FAQ: Hard Money Lending Laws

I love that my clients and readers share my views on capitalism.  In response to my previous post, “Need a Construction Loan?  Consider Hard Money Lending,” I received an overwhelming number of questions asking how people can get into the business of lending, rather than borrowing, hard money. I will answer a three of the more frequently asked questions that were emailed to me.

1.  Do I need a license to become a hard money lender?

It depends.  State law governs licensing of mortgage lenders and, therefore, varies from State to State.  However, under Pennsylvania law, lenders making mortgage loans to borrowers  strictly for business or commercial purposes and for non-residential property are NOT required to obtain a mortgage brokers license.  Because the exception to the licensing requirement applies to a narrow classification of loan, lenders should consider obtaining a license.  Furthermore, those operating outside the Commonwealth of Pennsylvania should check with their State’s licensing commission on licensing requirements.

2.  Do I have to comply with the Truth in Lending Act or RESPA?

No, provided the mortgage loan is made to a borrower strictly for business or commercial purposes.    The Truth in Lending Act and the restrictions of Regulation Z, do not apply to “business, commercial, agricultural, or orginational credit.”  Therefore, the various restrictions that Regulation Z places on the types and amounts of fees a lender may charge in a residential mortgage transaction do not apply to typical hard money loans.

Moreover, Section 2606 of RESPA specifically exempts “credit transactions involving extensions of credit . . .primarily for business, commercial, or agricultural purposes.”   However, hard money lenders should be careful not to secure the loan with any part of the borrower’s primary residents, otherwise, TILA and RESPA may apply.

3.  Will you get back to blogging about construction?

Yes, as soon as clients and readers stop asking me about side hard money lending businesses they want to start. 

Out In the Street: Friday, July 22, 2011

Its Hot.  Stay cool.  See you next week.

Need a Construction Loan? Consider Hard Money Lending

Both in the today’s print edition and on its real estate blog Developments the Wall Street Journal discusses the concept of hard money lending.

As many developers already know, hard money lending is not the dark underbelly of the lending world where loan sharks swarm.  Instead, hard money lending is interim financing similar to a bridge loan.  Hard money loans carry a higher interest rate than conventional financing and have terms that can last as short as a few months.  As the Journal notes,

Hard-money lenders don’t focus much on a borrower’s credit scores. They care more about asset valuations and loan-to-value ratios. Many lenders won’t lend more than 50% to 70% of the home’s value, while banks will lend as much as 80% and government-backed loans can go as high as 96.5%.

Those with shoddy credit are not the only ones that turn to hard money lenders.  Many, who are otherwise creditworthy, but that cannot qualify for traditional bank financing for not credit related reasons, such as current property values or cross collateral restrictions, often turn to hard money lenders.  When the project is completed, these creditworthy borrowers will refinance the hard money loan with traditional bank financing.

For example, consider a developer who may have several mortgages with a traditional bank.   The developer locates a depressed property that it feels can be rehabilitated and flipped for a profit.  The property may literally be depressed – as in the verge of collapse – or the developer may have acquired the property through a foreclosure or short sale.  In any event, the appraised value of the property in its current condition will not support a loan to value ratio sufficient for the developer’s traditional lender to extend it financing for the acquisition and construction of the property.  Or, the developer’s lender’s internal lending guidelines have changed and it no longer makes loans secured by the type of project the developer is proposing.  The relationship between the developer-borrower and the lender may be great and the developer’s loans may all be performing, nonetheless, financing is unavailable.

In this situation, a short term hard money loan is attractive to a developer.  The developer can quickly acquire the property and complete construction.  After completion, the developer will pay back the loan with traditional financing.

Obviously, using hard money for development can be tricky.  First, a developer needs to be sure that the construction can be completed before the hard money loan matures.  Many hard money lenders charge a hefty “roll over” fee if short term loans are not repaid at the end of the term.  Second, a developer needs to be certain that the finished project will have an appraised value sufficient to support traditional financing.  Otherwise, the developer may be stuck with paying a high interest loan to carry the project or, in the worst case scenario, losing the project to a foreclosing hard money lender.

Despite its unearned unsavory reputation, hard money lending can prove to be attractive to developers in unique situations.  For those interested in learning more about hard money lending and borrowing, I hope to have an interview with a hard money lending specialist up in the next few weeks, so be sure to check back.

Wall Street Journal Takes On PLA’s

Hurrah to the Wall Street Journal Opinion page today for taking on Project Labor Agreements.  The Journal’s opinion piece is by far the highest profile criticism of wasteful project labor agreements.  As the editors note, the tide of public opinion is turning squarely against project labor agreements even in those areas that are sympathetic to organized labor.

