A commercial construction loan does not hand over the full amount at closing. It funds in stages as the building goes up, and that changes how the title and the closing work. Let me walk through what is different.
Written by Adam L. Engel, Esq., Principal and real estate attorney at Prime Title & Escrow
Financing the construction or major renovation of commercial property is its own kind of closing. Unlike a purchase loan that funds once, a construction loan is disbursed in draws as the work progresses, and the title coverage has to keep pace. The central concern throughout is mechanic’s liens, because unpaid construction work can threaten the lender’s first position.
This builds on the basics in my guide to how a commercial closing differs from a home purchase, with the added layer of staged funding.
A commercial construction loan funds in draws as work is completed rather than all at once. At the initial closing the deed of trust is recorded and title is insured. As each draw goes out, the title is brought current with a date-down endorsement that confirms no new liens have been recorded. Throughout, the lender wants protection against mechanic’s liens, which in Virginia can take priority based on when work began.
How a construction loan is different
On an ordinary purchase or refinance, the lender funds the full loan at closing and the deed of trust secures that amount. A construction loan instead commits to a maximum amount that is advanced over time, in a series of draws tied to construction progress. The borrower draws funds as foundations, framing, and finishes are completed, often after an inspection confirms the work. The deed of trust still secures the full committed amount, but the money goes out in pieces.
The initial closing
At the initial closing, I record the construction deed of trust and the title company issues a lender’s policy, usually with the coverage and endorsements a construction lender requires. This is also where the entity authority, the survey, and the existing payoff, if the borrower already owns the land, are handled. If the borrower is buying the land and building, the acquisition and the construction loan can close together, with the purchase money and the first construction draw coordinated.
Date-down endorsements and the draws
Because money goes out over months, the lender wants assurance at each draw that nothing has clouded the title since the last advance. That assurance comes from a date-down endorsement, sometimes called a continuation. Each one updates the effective date of the lender’s policy to the current draw and confirms that no new liens, including mechanic’s liens, have been recorded against the property in the meantime. In effect, the title is re examined at each stage so the lender keeps advancing money against clean title. For a closer look at running those draws, the date-down at each advance, and the disbursement and retainage that go with them, see my piece on construction loan draws and title date-downs.
Each draw is a small closing of its own. Before funds go out, the title is brought current and the lender confirms the work supporting the draw was done. Coordinating the inspection, the title update, and the disbursement is a routine part of running a construction loan, and getting it right keeps the project funded on schedule.
Mechanic’s liens are the central risk
The reason construction lenders are so careful is priority. In Virginia a mechanic’s lien can relate back to when work on the project began, which can place an unpaid contractor’s claim ahead of the lender’s deed of trust even though the deed of trust was recorded first. I explain the deadlines and mechanics in my guide to mechanic’s liens on commercial property. To manage this, the lender requires title coverage against mechanic’s liens, and I collect lien waivers from contractors and suppliers as draws go out, along with an owner’s affidavit, so each advance rests on confirmation that the trades have been paid.
The conversion to permanent financing
When construction is finished, the loan is typically paid off by permanent financing or converts to a permanent loan under a prearranged structure. Either way there is a final step. The title is brought fully current one last time, any final lien waivers are collected, and the permanent lender gets a policy insuring its position. I coordinate that transition so the project moves from construction to permanent financing without a gap in coverage.
Building across Virginia and West Virginia
Construction lending is busiest where development is active, from the commercial and data center growth in Northern Virginia to projects across Central Virginia and the growing markets of West Virginia. Wherever your project sits, I handle the initial closing, the draw updates, and the conversion so the financing tracks the building.
Send me the loan and the project details and I will handle the initial closing, the date-down endorsements at each draw, and the lien waivers that keep the lender protected.
Get Your Free Quoteor call (703) 552-4155Frequently asked questions
How is a construction loan closing different from a purchase?
A purchase loan funds the full amount at closing. A construction loan commits to a maximum and advances it in draws as the work progresses. The deed of trust secures the full committed amount, but the money goes out in stages, so the title coverage has to be updated as each draw is funded.
What is a date-down endorsement?
It is an endorsement, sometimes called a continuation, that updates the effective date of the lender’s title policy to the current draw and confirms no new liens have been recorded since the last advance. It lets the lender keep funding against clean title as construction proceeds.
Why are mechanic’s liens such a concern on construction loans?
Because in Virginia a mechanic’s lien can relate back to when work began, which can put an unpaid contractor ahead of the lender’s deed of trust even though the deed of trust was recorded first. Lenders require title coverage and lien waivers to protect their first position.
What are lien waivers and why do you collect them?
Lien waivers are signed releases from contractors and suppliers confirming they have been paid for work to date and waiving their lien rights for that work. Collecting them at each draw, along with an owner’s affidavit, supports the title coverage and confirms the trades are being paid as the money goes out.
Can the land purchase and the construction loan close together?
Yes. If the borrower is buying the land and building on it, the acquisition and the construction loan can close at the same time, with the purchase funds and the first construction draw coordinated. I handle both sides so the deal closes cleanly.
What happens when construction is finished?
The construction loan is usually paid off by permanent financing or converts to a permanent loan. The title is brought current one final time, any last lien waivers are collected, and the permanent lender receives a policy insuring its position, so the project moves to permanent financing without a coverage gap.
This article is general information about commercial real estate closings in Virginia and West Virginia. It is not legal advice for your specific transaction, and your costs and requirements depend on your deal. Please confirm the details with me directly.