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Obligatory Advances

DEFINITION

Disbursement of a construction loan.

EXPLANATION

Obligatory advances refer to the disbursed funds a lender makes over the construction loan period. During construction, a manager will verify that construction is on schedule and in accordance with the terms of the agreement with the lender. If construction falls behind the agreed-upon draw schedule at any stage, the next obligatory advance will be delayed or prevented.

Obligatory advances have seniority over all other liens, except for tax liens.

A borrower typically does not begin making payments to the lender until after the project is complete.

The standard order of lien holders in a subordination agreement are as follows:

Tax liens

Obligatory advances in construction loans

Senior lien holder

Junior lien holders

Unrecorded liens

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