BREAKING NEWS: Arizona’s Newly Expanded Anti Deficiency Protection

BREAKING NEWS: Arizona’s Newly Expanded Anti Deficiency Protection

 In a move sure to cause shockwaves in the Arizona mortgage lending community, the Arizona Court of Appeals expanded Arizona Anti Deficiency Protection (under A.R.S. §33-814(G)) to protect borrowers whose property is foreclosed upon even while it is still under construction, so long as they intended to occupy the home upon completion.

Many lenders are concerned, as the decision, released on December 27, 2011, could not have been anticipate by a plain reading of A.R.S.  § 33-814(G), which provides:

If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses. (Emphasis added)

The changes bring much needed relief for some concerned borrowers. But give pause to local hard money and construction lenders, specifically those focused on the homebuilding community, which have been acting in reliance on the former meaning of the statute.

In the recent test case, the Muellers bought a parcel of vacant land with a loan from M&I Bank secured by a deed of trust to construct a single-family home on the property for their personal use.  Sometime later the Muellers abandoned the property and defaulted on the loan after they had discovered much of the construction was defective, that the contractor was behind schedule and were denied additional loan disbursements by M&I to remedy the defects.  M&I instituted a trustee’s foreclosure sale of the Property and then later filed an action against the Muellers seeking to recover a deficiency judgment arguing that they the anti-deficiency statute does not apply because construction on the home was never finished and the property was never “utilized” as a single-family home.  The trial court dismissed M&I’s claim and ruled that the borrowers were entitled to protection as a matter of law.

The Arizona Court of Appeals distinguished this case from the prior precedent in Mid Kansas Federal Savings & Loan v. Dynamic Development Corporation), which case involved a corporate homebuilder that would never have utilized (live in) the properties as a single-family home, even if they were completed.  In Muller, the Court expanded the definition of “utilized for” a single-family dwelling to include the fact that the borrower intended to live in the home upon its completion. In expanding the breadth of protection, the Court reaffirmed that the primary purpose of the Arizona anti-deficiency statutes is to protect “homeowners” from deficiency judgments — not to afford protection to commercial homebuilders.”

For more information please call (480) 889-8948, send an email to info@steinlawplc.com or visit www.SteinLawPLC.com.

Only You: Making the most of your Assignment provision

“Only You”

(Making the most of your Assignment provision)

           Commercial real estate purchase agreements typically contain provisions regarding the assignment of the agreement prior to the closing. It’s no surprise that sellers want to know who they are dealing with and dislike agreements that are freely assignable and allow a buyer to flip the contract to another buyer. As such, real estate purchase agreements commonly provide that the contract is not assignable or only assignable with the seller’s consent. Unfortunately, inattention to a contract’s particular requirements can mean trouble for a potential buyer needing to change the initially named buyer.

Below are some issues to consider in connection with any assignment provision:

         Affiliate.  Buyers should always insist on the right to be able to assign the agreement to an “affiliate.” After all, a named party may decide to form a new entity, such as a limited liability company or other form of entity to own the property. While discussions can arise defining “affiliate,” requesting the right to assign to affiliates is a common and reasonable request, and often a legal necessity.

         Release. Buyers will want the originally named buyer to be released following an assignment. Concerns can arise when the new named buyer is a recently formed company with no assets, Seller will want the originally named buyer would to continue to be responsible for all obligations under the agreement. Sellers often do not want to allow for a release as it is easier to hold all parties liable for the pre and post closing obligations, than it is to engage in an evaluation of the creditworthiness of the new party. This issue is often intertwined with what rights and remedies available to the seller in the event buyer fails to close.

Closing Logistics. Even where agreements are fully assignable by a buyer, both the seller and the title/escrow company involved in the transaction will want to know the name of the assignee party. This information needs to be made available far enough in advance of closing to ensure that the Deed, Title Insurance Policy and other closing documents reflect the correct name and satisfy any requirements the either may have in connection with the new party’s formation or authority.

