I.Commercial Real Estate Development Cycle
A.Start with Vision – What are your goals?
B.First Phase
C.Second Phase
II.Contract for Sale of Real Estate
A.Generally
B.Role of Real Estate Broker p. 19
C.Role of Real Estate Attorney pp – 1-10, 27-41
1.Baldasarre v. Butler – pp. 35 - Dual Representation
2.Contract Phase
3.Executory Phase
4.Recission - Breach in K
5.Contingencies & Conditions Precedent – p. 31
D.Marketable Title p. 42
1.Van Vliet & Place, Inc. v. Gaines – pp. 43
2.HYPO
3.McMaster v. Strickland – pp. 45
E.Insurable Title
F.Deeds and Convenants
1.Deed Overview
2.Types of Deeds
G.Default Remedies
1.Maxton Builders v. Lo Galbo – pp. 53
2.Liquidated Damages.
3.Lefemine v Baron – pp. 57
III.Title and Title Insurance (p. 61)
A.Title – General Overview
B.Insurable Title
C.Title Insurance
1.Definition
2.Who Must Purchase Title Insurance
3.Insurance Premiums
4.Exclusions from Coverage – p. 64
5.Schedule A and B p. 66
D.Title Insurance Conditions and Stipulations p. 69
1.Continuation of Insurance after Conveyance
2.Limits of Coverage
3.Defense
4.Notice
E.Closing the Sale Transaction - p. 72
IV.Mortgages and Mortgage Substitutes (i.e., i can’t believe it’s not a mortgage)
A.Overview of Mortgage Law
1.The Mortgage - Overview
2.Non-recourse Loan
3.Recourse Loan
4.SPE – Single Purpose Entity –
5.The Promissory Note (aka mortgage note)
B.The Mortgage as Security for the Mortgager’s Performance of an Obligation
1.Jeffrey Towers, Inc.
C.The Mortgage (Promissory) Note as the Underlying Obligation
1.Emporia State Bank v. Mounkes
2.Dragnet clause (Anaconda Clause) – FUTURE ADVANCES – p. 93
3.After Acquired Property p. 93
D.Personal Liability of the Mortgager
1.Bedian v. Cohn (1956)
2.Non-recourse Loan
3.Recourse Loan
E.Equitable Mortgages p. 97
1.Definition
2.Absolute Deed p. 98
3.Negative Lien p. 99
4.Vendor/Vendee Lien p. 99
F.The Deed of Trust as a mortgage Substitute p. 100
1.Deed of Trust
2.Difference between Deed of Trust and Standard Mortgage
G.The Installment Land Contract as an alternate to a Mortgage p. 104
H.Priority of Interests/Encumbrances p. 108
1)Overview of Priority of Interests
2)Recording Jurisdictions (from Property Outline)
3)4 Major Interests in order of Priority:
4)Subordination and Non-disturbance Agreements – p. 111
5)Direct v. Indirect Encumbrances – p. 113
V.Preclosing Terms and Conditions of the Mortgage Loan Commitment
A.Commercial Lending Cycle
1.Commitment Obtained from the Post Construction Lender
2.Commitment Obtained from the Construction lender (induced by #1)
3.Buy-Sell Agreement among developer, post construction lender, and the construction lender
4.Construction loan closes and disbursements authorized
5.Construction Funded by disbursements pursuant to construction loan agreement
6.Post construction loan closed when commitment conditions are met
B.Prefinancing Considerations
1.PostConstruction Financing – p. 117
2.Takeout Commitment
3.Buy-Sell Agreement
C.Commitment Letter
1.Teachers Insurance v. Butler- Commitment Letter is a binding K - p. 124
D.Breach of Commitment by Borrower
1.Commitment Letter is a binding K
2.Lincoln National Life Insurance v NCR Corp. pp. 135
3.Woodbrigde p. 139
4.Liquidated damages
5.Force Majeure p. 147
E.Breach of Commitment by Lender
1.Pipkin v. Thomas p. 148
F.Preclosing Commitment Terms and Conditions
1.The loan amount as a Percentage of Appraised Value
2.The Permanent Commitment/Financing - DOCUMENTATION
3.The Gap Financing Problem
4.What If The Construction Loan Exceeds The Permanent Loan?
