What your lender needs to understand about DRE requirements

The construction loan recorded and construction is well underway. The DRE process is clicking along, and you just found out you need to negotiate with the Lender… Again.

In an effort to fulfill their mission of consumer protection, the Department of Real Estate requires that certain documents be protected against any possibility of a loan foreclosure. In other words, certain documents that must be recorded during the DRE approval process must prevail and survive if a loan were to foreclose on a subdivision property.

Typically, recorded documents have “priority” if they record before loans docs. In other words, the priority of a document is largely dependent upon the order in which it was recorded in any given chain of title.

A construction loan is usually recorded before CCRs or other governing documents or agreements that are approved in a DRE filing, giving it priority over those documents.

The CCRs are the most important governing document. They must have priority over any potential foreclosure. To achieve this priority position, the construction lender must sign a “subordination,” relinquishing its priority over the CCRs.

It is possible to obtain a Public Report without having the Subordination recorded, however recordation of the subordination will then be a condition to closing the first escrow.  This is typically done using certified escrow instructions.

Other documents that must be granted priority over existing loans are Agreements that are needed to insure future access rights or reciprocal easements with neighboring properties. Some examples follow:

  • Subdivision Maps and Condominium Plans must include “Lender Consent” signatures which effectively subordinate the loan to the Map or Plan;
  • Road Easement Agreements, often used when common area roadways are held by the subdivider and conveyed in a future phase;
  • Reciprocal Access and Use Agreements over another HOA-owned property;
  • Agreements required by the local agency as a part of the map approval

Including a provision in the proposed Purchase Agreement or Escrow Instruction document that provides for the possibility of having the required Subordination document(s) record prior to the first escrow closing might prove to be a good way to avoid delays in lender negotiations when it comes to obtaining the Final Public Report. For additional information we welcome you to call our office.

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