MECHANICS’ LIEN COVERAGE-COMMERCIAL MORTGAGES
John Rapp
8/16/2000

Experience has shown that the following information will ensure that our evaluation of the risk is likely to result in an underwriting decision appropriate to both the customer and the Company. In other words, we will be able to substantially reduce the possibility of either rejecting a good risk or accepting a bad one. In no particular order of importance, the relevant factors for consideration are listed below:

1. Nature of Project - certain types of projects have historically been less likely to result in Mechanics’ Lien claims.

2. Identity of Developer – again, individuals or organizations possessing substantial experience in the construction of similar projects in the past are more likely to continue to do so successfully.

3. Identity of General Contractor and Construction Lender – frequently, if the developer is not the general contractor, prior projects may have involved the same general contractor and construction lender as the current project.

4. Build to Suit, Pre-Leasing or Purchase Contract – absent unusual circumstances, most successful construction projects will involve pre-leasing, build to suit, or contracts to purchase final product such as are common in cogeneration projects.

5. Evidence of Equity Investment – the greater the required percentage of equity investment the more likely it is that the project will be successfully completed.

6. Contractors Bonding Requirements – here, we are especially interested in whether Payment Bonds are required of the general contractor and/or major subcontractors. The absence of a bonding requirement is not necessarily a negative. It may suggest that the contractor’s track record warrants the elimination of such a requirement.

7. Construction Budget – the itemization of construction costs will confirm the adequacy of funds to complete the project. Further, it should disclose the amount of labor and materials already furnished and paid for at the time of closing. Finally, it should disclose the portion of funds to be used for the purchase of machinery and equipment. This latter item is of special significance in connection with the construction of cogeneration plants.

8. Identity of Indemnitor and Financials – to the extent that the developer and contractors have been involved previously in similar successful projects, we will remain flexible in our requirements with regard to the identity of the Indemnitor, as well as the contents of the balance sheet. However, it is appropriate to request the Indemnity from the same individuals or organizations required to provide guarantees to the lender.

9. Pending Disbursements Clause/Interim Waivers or Releases – in most instances we will require date downs of title prior to each advance in order to insure continuing priority over mechanics’ liens. Further, depending upon the circumstances of a particular case we may require production of waivers, releases, or affidavits of payment at the time of each draw.

10. Loan Commitment Letter – requirements imposed by the lender’s letter as a precondition to the making of the loan will normally address many of the Items listed above.

If the amount of the Loan Policy to be issued is less than $5 million the Underwriting review and approval process will be conducted within the Region according to high liability guidelines. Beyond $5 million, the relevant information must be submitted to the Headquarters Underwriting Department.