5.Holdback
6.BUY-SELL
G.PROFESSIONAL RESPONSIBILITY ISSUES FOR THE LAWYER
1.During Closing
2.Loan Opinion Letters
VI.PostClosing Terms of Mortgage Financing
A.The Rate of Interest
1.Joint Venture p. 222
2.Convertible Mortgage
3.Participating Mortgage p. 218
4.Shared Appreciation Mortgage:
5.Asset Backed
6.Negative Leverage
7.Usury p. 223
8.Wraparound Financing p. 225
9.Late payment charges and default interest:
10.Variable Mortgage Rate:
11.Bullet Loans:
12.Mini-perms and Bowtie Loans:
B.The Amortization Period
1.Amortization p. 229
2.Balloon Payment p. 232
3.Call Provisions and Partial Amortization
C.Non-Recourse Loan Carve Outs
1.Exculpation Clauses – p. 234
2.Examples of Exculpation Clauses:
D.The Prepayment Privilege
1.Prepayment Penalty
2."Lock-In" period
3.Lazzareschi Investment Co. v. San Francisco Fed S & L Assoc. (1971)
4.Notes and Questions
E.Payment of Taxes and Insurance: Escrows
1.Escrow
2.Notes and Questions
F.Satisfactory Hazard Insurance
1.Overview
2.Savarese v. Ohio Farmers Insurance Co. (1932)
3.Notes and Questions
G.The Prohibition of Junior Financing
1.Due-On-Encumbrance Clause
2.Wraparound Mortgage:
3.La Sala v. American Savings & Loan Association (1971)
4.Notes and Questions
H.The Right to Sell Mortgaged Property
1.Due-On-Sale Clause p. 264
2.Notes and Questions
VII.Construction Financing -
A.The Role Of Construction Financing In The Commercial Lending Cycle
1.THE CONSTRUCTION LENDER (CL):
2.THE POSTCONSTRUCTION LENDER (PCL):
3.FLOOR LOAN
4.GAP MORTGAGES
B.Terms and Conditions of Construction Financing
1.Loan Amount, Interest Rate, and Other Payment Terms
2.Mechanics Lien
3.Liens, and Optional-Obligatory Doctrine, and Waiver of Defaults p. 284
4.LIEN WAIVER and PAYMENT BONDS - Additional protections for CL
5.Equitable Liens
6.Assurance of Completion
7.Building Loan Agreement
VIII.Workouts
A.Working Out Defaults By Agreement
1.Workout Agreement
2.Questions Raised By Default
3.A Restructuring Work Out
4.A Deed-In-Lieu Work Out
B.Rights And Duties Of The Parties Prior To Foreclosure
1.Mortgagee’s Right To Accelerate The Indebtedness
2.The Mortgagee’s Right To Possession
3.The Mortgagee’s Right To Appointment Of Receiver
4.Assignment Of Leases And Rents
C.Methods of Foreclosure
1.Most Common: Judicial Foreclosure
2.Steps “Must Be Taken” To Judicial Foreclosure:
3.Non-Judicial Foreclosure: Power of Sale (Trustee's Sale)
4.Lender foreclosure is subject to Mortgage, Taxes and municipal charges.
