Modifying loan terms allows the lender and the borrower to advance additional funds to keep the project moving forward as well as to otherwise restructure loan terms when needed to avoid costly defaults, foreclosures and related issues.
At the same time, lenders (or those servicing the loans) must be careful to preserve the lender’s rights, including lien priority, title insurance coverage and to avoid “plastering over” unresolved problems and issues. Consider these factors:
- Use of a “protocol” agreement
- Obtaining appropriate waivers and releases as part of the consideration for the modifications
- Advances: Are the additional funds part of the existing loan or a new loan transaction?
- Lien priority: avoiding the loss of current lien priority
- Title Insurance: avoiding loss of, or inadequate coverage
- Documentation: eliminating ambiguities which could lead to later disputes
- Anticipate potential challenges to lien priority by subordinate lenders or the borrower’s bankruptcy trustee
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