Construction lending and borrowing is on the verge of becoming a lot more expensive and a lot more difficult in Illinois. The Illinois General Assembly is considering House Bill 3636 (HB3636). And if passed, this bill will dramatically reduce the amount of money that gets paid from a foreclosure sale to a construction lender, and instead disproportionately redistribute much of the foreclosure sale money to mechanics lien claims.
Currently, if there is not enough money from a foreclosure to pay off all of the creditors—construction lenders and mechanics lien claims—Illinois law divides the money into two classes, and then sets priority to the money in each class between construction lenders and mechanics lien claims:
- Class 1 represents the value of the land before construction. Assuming the construction lender records their mortgage before work starts or the project owner enters into a contract for construction, design work, material, or equipment, the lender gets first priority against the money in Class 1 and draws money from that class before anyone else.
- Class 2 represents the value added to the land by construction labor, other services (e.g., architects and engineers), material and equipment.
This video explains how priority and money in this class gets allocated between construction lenders and mechanics liens claims (under the Illinois Supreme Court’s decision in LaSalle Bank v. Cypress Creek).
- Subordinate their mechanics lien rights from the outset to the construction lender’s mortgage and mechanics lien claims that the lender takes by assignment;
- Record mechanics lien claims before each payment request, and instead of delivering a lien waiver with each progress payment request, deliver an assignment of that lien claim to the construction lender; or
- Both subordinate, and record and assign with each payment.
The byproducts of these reactions: increased construction loan costs, higher interest rates and fees on construction loans, and more paperwork, processing, and delays in disbursing each payment. This is bad for business, bad for real estate investors and developers, and bad for the construction industry.
Real estate investors, project owners, and construction lenders each have a lot at stake should HB3636 pass, and each should consider adding their voice to those already opposing it. They can do that by contacting the government affairs offices at their trade associations and legislators in the Illinois General Assembly and sharing a link to the video.
Off-line readers can play the video at: http://www.constructionlawtoday.com/2012/09/video-plain-language-explanation-of-cypress-creek-and-house-bill-3636/
Joshua Glazov is a Principal in the Litigation & Dispute Resolution group and a member of the Construction Law practice at Chicago-based law firm Much Shelist. He regularly represents clients engaged in contracting to design and build commercial, industrial and residential projects. He also advises borrowers, lenders and investors. Glazov can be reached at 312.521.2659 or [email protected].