NEW YORK—Contractors and developers negotiating construction projects are coming up against tough decisions.
Take a 40-unit building in Brooklyn that is 90 percent complete as an example, said Jennifer Redmond, principal at the Redmond Law Office.
In the past, all contracting would be paid for by this stage, but there is $900,000 owing on this project.
“The developer is defaulting on the loan, and there is no financing,” Redmond said.
The choices are slim for the contractor. “Do they file a lien or sit and negotiate?” Redmond said at an NYC Network event recently. Her office represents developers, owners, sub-contractors, and contractors.
In short, a mechanics lien is the legal claim of one person upon the property of another person to secure the payment of a debt or the satisfaction of an obligation. Liens are filed by contractors, sub-contractors, and suppliers of labor.
The banks get paid first in a mechanics lien, but if they lend after the mechanics lien is filed, that money may not be recouped.
Banks and lenders face tough decisions too. Do they foreclose on a 90 percent complete building and own a building where the remaining 10 percent could cost 30 to 50 percent more to complete?
Redmond said the bank has started the foreclosure process on the above example, but are likely to continue funding because they do not want to own an unfinished building. Of the 40 units, 18 are sold, and the bank has agreed that the remainder be converted to rentals.
“Hopefully that's how this example will work out,” Redmond said. “Banks are trying to help get projects complete.”
Redmond said she never used to worry about foreclosure on a mechanics lien. “Now it is different.”
Mechanics liens differ between residential (single-family) and commercial property. The lienor has four months from work completion to file a mechanics lien if the work is on a residential property and eight months if commercial. The lien is good for a year, but can be renewed once for another one-year period.
Bonding of a mechanics lien is a way to shift the focus from real estate to the bond, said John Kazazis of title company ARS Abstract. “It takes the pressure off the parties that close so they can close,” he said.
Liens vary from state to state, but in New York, since 2003, the amount is set by the court, and it totals 110 percent of the bond.
The paperwork is imperative for this option to work, said Kazazis. He said the County Clerk's office requires a resolution authorizing the bond, signed by the Board of Directors of the bond company, and a certificate of authentication. This is served upon the lienor and sub-contractor, and if there is no objection, 10 days later the problem shifts to the bond and closing can move ahead.
“This eliminates the title company from holding money,” Kazazis said. “It has to be done legally, otherwise it can jeopardize foreclosure of mechanics lien.”
A mechanics lien can be settled on, or also foreclosed upon.