David Ginn was quoted in an article on construction loans.  Here is the link: http://cbs5.com/consumer/construction.loan.crackdown.2.1145216.html
Here is the video: http://cbs5.com/video/?id=54623@kpix.dayport.com

What is a Construction Loan?  A construction loan is money borrowed from a lender to construct a building.  It is different from a normal loan in a few ways.

(1) The lender does not lend all of the money to you at once.  Instead, there is a construction fund from which the lender will pay for the construction based on the progress of construction.

(2)  Part of the loan includes a contingency fund to account for change orders and other unanticipated expenses.

(3) The contingency fund typically includes an interest reserve, that is intended to account for the interest on the loan during the course of construction.

(4) After the construction is finished, the amount of money that has been loaned is then converted into what is called a permanent loan, which is usually for a longer term, and closely resembles the typical homeowner’s mortgage.

What are the important points to negotiating a Construction Loan?

(1) Employ a lender who has a lot of experience in providing Construction Loans.

(2) Find out what kind of support the lender will provide during the construction process.  Most lenders will conduct periodic inspections to determine the progress of construction, and will handle progress payment requests from the contractor.

(3) The planned duration of a construction loan is critical.  Always request more time than you think it is going to take.  Construction is a very uncertain process, and is subject to many events that can delay the progress of work.  You can also ask the lender to provide you with agreed upon extensions of the time on the loan.  You need to do this up front.  It is much more difficult and expensive to request an extension of a construction loan beyond the agreed upon time.  For example, extending the term of a construction loan will usually require a new appraisal.  Particularly if market conditions are in decline, this can result in increased loan costs, reduced loan amounts, and even a demand that the borrower contribute more money to the construction project.

What can the Borrower Do to Ensure a Successful Project?

(1) Know your contractor.  The contractor is the keystone to supporting a successful project.  You need an experienced contractor with a record of reliability, financial stability and quality workmanship.

(a.) Get a list of references and visit with the owners.  Ask how construction went and what they would have done differently.  Ask how much the construction cost varied from the amount originally promised.  Inspect the quality of the construction carefully to see if it meets your expectations.

(b.) There are also resources online that will help you.  In California, the Contractors State Licensing Board has guides to hiring contractors, and an easy way to search for your contractor’s licensing history.  The website is www.clsb.ca.gov.  You can also check the local court records to see if your contractor has been involved in any lawsuits about construction defects or making payments to subcontractors.

(2) Make decisions on what your project is going to be like before construction starts.  Most consumers allow a construction project to start with very general design drawings.  They do not consider things like finishes, hardware, appliances, flooring and other items that can greatly affect the total cost of a project.  When it comes time to make these selections, the number of decisions can be overwhelming to most consumers.  It is not unusual for consumers to stop making decisions at some point during a project because there are so many decisions to be made.  This can greatly impact the completion of a project.

(3) Watch out for “allowances” in your construction contract.  If you have not told a contractor specifically what type of flooring or appliances you want to use, contractors often put in their bids an “allowance” for the item that will change based on what you ultimately select.  Many times, these allowances are used to make the contract price seem much lower than it actually will be.  The result is that the actual construction price will be much higher than anticipated.

(4) Try to avoid changes in the work.  It is very common for consumers to change their mind in the middle of construction about the location of a wall, expanding a room, or other changes.  Changes during the course of construction are usually very expensive, and can result in unintended consequences.  Moving a wall, for example, may require a structural engineer’s approval, and may affect the routing of electrical, plumbing or other items.

(5) Make sure everyone is getting paid on your project.  Contractors usually hire subcontractor to perform specialty work, such as electrical, plumbing, and roofing.  They also order a lot of supplies, like lumber, concrete, windows and siding.  All of the people providing services or supplies potentially have the right to record a lien on your home to compel payment.  If a contractor runs into financial problems in the middle of a project, the consumer can be caught having to pay again for work he or she thought was already paid for.  It is a good practice for consumers to keep track of any notices received, and make periodic calls to subcontractors and materials suppliers to find out the status of payment.  Also, there is a process for receiving lien releases that can greatly reduce a consumer’s exposure to claims.

(6) Hire an expert to observe construction.  Mistakes in construction are common, and can happen for a variety of reasons.  Correcting a mistake after construction is finished is much more costly than catching it early.  Hiring an experienced contractor to help observe construction can save a tremendous amount of money.  In addition, a contractor who is on your side can help you decide whether a request for additional money from a contractor is reasonable.

