Escrow Account for Construction Vendors

[stevenpinto]

What is the name of your state? FL

I'm starting a project with investors for a new building development. Is it common practice to have an Escrow account through an attorney where investors deposit money into and vendors can be paid from it? Would I have to go through the attorney in order to pay vendors or would I have full access to the bank account holding the funds? This is in the preliminary stages so I just need some details this practice.

 

[quincy]

What is the name of your state? FL

I'm starting a project with investors for a new building development. Is it common practice to have an Escrow account through an attorney where investors deposit money into and vendors can be paid from it? Would I have to go through the attorney in order to pay vendors or would I have full access to the bank account holding the funds? This is in the preliminary stages so I just need some details this practice.

You need to sit down with an attorney in your area to go over your project and how you hope to finance it. You are not going to find what you need on an Internet forum.

Escrow accounts set up through a financial institution are a common way to securely hold onto other people’s money. The funds held in escrow are not like checking or savings accounts that you can dip into at will, however.

 

[LdiJ]

What is the name of your state? FL

I'm starting a project with investors for a new building development. Is it common practice to have an Escrow account through an attorney where investors deposit money into and vendors can be paid from it? Would I have to go through the attorney in order to pay vendors or would I have full access to the bank account holding the funds? This is in the preliminary stages so I just need some details this practice.

I agree that you need a sit down consult with your own attorney. I will tell you however, that an escrow account would not be even a remotely normal or reasonable/practical way to handle investments into a building project, and no, it would defeat the purpose of an escrow account for you to have direct access to the money. This would also be an extraordinarily expensive way to handle the financial matters of the project. You would be paying an attorney's office, and their rates, to handle the basic bookkeeping of the project.

It is not uncommon in the construction/building industry for loans to be released to a project after certain stages are completed. A certain percentage released upfront, then another percentage released after the foundation is poured, and so on. That is one way that lenders and possibly investors make sure that the money is going where it is supposed to go, and not lining the pockets of someone.

 

[quincy]

Construction escrows are common and sometimes a requirement.

 

[LdiJ]

Construction escrows are common and sometimes a requirement.

Not escrows in the sense that this OP is asking. Phased releases of financing is common, but it is tied to progress on the construction and not restricted once the funds are released. Nor are the funds held in an attorney's escrow account. I have been involved in the construction industry for years on the accounting side and what the OP is describing is not normal and very impractical.

 

[quincy]

Not escrows in the sense that this OP is asking. Phased releases of financing is common, but it is tied to progress on the construction and not restricted once the funds are released. Nor are the funds held in an attorney's escrow account. I have been involved in the construction industry for years on the accounting side and what the OP is describing is not normal and very impractical.

You are most familiar then with escrow accounts involving construction loans which are held in escrow by the financial institution lending the money. This is not what is being described here, though. The investors are not lenders.

Whatever escrow account is set up, the one thing stevenpinto can’t do with escrowed funds is withdraw funds from the account on his signature alone.

 

[LdiJ]

You are most familiar then with escrow accounts involving construction loans which are held in escrow by the financial institution lending the money. This is not what is being described here, though. The investors are not lenders.

Whatever escrow account is set up, the one thing stevenpinto can’t do with escrowed funds is withdraw funds from the account on his signature alone.

I agree, which is why it would be totally impractical/expensive for the funds to be held in an attorney's escrow account unless they were released in a similar fashion to a construction loan and the attorney's office was capable of doing things in a timely manner to prevent expensive construction delays.

 

[quincy]

I agree, which is why it would be totally impractical/expensive for the funds to be held in an attorney's escrow account unless they were released in a similar fashion to a construction loan and the attorney's office was capable of doing things in a timely manner to prevent expensive construction delays.

Funds held in escrow accounts must be managed according to the state’s escrow laws, whether the escrow is set up through a financial institution, a law firm, a real estate brokerage, a title company.

What appears clear is that stevenpinto will want to meet with a Florida attorney to go over the plans for his project and to discuss with the attorney how best to handle the funding for this project. An interest-bearing escrow account seems to me to be a good option.

 

[LdiJ]

Funds held in escrow accounts must be managed according to the state’s escrow laws, whether the escrow is set up through a financial institution, a law firm, a real estate brokerage, a title company.

What appears clear is that stevenpinto will want to meet with a Florida attorney to go over the plans for his project and to discuss with the attorney how best to handle the funding for this project. An interest-bearing escrow account seems to me to be a good option.

I understand that it seems like a good option to you. I, from an accounting/bookkeeping standpoint think that it is a horrible idea. Again, if funds are released to the builder upon completing milestones then its workable and normal for the industry. Otherwise, you risk all kinds of extra expense and delays when vendors cannot get paid in a timely manner. Vendors not getting paid in a timely manner is the kind of thing that can sink a building project.

 

[quincy]

I understand that it seems like a good option to you. I, from an accounting/bookkeeping standpoint think that it is a horrible idea. Again, if funds are released to the builder upon completing milestones then its workable and normal for the industry. Otherwise, you risk all kinds of extra expense and delays when vendors cannot get paid in a timely manner. Vendors not getting paid in a timely manner is the kind of thing that can sink a building project.

I think the protections offered funds held in escrow outweigh the (typically minimal) delays in the release of funds. The escrow agent/manager will review receipts and may want to inspect the project before releasing the funds requested by the developer/contractor but that can be reassuring to the investors who are providing the capital for the project.

 

[Taxing Matters]

What is the name of your state? FL

I'm starting a project with investors for a new building development. Is it common practice to have an Escrow account through an attorney where investors deposit money into and vendors can be paid from it? Would I have to go through the attorney in order to pay vendors or would I have full access to the bank account holding the funds? This is in the preliminary stages so I just need some details this practice.

It's common to pay contractors in stages as the work is done. You don't necessarily need a true escrow account to do it. If the contract with the contractor is well written you aren't obligated to pay the contractors at any stage if the work doesn't meet the standards of the contract. If the contractor wants to know you'll have the money to pay at each stage there are several ways to do that — escrow isn't the only option.

What is common in your area helps inform you what your contractors may expect when you start negotiating the deal. But there isn't anything wrong with a contract that departs from the norm if all the parties to the contract with the terms.

 

[zddoodah]

Is it common practice to have an Escrow account through an attorney where investors deposit money into and vendors can be paid from it?

Common for whom? Why does it matter in the slightest if it's common? Who is asking for/insisting on the escrow account? I assume "vendors" means contractors and material suppliers who are building the new building. Correct? What sort of building is it? Who owns the land where the building is being buit?

I'm curious, though, why it is that you are getting into something like this without being familiar with common practices.

Would I have to go through the attorney in order to pay vendors or would I have full access to the bank account holding the funds?

Depends on the terms of your contract(s) with your investors and the escrow agreement.

 

[quincy]

… why it is that you are getting into something like this without being familiar with common practices. …

stevenpinto did say that this plan of his was in the “preliminary stages,” so gathering information prior to implementing any plans is a pretty good first step.