5.Judicial Foreclosure - Junior Interests
D.Foreclosure - Protection Of The Borrower
1.Antideficiency Judgment Statutes
2.The One-form of Action Rule “Mostly California”
3.Sales Confrimation, Upset Prices, Unconcinalble Prices
4.RIGHTS OF REDEMPTION
5.Constitutional Attacks On Power Of Sale Foreclosures
6.Enforcability Of Forfeiture Provisions In Installment Land Contracts
IX.Commercial Leasing Transactions (Chapter 10, p. 485)
A.General Info:
B.Types of Leases:
1.Gross Lease
2.Retail Lease (NET LEASE)
3.Industrial Leases
4.Percentage Rent:
5.Covenant of Continuous Operation:
6.Restrictive Covenants
7.Assignments and Sublets p. 501
8.Repairs and Compliance with Law p. 512
X.Tax Shelters and Tax Considerations (p. 635)
A.General Tax Info
1.Tax Calculations
2.Tax Definitions
B.Tax Shelter – Real Estate as a limited Tax shelter
1.The Crane Doctrine - Recapture of Imputed Income
2.The Depreciation Deduction - Recapture of Depreciation
XI.Selection of Ownership Entity (p. 697)
A.Consideration in Selecting the Ownership Entity
B.Tenant in Common
C.General Partnership (Partnership Agreement):
D.Limited Partnership (Limited Partnership Agreement):
E.C Corporations (By-laws)
F.S Corporations (By-laws)
G.LLCs (operating agreement)
H.Comparison of real estate ownership structures ( pg 712, table 14-1)
1.Name of owner
2.Limited liability
3.Participation in management
4.Transferability of interests
5.Levels of federal income tax status
6.Special allocations of income and loss
I.PROBLEM
1.Define the Relationships First?
2.So, how do I select the entities now? Looks like 2 ways we can go??
XII.Securitization (p. 715)
A.Securitization on the Equity Side of Commercial RE Investments
1.REIT: Real Estate Investment Trust
B.CMBS NOT ON EXAM – section deleted
I.Commercial Real Estate Development Cycle
A.Start with Vision – What are your goals?
Land use – Develop land yourself
- Cash Flow Stream – Rent Role
Option Contract - Obtain option to purchase the property at a fixed price at a future time
If NOT income producing, NOT commercial real estate
B.First Phase
Contract
Permanent Mortgage
- First thing developer does is get this
- Need this to be able to get a construction mortgage
- Mortgage financing in place for Holding Period
- More focused on Net Operating Income of project
Construction Mortgage
- Want to make sure there is a cash source to take them out (permanent mortgage)
- Short term loan…Commercial bank
Construction
C.Second Phase
Take Out (Buy/Sale Document)
Project Management (leasing/upkeep)
Disposition
II.Contract for Sale of Real Estate
A.Generally
1.Writing Required.
2.Executory: Signing of binding K (earnest money) does not end ambivalence.
3.Contingencies & Conditions Precedent remain
- Financing
- Inspection
- Clean title to be transferred
- Title insurance.
4.Property Description
1)Reasonable particularity sufficient. No set form.
2)RuralLand: metes & bounds or JeffersonTownship system.
3)UrbanLand: usually refer by lot #. Already surveyed, defined & recorded w/county.
B.Role of Real Estate Broker p. 19
Broker – Recovery of Fee
- Most jurisdictions, writing for hiring of broker is NOT necessary for broker to recover Fee from the Seller and the RE Transaction does NOT need to be consummated
- Broker earns commission when he produces a READY, ABLE, WILLING customer on the terms given to him by the Seller
Minority of Jurisdictions, Broker can recover fee from purchaser if buyer rejects the deal capriciously and title does not close.
Exclusive Arrangements
- Extension Period - Brokers reserves right to a commission fro a deal originating from the broker’s efforts during the exclusive period but consummated after the period expires.
C.Role of Real Estate Attorney pp – 1-10, 27-41
Real Estate Attorney is now looked at as a Business Advisor.
1.Baldasarre v. Butler – pp. 35 - Dual Representation
- Attorney represented both Buyer and Seller and the Buyer again on his flip of the property.
- Prof: Don’t do it. Stay out of such a situation.
2.Contract Phase
Statute of Fraud requires Contracts to be in writing
- Risks of Preprinted forms – Two Pitfalls
- Forms can suppress thought – i.e., because a pre-printed form says the seller will pay for title insurance (which is usually the case), there is no reason why you couldn’t try to shift the cost to the buyer during negotiations.
