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Construction loans in our current tight financial market are very challenging. Most banks won’t touch them. Some banks may claim to offer construction loans, but with terms so severe and demanding that most clients quickly realize that it’s not worth the effort. I have heard horror stories from clients who came to work with our company, after first trying to work with local banks such as First Republic, Boston Private, and Wells Fargo. Typically, these banks require either large depository relationships, or large reserve accounts, that are so ridiculously excessive that it almost makes the loan pointless; as one client said, “if I had all that money for reserves I would never need the loan in the first place”.

One of the most difficult aspects of construction loans these days is the subset of “construction completion” loans; these are loans which complete a project that has been started already. Most banks will automatically pass on any project that has already started construction, and only a couple of banks that I know of will consider a project that has already broken ground.

Their reason for this attitude may not have anything to do with you, or the strength of your project. A project that has been started before the loan is created is considered to be a "broken priority" situation, and this refers to potential risk from mechanics liens.

This may seem like a problem with the lenders, but actually it is not. The problem rests with the title industry. Title companies of course provide title insurance, and banks and even most private lenders will always want a full policy of title insurance.

Once a project has broken ground, it becomes apparent to title companies (who require an inspection) that work has begun, but it is of course impossible to tell how much work has been done, and to verify what has been started, and to identify which company or subcontractor has or has not been on site, and has engaged in any labor that could result in activities that require compensation.

So here is the complication for a project that has started work already. You can keep immaculate lists of all work on the property, you can have all of the subcontractors sign unconditional releases, and you can ask the contractor for indemnity, but when it comes time for a title company to issue a title policy there is no way to “prove” that your list is complete, and there will always be (to a title company) some risk of some unknown subcontractor filing a mechanic’s lien against the property.

The priority given to mechanic’s liens create a high level of risk to all banks and construction lenders, and to title insurance companies. a very common “workaround” that a title company will offer will be to add an “exception” within the policy that excludes mechanics lien risk. This is a solution only for the title company – no lender that I have ever worked with will accept mechanics lien exclusion.

A very common method to resolve this issue is a costly and painful “shutdown” of the project, and a filing and recording of a notice of work stoppage on the project, and then waiting typically six months for the risk of mechanics liens to go away. Once mechanics lien risk has been managed, then a full title policy can be issued, and work can be resumed until completion.