“As Andy Conlin of Associated Business and Contractors notes, wherever PLAs are subject to popular referendum, they’re rejected.”

The Journal calls project labor agreements

“a form of political bid-rigging that robs taxpayers even in good economic times.”

and calls for them to be outlawed.

What the article implies, but does not state, is that project labor agreements run contrary to the fundamental America values of free enterprises  and reward which is based on merit, not class, rank, or, in the case of PLA’s, political connections.  It is these values that explain why voters of all political persuasion find project labor agreements so distasteful.

Navigating a “Construction” Bankruptcy

Stick around long enough and dealing with a bankruptcy during or after a construction project is inevitable.  Moreover, when a member of the construction “chain” – owner, contractor, or subcontractor – files for bankruptcy everyone is effected.

Receiving a Trustee’s “preference letters” might be largest cause of irate phone calls from clients to their attorneys.  Subcontractors and suppliers, in particular, are flabbergasted when they are told that the Bankruptcy Code permits a Trustee to require repayment of money even if the payment was due when the  debtor made it.  The Trustee’s “strong arm” power is a fitting moniker for Trustee’s ability to recover money rightfully owed when payment was made within 90 days of the date debtor filed bankruptcy.

In this month’s Construction Executive Magazine,  Michael R. King of Gammage & Burnham in Phoenix, gives a refresher  on what a contractor’s options are in responding to or defending against a Trustee’s demand for repayment of a “preferential” transfer.  The article also reminds us that further efforts to perfect, but not to collect or enforce, a mechanics lien are not subject to the Bankruptcy Code’s automatic stay provisions.  I recommend saving the article to your favorites as a quick reference guide for when you next receive a preference letter.

What the article does not discuss is an unpaid subcontractor’s super priority in unpaid funds either withheld from a debtor or retained by the debtor.  I have long been an advocate of subcontractors aggressively pursuing payment using this super priority. I am surprised how few subcontractors and suppliers pursue this claim.

Next time you have a payment owed form a debtor that files for bankruptcy, don’t simply write it off.  Instead, take a minute to explore your options.  What you will find is that you are not as bad off as you think.

Out In the Street: Friday, July 15, 2011

Unknown, Unknowns: Former Defense Secretary Donald Rumsfeld once quipped “there are known knowns; there are things we know we know.  We also know there are known unknowns; that is to say we know there are some things we do not know.  But there are also unknown unknowns – the ones we don’t know we don’t know.”  I guess the TSA took heed of his words when they subjected him to a pat down at a security checkpoint at O’Hare.

Raise a glass:  This week our nation bestowed the Medal of Honor on Leroy Petry for his uncommon valor in service to our country in Afghanistan.    Sergeant First Class Petry is one of 85 living Medal of Honor recipients.  This week we raise a glass to Sergeant Petry and all the Medal of Honor recipients living or deceased.

“Big Stan” – The Coolest Tool In Construction

One of the things I love about construction are the crazy pieces of equipment that are used on jobs.  Engineering New Record has a short piece about “Big Stan,” which is believed to be the world’s largest truck mounted drill.  According to ENR:

The 250,000-lb, 93-ft-high boring behemoth was built in 1986 by Anderson Drilling, Lakeside, Calif., now a part of London-based Keller Group PLC. The mega-machine, which cost $1.5 million to construct, is named after 6-ft, 3-in.-tall Stan Anderson, who retired as company president in 2006.

A picture of “Big Stan” – courtesy of the Las Vegas Paving Corp. – appears to the above.  The auger alone weighs 15,000 lbs and it backs that bit up with a colossal 534,000 ft-lbs of torque.  Wow.

Will Wind Farms Equal Jobs?

The story that wind farms will be constructed off the coast of Southern New Jersey appears to be heating up.

In June, the Cape May County Herald, reported that Atlantic Wind Connection presented to local community leaders in Cape May County about plans to construct a 350 mile transmission system that will be able to transmit 6,500 to 7,000 megawatts of electricity from wind farms located off the New Jersey coast.

Yesterday, the Wall Street Journal reported that the US Interior Department has completed an environmental impact study regarding off shore wind farms and concluded there would be little environmental impact from off shore wind farms.  The Journal believes that the findings are an indication that the agency may be prepared to open up the coast of New Jersey for wind farm development.  Indeed, the Journal reports that up to 354,000 acres off the New Jersey coast are being considered for wind farm development.

Wind farms will do little to solve our energy problems.  Unfortunately, the current wind farm technology does not generate enough electricity to have any real impact.  What gets me excited about this project is the prospect of job creation and the potential positive impact on the Southern New Jersey economy.  Perhaps we could also add new nuclear power plants to the mix of new energy projects in New Jersey.  Nuclear power is a proven technology that generates a significant amount of energy and creates jobs.  When it comes to new energy sources, the solution needs to be “All of the Above.”

