Pub. 11 2016-2017 Issue 1

www.nebankers.org 28 Extraordinary Service for Extraordinary Members. Commercial Construction Financing A Step-by-Step Guide to Protecting Your Security Brian Koerwitz, Endacott Peetz & Timmer PC, LLO M OST NEBRASKA-BASED COMMERCIAL LENDERS HAVE probably heard about a situation where a con- struction lien has taken priority over a bank’s deed of trust. While rare, this does happen; however, it can be avoided in almost every circumstance. Follow this step-by-step process to greatly, if not completely, eliminate this risk. Step 1 – Verify Clean Title When lendingmoney on a construction project, the lender should always obtain an updated title report to ensure that the borrower has clean title and that no pre-existing construc- tion liens or other encumbrances are present. With respect to liens, this precaution is necessary because a lien claimant in Nebraska can record a construction lien just as soon as the contract is signed. Thus, even if work has not yet commenced on the project, the possibility that a lien has been recorded still exists. Step 2 – Record a Deed of Trust (and Create a Construction Security Interest) Assuming the title is clean, and prior to disbursing any funds, the lender should record its deed of trust. However, this should not be any ordinary deed of trust. As set forth in the Nebraska Construction Lien Act, a lender on a construc- tion project would typically record a deed of trust that also creates a construction security interest. According to the Lien Act: A construction security interest shall mean a security interest created by a security agreement that contains a legend on the first page clearly stating that it is a Construction Security Agreement and that secures an obligation which the debtor incurred for the purpose of making an improvement of the real estate in which the security interest is given if the instrument recorded to perfect the interest states that it is a construction security interest. The purpose for creating a construction security interest is that the Lien Act protects a bank’s priority in subsequent advances if the advance is made for improvements to the property and if the advance is made under a construction security agreement. See Neb. Rev. Stat. § 52-139. Step 3 – Record a Notice of Commencement Perhaps themost important step is next. The lender should record a notice of commencement. The reason for this is simple: a notice of commencement can prevent a construc- tion lien from jumping ahead of a deed of trust in priority. Section 52-137 of the Lien Act provides that “[i]f a lien is recorded while a notice of commencement is effective as to the improvement in connection with which the lien arises, the lien attaches as of the time the notice is recorded, even though visible commencement occurred before the notice is recorded.” In layman terms, this provision provides that liens recorded after the notice of commencement will be deemed to attach on the date of the notice of commencement. Obviously a bank does not want a lien to attach prior to its deed of trust; thus, it is critical that the lender records its deed of trust prior to recording the notice of commencement. The Nebraska Supreme Court has weighed in on this issue in the past and found that, if the two documents are recorded simultaneously, it does not matter which one was actually