Blog

By Amy Brownstein, Esq.

     Title policies contain what are generally referred to as “standard” exceptions. These exceptions to coverage are the non-property specific exceptions that will appear in the title policy unless the lender negotiates their alteration or removal. They are usually the first exceptions listed in Schedule B of any title commitment or policy.

     The first standard exception in a title commitment is usually for matters that attach (e.g., judgments and liens) or are recorded after the effective date of the commitment but before the insured instrument is recorded. This is known as the “gap” exception because it relates to the gap in time between completion of the title search and recording of insured instruments. Lenders should require this exception to be removed at closing, as the title company should perform a bring-down title search immediately prior to closing or recording to confirm that no such additional matters exist, and because the 2006 form of ALTA loan policy (available in all nearly all states) specifically provides coverage for the gap period. While this exception is removed as a matter of course in some states, in others the owner may be required to provide a “gap affidavit” as a condition to its removal.

     Another standard exception is for rights of parties in possession of the premises under unrecorded leases or agreements of sale. This exception excludes coverage if an occupant has possession of the property under a record interest (such as a recorded Memorandum of Lease or Installment Sales Agreement). Generally, a lender needs to know who might have rights to occupy a property in which it is taking a security interest, and in many cases the lender will want a subordination agreement from any such party subordinating such party’s interest to the lender’s lien. To provide coverage in the event that a third party has rights to possess the property, this exception can be revised so that it is limited as follows “Rights of [insert known tenant name], as a tenant only, pursuant to a written lease, without rights of first refusal or options to purchase the property.” In order to make this revision, the title company will usually require an affidavit from the owner identifying all tenants or averring that such tenants do not exist. If the exception is limited, the lender would likely have the basis for a title claim if a third party tenant not known to the lender is discovered to exist.      

     Removal of the “survey” exception, commonly phrased as “any variation in location of lines or dimensions or other matters which an accurate survey would disclose”, is also desirable. If this exception is not removed, the lender will not have title coverage with respect to matters that are visible on the land and would have been known to the lender and the title company had a survey been obtained. These matters can be significant, such as a portion of a collateral building being located outside of the property, and therefore obtaining a survey (and learning the information it discloses) is almost always preferable to not obtaining a survey. In many states, title companies are willing to remove the survey exception without requiring a survey. In other states, however, the survey exception will be removed only if an acceptable survey is provided, and for this reason it is advisable to determine the title company’s requirement for removing the survey exception early in the process of making a loan to avoid closing delays.

     One additional exception that lenders frequently require to be removed is the exception for mechanics’ liens, e.g. “any lien, or right to a lien, for services, labor or material heretofore or hereafter furnished, imposed by law and not shown by public records.” Because mechanics’ liens often have “superpriority” over other liens and therefore could, in some states, constitute a lien senior to the lien of a lender’s mortgage even if not filed at the time of closing, having this exception removed can provide the lender with valuable protection when construction work has recently been completed or is contemplated in connection with a loan. Because of the high number of title claims associated with mechanics’ liens, if construction has recently been completed or is contemplated the title company will likely have certain underwriting requirements that must be met before this exception will be removed. Therefore, lenders should advise the title company early in the process that removal of this exception will be required.

For more information regarding Title Insurance, please contact Amy at ABrownstein@starfieldsmith.com or (215) 542-7070.

By: Kevin Ryan, CPA

     It’s often difficult to stay on top of the ever changing tax issues when, as a business owner, your company requires your full attention. The reality is that you get caught up in the day-to-day operations of managing employees, delivering results to your clients, developing new business and tending to an increasingly active email inbox that never sleeps. Despite competing demands, it is important to keep an eye on legislative tax changes or have a trusted advisor who does it for you. This way, you can proactively consider potential changes and plan accordingly.

     In February 2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012, also known as “The 2012 Act,” which, among other things, extended the payroll tax relief package through December 31, 2012.

     The original relief package, passed in December 2011, only provided a two-month relief extension of the original 2010 Tax Relief Act. The 2012 Act extends the relief package, keeping the employee portion of Social Security tax on earned income at 4.2 percent instead of 6.2 percent. For 2012, the maximum taxable wage base for Social Security taxes is $110,100, so individuals can save a maximum of $2,202.

     Here’s a look at other provisions that will be extended through the end of 2012, as a result of the 2012 Act.

• Enhanced unemployment benefits (the number of weeks of benefits does reduce as the year progresses)
• Current Medicare payment rates for physician services
• Other Medicare-related provisions that are normally extended when physician payment rates are extended

     One point of debate regarding the extension which has not yet been fully addressed is how the Middle Class Tax Relief and Job Creation Act of 2012 will be paid for.

