ConstructionPro Week, Volume: Construction Advisor Today - Issue: 107 - 05/12/2011

Crashing the Line for Construction Loan Proceeds

Capital is hard to come by in today’s constrained credit market. This is encouraging parties to grab a share of the construction loan proceeds as quickly as possible, leaving less money for construction and compromising the positions of those parties downstream. Two recent cases illustrate this phenomenon.


A California lender wrote a construction loan agreement in a manner which reserved the right to take interest and fees out of the loan proceeds. The bank promptly took more than $1.6 million in interest and fees out of the loan proceeds and then disbursed the balance to the property developer over a period of time. When an unpaid contractor served the bank with a stop notice – a lien on the construction loan proceeds – the bank responded that there were no more proceeds.


A Texas developer created an “architectural firm” even though the developer was not a licensed architect. The developer then paid his firm over $881,000 in design fees from a construction loan insured by the federal government. The drawings proved to be useless and the project was not constructed.


Have you seen situations where parties have crashed the line and taken construction loan proceeds on the front end? What are the ramifications of these practices? As always, I welcome your comments.


Featured in Next Week’s Construction Claims Advisor:


  • “Good Faith Dispute” Determined Objectively under Prompt Payment Statute
  • Contractor May Have Received Delay Damages Prohibited by Disclaimer
  • Court Distinguishes Direct and Consequential Damages




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