Understanding Lien Priority for CRE Loans in Texas

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A deed of trust is a document that establishes a security interest and lien on the property, effectively transforming it into collateral for the commercial real estate loan. It prevents other liens from attaching to the property during the loan term, protecting the lender in case of default.

This blog will discuss the general rules, procedures, and relevant laws governing deeds of trust and lien priority. Commercial real estate loans in Dallas, TX. We’ll also provide insights on drafting a deed of trust and essential closing matters.

Understanding Texas Lien Priority

Before closing commercial real estate loans in Dallas TX, the lender’s counsel will typically perform due diligence and investigate the property and the borrower. The investigation’s goal is to:

  • Identify and subordinate or clear liens and encumbrances that can get in the way of the deed of trust from attaining a first-priority position
  • Assess the risk of liens occurring throughout the loan term that may take priority over or prime the deed of trust.

Priority and perfection

A perfected deed of trust establishes a trustworthy hierarchy for liens on the property. To achieve this status, the deed must meet specific requirements:

  • The lien must be legally attached to the property and enforceable against you, the borrower.
  • The lien should take priority over any claims from others who might acquire an interest in the same property during the loan term.

The deed must also include several critical details for perfection in Texas:

  • The deed of trust should follow the Texas Assignment of Rents Act (TARA) or a separate assignment instrument. This allows the lender to collect rent from the property if you default.
  • The deed of trust can also act as a filing for fixtures under the Uniform Commercial Code (UCC). Fixtures are items that become part of the real estate, like lighting or built-in appliances. This protects your lender’s interest in these items as well.

Once the deed of trust includes these details, it becomes perfected simply by recording it with the appropriate Texas recording office.

“First in time, first in right”

This rule means the lien priority is typically determined by the order by which the liens are recorded in the county’s public records (precisely where the property is located). So, a lien recorded earlier generally has a stronger claim than one recorded later.

Once your lender’s deed of trust lien is recorded, it gains priority over most subsequent claims on the property — including those from buyers or creditors who didn’t have prior knowledge of the lien.

Note that there are some exceptions to the “first in time” rule. Super liens (such as certain tax liens) take priority over previously recorded liens even if they aren’t part of the public record.

Drafting the documents to protect and establish priority

Expect the loan documents you receive from your lender to include provisions designed to protect the priority of their lien on the property (established by the deed of trust). These provisions may vary depending on the specific loan details, but here’s a breakdown of some of the standard clauses you might encounter:

  • Your commitments (covenants) – These outline your obligations as the borrower, such as maintaining the property in good condition and making timely loan payments.
  • Your assurances (representations and warranties) – These are statements you make about the property and your financial situation to ensure the lender is operating with accurate information.
  • Financial reserves and escrows – These may be established to hold funds for future expenses like property taxes or insurance.

In addition to these standard provisions, the deed of trust itself may address specific situations:

  • Future advances (this applies when funding a loan in multiple advances)
  • Mechanic’s liens
  • The lender’s protective advances for when borrowers cannot satisfy obligations and jeopardize the secured real estate
  • Tenant subordination

Understanding mechanic’s lien provisions

Mechanic’s liens can arise if contractors aren’t paid for their work on a property. Even if there aren’t any recorded mechanic’s lien claims yet, your lender will likely require some things from you to protect their investment:

  • You’ll likely be asked to guarantee that no construction work has happened on the property before the loan closes that could result in a mechanic’s lien.
  • You’ll also need to disclose any plans for future construction. This protects the lender from hidden costs or potential claims.
  • The loan documents might include a clause requiring you to compensate the lender for any losses caused by mechanic’s liens, including ones that arise later. This is designed to incentivize you to ensure that all construction bills are paid to avoid putting the loan at risk.

If the property has undergone renovations or construction before your loan, the lender might add some extra conditions:

  • You may need to provide documentation showing the construction timeline, purpose, and proof that bills for completed work have been paid.
  • In some cases, the lender might require evidence that the construction is substantially finished before they fund the loan.

Future advance clauses

This clause allows your lender to provide you with additional funding in the future, using the same property as collateral.

The deed of trust secures the initial loan amount plus any future advances approved by the lender and you. These future advances would also benefit from the priority established by the deed of trust.

As long as the deed of trust indicates the possibility of future advances, it maintains priority over most claims arising after the initial loan closing. This protects the lender’s position if they decide to provide you with additional funding in the future.

Important note: This priority over future claims applies to those who have notice of the future advance clause in the deed of trust.

Other essential details

There are a few other essential aspects that can affect your loan’s priority:

  • Protective Advances
  • SNDA (subordination, non-disturbance, and attornment agreement)
  • Closing considerations

The attorney representing your lender/provider of commercial real estate loans in Dallas, TX, will ensure that the deed of trust is drafted and executed correctly to facilitate recording in the appropriate public records.

Simplifying commercial real estate loans in Texas

As direct lenders, Private Capital Investors can help you get suitable commercial real estate loans in Dallas, TX, quickly and easily from various CRE loan programs. We are proud of our track record in helping commercial property investors find the most suitable funding at competitive rates.

We offer commercial real estate loan programs with rates as low as 5.99% and can get you approved in 24 to 48 hours, with funding released in 14 days or less. We have also helped investors nationwide, especially in Florida, Massachusetts, and Arizona, and we can handle international deals.

Apply now for a loan by filling out the inquiry form. You may also email info@privatecapitalinvestors.com or call 972-865-6206 for more details about our commercial real estate loan programs.

Want to learn more? Get in touch with us today.

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