Dan J. Harkey

Educator & Private Money Lending Consultant

UCC-1 Financing Statement? What is it and how does it work?

A UCC-1 (Uniform Commercial Code-1) financing statement is a legal form that a lender files to publicly declare their interest in a borrower’s personal property as collateral for a loan. It’s part of the Uniform Commercial Code, which governs commercial transactions in the United States. This filing process is a crucial step in the loan process, ensuring that all parties are informed and knowledgeable about the legal aspects of the transaction.

by Dan J. Harkey

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Summary

Unlike a deed of trust or mortgage, which secures real property (land and buildings), a UCC-1 secures personal property — assets that are not permanently affixed to the land.

Overview:

Trust deeds are a security instrument that, when recorded, provides public notice of the lien. When someone wants to pull a property profile, the public notice of the recorded instrument will be displayed.

However, encumbering personal property is different. A recording with the Secretary of State is the platform available in California and most other states.

When a property is a business property that contains personal property, such as a gas station, carwash, motel/hotel, or congregate care facility, it is necessary to concurrently record a trust deed encumbering the real property and a UCC-1 with the Secretary of State.

Why Is It Important in Construction Completion Loans?

When development occurs, construction funds held by a fund control company will be used to deliver lumber,  permits, plans, supplies, and equipment to the property. It remains personal property until it is affixed to the earth; then it becomes real property. Construction loans require both a trust deed and a UCC-1 filing.

To protect their interest in these assets, lenders file a UCC-1 statement with the Secretary of State in the state where the property is located.

This filing:

  • Creates a public record of the lender’s claim.
  • Establish priority over other creditors.
  • Secures the lender’s interest in assets like:
    • Loan proceeds held in fund control accounts
    • Building materials have not yet been installed
    • Architectural plans and engineering reports
    • Permits and entitlement approvals

How It Works in Practice

  • Filing: The lender files a UCC-1 statement at the Secretary of State’s office.
  • Public Notice: The filing serves as public notice of the lender’s interest in the borrower’s personal property.
  • Duration: The lien remains active until a UCC-3 termination statement is filed, indicating the debt has been satisfied.
  • Protection: If the borrower defaults, the lender has a legal claim to the personal property listed in the UCC-1 financing statement.

Example in Construction Lending

Let’s say a lender provides $1.5 million for a construction completion loan. Of that:

  • $900,000 earmarked for construction costs.
  • $100,000 held in reserve for interest payments.
  • $50,000 allocated for permits and reports.

The lender will file a UCC-1 to secure their interest in:

  • The $900,000 is held by the fund control company.
  • Any building materials that have been delivered but not yet installed.
  • The architectural plans and permits.

The process ensures that if the borrower defaults, the lender can recover or claim these assets.