- Allocation of Risk may not be in your client’s best interest
K must state the name of each party
K must state the Purchase price
K must contain the legal description of the property
- Preferably Lot and Block
- Sometimes postal address
3.Executory Phase
After contract signed but Prior to Closing
After Purchaser signs contract, he obtains Executory Interest in property even before property closes. (SEE RISK OF LOSS CONTINGENCY BELOW)
- If contract is silent on this issue, and there is a purchase (contemplated or proposed), and building catches on fire…buyer bares risk of loss.
- Through Executory phase, purchaser is responsible UNLESS addressed in contract
-If not stipulated, Attorney probably has committed malpractice.
4.Recission - Breach in K
Seller may keep a portion of deposit
Buyer entitled to Specific Performance
5.Contingencies & Conditions Precedent – p. 31
- Financing Contingency
- Buyer’s attorney should include a contingency clause for financing the purchase price or may risk losing the earnest money deposit.
- Development Approval Contingency
- Zoning Contingency
- Question becomes – how long is this process going to take?
-what if contingency asks for 9 months - what effect does that have
- time value of money
- property value may change
- interest rate may change
- Shifts Development Approval to seller
- Seller should be getting paid for excess of time over reasonable industry standard time.
- Contingency becomes an Option…allocated all or part of risk to seller so should get paid for it.
- Risk of Loss Contingency
- Commercial, Majority rule places onus on buyer for the risk of any casualty or condemnation loss before the closing date
- by reason of the doctrine of equitable conversion unless the parties agree otherwise.
- MOST CONTRACTS WILL, and MUST, EXPLICITY SHIFT THIS BURDEN TO THE SELLER.
- Residential, Seller usually bares the Risk of Loss
- Right of Inspection Contingency
- Clean title to be transferred at COE
- Title insurance.
- Time of the essence
- Closing is targeted date
- Need to go through local administrative hurdles before becoming TofE contingency but closing is generally the target date.
D.Marketable Title p. 42
A title to real estate that is free and clear of liens or other title defects; a title that enables an owner to sell the property freely to others and which others will accept without objection (i.e., free from law suit)….HARD STANDARD TO UPHOLD…see Long’s Definition in next bullet
Marketable Title, although free from “clouds,” is not free from any law suit.
- Prof Long’s revised definition as follows:
- Real issue is that on a reasonable basis does it give you a clear assessment of all of the rights associated with that property interestand with that assessment, can you transfer that property.
- At the end of the day, you end up with Insurable Title.
- There is not much of a distinction b/n Marketable Title or Insurable Title.
- If you cannot ascertain the Bundle of Rights, then you can’t sell it and simultaneously, no one will Insure it.
To the extent you have Marketable Title you have a General Warranty Deed.
1.Van Vliet & Place, Inc. v. Gaines – pp. 43
- FSA = FSD + Possibility of Reverter
- The POR contained in the Covenant renders the title unmarketable
- Reasonable doubt exists and is sufficient to justify rejection of the title by the buyer
- property was granted with a Fee Simple Determinable – if the Grantee permitted a cemetery, slaughter house, etc to operate on the property, the rights would revert back to the Grantor.
- The issue is: Is Fee Simple Determinable – Marketable Title?
- No. In order to convey and record Marketable Title, it must be a Fee Simple Absolute.
- You can’t give what you don’t have.
- If you have a Fee Simple Determinable, you would need to purchase and combine the Possibility of Reverter in order to have Fee Simple Absolute.
2.HYPO
- A – Original Grantor
- B – Subsequent Grantor (Purchased Fee Simple Determinable but was able to receive Title Insurance)
- C – Purchaser
- C’s title insurer will rely on B’s Title Insurance and C’s Insurer will cover the risk for the appreciation in property value.
3.McMaster v. Strickland – pp. 45
- Purchaser signed a K that was situated on “wetlands,” which are protected.
- However, the purchaser had bought Marketable Title, although the Property wasn’t Marketable.
- Marketable Title does is not effected by the functionality of the property.
- You can obtain Marketable Title with the property itself being unmarketable
- Should have had a contingency for use…”If necessary permits are obtained...etc”
E.Insurable Title
Title to property that a company agrees to insure against defects and disputes.
