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Post-Closing Construction
A holdback (see holdbacks in Chapter 13) is usually established for the value of post-closing construction required as a condition of the loan. The inspection and verification of post-closing construction, and the release of escrow funds should be managed in a manner to minimize the involvement of the technical representative while at the same time securing the interests of the lender. As such, it is desirable to require the assistance of third party technical representatives to verify completion.
These services should be paid by the borrower. At the same time, the number of disbursements of funds should be minimized in order to limit involvement of both loan servicing and technical representative staff. Formal monthly inspections should be required for complex construction involving significant costs. For routine completion and punch-list items verifications most often takes the form of letters provided by the borrower certifying completion of the work. See construction completion in Chapter 3 for a list of documents to be received by the lender along with the request for final payment (release of escrow) when the work is completed.
Level of Effort and Time
Servicing efforts of technical representatives should be considered to be excessive when greater than 10 percent of available manpower is required to perform the work. When this occurs, and the effort does not primarily involve forbearance and foreclosure inspections (as in a downturn of a market or markets), it likely indicates that loan documents are not being appropriately structured. Scrutiny of loan provisions and procedures should be made for future loans. Provisions that should be considered for inclusion include:
- The requirement of third party technical assistance and payment of same by borrower for verification of completion of capital improvements for release of escrow funds at the discretion of the technical representative and loan servicer.
- The reduction of the frequency of releases of escrow funds. This is best achieved by establishing limitations on requests for release of funds based upon separations over time rather than by dollar amounts that exceed threshold minimum amounts.
- Using creative methods for the management of escrow reserves and holdbacks that minimize staff involvement (see capital expenditure escrows in Chapter 13).
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