• Chaim Zlotowitz

Hard Money [Construction] loans vs. Mechanics lien's: L__N - What has priority the "oa" or the "ie?"


PART 1 of 2: You are a hard money lender. A borrower seeks to borrow $3M : $2.5M to payoff a maturing loan and the remaining $500K for improvements to the property. You agree to lend the funds, you will disburse at closing $2.6M - $2.5M to payoff old lender and $100K for improvements and the remaining $400K over three separate draws. The loan closes Jan 1. You make a second disbursement of $150K Feb 1 and the next disbursement will be made in July. However, on June 5th, a Mechanics lien is filed by the Contractor for non-payment of a $12,000 invoice. At about the same time borrower defaults and you start the foreclosure process. The contractor also starts an action to foreclose on his mechanics lien and asserts that his $12,000 lien has priority over your entire $2.75M mortgage! You feel this is absurd.


You go to court to litigate and find out that in fact his $12,000 lien does have priority, and can wipe out your Multi-million dollar mortgage.


Why? Because your loan didn't comply with section 22 of the Lien Law, the law imposes a "subordination penalty" which makes your loan lose priory to mechanics liens filed after your loan.


To be continued..

Part 2 will discuss how this loan didn't comply and methods how to comply

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