Construction Funding in Nevada: Disbursement Control Benefits and Regulatory Requirements

Construction projects can quickly go underwater when funding isn’t monitored carefully. In fact, close to 80% of construction loan defaults occur due to funds-related reasons. Lenders commonly use risk management tools such as Construction Project Monitoring and Funds Control to make sure improvements are consistent with the proposed collateral, that the construction is on-schedule, and remaining loan funds are adequate to complete construction.

Practically speaking, funds control services act as the eyes and ears of the client, whether they are a lender, developer, contractor, subcontractor or a credit union. In the beginning, funds control ensures that projects are reasonably budgeted according to needs and that the work is done on schedule. Over the course of the project, funds disbursement assures that all subcontractors and suppliers are properly paid and that projects are completed lien-free.

For Nevada, a roaring economy and the fastest-growing employment in the country has resulted in a statewide construction boom. Las Vegas, which was heavily hit during the economic devastation of the Great Recession, is investing Billions in continued recovery and growth. Prominent projects include the $4 Billion-dollar World Resorts Las Vegas, estimated to open in 2020, the new $1.8 Billion-dollar stadium for the Raiders, also set to open in 2020. Now under construction are the Las Vegas Convention & Visitors Authority Expansion, estimated at $900 Million dollars and the MSG Sphere, a $633MM project. With a footprint of more than 1.9 million square feet, the Reno-based Tesla Gigafactory, which houses more that 4.9 million square feet of operational space across several floors, has been under construction since 2014. Once completed, the Gigafactory is anticipated to be the biggest building in the world!

With such a heavy volume of construction and development comes the increased risk of project default. But in addition, in Nevada, special construction control requirements may apply. For example, under two special circumstances, Nevada law mandates third-party funds control.

In some cases, hard money lenders, as many alternative lenders are, may be required by Nevada law to engage third-party funds control.

In the second circumstance, if a landlord or owner files a notice of non-responsibility on a tenant improvement(s), Nevada law mandates the tenant must record a Notice of Posted Security on the property by either a) securing a Surety Bond 1 1/2X the value of the tenant improvement or b) depositing 100% of the tenant improvement value with a third-party Construction Control Company. The statute outlines in detail the consequences to the Owner and to the Tenant if they are not in compliant with the law.

If a third-party funds control company (a “construction control company”) is engaged for services, Nevada law stipulates that it must be a licensed and bonded Escrow Agency and any person(s) managing construction funds must be a licensed    Escrow Agent by passing a test of fifteen (15) specifically required CEU’s, passing a background check, and completing a licensee application.  In addition, they must renew their license annually by passing a test of ten (10) CEU’s and updating and re-submitting their personal documentation.  The Escrow Agency must also renew their license annually by submitting specific updated company, financial, and personnel information.

I refer to any disruptions or defaults in construction projects as having to “unscrambling the egg”.  If your construction control company (issuing funds control disbursements) is not licensed and they are issued with a Cease and Desist Order, you will need to unscramble the egg! If lack of funds or misappropriation of construction budgets causes a default, you will need to unscramble the egg! In the long run, developers will experience construction delays, confusion, possible loss of contractors, construction disbursements will stop, and the State will step in.  It will create a high risk for mechanic liens to be recorded on the property and put the construction loan itself at risk.  To best protect your investment and ensure a smooth, compliant construction process that is on time and on budget, engage the funds control services of an experienced construction control company with specific expertise in Nevada law. You can verify that the construction control company is appropriately licensed by going to the State of Nevada/Division of Mortgage Lending website.