     While staying aware of new or extended tax opportunities, business owners, individuals and the self-employed, alike, also need to know which provisions have expired at the end of each year. For 2011, they include: alternative minimum tax relief, the research credit and the deduction of state sales tax in lieu of state income tax. These expired benefits, combined with the expiration of the Bush Tax benefits at the end of 2012 should make this an interesting year for tax legislation.

      In order to reap the benefits of The 2012 Act, business owners and self-employed individuals should consider accelerating income to reach the maximum taxable Social Security base. When negotiating compensation, individuals may want to request that bonuses are distributed in 2012 to take advantage of the lower Social Security rate.

     Having a clear understanding of these provisions and taking them into consideration, is essential for your 2012 and 2013 tax planning.

About the Author:  Kevin Ryan is a Certified Public Accountant for Citrin Cooperman, an accounting, tax and business consulting firm in Philadelphia, where he is a partner with more than 20 years of experience providing audit, tax and business consulting services to clients in a variety of fields, with a special expertise in the hospitality industry. He is also an expert in the not-for profit sector, providing audit services to a number of charter schools in the Philadelphia area. Kevin can be reached at kryan@citrincooperman.com or (215) 545-4800.

By Sharon Brown, Esq.  

     Even the most sophisticated lenders sometimes ask, “What are Corporate Tax Liens?” It is not surprising that statutory Corporate Tax Lien Certificates Liens are often missed by Lenders or are confused with tax lien and judgment searches and certificates of good standing, because the concepts between the items are related. The terminology and availability of Corporate Tax Lien Certificates (“CTLCs”) vary from state to state. Whenever available, CTLCs are usually an important tool to confirming that lenders will achieve desired lien positions on loan collateral. When lenders are participating in a Small Business Administration (“SBA”) loan program, achieving the lien position required by the SBA Loan Authorization is critical to protecting the SBA loan guaranty. A better understanding of CTLCs will come from: (1) understanding what information CTLCs provide, (2) how CTLCs are distinct from tax lien and judgment searches and good standing certificates, and (3) understanding the administrative challenges sometimes encountered when requesting CTLCs.

     What CTLCs Are.   CTLCs are a search of a state’s records for outstanding taxes that are indexed against a business entity. Understanding the records that CTLCs cover is key. CTLCs are not a search of public land records, such as a county recorder’s office in which a mortgage or other liens would be filed. CTLCs are a search of a state’s taxing authority’s records, such as a Department of Revenue or Taxation. CTLCs are ordered in the state(s) in which the business entity was formed. CTLCs may identify outstanding taxes such as corporate, sales or franchise taxes due to the state. Such outstanding taxes often have not yet been reduced to judgments and indexed against the company, so at first glance the taxes would not seem to impair the Lender’s lien. The catch, however, is that many state laws provide that such outstanding taxes have statutory priority over all prior recorded mortgages, liens, claims and judgments. For example, Pennsylvania’s law giving “superpriority” to state taxes is found at 72 P.S. § 1401. In Pennsylvania, the lien for such taxes is effective as of the date of assessment, and no judgment lien need ever be filed. Id.

     Distinguishing CTLCs from Other Searches.   Since names for CTLCs vary from state to state, this often results in CTLCs being confused with tax lien and judgment searches and/or good standing certificates. Tax lien and judgment searches are a search of local public records, for tax liens or judgments filed or recorded against a person, entity or property. Again, CTLCs are a search of a state taxing authority’s records, and any outstanding taxes shown on a CTLC may have superpriority over other liens recorded in the county records. CTLCs are also frequently confused with certificates of good standing. Certificates of good standing are typically issued from the state office in which one must file to form a business, which is often the office of the Secretary of State. A certificate of good standing provides that a business’ required paperwork is in order, e. g., all annual reports and other filings are current. CTLCs, by contrast, are usually a certification from a state’s taxing authority, and indicates whether the business owes any taxes to the state. One frequent source of confusion is that in some states, CTLCs are called “Certificates of Good Standing,” but the key is that such a certificate comes from the state’s Department of Revenue or other such taxing authority.

     Administrative Challenges in Ordering CTLCs.   Procedures and turnaround times for ordering CTLCs vary significantly from state to state, although fees are usually nominal. It is important to note that some states can take as long as four weeks to process CTLCs. For these reasons, CTLCs should be obtained early in the loan documentation process to ensure that the request will not delay closing. For example, in Pennsylvania, one only needs to submit the business entity name and a small fee to obtain a CTLC from the Department of Revenue, and turnaround is approximately one week. By contrast, some states require businesses to submit a letter or power of attorney before tax information will be released to a third party (respectively Oregon and Colorado). In Michigan, tax information may only be released to the business itself.

