4A — August 29 - September 11, 2014 — M id A tlantic
Real Estate Journal
www.marejournal.com
C ommercial R eal E state L aw E xperts By Derek P. Dissinger, Barley Snyder Act 117 signed into law amending the Mechanic’s Lien Law and easing construction lending
A
few months ago we published an article titled, “Pennsylvania
ate Bill 145 of 2014 into law on July 9, 2014 as Act 117 of 2014. This is welcome news for developers, banks and title companies. The key provision of Act 117 (“the Act”) is that it gives an open-end mortgage, where at least 60% of the loan proceeds secured by the mortgage are used for “costs of construc- tion”, priority over mechanic’s liens filed after the bank’s mortgage is recorded. This fixes the current problem created by the Pennsylvania Superior Court’s Opinion in Commerce Bank/Harrisburg,
N.A. v. Kessler, where the developer already owns the real estate and has started construction before the bank’s mortgage is recorded. For example, under the law prior to the Act, if a devel- oper purchased real estate, hired an excavator to begin site work, and then, after site work was underway, obtained a construction loan, the me- chanic’s lien that would result from the excavator not being paid (and any subsequent, unpaid contractors) would have priority over the bank’s mortgage unless 100% of the
proceeds of the loan secured by the open-end mortgage were used for “hard costs”. Many developers will acquire real estate and begin con- struction using equity prior to obtaining a construction loan, so the Kessler case created a headache for title insurance companies, who were asked to insure the priority of the bank’s mortgage over me- chanic’s liens. Now, under the new provi- sions of the Act, if, for example, a bank extends a $1,000,000 mortgage to a developer, as little as $600,000 can be used
for both hard and soft con- struction costs and as much as $400,000 can be used to refi- nance existing debt, and both the bank and title company can have some comfort as to the priority of the mortgage. The Act should ease the anxi- ety that previously existed for title companies providing me- chanic’s liens coverage. Banks should be expected to include specific language in their mortgages regarding use of funds in compliance with the Act, because title companies regularly ask to review the mortgage they are insuring when issuing construction- related endorsements. Unfortunately, while wait- ing for the Act to pass, the Ti- tle Insurance Rating Bureau of Pennsylvania (TIRBOP) adopted new title insurance endorsements which became effective July 1, 2014. The purpose of the new endorse- ments is to mitigate the in- creased risk to title companies resulting from the Kessler case and significantly increas- es the cost of construction lending. To receive the same coverage which would have been given to an open-end construction mortgage prior to the Act, borrowers will now pay a 20% increase over the applicable non-sale rate. If the bank is willing to accept limited mechanic’s lien cov- erage (explained below), the borrower will now pay a 10% increase in premium. These increases are in addition to TIRBOP endorsement 1015, which already carries a 10% increase. For example, if a de- veloper obtains a $5,000,000 loan and a corresponding loan policy of title insurance with full mechanic’s lien coverage and common construction- related endorsements, the total increase in premiumwill be almost $5,000. The limited mechanic’s lien coverage which carries a 10% premium over the ordi- nary non-sale rate is offered through a new endorsement, TIRBOP endorsement 1500. This endorsement limits the bank’s coverage to the amount of the loan secured by the mortgage advanced for con- struction. Each time the bank makes an advance, the bank will be required to receive a date-down endorsement, TIR- BOP endorsement 1520, to in- crease the amount of coverage continued on page A
House and Senate pass bills to ease construction l e n d i n g . ” The article d e s c r i b e d Senate Bill 145 of 2014 which con-
Derek Dissinger
templated amendments to the Mechanic’s Lien Law of 1963 authored to ease construction lending. Fortunately, Gover- nor Tom Corbett signed Sen-
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