Out In the Street: Friday, July 8, 2011

At the top of my summer reading list is The First Tycoon: The Epic Life of Cornelius Vanderbilt by T.J. Stiles , which won the 2010 Pulitzer Price for autobiography.  I am amazed at the disparaging treatment the typical history book gives our founding industrial fathers.  Often derided “robber barrons,” men like Vanderbilt – and his later co-horts Carniege, Mellon, and Rockefeller – took this country from a colonial backwater and turned it into an industrial power.  Their rise to power was not achieved through birthright or class, but rather through risk, merit, and hardwork.  Moreover, they built their fortunes with a simple can do spirit that embodied the age in which they lived and which, unfortunately, is all too lacking in our current era. 

Raise a glass:  Tonight I ask you to raise a glass to the risk takers.  They built this country. 

Common Sense Infrastructure Spending

Today’s Wall Street Journal discusses competing infrastructure spending bills making their may through the House and Senate respectively.  After years of infrastructure programs laden with pork and bridges to nowhere coupled with a disastrous “stimulus bill,” which resulted in job loss instead of creation, it is important that investments in our nation’s infrastructure be both pro-growth and fiscally sound.  Here are a few ideas on what needs to be included in a pro-growth fiscally sound infrastructure bill.

1. THE GOAL OF AN INFRASTRUCTURE BILL SHOULD NOT BE JOB CREATION.

Too often, the primary purposed of government spending is job creation. However, as with the stimulus bill, billions of dollars are spent creating few — if any — jobs. Instead, Congress’ primary goal in funding infrastructure projects should be to fund projects that promote commerce. For example, as Robert W. Poole pointed out in the Weekly Standard there is no interstate route between the rapidly growing metro areas of Las Vegas and Phoenix. Moreover, infrastructure spending has not reflected demographical shifts in the American population. Therefore, Congress should seek to invest in infrastructure projects that will promote commerce in the parts of the country that have growing populations and centers of commerce and not in areas of the country where population is declining, like the Northeast.

2. REQUIRE OPEN AND FAIR COMPETITION FOR INFRASTRUCTURE FUNDS

Congress should insist that a large number of contractors should be able to compete for infrastructure contracts. This means that Congress must ban Project Labor Agreements from being used on any infrastructure project it funds. Project Labor Agreements are a de facto requirement that the contractors bidding on certain government contracts be union contractors. According to Labor Department statistics, only 14.5% of those employed in the construction industry are members of a union. Therefore, by requiring the use of union labor through Project Labor Agreements an overwhelming majority of those working in the construction industry are denied a chance at employment. Moreover, because union labor is typically more expensive than its non-union counterpart, requiring open and fair competition for infrastructure projects will assure that taxpayers are getting the best price possible for the work that is being performed.

3. TAXPAYERS MUST BE GIVEN VALUE.

Besides not spending money on earmarked pork projects, Congress should insist that infrastructure spending is not used to reward special interests, which artificially inflate costs. Therefore, Congress should scrap any requirement that new infrastructure projects follow the David-Bacon Act, which inflates project costs by requiring that contractors pay their employees a certain hourly wage. While workers should earn a decent wage, Congress should not mandate wages that bear no relation to the market rate wages that would be paid by a private employer for the same work.

Also out should be any “Buy American” provisions. While I am sure taxpayers prefer to buy American made goods, they should not be forced to subsidize American manufacturing, which is declining for a variety of factors and will not be helped through Buy American clauses in infrastructure contracts.

Finally, all “green” requirements should be stripped from infrastructure spending unless it is conclusively shown that it will save the taxpayers’ money. The purpose of infrastructure spending should not be to promote dubious global warming and sustainability causes.

4. FUND SMART PROJECTS

Congress should not fund projects that are obsolete the moment they are completed. The cost of the project should be evaluated over the long term not just at the time of funding. However, taxpayer value and long term costs control cannot be achieved unless projects are constructed to adequately handle future growth.

5. HAVE STATES COMPETE FOR MONEY.

States should be required to compete for infrastructure spending. They should be required to submit plans that show the proposed infrastructure project will meet the criteria set forth above. This will assure that unnecessary pork laden projects that generate little value to the taxpayer do not get funding and growth creating cost effective projects do.  Competition for funds will keep costs down and create value.  A infrastructure “bank” will not.  Over the long term the “bank” will become another government agency hamstrung by special interest rules and in need of a bailout.

Congress can easily accomplish all of these goals in an infrastructure spending bill.  It is important to invest in our national infrastructure.  Indeed, the Constitution all but mandates it.  However, after years of waste, now is the time to get back to investing in infrastructure rather than wasting money on it.