by Thomas M. Rickart – “Future Advance Loans” are loan transactions under which loan proceeds may be advanced over time, and in some instances repaid and readvanced, under a single set of loan documents. In Connecticut commercial transactions, these commonly take two forms, construction loans and commercial future advance loans, and there are Connecticut statutory provisions which provide special lien protection for mortgages securing those loans. In each case, provided that the mortgage drafted to secure the loan complies with some specific requirements, advances made over time shall all be entitled to lien priority as of the recording of the mortgage, notwithstanding that there may be intervening liens recorded between the recording of such mortgage and the actual making of the advances. This provides an invaluable tool for funding not only construction projects but also lines of credit to fund general operating capital, equipment purchases, and similar installment obligations.
Construction mortgage loans in Connecticut, intended to fund the construction or repair of buildings and improvements, including site improvements, are governed by Connecticut General Statutes Section 49-3. That statute sets forth specific language to be included in the mortgage deed securing a construction loan in order to ensure the lien priority for future advances made to the borrower. Compliance with the statute also ensures, in the event of a default, the ability of the mortgage holder to complete construction itself and include its costs as part of the debt secured by the mortgage, so long as the total debt does not exceed the face amount of the promissory note secured by the mortgage.
Commercial future advance loans, or lines of credit, are those under which funds may be advanced in installments for any variety of business purposes. These commonly are done on a “revolving” basis such that advances may be made, repaid, and re-advanced, or on a “non-revolving” basis such that advances are made over time, but without the option for re-advance following payment. Both types are commonly used by commercial lenders and borrowers, and mortgages securing such loans are governed by Connecticut General Statutes Section 49-2(c). As with construction loans, the statute includes very specific provisions to be included in the mortgage deed so as to qualify for the lien priority of future advances.
Whether you are a prospective borrower or lender, make sure to review your loan documents with a competent commercial attorney in order to ensure that you derive the benefits of the Connecticut statutes. Any questions? Don’t hesitate to contact Tom Rickart at [email protected] or at 203-744-1929, Ext. 31.