     In the current economic climate where states are looking for every available tool to increase revenue collections, CTLCs are a valuable tool for lenders to ensure that they achieve their required lien positions. This is especially important when the loan is an SBA Loan and achieving the required lien is central to protecting an SBA loan guaranty. Clarifications of what CTLCs are and distinguishing CTLCs from tax lien judgment searches and from Secretary of State good standing certificates are keys to avoiding misunderstandings during due diligence collection. As long as the administrative challenges of ordering CTLCs are anticipated and addressed, one will have the full benefit of the simple, inexpensive and vital benefit of CTLCs.

For more information regarding Corporate Tax Lien Certificates, please contact Sharon at SBrown@starfieldsmith.com
or (215) 542-7070.

By Timothy D’Lauro, Esq.

     One of the most troublesome issues lenders face is whether they must obtain a Landlord’s Waiver, especially when third party landlords are uncooperative or when the personal property collateral has marginal value. Since Landlord’s Waivers are a frequent requirement in the making of SBA loans, lenders must understand what the SBA means by a Landlord’s Waiver, and when a lender is required to obtain one.

     The elements of a Landlord’s Waiver are most precisely set forth in the following optional requirements from the National Authorization 7(a) Boilerplate:

     “Lender must obtain a written agreement from all Lessors (including sublessors) agreeing to: (1) Subordinate to Lender Lessor’s interest, if any, in this property; (2) Provide Lender written notice of default and reasonable opportunity to cure the default; and (3) Allow Lender the right to take possession and dispose of or remove the collateral.”

     Thus, if a Landlord’s Waiver is required, it must include provisions whereby the landlord agrees to subordinate to the lender its interest in the subject collateral located on the leased property; notify the lender of the borrower’s default and allow an opportunity to cure; and permit the lender to enter onto the leased property and to remove and dispose of the collateral.

     SOP 50 10 5(D) identifies several circumstances when a Landlord’s Waiver should be obtained. “When a substantial portion of the loan proceeds are to be used for leasehold improvements or a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery, or equipment that is attached to leased real estate, the lender should obtain … [an] Assignment of Lease …; and [a] Landlord’s Waiver.” (SOP 50 10 5(D) at page 208) (emphasis added). The SOP provides further guidance: “[t]he Landlord’s Waiver … should be obtained for all SBA loans with tangible personal property as collateral.” (SOP 50 10 5(D) at page 208).

     Accordingly, there are two identified circumstances when a lender should use its best efforts to obtain a Landlord’s Waiver: (1) when the lender is financing the making of, or its collateral is substantially comprised of, leasehold improvements, fixtures, machinery or equipment that are or are to be attached to leased real estate, or (2) when the lender is financing SBA loans with tangible personal property collateral. Not surprisingly, because lenders making SBA-guaranteed loans are required to take security interests in “all available collateral,” prudent lending suggests lenders should attempt to obtain a Landlord’s Waiver when making SBA-guaranteed loans made to borrowers who operate or otherwise have collateral located on leased property.

     Obtaining a Landlord’s Waiver in an EPC-OC loan (i.e., when the landlord and tenant are borrowers or guarantors) is rarely controversial. However, Lenders frequently find that obtaining a Landlord’s Waiver from a third-party landlord presents a significant challenge. Such landlords may refuse to subordinate their rights or obligate themselves to provide notice of default; insist on limiting the lender’s access to the leased premises; require broad indemnification from the lender; provide only a brief window for the removal of collateral; or otherwise object to the terms and provisions of a landlord’s waiver that addresses the SBA’s requirements.

     Generally, the prudent lender should view the SBA’s suggestion as an imperative, as the failure to obtain the required waiver may result in a repair or denial of the SBA guarantee if the absence of the waiver – and the rights it provides to the lender – prevents the lender from liquidating its collateral, and the lender suffers a loss as a result. If the landlord is unwilling to agree to the necessary provisions, the lender should decline the loan; or move forward by obtaining the SBA’s approval to waive the requirement (for loans submitted through standard processing); or make a credit decision to omit the Landlord’s Waiver entirely.

     Any such justification is critical. For example, if the value of the collateral is substantial and the landlord will not cooperate, the lender may not continue to process the loan without jeopardizing the SBA loan guaranty. If, however, the loan is processed through a lender’s delegated authorty, the lender must establish that the liquidation value of the collateral is de minimus; the bank has been unsuccessful in obtaining the waiver; and the lender is nevertheless proceeding with the loan since the cost of the recovery would likely exceed the liquidation value of the collateral. The documentation must be performed contemporarously with the Lender’s decision so that, in the event of the event of a default and guaranty purchase submission, the Lender may make a credible argument to the SBA.

For any questions about when Landlord’s Waivers are needed, please contact Tim at tdlauro@starfieldsmith.com or (215) 542-7070.