Future Advance Clause Security Agreement

A future advance clause security agreement, also known as a “future advance mortgage,” is a legal agreement between a borrower and a lender that can provide flexibility in borrowing for future expenses. This type of agreement is commonly used in commercial real estate transactions, where the borrower needs to obtain financing for expenses that will not occur until a future date.

In a future advance clause security agreement, the lender agrees to provide additional funds to the borrower as needed, up to a specified limit. This can be an important tool for borrowers who anticipate needing additional funds for future expenses, but who may not know exactly when those expenses will occur or how much they will cost.

One potential use for a future advance clause security agreement is in the context of construction financing. For example, a borrower may need to obtain funds to complete a construction project, but may not know exactly how much money will be needed for various expenses until the project is well underway. A future advance clause security agreement allows the borrower to obtain additional funds as needed, without the need to negotiate a new loan or refinance the existing loan.

Another potential use for this type of agreement is in the context of commercial leasing. A tenant may need to obtain funds for tenant improvements, such as building out a space to meet their specific needs. A future advance clause security agreement can provide the tenant with the flexibility to obtain funds for these expenses as needed, without having to renegotiate the lease or seek separate financing.

Despite the potential benefits of a future advance clause security agreement, there are also potential risks and downsides to consider. For example, if the borrower defaults on the loan, the lender may have the right to foreclose on the property and seize any future advances that were made. Additionally, the lender may charge higher interest rates or fees to compensate for the added risk involved in providing funds for unknown future expenses.

Overall, a future advance clause security agreement can provide valuable flexibility for borrowers who anticipate needing additional funds in the future. However, it is important to carefully consider the risks and costs involved in this type of agreement, and to consult with legal and financial experts before entering into any such arrangement.

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