Many smaller investors are willing to offer loans to borrowers who do not want a loan from a traditional financial institution. The slightly higher costs of the loan are often worth it, considering borrowers will avoid the many hassles and daunting requirements of traditional lenders.

With a willing lender and a willing borrower, what could possibly go wrong? The short answer is that a lot can go wrong. Besides the obvious, such as defaulting on the loan, there is one trap for the unwary lender that should not be ignored: the loan’s purpose.

Why does the purpose of the loan matter? Because when a default does occur on a loan, the stated purpose of the loan may have a dramatic effect on the lender. There are many varieties and types of loans, but they all fit into one of two categories: business or personal.

Let us say that as a smaller investor, you want to make loans of a business nature. The borrower comes to you and says that the loan is for construction for a business. To most it would seem to be a no brainer: it’s a business loan. If it is a business loan, then all of the documents need to state the business loan as the purpose.

Why is it important to state the purpose of the loan in the loan documents? Because if the purpose of the loan is not stated in the documents and the loan defaults, the lender could be found to be a usurious lender in the state of Washington. The Washington Supreme Court recently issued an unpublished opinion in which a small investor was found to have charged a usurious rate of interest because it did not state the loan’s purpose as business within the loan documents. It was, therefore, a personal loan. Personal loans have far more controls regarding interest rates than do business loans, and the lender was substantially financially penalized for charging too high of an interest rate on what was deemed as a personal loan.

While no Oregon case has directly confronted this issue, a perusal of cases would indicate a potentially similar result in Oregon if brought through the courts.

The test for whether a loan is a business or personal loan is seen from the eyes of the borrower, not the lender. If the loan documents do not say anything, then the loan purpose is determined by the borrower’s subjective statements of the purpose. The takeaway? The borrower and lender need to agree to the purpose of the loan and put it in writing in the contract.

It is not hard to make a loan business in nature instead of personal, if in fact it is for business.  A clause simply needs to be inserted into the loan documents stating the business purpose of the loan. The clause just needs to say that the borrower and lender agree the loan’s purpose is for business, with a brief mention about the ultimate use of the loan proceeds. If the lender requires a personal guarantee for a loan made to a business, then similar language needs to be included in the personal guarantee.

It is important to note that placing a statement of business purpose for a loan in the recitals of the loan document, if there is a recitals portion, may not work for creating a business purpose in the loan documents, unless the recitals become incorporated into the operative portion of the contract.

Sometimes simple things get overlooked. If you are offering small loans, make sure you do not overlook the importance of stating the purpose of a business loan in the loan documents and any guarantees. Without paying attention to the addition of the “business purpose” clause to each of the loan documents, a small investor making loans could end up on the wrong end of a court decision.

Scott S. Anders is an attorney and shareholder in Jordan Ramis PC.  A former civil prosecutor and former District Court Judge in Clark County, he now focuses his practice on land use, real estate, and business matters.  Contact him at 360.567.3904 or by e-mail at scott.anders@jordanramis.com.

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For those familiar with commercial real estate deals, it is well-known that buyers and lenders want to see a No Further Action Letter (NFA) when dealing with property that has suffered some sort of environmental contamination. An NFA is considered a panacea for all environmental ills on real property.

Lenders demand to see an NFA before they will loan money to any potential purchaser. Real estate brokers will tell you that attempting to sell contaminated property without an NFA will lead to far fewer potential buyers and a greatly reduced price. Many prospective buyers do not want anything to do with a contaminated property without an NFA.

What many banks and real estate brokers do not know, do not realize or choose to ignore is that an NFA may be only a temporary reprieve from additional remediation work at the discretion of Oregon’s Department of Environmental Quality (DEQ) or Washington’s Department of Ecology (DOE). Both may reopen an NFA.

The DEQ is charged with reviewing files every five years. The reasons given for reviews every five years include making sure that the situation is still stable, that there is no new technology that could otherwise detect the previously undetectable, and other similar reasons.