         Seller’s Rights. Buyers should be wary of terms that allow a seller to assign an agreement and generally reject such language as it frustrates the purpose of the purchase agreement, as well as undermining the title review and control over due diligence.

We help commercial real estate purchasers and investors structure their acquisition and review and negotiate all forms of purchase and sale agreements.

For more information please call (480) 889-8948, send an email to  info@steinlawplc.com or visit www.SteinLawPLC.com.

KEEPING YOUR NON-RECOURSE LOANS NON-RECOURSE

Keeping Your Non-Recourse Loans Non-Recourse

 

The good news is that even in today’s tough credit markets, non-recourse loans are generally available. The bad news is that lenders have been expanding the “carve-outs” to non-recourse protection – eroding the benefit of the bargain that Borrowers and Guarantors thought they made. Unfortunately, it is very easy for these changes to go unnoticed, but a closer look is necessary to ensure Guarantors aren’t met with an unhappy surprise, simply because a property failed to perform as projected and the non-recourse loan they thought they had, was not non-recourse.

 

Non-recourse Guarantees or “Bad Boy” Guarantees are exactly that – Guarantees where the Guarantor will only incur liability if the Borrower or Guarantor has taken certain specific acts, usually prohibit under the law or loan documents. Carveouts to this non-course protection should generally be limited to (i) fraud, (ii) voluntary bankruptcy, and (iii) theft of rents, each of which, to one degree or another, could have been avoided by the Guarantor, generally without outside factors coming into play. Not surprisingly, borrowers will want their non-recourse carveouts drafted very narrowly, as precise wording is essential to know whether the loan is truly non-recourse. More and more, however, there are loans are being “sold” as non-recourse, which contain broad and even ambiguous carveouts that could either intentionally or unintentionally subject a Guarantor to personal liability even without doing anything “wrong.”

 

The following are some troubling terms, which have made their way into some lenders’ non-recourse guarantees, which may subject to a borrower to unknowing liability:

• “Any failure to pay real estate taxes, insurance premiums, or charges for labor or materials or any and all other charges which may create liens on the Property.” A borrower can only pay such amounts to the extent there is income generated by the property to do so. Creating obligations to pay such amounts absent such rental income is antithetical to a non-recourse loan. Even “waste”, typically viewed as a terrible sin among real estate owners, can only be avoid if there is money to pay for maintenance and repairs.

• “The borrower must not commit a default under any lease of all or any portion of the Property.” While lenders do have a fair concern if their borrowers are breaching their commercial leases, this is not the kind of loan default that should trigger personal liability. After all, there could be a number of reasons why a lease is breached (or alleged to be breached) by a borrower/landlord) which could arise in the borrower’s reasonable business judgment.

• “The borrower must remain solvent.” Including a solvency requirement negates the entire benefit of a non-recourse loan, which would otherwise allow a borrower to walk away from the property if the property is no longer profitable.

• “Any attempt by Borrower to delay or enjoin of any remedies provided to Lender under the Loan Documents, raise defenses or counterclaims in connection with any such enforcement action, or otherwise object to any actions taken by Lender to exercise any remedies under the Loan Documents”. It is unfair for a borrower to open itself up for personal liability simply by challenging a lender that it believes is acting without just cause.

Lastly, Borrowers should be wary of word games. Lenders may substitute one appropriate carveout, with another similar sounding, but very different one. For example, a Borrower or Guarantor may not deserve protection in the case of “misappropriation” of rents or funds. Misappropriate is defined as “the intentional, illegal use of the property or funds of another person for one’s own use or other unauthorized purpose.” However, Lenders frequently replace this sinister act with “misapplication”. A benign act, where because of a shortage of funds a Borrower may have to choose between paying the electric bill and the insurance bill. Even if the loan documents suggest a priority among payments, liability under a non-recourse guaranty should not be triggered if funds are used for a legitimate property related purpose.
Commercial real estate borrowers have the most leverage in negotiating their non-recourse terms early on in the loan process, at the time when the commitment is being prepared and approved and should use that time wisely to have their terms reviewed and negotiated to ensure that the terms are fair and understood. After all, a loan is not truly non-recourse, if the borrower has potential liability even when it has not been behaving badly.

