New York’s Building Loan Contract: Promises, Promises

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PART III OF A SERIES:
Commercial Real Estate Finance in New York

IN THIS SERIES, ROBERT RIVA NAVIGATES THE NUANCED AND OFTEN CONFUSING WORLD OF COMMERCIAL REAL ESTATE FINANCES IN NEW YORK, WITH PRACTICAL GUIDANCE ON CHALLENGES AND CONSIDERATIONS.

Nothing quite sets New York apart from other states’ attempts to balance the interests of construction contractor and construction lender as does New York’s iconic building loan agreement – or, to call it by its technical name, the “building loan contract.” A staple of New York construction lending, the building loan contract is a truly unique innovation, but also one that must comply with often inflexible statutory requirements.

WHAT IS A BUILDING LOAN CONTRACT?

• A building loan contract is essentially just a construction loan agreement that complies with specific – but deceptively simple sounding – statutory requirements.
• New York defines a building loan contract as a construction loan agreement where the lender, “in consideration of the express promise of an owner to make an improvement upon real property, agrees to make [building loan] advances … secured by a [building loan] mortgage on such real property”.
• The key takeaway is this: no promise to build, no building loan contract; no building loan contract, no building loan; and no building loan, no statutory protection for the construction lender’s building loan mortgage.
• To be clear, there are other requirements for a construction loan agreement to be considered a building loan contract, but that exchange of promises – the promise to build in exchange for the promise to advance loan proceeds – is the essence of a building loan contract.

WHAT SPECIFIC BENEFITS DOES A NEW YORK CONSTRUCTION LOAN AGREEMENT GET IF IT QUALIFIES AS A BUILDING LOAN CONTRACT?

• Among other things, it opens up to a construction lender many of the Lien Law benefits that are discussed in other installments of this series.
• For example, it allows the lender’s building loan mortgage to slice into the “relation-back” rights that New York law otherwise gives mechanics lien holders, and so – subject to important nuances – it allows the building loan mortgage to keep its priority over mechanics liens that are filed after the mortgage.

WHAT IF A CONSTRUCTION LOAN AGREEMENT IN NEW YORK DOESN’T QUALIFY AS A BUILDING LOAN CONTRACT?

• Quite simply, failure to comply can be potentially devastating for a construction lender in New York, leading to draconian results in which the entire building loan mortgage is subordinated to all mechanics liens – the so-called “subordination penalty.”

We lay out additional aspects of a building loan contract, how they work together, and why, in upcoming installments of this series.