Best Practices: Due Diligence in 7(a) Loans secured by Commercial Real Estate: Surveys

Borrowers undertaking a U.S. Small Business Administration (“SBA”) 7(a) loan often ask lenders whether a new survey will be required to close. This is a complex question and often, the answer will not be available until, at a minimum, the title insurance commitment is prepared by the title agent.

1. Types of Loan Policies and the Standard Survey Exception

Borrowers and lenders should understand that on a closing transaction where a borrower is purchasing a piece of real estate using loan proceeds, there are two types of title insurance coverage that may be issued. The first is the “Owner’s Policy,” which benefits the owner of the real estate. The second is the “Loan Policy” which benefits the lender.

Each type of policy contains similar but different types of coverage due to different risks and availabilities, the discussion of which is beyond the scope of this article. Generally, though, both types of policy include a “standard survey exception” which is a general exception to all title insurance claims regarding survey matters unless a sufficient survey is provided or a state-specific title endorsement is applicable to provide affirmative coverage over survey matters without a survey.

In other words, a title agent typically will not ensure survey matters without a survey that “accurately describes the land,” and discloses “any matters that would have been disclosed by an accurate survey of the property.” So, where there is no survey or an insufficient survey, the title policy will include a standard survey exception unless there is a state-specific title endorsement applicable which permits the title agent to remove the standard survey exception without a survey.

Sometimes a plator survey of record from a prior transaction or time period may be sufficient to satisfy the title requirements. However, this analysis will be dependent on the applicable state, specific facts relating to the title record and the transaction, and the intended use of the property. If a borrower or lender is uncertain whether a new survey will be required, it is very beneficial for all parties to have direct communication with the title agent even the agent may not know what will be required until the preliminary title commitment is issued.

It is helpful to note that the SBA does not require borrowers to have any kind of survey coverage under an owner’s policy of title insurance. However, the SBA does require deletion of the “standard survey exception” from a loan policy for lenders making loans secured by commercial real estate under the SBA National 7(a) Authorization Boilerplate, Appendix A.

2. What kind of survey is needed to delete the standard exception?

Knowing what kind of survey is required well in advance of closing will minimize delays to the loan closing. There are two main types of surveys – a “boundary survey” and an ALTA/NSPS (“American Land Title Association/National Society of Professional Surveyors”) survey.

A boundary survey is a more affordable, limited-scope survey that usually depicts existing lines of the property and visible encroachments. However, a boundary survey may not be sufficient for the type of loan or planned use of the property to be purchased. A boundary survey can help ascertain certain matters, but because it does not incorporate the actual title exceptions affecting title to the land, it may not identify title matters such as recorded easements, rights-of-way, encroachment agreements, as would an ALTA/NSPS Survey.

An ALTA/NSPS survey incorporates a higher level of precision and procedure than the minimum technical standards, which vary from state to state.  An ALTA/NSPS survey includes additional information that may be specific to the transaction or intended use of the property, such as local zoning requirements, regulations regarding building height, topography, setback lines, and parking spaces. The surveyor will require a copy of the preliminary title commitment and all exceptions thereto in order to proceed, so that the surveyor can incorporate this information into the ALTA/NSPS survey.

In the event a survey is required to delete the standard survey exception or issue certain title endorsements to a loan policy, lenders and borrowers should work with the title company early in the due diligence process, as a new survey can take weeks to obtain, especially in the case of an ALTA/NSPS survey.

For further assistance regarding title and survey matters in SBA 7(a) closings, please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070.