For more information please call (480) 889-8948, send an email to info@steinlawplc.com or visit www.SteinLawPLC.com.

For Your Consideration

For Your Consideration

           Buyers and sellers of commercial real estate assume that their contracts mean what they say.  However, because of recent judicial activism and uncertain future decisions, that may not be the case; and without some new language in your purchase agreement – sellers may be able to break the real estate contract and walk away without consequence (keep reading – we provide suggested language below).

At issue is whether a buyer’s refundable “free look” earnest money deposit is sufficient (as “legal consideration”) to bind Sellers.  In order to protect yourself, we advise including a buyer’s “independent consideration” for entering into the contract to ensure the enforceability of the agreement and not inadvertently providing a seller with its own right to terminate the agreement.

This issue came to a head in the California Court of Appeals case Steiner v. Thexton (163 Cal. App. 4th 359), where the court ruled that a “free-look” purchase agreement was no more than an “option agreement” that the seller could rescind due to a lack of consideration. Notwithstanding that the lower Steiner ruling was overruled by the California Supreme Court last year, the Supreme Court’s own ruling held that the agreement in question was in fact an “option” but nevertheless enforceable because the buyer had taken specific entitlement steps to create sufficient legal consideration to make the contract binding.

The ruling has nevertheless led many buyers to require the insertion of an independent contract consideration clause into their purchase agreements to ensure that adequate legal consideration is given in all circumstances so that it will not be left with an unenforceable option agreement.

The following is an example of a sample independent contract consideration clause:

Independent Consideration. Simultaneously with the delivery of the Earnest Money by the Buyer, Buyer shall pay to Seller an amount equal to One Hundred and No/100 Dollars ($100.00)  as independent consideration for Seller’s performance under this Agreement (“Independent Consideration”), which amount the Parties bargained for and agreed to as consideration for Seller’s execution, delivery and performance of this Agreement and shall be retained by Seller in all instances, and shall not be applied against the Purchase Price.

We help real estate investors and developers understand unfolding areas of law and assist in all phases of commercial real estate transactions, including the drafting and negotiation of enforceable purchase agreements, financings, development, leasing and operations.

For more information please call (480) 889-8948, send an email to info@steinlawplc.com or visit www.SteinLawPLC.com.

Surveying the Unknown

Surveying the Unknown

With many commercial real estate buyers using cash, rather than traditional loans to acquire distressed and opportunistic assets, it is no wonder that extra costs for items that were previously “lender requirements” are being trimmed from acquisition budgets. One such expense being cut is the cost of a current ALTA/ACSM survey. There are good reasons why lenders require a current survey for every transaction and, while skipping a new survey can save several thousands of dollars now, there are certainly potential drawbacks that every buyer must consider:

• Boundary Lines and Existing Encroachments: Without a survey, a purchaser cannot fully analyze the current status of the property, identify access, easements, setbacks, improvement locations, parking and verify the accuracy of a metes and bounds legal description. Sadly, boundary and encroachment disputes are a fact of life and these are not issues you can see with a casual walk of the property. In this case, what you can’t see can still hurt you and only a current survey can help you hedge against the costly downside risk of such disputes.

• Title Insurance: We recommend obtaining an ALTA 2006 Owner’s Extended Coverage title insurance policy rather than obtaining standard coverage. Unfortunately, often times, a title company may require an updated survey in order to provide such extended coverage. Even in those cases when a title company will provide Extended Coverage without a current survey, the issued policy will have a coverage exception for any “facts, rights, interests or claims which would be disclosed by a correct ALTA/ACSM survey.” Given this exception, it goes without saying that in the event of an actual title claim arising from an existing easement or encroachment, your policy will have a pretty wide gap in coverage if all the title company needs to argue to deny coverage is that the defect in question would have been disclosed by a current survey.