(7) Consider obtaining a Performance and Payment Bond.  A performance bond is a promise from a third party surety that the construction project will be completed.  A payment bond is a promise from a surety that the people providing work, labor or service to a project will get paid.  Obtaining a Performance and Payment Bond (they are usually provided for a single premium) protects an owner against the risks presented by a contractor failing to complete construction or making payments to his or her subcontractors.

It has been a very tough time for contractors over the past few months.  Private jobs have dwindled to virtually nothing.  Public works jobs are not being flooded with bidders, bringing the price bid down to absurd levels.  The lack of work combined with the highly competitive environment is a prescription for contractor defaults.  Owners, subcontractors and suppliers should take immediate action to maximize protection.  Here are a few tips on what to do.

1.  Maintain Your List of Potential Claimants.  Whenever you receive a twenty day preliminary lien notice, put it into a single file, and have a list on the front page with the contact information for each potential claimant.  This will provide you with a list that you can readily access to ensure that you are receiving lien releases from anyone who may be a potential claimant.  This is also a good way to have an easy way to check on subcontractors and material suppliers to make sure they are getting paid.

2.  Obtain timely progress payment releases.   Obtaining conditional and unconditional releases from all potential claimants who have provided 20 day preliminary lien notices is a good way for owners to manage liability exposure on projects.  Here is the right way to do it.  When the contractor submits the first progress payment, attached should be conditional lien releases on progress payment in the statutory form that is prescribed by Civil Code section 3262.  Check the conditional lien releases against your list of potential claimants in your 20 day preliminary lien notice file.  If there are any conditional lien releases that are missing, follow up with the contractor and the subcontractor or material supplier to find out why a lien release has not been supplied.  Be sure to keep written notes of your discussions with the contractor and potential claimants.  Also check to make sure that the dates listed on the lien release match with the progress payment request.  On the following progress payment, you should receive unconditional lien releases from the claimants who sent you conditional lien releases on the prior progress payment request, and conditional lien releases on the current progress payment request.  By following this method through the end of the project, owners can contain their liability exposure in the event of a contractor default.
3.  Contact subcontractors directly to verify they are getting paid.  In these uncertain times, just obtaining lien releases is not enough.  Contractor defaults can happen in as little as 60 to 90 days.  The usual payment cycle can easily put owners behind in getting lien releases.  Owners should make a point of contacting subcontractors ten to fifteen days after making payment to the contractor to ensure that payments are flowing down to the subcontractors.  This is particularly a wise step to take when a particular subcontractor or material supplier represents a substantial portion of a particular progress payment.

4. Stop Notices and Mechanic’s Liens Require Immediate Attention.  Stop Notices place a hold on construction funds that are due or will become due to the contractor.  Mechanic’s Liens place an actual lien upon the real property receiving the work of improvement.  Whenever you receive a stop notice or a mechanic’s lien, it should be treated as an emergency situation, requiring immediate action.  Upon receipt of a stop notice or mechanic’s lien, call the claimant.  Get details about how much is claimed to be owed, how long it has been since the last payment was received.  The next step is to call the contractor to set up a meeting to discuss the problem.  Bring to the meeting all of your records of payments to the contractor, to make sure that there have been no errors on your part.  Obtain a specific plan from the contractor as to how the contractor will remedy the payment issue.  You may want to consider entering into a joint check agreement with the contractor to provide additional protection.  At your meeting with the contractor, obtain a commitment that the contractor will contact the claimant immediately.  Follow up with the claimant to make sure that the contractor has made his promised contact.  Continue to be involved until there is a recorded release of mechanic’s lien or a stop notice release in your hands.  Alternatively, if the issue of payment is disputed, have the contractor obtain a mechanic’s lien release bond.
5.  Check your bonding.  Owners should consider being more conservative, and requiring performance and payment bonds on projects that perhaps they would not have considered bonding in the past.  The premium paid for these bonds is well worth the diminished risk of a contractor default.  A performance and payment bond, however, is only as good as the surety that is backing it.  Be sure to check through an independent rating services, such as A.M. Best, the financial stability and size of the surety.

Part 19 of Our Series on Construction Project Management Skills

XIX. Effective Project Close Out

A. Determining Substantial Completion

As the project winds down to a close, particular attention should be paid to establishing and documenting the date of substantial completion. The general rule to be applied is that substantial completion arises when all of the contract work is completed, and the work remaining is work to repair work that is already in place.

The date of substantial completion should be established as a bright line. There are several reasons for this approach. Substantial completion is usually the date upon which liquidated damages cease to accrue. Strategically, substantial completion should be deemed to have occurred after a determination is made of whether there is sufficient retention to complete all of the punch list work in the event of a contractor default.

