Understanding Construction Escrow

The concept of escrow revolves around a neutral third party retaining funds until specific criteria are satisfied. When it comes to construction, escrow accounts are commonly established by financing institutions and project managers to reserve funds meant for construction endeavors.

Large or small, most construction endeavors in Florida encompass multiple phases, possess inherent risks, and necessitate sizeable construction loans, with hefty amounts of money being transferred. This is where construction escrow accounts prove invaluable, ensuring the safe transfer of funds among contractors, suppliers, financiers, and property holders.

Deciphering Construction Escrow & Financing

In most instances in Florida, when a property undergoes renovation or construction, the property holder is required to make periodic payments through a construction loan. It’s rare for property owners to solely fund a construction task.

By channeling the lender’s funds into a construction escrow account, all involved parties benefit from the legal scrutiny, thereby reducing potential risks.

Money remains in the escrow account until the stipulated work phase is finished and verified. Subsequently, the escrow manager disburses the agreed-upon sum for that phase of the project.

The escrow agent generally receives a fee for the service of managing the escrow account.

Why Construction Projects Require Escrow?

Escrow accounts in construction ensure proper fund allocation for projects and diminish potential title disputes among project stakeholders.

Such accounts enable a seamless payment mechanism for contractors, safeguarding them from construction liens and ensuring lenders fulfill payment commitments for each phase.

For property owners, the assurance derived from escrow is twofold: it guarantees the apt release of contractor liens (preventing future sale complications) and ensures payments align with construction progress.

Navigating Construction Loans in Florida

Almost every significant construction initiative in Florida mandates a construction loan. A crucial part of the construction process involves the property owner entering a binding contract detailing payment milestones and the associated work prerequisites.

The payment “draw schedule” should encompass a projected timeline to ensure timely project completion and specify the mode of draw requests, often requiring detailed invoices.

Following the culmination of each phase, an evaluation is essential before the owner or financier greenlights the draw request. The title/escrow agent then disburses the money to the contractor. At times, the property owner might provide the payment directly, necessitating reimbursement from the escrow agent.

Upon finalizing the process, the escrow agent obtains and logs the relevant contractor lien releases to avert title complications.

Constructive Insights for Contractors Regarding Escrow Accounts

Construction escrow’s pivotal role demands contractors grasp its nuances. Here are some key takeaways:

  • Protection for All: Escrow isn’t solely advantageous for property owners. Given its legal structure and third-party mediation, contractors can rest easy about payment, provided they meet the set standards.
  • Escrow’s Versatility: As a contractor, you may request an escrow account be set up by your customer to facilitate payments — even if there is no construction loan.
  • Potential Delays: Due to the additional steps inherent in escrow, payment durations might extend, but the augmented security is generally worth the slight wait.
  • Documentation is Crucial: To access funds from escrow, providing documentation, such as work completion evidence and cost substantiation, is typically necessary.

For all your construction escrow needs, reach out to Haber Law today.