• Unplotted Easements: All properties are subject to certain title exceptions that should be reviewed during a buyer’s due diligence period. Not only is it critical to see the clearly defined encumbrances, but the easements that cannot be located can impact the marketability of title, existing use rights and the right to redevelop property in the future. Prior to your acquisition, a buyer can object to an unlocated easement or try and obtain affirmative tile insurance coverage, but without a survey, these items will be unknown until there is an issue, in which case you alone will be left to resolve the problem.

For the cost of a survey, a buyer and its investors can rest assured that they are fully apprised of any potential title and survey issues early-on, and make an informed decision to move forward with a full understanding of the property. For these reasons, and many more, we recommend obtaining a current ALTA/ACSM Land Title Survey for your next acquisition.

We assist in all phases of the acquisition of distressed and opportunistic assets to take advantage of today’s market, including due diligence, negotiation and documentation of purchase agreements, financing and development, leasing and operation.

For more information please call (480) 889-8948, send an email to info@steinlawplc.comor visit www.SteinLawPLC.com.

Playing With Fire

Playing With Fire

Our dear friends at regional banks, commercial lenders and life insurance companies are making new commercial real estate loans. In recent months, Stein Law has closed several new financing transactions. But we have also witnessed a more concerning trend – borrowers getting strung along by lenders or brokers only to be left at the altar late in the game when they are told that their deal is not going to be funded.

There is no doubt that the Great Recession and Credit Crunch have impacted underwriting guidelines and that traditional lenders are now utilizing untraditional means to evaluate deals with greater deliberation before pulling the trigger. So what can a borrower do to protect themselves from getting all the way to the closing, only to find out their lender will not fund their loan?

• Risk, But No Reward. The risks to getting to closing without a reliable financing source are substantial. If the financing is to be used to fund an acquisition, a borrower can get a reputation for being unreliable – and not a “closer.” Additionally, if the contingency period under the purchase agreement has expired, a buyer can lose their earnest money deposit. Lastly, some would-be borrowers are left with the feeling that Lenders are simply running-up fees for applications, reports and other due diligence items – without ever having the intention of funding a loan.

• Trust But Verify. Borrowers cannot rely on lenders and mortgage brokers with soft approvals and baseless promises, as they run the risk that their loan will not be approved when it reaches committee. And since financing contingencies are not common in this market, senior bank executive approvals should be obtained early on before going hard with earnest money on the underlying purchase. Borrowers need to ensure that they have adequate time and alternatives should the funds fail to be delivered.

• Paying for Nothing. When signing loan applications and broker commitment agreements, borrowers must take caution in not paying for undeliverable loans and that the fees and deposits being provided are refundable if the lender does close. If fees and deposits are not refundable in their entirety, then make sure that the mechanism and calculation for releasing the remainder is fair and verifiable.

• Commissions Without Closing. Eager and hardworking brokers are caught in the middle between their lenders who profess a desire to lend and their borrowers who are relying on the broker’s ability to deliver funds in exchange for a commission. Many broker agreements require payment following an approved commitment even if the deal does not close. Unfortunately, some deals do not get funded through no fault of the borrower and because of events outside of their control. Borrowers should not be obligated to pay a broker fee unless and until the funding occurs.

In many ways, dealing with lenders to obtain a commercial real estate loan can be like playing with fire. We help borrowers of all sizes to review and negotiate their loan documents and take the necessary steps to ensure that their deals are getting closed, minimize their risk for those that don’t and help them from getting burned.

For more information please call (480) 889-8948, send an email to info@steinlawplc.com or visit www.SteinLawPLC.com

For the Long Haul

For the Long Haul

Time kills deals.  Generally, the longer it takes to get to the goal line, the smaller the chance of actually getting there.  With commercial real estate, this rings true for the spectrum of related transactions from leases to financing to sales.  However, in today’s market there is no escaping the fact that, except for trustee auctions, deals that are getting done are taking a long time to do so.  With extended timeframes, comes the opportunity for some deal point to go awry.   In our role as attorneys, we focus on doing all things necessary to facilitate our client’s goal based on a sound legal framework. 