B. Timely and Effective Recordation of Notice of Completion

Another reason for establishing the date of substantial completion is that the date should be used to ensure timely recordation of the Notice of Completion. A Notice of Completion must be recorded within ten days of completion. Civil Code Section 3093. All of the work must be completed under the contract in order for the Notice of Completion to be considered valid. Lewis v. Hopper (1956) 140 Cal.App.2d 365.

NEW RULE ON GIVING NOTICE TO CLAIMANTS. Recording a valid Notice of Completion was all that was necessary to shorten the lien recording period from 90 days to 30 days after the date of recordation. Under a new law, the owner is obliged to provide notification to all persons who have provided a 20 Day Preliminary Lien Notice within ten days of recording the Notice of Completion. Notification may be made through registered mail, certified mail, or by U.S. Mail with a certificate of mailing. Failure to provide this notification extends the time for recording a lien to 90 days after the date of recording a notice of completion. See Civil Code section 3259.5.

C. Developing and Tracking Punch List Items

Punch lists should be developed with the assistance of the design professionals involved in the project, the owner and the project manager. Punch Lists should be a comprehensive list of all items in need of correction, completion or commissioning. Punch lists should be organized with a numbering system that remains on the list until everything needed to complete or repair the item has been addressed.

D. Timely Completion of Punch List Items

It is extremely important that the project manager be the catalyst to get punch list items finished. It is all too frequently the case that contractors move off to other projects after reaching substantial completion, and punch list items sit until the contractor has some free time to address them. Imposing time limits on contractors to complete punch list items in the project contract, and assessing liquidated damages for a failure to complete punch list items is one approach to dealing with this issue.

E. As Built Drawings, Warranties, Product Literature and Training

At the conclusion of the project, project management should conduct a comprehensive review of the project specifications, and develop a list of products for which Warranties and Product Literature are required to be provided by the Contractor. If the contract fails to provide for the contractor to supply this information, it is a great service to the owner to go ahead and obtain this information from the manufacturers.

During the course of the project, the project manager should be monitoring changes to the work by annotating the project drawings. At the completion of the project, this document can prove to be a valuable tool in checking the as builts prepared by the project contractor.

If training is a part of the contract work, training sessions should be initiated and scheduled as near to substantial completion as possible.

F. Tracking Lien Releases

With every progress payment, the project manager should identify those subcontractors, material suppliers and equipment rental companies that have provided 20 Day Preliminary Lien Notices. On public works projects, only subcontractors, material suppliers and equipment rental companies that are not in direct contract with the prime contractor are required to provide these notices. The notices must be hand delivered, or sent by registered or certified mail, return receipt requested.

With every progress payment request, the contractor should provide the project manager with conditional releases of lien by each subcontractor who performed work during this performance period. A conditional release of lien means that the release is conditioned upon the check provided by the contractor being negotiable.

In each succeeding progress payment request, the contractor should provide the project manager with unconditional releases of liens as to the prior progress payment, and provide new conditional releases of lien as to the current progress payment. See Civil Code section 3262.

At the conclusion of the project, it is essential that the project manager obtain unconditional releases of lien from all subcontractors, material suppliers and equipment rental companies before release of retention. Be sure to review the signed originals before disbursing retention, as there is a space for the contractor to identify unresolved claims for additional work.

The form of the releases should always follow exactly the forms provided by Civil Code section 3262. Forms that provide additional terms may be considered invalid. See Civil Code section 3262 and Public Contract Code section 7100.

G. Handling the Prompt Payment of Retention

In the early 1990′s the State Legislature passed a flurry of bills addressing prompt payment of retention to contractors. There are presently some sixteen different statutes that govern the time limitations for payment of progress payments and retention. In general, these laws provide that if payment of progress payments is not made within 30 days from the request of the contractor, then the owner may be responsible for payment of interest that is generally 2 percent per month. Final payment generally must be made within 45 days after completion.

Recent decisions indicate that it is very unwise to withhold retention owed to a contractor. The attorneys fees incurred by the contractor in seeking its right to retention may be sought from the owner. Conversely, the owner may seek attorneys’ fees from the contractor if the owner is the prevailing party on the issue of whether money withheld from retention was done in good faith. Taylor v. Van-Catlin Const. (2005) 130 Cal.App.4th 1061, 1070.

Particularly in those instances where retention is modest, and a dispute is likely to occur, it is very risky for an owner to expose itself to liability for the contractor’s attorneys’ fees by withholding retention.