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Attorney
Spotlight
 | | Kimberly Rayer, Esq. |
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Kim concentrates her practice in the areas of financial services, commercial contracts, real estate and corporate law. Kim has extensive experience representing banks, financial institutions, as well as companies in connection with commercial financing transactions, including acquisition financing, asset-based financing, healthcare receivable financing and other secured transactions. She has experience with intercreditor relationships, as well as creditor's rights in bankruptcy. Kim also advises small businesses on corporate governance and transactional matters.
Kim is admitted to practice before the Supreme Courts of Pennsylvania and New Jersey and the Federal District Court for the Eastern District of Pennsylvania. She is a member of the Philadelphia Bar Association and the National Association of Government Guaranteed Lenders (NAGGL).
Kim is a graduate of Drexel University where she received a Bachelor of Science Degree, cum laude, and the James E. Beasley School of Law, Temple University, where she earned a Juris Doctor degree.
Prior to joining Starfield & Smith, P.C., Kim was an associate at Blank Rome LLP in Philadelphia, Pennsylvania. | |
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Best Practices: New Construction and
the Use of Loan Proceeds
By
Joseph A. Ernst, Esq.
 | | Joseph A. Ernst, Esquire |
Under SOP 50 10 5(D), one of the permissible uses of loan proceeds is for the construction of new buildings and renovations to existing buildings. SOP 50 10 5(D), page 81. Furthermore, it is clear under the SOP 50 10 5(D) that twenty percent (20%) of a newly constructed building may be leased "permanently" to a third party tenant. SOP 50 10 5(D), page 137. However, effective as of October 1, 2011, the SOP 50 10 5(D) now contains an express prohibition against using loan proceeds to improve or renovate any part of the space that is leased to a third party tenant. In the context of an existing building, it typically is relatively easy to identify and segregate the costs of making improvements or renovations to space leased to a third party tenant and, hence, relatively easy to comply with the prohibition on using loan proceeds to improve or renovate the space leased to a third party tenant. In contrast, in the context of ground up construction, the distinction between using loan proceeds for the permissible use of new construction and using loan proceeds for the impermissible use of improving space leased to a third party tenant can be much more difficult to make, particularly if the Lender does not have a through understanding of what is being constructed and why.
In general, loan proceeds used to construct the building's shell and the mechanical, electrical and other utility systems serving the entire newly constructed building are permissible under the SOP 50 10 5(D), even if part of the newly constructed building will be leased to a third party tenant. In contrast, loan proceeds used for improvements to a third party tenant's space that are designed or intended for the third party tenant's specific or unique use of its space are prohibited under the SOP 50 10 5(D). In general, if the improvements are requested or needed by the third party tenant to operate its particular business operations in its space, then loan proceeds cannot be used for such improvements. By way of an example, its is permissible under the SOP 50 10 5(D) to use loan proceeds to construct all of the structural floors for ground up construction. However, under the SOP 50 10 5(D), it would be impermissible to use loan proceeds to finance the tenant's fit-out or even to reinforce the structural floor of the third party tenant's space if the third party tenant's use of its space dictated that its floor have a higher than normal load bearing capacity. Lenders should be mindful of who will directly benefit from the improvements and wgho requires the improvements when conducting this analysis.
Because there is a grey area in ground up construction between the permissible use of loan proceeds for new construction and the impermissible use of loan proceeds for third party tenant improvements, Lender's need to be cognizant of this distinction between permissible and impermissible use of construction loan proceeds for certain types of improvements. In ground up construction, particularly in the case where a third party tenant is already lined up to lease part of the space, a careful and through review of the construction contract is warranted to ensure that loan proceeds will not be used for impermissible improvements to a third party tenant's space. If the construction contract is unclear as to the scope of work and/or the improvements that are to be made to the third party tenant's space, then the Lender must obtain clarification to ensure that the loan proceeds will be used for a permitted use. In addition, in many instances, the borrower/landlord would not be undertaking ground up construction without having first secured in some fashion the rental income from a third party tenant; consequently, there may be a letter of intent or lease with the third party tenant. If this is the case, the Lender should carefully scrutinize any such letter of intent or lease with the third party tenant to ascertain if improvements are being undertaken that are unique or specific to that particular third party tenant. Should this be the case, care must be taking when disbursing the construction loan proceeds to ensure that such tenant specific improvements are not funded with the loan proceeds.
For more information regarding the prohibition on using loan proceeds for third party tenant improvements , please contact Joe at JErnst@StarfieldSmith.com or (215) 542-7070.
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Seminars and Events
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2012 NAGGL SBA Lending Technical Conference
Presented by: NAGGL
Dates: April 30, 2012 - May 4, 2012
Location: The Swan Hotel - Orlando, FL
Session: Advanceed SBA Loan Documentation and Closing
Instructor: David W. Starfield
Date: May 3-4, 2012
Time: 8:30 A.M. - 4:30 PM EDT
Location: The Dolphin Hotel - Orlando, FL
Session: The Guarantee Purchase Process
Instructor: Ethan W. Smith
Date: May 4, 2012
Time: 8:30 A.M. - 4:30 P.M. EDT
Location: The Dolphin Hotel - Orlando, FL
For more information about and to register for, click here.
2012 America East Conference for SBA Lenders
Dates: August 1, 2012 - August 3, 2012
Location: Baltimore, Maryland
For more information about this event and/or to register, click here.
18th Annual Mid-America Lenders Conference
Presented by: HAGGL
Dates: August 13, 2012 - August 15, 2012
Location: Hilton Americas - Houston, Texas
For more information about this event and or to register, click here.
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Did You Know...
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...that Starfield & Smith, PC advises its lender clients on both SBA and Federal Bank regulatory matters?
For more information about this and other services Starfield & Smith, P.C. provides its clients, please call Ethan at 215-542-7070 or by email at esmith@starfieldsmith.com.
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Starfield & Smith, P.C.
Pennsylvania Office
1300 Virginia Drive | Suite 325 Ft. Washington, PA 19034
phone: (215) 542-7070 | fax: (215) 542-0723
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Florida Office
1101 North Lake Destiny Road| Suite 105
Maitland, FL 32751
phone: (407) 667-8811 | fax: (407) 667-0020
* * * * *
California Office
2955 Main Street, Second Floor
Irvine, CA 92614
phone: (949) 333-4108| fax: (949) 679-1709
Loan Documentation | Closing | SBA Guaranty Purchase
Franchise Consultation | Regulatory Compliance
Business Consulting
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