In addition to the mutual exchange of promises – the borrower’s promise to build in exchange for the lender’s promise to advance loan proceeds discussed in an earlier installment of this series – there’s another crucial aspect to a building loan contract that must be complied with: the so-called “Section 22 Affidavit.”
What is a Section 22 Affidavit?
New York law defines the Section 22 Affidavit as “a true statement under oath, verified by the borrower, showing the consideration paid … for the loan …, and showing all other expenses … to be incurred in connection therewith, and” – and this is the most important part – “the net sum available to the borrower for the improvement.”
As part of providing that notice of the “net sum available,” a Section 22 Affidavit must be filed as part of the building loan agreement. Common practice typically has the Affidavit attached as an exbibit to the building loan agreement. This makes it easier to find for construction contractors – for whose benefit New York law requires it.
As one New York court famously summed it up, the purpose of a Section 22 Affidavit is “to give contractors … notice of how much money a building loan makes available for construction.” [Altshuler Shaham Provident Funds, Ltd. v. GML Tower LLC (2013)]
Distinguishing the “Cost of Improvement” from the Cost of Construction
However, calculating the “net sum available” to contractors isn’t as straightforward as it may at first glance appear. The reason for this is that, with few exceptions, a building loan in New York is only a subset of a larger construction loan. So even for construction lenders who properly file a building loan agreement, New York protects construction advances only to the extent that those advances are intended for construction expenses deemed to be a “cost of improvement” or a cost of the “improvement” (which are specifically defined in the Lien Law and are not the same thing).
In other words, in New York the cost of construction is not the same thing as – in fact, it is typically much broader than – the “cost of improvement” and the cost of the “improvement.” A properly drafted Section 22 Affidavit doesn’t set forth the net sum available for construction costs generally, but instead only the net sum available for the cost of the “improvement.”
Summary and Upcoming Installments
Unfortunately, what constitutes a “cost of improvement” – and therefore the net sum available for the cost of the “improvement” – is anything but obvious.
We turn to this often murky area of law in upcoming installments of this series.
