When a senior note is $480,000 but the deed of trust secures up to $600,000

Question

Take a deal structured as a $420k purchase, $180k rehab budget, senior hard money at $480k funded in draws, and a recorded second at $120k. ARV pencils around $780k. The detail worth scrutinizing is the senior lender's deed of trust. When the secured obligation is described as up to a maximum principal amount of $600,000, plus a future advances clause, plus protective advances for taxes, insurance, and completion of improvements, there is $120k of room above the actual $480k note that the senior lender can fill later at its discretion, exactly the size of the second position sitting behind it. Default interest at 24% combined with a note that lets extension fees and accrued interest capitalize into principal raises a real question: if the exit slips nine months and everything capitalizes, do those additions climb ahead of the second position, or do they sit at the priority of whenever they were actually advanced. The answer generally depends on how the future advances language is drafted and whether state law treats those advances as obligatory or optional. An intercreditor agreement is the right place to cap this exposure, specifying that advances beyond the funded note amount are subordinate to the second position. Absent that language, the $600k ceiling is what a second position lender should underwrite against, not the $480k actually funded.

Rena Expert · Accepted Answer

Underwrite against $600k. That's what the recorded instrument tells the world, and in most states a stated maximum principal amount plus a future advances clause is exactly the mechanism that lets later advances take the recording date of the original deed of trust rather than the date the money went out. Whether a given advance keeps that priority often turns on whether it was obligatory under the loan documents or optional, and states split on how they treat optional advances made after the senior has notice of your lien, so that's a question for a real estate attorney licensed where the property sits. Protective advances for taxes, insurance, and preserving the collateral usually get priority treatment on their own footing, sometimes above the stated cap.

Capitalized default interest and extension fees are the part people miss. At 24% on $480k you're adding roughly $9,600 a month, and nine months of that plus a couple of extension fees eats the $120k of headroom without the senior ever writing a new check. Your cushion is $780k ARV minus $600k, which is nothing once you subtract selling costs.

Things worth pushing for in the intercreditor: a hard cap on additional advances at a number you choose, notice of borrower default with a cure right, and a right to buy out the senior at par plus accrued. Senior hard money lenders sometimes give the notice and the buyout and almost never give the cap.

The other question is who funds draws four through six if the borrower stalls and the senior stops advancing. Your $120k is in the ground already, and finishing the job out of pocket may be the only way to protect it. Price that possibility, not just the interest rate, and get whatever the senior agrees to in the signed intercreditor rather than an email.

When a senior note is $480,000 but the deed of trust secures up to $600,000

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