6.4.18: Keep Contractor Work to a Minimum When Closing a CMBS Conduit Loan

We recently had to work through an issue on a relatively simple CMBS conduit loan. The transaction was a 50% loan-to-value (LTV) cash-out refinance of a small neighborhood shopping center that was 100% leased. One of the tenants that will occupy 24% of the space has a signed lease and is paying rent while finishing up tenant improvements, including installation of a sprinkler system, at the tenant’s own cost, in anticipation of opening for business in 30 days.

On the day of loan closing, an inspector from the title company happened to drive by and see the work. The title company would not provide title coverage for mechanics liens because of the work. The closing was postponed.

Even though there is no mechanics lien on the property now, the priority of a mechanics lien typically relates back to the date that the labor, services, or materials were initially furnished by the contractor. During construction (and after the title insurance policy is issued), a lender could lose its first lien priority to a mechanic’s lien if the contractor’s work began before our loan closed.

So since work started before the closing date, a lien dated between the start of work and closing would be in first position ahead of the mortgage, hence the refusal of the title company to provide title coverage for mechanics liens.

What were the options for resolution?

  • The contractor could provide a security bond to the title company for the amount of the contract.
  • The landlord could request a construction control account whereby funds are disbursed only upon receipt of lien waivers.
  • The borrower could post cash collateral with the title company for the amount of the contract.
  • An indemnification agreement from the borrower could protect and indemnify the title company from and against any and all liabilities from the construction work, including mechanics liens.

Once the title company received the construction contract for the work and a financial statement from the borrower, the title company agreed to the indemnification and provided coverage for mechanics liens and the loan closed.

This entry was posted in CMBS, CMBS Conduit Loans, Commercial Mortgage-Backed Securities, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , . Bookmark the permalink.

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