Managing risk in preparation for a church's loan approval takes savvy and careful planning.
Tim Lawrence · February 27, 2018
Sometimes, when churches have a substantial amount of cash contribution into the project, they will start the project, thinking they will pay the initial portions of the project with their own cash, figuring that they will finalize their loan when the funds are actually needed to finish the project.
The problem is that as soon as any work begins on the property, the mechanics lien rights for those firms working start the day they set foot on the property, regardless of whether they actually file the lien or not. This creates what is called broken lien priority, and the title company will no longer be able to issue a title policy to insure first lien position to the lender.
Even the most innocuous contractor activity can lead to broken priority. Merely putting up a chain link fence around a property, bringing a trailer on the property, or even storing tools somewhere on the property constitutes beginning the project.
The title company will physically inspect the property just prior to the deed recording to look for evidence of broken lien priority.
If lien priority is broken, the title company will require an indemnity agreement from the borrower, which holds the title company harmless against liens arising from the broken priority.
The indemnity agreement process used to be a fairly straightforward process of assessing the church’s ability to manage the risk of dealing with these liens, but now it is a much more difficult process, and there is no guarantee the title company will approve the indemnity agreement. Many lenders will now not consider loans where the construction has started and there is broken lien priority.
Danger Zone #5: Progress Payment Planning, Retainage, and Cash Management
The typical construction loan progress payment process has a lot of moving parts.
Sometimes the lender’s process for their due diligence on the progress payments does not correlate well with the payment progress terms of the contract between the church and contractor. For example, most lenders, when they receive the approved progress payment request from the borrower, will then schedule an inspection by an in-house or third-party inspector.
The inspector will make sure from the lender’s perspective that all the amount of work billed is commensurate with the amount of work finished, and that the work was done according to the plans.
The lender will review the supporting documentation, including lien releases, and make sure there is adequate cash and remaining loan proceeds to fully fund the project. This process can take a few weeks. When these few weeks are added to the time it takes for the church to approve and submit the payment request to the lender, it can take around 30 days to get the contractor paid for the work done.