Simply because title is Insurable, the title does not automatically Marketable.
- If Title is Marketable, then it is definitely Insurable.
If you cannot ascertain or convey all of the Bundle of Rights, then the Title is not Marketable, but if an Insurer is willing to Indemnify the Title, it can be Marketable….SEEMS TO CONFLICT WITH LAST BULLET
F.Deeds and Convenants
1.Deed Overview
- evidence of the holder of the property rights.
- The legal document that transfers ownership of a piece of property.
- Conveys Marketable Title
- Must contain
-Name of Grantor
-Name of Grantee
-Legal Discription of property
-Must by executed by Grantor or Grantor’s appropriate executor
2.Types of Deeds
- General Warranty Deed
Provides Maximum Protection to the grantee since it contains all standard English Covenants
3 SEC Covenants (Seisin, Encumbrances, Conveyences)
- The SEC covenants survive the closing. These covenants allow the insurer of a subsequent purchaser who obtains title insurance, to rely on the seller’s title insurance.
- Present Covenants: Can be breached only at moment of conveyance
- Damages if defect in title – No limitation on damages to the seller depending on Jurisdiction.
- Covenant of Seisin
- An agreement, contract, or promise that the grantor possesses a quantity and quality of land described in the deed or other conveyance.
- Present covenant – does not run with land (except in NY). Can be breached only at moment of conveyance
- Covenant against Encumbrances
- An agreement, contract, or promise that there are no encumbrances against the land described in the deed or conveyance.
- An encumbrance is a claim by another person against the land.
-One example of an encumbrance is a mortgage or other lien against the real estate.
- Present covenant – does not run with land (except in NY). Can be breached only at moment of conveyance
- Covenant of Conveyances (right to convey)
- An agreement, contract or promise that the grantor has a right to transfer title to the land
3 FUTURE Covenants specified on p. 49 ….ALSO SURVIVE THE CLOSING BASED ON CASE BOOK
- Covenant of Quiet Enjoyment: Implies duty to defend title.
-An agreement, contract or promise that the grantee to a deed or other conveyance will have the land in peace and without disturbance from other persons with hostile claims to the land
-Rule: Breach requires a union of acts of disturbance and lawful title.
- Constructive Eviction: court decree or threat of litigation.
- Covenant of Further Assurances:
-The grantor promises to do whatever acts are within its power to perfect the title of the grantee
-residual promise to provide documents to clear title in event of error.
- Covenant of Warranty
-(same as covenant of quiet enjoyment)
- Grantors Deeds
- states grantor took no action to diminish the state of ? under their ownership
- none of the above warranty deed covenants included
- Bargain and Sale Deeds
- could be combined with Grantors Deed
- Many residential deeds is a B&S deed against Grantor’s Acts
- B&S deed doesn’t contain any of the Warranty Deeds
- Quit Claim Deed
- Lowest form of deed
- Grantee just grants whatever they have
- How different from B&S deed (not much different)
-Transfer risk
G.Default Remedies
1.Maxton Builders v. Lo Galbo – pp. 53
Clause in K stated that if RE Taxes were in excess of $3,500, upon due notice, K to purchase house can be repudiated.
π argued that proper notice of repudiation was not provided.
The Court found that if there was a disagreement in the K, this should have been negotiated “at the bargaining table.”
2.Liquidated Damages.
Liquidated Damages in RE Ks are commonly stipulated.
Generally, the clause states that if there is a breach by the buyer then the deposited is forfeited, or, the buyer is responsible for all actual damages.
Today, in a Residential Transaction, if the K is silent, generally, seller will be restricted to Actual Damages (not liquidated damages).
3.Lefemine v Baron – pp. 57
Liquidated Damages clause in this K gave the seller the option to Choose either Liquidated Damages or Actual Damages, giving him the ability to choose the higher of the two.
This Clause was stricken, possibly b/c it was a residential sale and the parties transacting may not be sophisticated buyers.
III.Title and Title Insurance (p. 61)
A.Title – General Overview
Title – abstract representation of the bundle of rights.