Developer Defaults Are Rising—Even Well-Drafted Loans Require Proactive Legal Execution

Across the real estate finance industry, rising construction costs and timeline disruptions are contributing to a steady increase in mid-project stress and developer defaults. Even in deals with strong legal protections—step-in rights, draw procedures, and completion guarantees—lenders are facing new challenges tied to enforcement, borrower transparency, and shifting project economics.

These aren’t drafting problems. They’re execution risks—and legal counsel plays a critical role in anticipating and managing them.

Emerging Pressure Points in the Market:

• Delayed disclosures: Some borrowers are slow to report project delays, budget reallocations, or contractor changes, which complicates timely enforcement of notice and consent provisions.
• Inspection blind spots: Draw reviews that meet contractual requirements may still miss practical red flags—like incomplete lien waivers or misaligned cost-to-complete figures.
• Informal modifications: Lenders under pressure to “keep the deal moving” may agree to midstream changes—such as equity contributions, revised timelines, or interest deferrals—without formal documentation, raising risks around lien priority, guarantor liability, and overall enforceability.

Legal Strategies to Strengthen Construction Loan Oversight:

• Translate step-in rights into a practical enforcement plan: Ensure your loan documents align with internal lender procedures—know who authorizes action, when notices must go out, and how to secure control over the project and remaining loan funds.
• Document borrower-led changes with precision: Amendments to extend maturity, change contractors, or adjust reserves should include reaffirmations by guarantors, updated title coverage (if needed), and lender protections tied to new capital contributions.
• Supplement draw protocols in writing: If expectations go beyond what’s in the loan agreement—such as updated project schedules, partial lien waivers, or more frequent inspections—consider memorializing these in a construction rider, draw procedure letter, or side agreement.
• Address related-party risk upfront: Include provisions requiring disclosure and lender consent for any GC or subcontractor changes, particularly where affiliated entities may be involved. This prevents informal substitutions that could create conflicts or reduce accountability.

Bottom line: Legal protections only work if they’re enforced in real time. As project conditions evolve, lenders should be prepared not just to rely on their documents—but to use them.

If your team is refreshing its enforcement tools or construction loan templates, the attorneys at Stites & Harbison are happy to assist with benchmarking, drafting, or strategy support.