When closing a commercial construction loan, a lender’s due diligence gathering typically does not end at the loan closing table. Once a construction loan closes, a lender must carefully follow up on its post-closing conditions. In most cases, the borrower provides the plans, permits, construction documents, and contractor’s insurance pre-closing. However, there are cases, such as a combined real estate purchase/construction transaction, where the construction items may be provided post-closing. Lenders should proceed with care to ensure that they gather the necessary documentation and perform the required inspections to ensure the project will be completed properly and efficiently.
During construction, lenders should make sure that the construction is progressing as scheduled by completing site visits and/or obtaining site inspection reports from third party construction companies. Lenders must obtain proper documentation of all work performed before issuing payment for completed work. If you have obtained title insurance on the commercial property, it is imperative to keep the title agent up to date in order to obtain date-down endorsements and confirm your lien positon.
Prior to final payment to the general contractor, lenders should ensure that all punch list items have been completed and a fully executed final unconditional lien waiver from the general contractor and all sub-contractors has been received. Lenders should obtain a statement from the architect or general contractor confirming that the project is substantially complete and was built in conformance with the plans and specifications approved by the lender. If there is title insurance, then you also need to consult with the title agent to ensure that all title requirements have been properly and fully met to avoid any exceptions related to mechanics liens.
Once the project is completed, lenders should collect all required insurance, including, but not limited to, property insurance, liability insurance, worker’s compensation insurance, malpractice insurance (if applicable) and dram shop insurance (if applicable); all invoices for machinery and equipment purchased with the loan proceeds; and an updated list of all machinery and equipment which is collateral for the loan. In addition, prior to opening for business, the borrower needs to provide a certificate of occupancy and copies of all required business licenses. Closing commercial constructions loans is a complex process with considerable post-closing requirements. Lenders should take care to carefully monitor construction progress and adhere to prudent lending requirements.
For assistance with SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070.