Good Construction Loan Disbursing Practices Can Protect the Borrower and Lender

By on Mar 4, 2012 in Real Estate Law |

When a construction loan is being disbursed as a project proceeds forward, the construction disbursing agreement and the construction disbursing agent are key to the process and to protection for the Owner and Lender.

When a large real estate project is being financed by a construction loan, a bank or other lender will often require that the loan will be “escrowed” or held by a neutral third party as “escrow agent”.  In addition, the escrow agent is usually charged with disbursing the loan proceeds or paying the funds out of the loan proceeds as work progresses on a project.  This process is done according to a “Construction Disbursing Agreement” signed by the owner of the property, the contactor, the lender and the disbursing agent.  Typically, the contractor presents request for funds as the work progresses.  The requests for funds are usually accompanied by lien waivers from the subcontractors showing that the work has been done and that any mechanic’s liens are waived upon payment.  The disbursing agent disburses funds according to a schedule and inspections done at the work site to verify that the “draw” requests are for work actually done or supplies or materials actually installed.  Review of the “sources and uses” documentation is done as well.  Also, typically, the owner will sign off on the request and the disbursing agent pays the contractor. 
It is wise to make sure that the disbursing agent is reputable,  experienced in construction disbursing and has a clean track record.  It would be important to make sure in advance of having construction funds delivered to a disbursing agent to make sure there have been no lawsuits filed against the agent.  Discuss the practices the agent uses to a)confirm the identities of all the subcontractors and suppliers to make sure everyone gets paid and provides lien waivers, and b) the construction expertise the agent brings to the process.  Thoroughly review the process before signing any agreements regarding the disbursement of the construction funds.

In addition to the above suggestions, an owner or lender or both, as the case may be, should be sure to obtain title insurance coverage against mechanic’s liens during the disbursement process.

For more information about construction loan disbursing practices, contact The Newman Law Firm.