The DOE also has stringent standards. In one particular case an NFA was not granted by the DOE because, even though no further environmental hazards could be detected, it wanted to wait until better detection techniques were developed in the future.

While lenders and brokers may want an NFA, that’s not where the story ends. It is very much up to the buyer of a formerly contaminated property to make sure that future uses are disclosed and discussed, because real danger may exist in a change of use. NFA or not, the due diligence process is extremely important in saving a prospective purchaser from the many problems that lurk on a previously contaminated property.

If a property’s planned use is similar to its previous uses or even less intense in nature, then the purchaser should be just fine with the NFA. However, if the planned use is significantly different than the most recent use, the purchaser can inadvertently enter into a real quagmire if the due diligence process is glossed over.

A significant change of use will cause both state agencies to re-examine their previous NFA determination to see if further investigation may be needed. The two state agencies may also reopen or revoke an NFA if the NFA had conditions related to the anticipated uses and the proposed use is different altogether.

A simple example of the types of issues that can arise with a change of use includes a commercial office space with a former gas station on the corner. Assuming that the gas tanks leaked and most of the contaminated soil was removed, a seller will likely get an NFA to continue with the commercial building project. But what if the buyer wants to change use from the commercial building into condominiums with an underground garage? Test results needed to get the NFA for the commercial building may not be sufficient for such a change in use. Acceptable levels of contaminants for one use will be different than for another.

It is important for the buyer to get a copy of the NFA file from the respective state agency in order to determine if the NFA will be sufficient for the intended use. The buyer also should employ an environmental consultant to help sort through the issues long before the closing date of any sale and perform an independent Phase I (and possible Phase II) assessment of the property in advance of closing.

Prospective buyers can save money, time and grief by closely examining all environmental concerns with a property, including scrutinizing any NFA – and they should be ready to walk away if they are not satisfied with what they find, instead of paying minimal attention to the potential environmental issues before them.

Scott Anders is an attorney and shareholder in Jordan Ramis PC. He has been practicing law for more than two decades, and now focuses on land use, real estate and business matters. Contact him at 360-567-3904 or scott.anders@jordanramis.com.

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Battling NIMBY (Not in My Back Yard) and the agents of CAVE (Citizens Against Virtually Everything) can appear a daunting task more suited to comic book heroes than developers. But taking on these forces ahead of a project can reap rewards for those who know how to present their development well.

How does one work with NIMBY or an agent of CAVE? It depends on the proposed project. If you propose to build a new airport, prison or nuclear power plant, there’s probably not much you can do, except brace for the onslaught and gather the favorable evidence for your project. But if your project is a bit more routine, approaching opposing parties early on in the process will often reap rewards for all involved.

Let’s say, for example, that a new neighborhood is your goal and that it is near already-existing neighborhoods. Then approaching the potential neighbors may prove to be beneficial. In exchange for working with the neighbors to mitigate certain impacts or present a buffer that exceeds the bare minimum required by code, the developer may be pleasantly surprised to find less resistance than anticipated. Working with the neighbors may ultimately save a developer legal fees and time in navigating the approval process.

Take a look at what your proposed development might have to offer to those impacted by the development. Can your project offer additions to the existing neighborhoods that residents will see as positive benefits? Do you plan to add parks or common areas that the existing neighbors can use? Will there be improved access to thoroughfares or services?

If the project is commercial in nature, then you might want to focus on mitigation measures that reduce noise, light and litter. Other factors to consider are the traffic impacts, circulation and power and sewer improvements that may be beneficial to the area.

No matter how proactive a developer may be, almost all projects will have relentless NIMBYs and CAVEs who will not quit, regardless of whether their basis for the resistance is rational. Significantly reducing the number of detractors is the goal.

In one such effort to work with NIMBYs and CAVEs, a developer approached the surrounding business neighbors before a development application was submitted to the government. A first meeting brought substantial interest and input from those concerned over any additional development. Once the developer explained that it was trying to be a good neighbor, had a right to develop the property, and wanted to make a good project for all parties, most of the neighbors in attendance engaged in helpful discussion.

