic disruptions and best practices for working out and modifying distressed loans.