What Are Construction Loan Endorsements?
Construction endorsements, such as the ALTA 32 series and the ALTA 33, play an important role in commercial real estate transactions involving construction activities. These endorsements help provide invaluable protection against title defects arising from construction activities by increasing the policy coverage as construction funds are advanced and perfecting your interest against mechanic’s liens.
When Do You Need an ALTA 32 Endorsement?
The ALTA 32 endorsement series ensures that you have adequate coverage to cover unrecorded mechanics liens. ALTA Endorsements 32, 32.1 and 32.2 are designed to be used with an ALTA 33 endorsement for loan policies where the security instrument may never have priority over Mechanic’s Lien or where it has lost priority to Mechanic’s Liens, for example, due to work that began prior to the recordation of a security instrument. However, these endorsements may also be used in situations where the security instrument already has priority over mechanic’s liens. Each variation is a bit more conservative than the one proceeding it and the variation chosen by the title insurer depends upon the degree of risk the particular transaction might pose.
Understanding the Different Types of ALTA 32 Endorsements
ALTA Endorsement 32 (Construction Loan):
ALTA 32 coverage only applies to unrecorded Mechanic’s Liens filed by contractors and suppliers specifically shown in the draw package documents and disbursed by the lender before the Date of Coverage.
ALTA Endorsement 32.1 (Construction Loan – Direct Payment):
ALTA 32.1 coverage is available when either the title insurer directly pays the unrecorded Mechanic’s Lien claimant, or if the lender has made the payment with written approval of the title company.
ALTA Endorsement 32.2 (Construction Loan – Insured’s Direct Payment):
ALTA 32.2 is suitable when the lender or its agent personally examines the draw requests, handles money disbursement, and directly pays subcontractors and suppliers.
What If a Title Company Will Not Issue an ALTA 32 Endorsement?
- Review the contract and any specific requirements with the title insurer and ensure that the refusal to issue the endorsement aligns with contractual obligations and industry standards. One way to overcome any potential pushback to an ALTA 32 endorsement request is to, as a matter of course, require that a detailed draw schedule gets attached to the loan agreement.
- Discuss potential alternatives or modifications to the terms of the endorsement that could address the title company’s concerns while still providing sufficient protection for your interests as a lender or property owner. For example, in some instances, the title insurer may cover payments to a contractor or supplier that were made by the owner. This allowance is made on a case-by-case basis will likely require an indemnification agreement from the owner, paid invoices and lien waivers to protect the priority of the disbursements.
What Is an ALTA 33 Endorsement?
Briefly, an ALTA 33 endorsement is used in conjunction with a construction loan on improved or unimproved property and protects against the indebtedness that arises as a result of construction loan advances that occur after the date of the policy. On non-construction loans, the title policy will insure 125% of the loan amount advanced at Closing, however, the ALTA 33 endorsement will incrementally increase policy coverage based on periodic construction disbursements.
Best Practices for Construction Loan
- Consider whether you intend to disburse payments or whether you prefer the title insurer to make disbursements and whether you are comfortable with being required to obtain written approval from the title insurer to make disbursements. Some variations of the ALTA 32 endorsement may be used when the insured lender disburses the money itself, when the title insurer reviews the draws and disburses the money, when the general contractor is paid, and when payments are made directly to subcontractors and suppliers.
- Consider requiring specific construction endorsements to be included in the title insurance policy as a part of Lender underwriting requirements.
- Consider the nature and complexity of the construction project, and whether endorsements need to be customized to address specific concerns and risks.
Questions?
Construction loan endorsements are an important part of protecting a lender’s security interest throughout the life of a construction project. Selecting the appropriate endorsements at closing and understanding how they apply as funds are advanced can help reduce title-related risks, preserve lien priority where available, and minimize costly disputes later in the project.
Because every construction loan presents unique underwriting considerations, lenders should evaluate endorsement requirements early in the transaction and work closely with experienced legal counsel and title professionals to ensure appropriate coverage. If you have questions about construction loan endorsements, mechanic’s lien risks, or title insurance requirements, contact Fortra Law to discuss your transaction with our Banking & Finance team.
