Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Mechanics' Liens

One of the important issues that should be focused on at the outset in conjunction with a construction project is mechanics' liens. Mechanics' liens relate to claims made by contractors and/or subcontractors or other venders who have supplied material or services to the project. In California, as well as many other states, mechanics' liens relate back in priority to the commencement of construction. In other words, if you start construction on January 1 and you record the trust deed for the construction loan on January 10, you have created a potential problem. Any claim for services rendered in July made by a contractor or subcontractor, such as an electrician, relates back to January 1, the beginning of construction, and takes priority over the construction loan. Lenders tend to frown on a loss of priority.

The simple way to avoid this problem is to record the construction loan before any work whatsoever is commenced on the project. Sometimes, however, this orderly process does not work. For example, what do you do if you must start construction to meet a tenant's occupancy needs and the construction lender is not in a position to record? An alternative solution is to work with the title company so that the title company takes the risk on mechanics' lien priority and issues a clean policy to the lender. For the title company to make this accommodation, they will usually insist on an indemnity from the borrower. Before accepting the indemnity, the title company ...