16A — April 25 - May 15, 2014 — Spring Preview — M id A tlantic

Real Estate Journal

L egal /C onstruction L ending

By Derek Dissinger, Barley Snyder Pennsylvania House and Senate pass bills to ease construction lending


ver the past two years following the Pennsyl- vania Superior Court’s

law, meaning mortgages which secure advances made from the bank to the borrower after the mortgage is recorded. Prior to the decision in Kessler, banks and title companies assumed open-end mortgages were al- ways entitled to priority over pre-existing mechanic’s liens, regardless of how the proceeds were used. That assumption was provided incorrect in Kes- sler, where the Superior Court held that “open-end” mortgages were only entitled to priority over mechanic’s liens if all of the proceeds went towards hard construction costs or the mort-

gage was a purchase money mortgage. Following Kessler, if the borrower already acquired the land and began construction, lenders have had to minimize risk by creating separate loans for hard and soft costs, or re- quiring developers to use equity to fund soft costs. Title compa- nies have asked contractors to sign indemnity agreements and asked those signing to provide financial information to deter- mine if those agreements were worth anything. In the current 2013-2014 legislative session, the Senate

passed Senate Bill 145 (SB 145) and the Pennsylvania House of Representatives passed House Bill 982 (HB 982), with the stated purpose of preventing subcontractors from filing me- chanic’s liens on residential properties when the property owner has paid the general contractor. Although this is the advertised purpose of the bills, the bills also quietly make con- struction lending easier on con- tractors, title companies and banks, by providing that open- end mortgages are entitled to priority over mechanic’s liens if 60% of the loan proceeds are

used for eligible “construction costs”, which is broadly defined to include both hard costs and soft costs of construction. For example, a $1,000,000 open-end mortgage would receive priority over a mechanic’s lien where $200,000 funded soft costs, $400,000 funded hard construc- tion costs, and $600,000 funded the refinance of existing debt. SB 145 was passed by the Senate on June 12, 2013, where on the Senate floor, the bill’s sponsor, Senator Ward, stated the bill “had been worked on for two legislative Sessions and it has the support of the bank- ers, title insurers, mechanical contractors and the realtors.” Senate Bill 145 is currently in the House Labor and In- dustry Committee. The House of Representatives passed its version of the bill, HB 982, on November 12, 2013 and that bill is currently before the Senate Labor and Industry Committee. Hopefully, an agreement between the House and Senate can be struck on this issue and legislation will be sent to the Governor’s desk, where it will ease construction lending by allowing open-end mortgages to fund hard costs, soft costs, and refinance existing debt, with banks and title companies having the assurance their mortgages will receive their intended priority. Derek Dissinger is an at- torney with Barley Snyder where he counsels his cli- ents in a variety of real es- tate and finance & creditors’ rights issues. n Retailers change direction with space in NJ... some point or another. So there is a strong dichotomy between how the large big box retailers and the smaller niche franchise concepts are address- ing their real estate needs in New Jersey, and we expect these trends to continue as tech- nology and The Web in general continue to shape every aspect of our lives on a daily basis, including the way we shop and do business. Rick Rizzuto currently serves as a vice president at Transwestern.He is responsi- ble for creating buyer, seller, tenant, and agency relation- ships with landlords, build- ing owners and tenants. n continued from page 14A

decision in C omme r c e Bank/Harris- burg, N.A. v. Kessler, title i n s u r a n c e agencies and banks have wrestled with how to handle

Derek Dissinger

the issue of mechanic’s liens and construction financing. Mortgages that finance con- struction are “open-end” mort- gages under Pennsylvania

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