Chapter 9 - § 9.3 • CONSTRUCTION LOAN DOCUMENTATION

• Jurisdiction: Colorado

§ 9.3 • CONSTRUCTION LOAN DOCUMENTATION

For most construction loans in Colorado, the well-drafted construction loan commitment becomes the checklist and provides the format for drafting construction loan documentation.

Basic construction loan documentation consists of the construction loan promissory note, deed of trust, security agreement and financing statement, construction loan agreement, and assignment of construction and architectural contracts. Those basic documents are often supplemented with construction loan guarantees. These documents are subject to and affected by Colorado law applicable to contracts, promissory notes, deeds of trust, financing statements, security agreements, and guarantees. A comprehensive discussion of that case precedent and those legal principles is beyond the scope of this chapter, but some general comments regarding construction law and loan documentation may be helpful.

§ 9.3.1-Drafting and Interpretation of Construction Loan Documents

Construction loans, notes, and deeds of trust are subject to general principles of contract interpretation and construction.¹² The parties' intent will be determined from examination of both the deed of trust and the promissory note, not from each one separately.¹³ If there is a conflict between the note and deed of trust securing it, or if uncertainty or ambiguity exists between the two documents, the terms of the note govern, unless the parties intend otherwise.¹⁴ For these reasons, the note and deed of trust should reflect the identical terms and should be mutually consistent.

In drafting the construction loan documents, the attorney for the construction lender should understand and be familiar with Colorado's statutory laws regarding mortgages and deeds of trust¹⁵ and Colorado's public trustee foreclosure process.¹⁶ The provisions of the deed of trust and the construction loan agreement should mirror the sections and procedures of these statutes.

§ 9.3.2-Foreclosure and Other Remedies to Consider

Even though most foreclosures in Colorado are through the public trustee, the lender can treat the deed of trust as a mortgage and foreclose by judicial proceedings.¹⁷

Usually, the public trustee foreclosure process is faster and less expensive, but the judicial foreclosure may be preferable if the lender anticipates lien priority disputes or issues with the title or legal description. In a judicial foreclosure, attorney fees can be recovered if the deed of trust and note so provide.¹⁸ In a public trustee foreclosure, the lender's attorney fees can be included in the lender's bid, especially if the loan documents so provide, but not in excess of 10 percent of the amount of principle, interest, and late charges included in the bid.¹⁹

In drafting construction loan documents, it is important to note that under Colorado law, as opposed to several other states, a lender's remedies are independent and separate. The lender may sue on the promissory note alone, foreclose on the property, or join both such proceedings in one civil action.²⁰

§ 9.3.3-Applicability of Uniform Consumer Credit Code and Uniform Commercial Code

Colorado's Uniform Consumer Credit Code - Loans is codified at C.R.S. §§ 5-3-101...