The developer was able to point out some things that might work and the reasons that other things would not work. By the time the development came up for a hearing only three neighbors spoke against the project, while other neighbors testified that the developer had worked with them to develop a good project.

Approaching NIMBYs and CAVEs early enough in a project for them to feel that they have had an opportunity for significant input may be the best avenue. Opposing parties may not ultimately agree with the project, but if their useful input is incorporated into the development, the developer may very well find an easier path to success when it comes time for the hearing, with far fewer NIMBY and CAVE agents protesting.

Scott A. Anders is an attorney and shareholder in Jordan Ramis PC.  He focuses his practice on real estate, land use, and business matters. Contact him at 360-567-3904 or scott.anders@jordanramis.com.

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Among the many important decisions from the most recent U.S. Supreme Court session was the latest statement on governmental takings in land and development.

With this recent ruling in Koontz v. St. Johns River Water Management District, landowners now hold additional leverage in fighting unreasonable development requirements – especially off-site development or payment in lieu of property dedication. Additionally, the decision means that governments need to be cautious about the off-site improvements they seek as a condition of land use decisions.

In Koontz v. St. Johns, the landowner, who had property near Orlando, Fla., sought to build on approximately three acres of a 14-acre parcel comprised mostly of wetlands. The wetlands that comprised the building site had been degraded by neighboring commercial developments.

As part of the development, the landowner proposed providing the government with the use and preservation of the remaining 11 acres through a conservation easement. The district imposed additional conditions of approval that are the subject of this case.

The Supreme Court ruled that the landowner’s rights were violated by a land use condition of approval requiring mitigation projects on government-owned land several miles from the landowner’s property. The Supreme Court also ruled that requiring a monetary payment for off-site improvements must meet the test of having the “essential nexus” and “rough proportionality” to the impacts of the proposed development as set out in the Nollan and Dolan cases of 1987 and 1994, respectively.

Nollan v. California Coastal Commission established the “essential nexus test.” In this case, the Nollans applied for a permit to replace their beachfront house with a larger home. The Coastal Commission approved their permit, with a condition of approval requiring dedication of an access easement across the beach frontage of the property.

The court said that requiring such an easement was a “physical invasion” of the property and that requiring the easement as a condition of approval was a taking under the Fifth Amendment. The requirement of the easement across the beachfront of the property did not have the “essential nexus” to the Coastal Commission’s stated purpose, which was to mitigate the negative impact of the larger house on the view of the beach from the street.

In Dolan v. City of Tigard, argued at the Supreme Court by Jordan Ramis PC attorney Tim Ramis, the “rough proportionality test” was established. The city of Tigard required a bicycle path and greenway as conditions of approval to expand the Dolans’ hardware store.

The court found no sufficient demonstration that the bike path or the greenway were related to the impacts caused by the expansion of the hardware store and that the city had not sufficiently shown that a bike path would mitigate the increased traffic as a result of expanding the store.

The court said, “We think a term such as “rough proportionality” best encapsulates what we hold to be the requirement of the Fifth Amendment. No precise mathematical calculation is required, but the city must make some sort of individualized determination that the required dedication is related both in nature and extent to the impact of the proposed development.”

The court stated that the government had the burden of demonstrating “rough proportionality.”

While concerns had been expressed that the rulings of Nollan and Dolan had been curtailed, it appears that the Supreme Court is actually strengthening the need for governments to demonstrate an essential nexus and rough proportionality between the impacts of a development and the exactions that governments require to mitigate those impacts.

The recent Koontz v. St. Johns case also strengthened the unconstitutional conditions doctrine, which says that if a government requires funding of an off-site project that does not meet the Nollan and Dolan tests of nexus and rough proportionality, then the government will pay for its improper exactions.

Scott Anders is an attorney and shareholder in Jordan Ramis PC. He is a former civil prosecutor and former district court judge in Clark County (Washington). He focuses his practice on land use, real estate and business matters. Contact him at 360-567-3904 or at scott.anders@jordanramis.com.

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