Now more than ever, to keep deals afloat during extended periods, parties need to focus on:

 

• Moving Targets.  Parties need to stay on top of changes to the underlying assets over the duration of an elongated escrow and digest how such changes may impact a deal’s overall viability or necessitate changes to previously agreed upon business terms or the legal documents effecting the transaction.  In addition, for those fortunate few obtaining financing, drops in occupancy or material adverse changes to a property may cause particular loan requirements to fail over the extended period even before the closing date.

 

• Adapt.  Be flexible to the alternative means of getting to the finish line.  Just because something worked during the boom, does not mean that it will accomplish the same result today.  To that end, existing lease and purchase forms may be out of date and in need of an update, as this market has even dictated changes to “boilerplate” that has come under finer scrutiny as existing (and recently cratered) deals have turned south.  

 

• Critical Dates & Deadlines.  As transactions drag on, often overlooked contract provisions may kick-in.  It only takes one missed point or deadline to lose a deal.  Without the forgiveness of freely given extensions, parties must stay on top of all action items and anticipate the next steps to keep deals going.   

 We help clients of all sizes, and on all sides of these deals, to prepare and negotiate the necessary documents and take the necessary steps to ensure that their deals are getting closed over any length of time. 

 For more information please call (480) 889-8948, send an email to info@steinlawplc.com or visit www.SteinLawPLC.com.

REO Purchases: Not Taking “As-Is” For An Answer

Weighing rockbottom prices against potential risk is always a delicate dance. Purchasers of Real Estate Owned (REO) properties are repeatedly told the deals are “as-is” and that the seller will provide only limited (if any) representations and warranties. REO sellers (typically the lender that foreclosed upon the property) posit that they cannot give extensive information or reps about the underlying real property due to their short length of ownership. Buyer Beware though, does not mean Buyer Be Foolish.

Accordingly, buyers should insist upon the following being included in the REO purchase agreements:

1. Reps and Warranties. Despite any misgivings from the REO seller, at a minimum, buyers should insist upon the following representations and warranties:

i. the seller owns all of the property, has the authority to sell the property, the sale and agreement are enforceable against the seller and will not conflict with other agreements for which the seller is a party;

ii. there is no litigation concerning the property and no written notice of any governmental action;

 iii. the provided due diligence materials that have been created by the seller are true, complete and correct and that the seller has no knowledge of any inaccuracy in all other provided due diligence materials; and

iv. the list of contracts and leases delivered to the buyer are true, correct, and complete.

2. Moving Targets Cannot Be Analyzed. Even in an as-is deal, the seller should have ongoing covenants regarding its operation of the property through and until the closing (i.e., to continue to operate and repair the property in a manner consistent with Seller’s past practices). Otherwise, the buyer is chasing a constantly changing asset and may be forced to repeat some of its own due diligence.

3. Beware of Limited Due Diligence Information. REO sellers will often only provide a “due diligence packet” that may reflect a small fraction of the information the seller has about the property from its involvement as the lender or otherwise. This can be troublesome and frustrating to a buyer that needs to analyze the full universe of all possible issues that may exist with the property, when simple answers regarding issues such as tenant default histories might be sitting in one the lender’s files. Buyers should insist on being able to review any materials not otherwise protected by legal privilege or are proprietary to the lender.

Make YOUR next REO purchase on your terms; not the seller/lender’s. We assist in all phases of the acquisition of distressed and opportunistic assets to take advantage of today’s market, including due diligence, negotiation and documentation of purchase agreements, financing and development, leasing and operation. For more information please call (480) 889-8948, send an email to info@steinlawplc.com or visit www.SteinLawPLC.com

Walk the Walk: Strategically Defaulting Commercial Property Loans

Walk the Walk:

Strategically Defaulting Commercial Property Loans

Last week, the Wall Street Journal reported that some of the country’s largest commercial real estate companies, including Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have intentionally stopped making payments on certain of their mortgage financing.  These “strategic defaults” signal a readiness by cash rich borrowers to walk away from properties on which the debt exceeds the current value of the asset.  Such defaults pressure lenders to either negotiate with borrowers to restructure their debts or to take back the properties and suffer massive write-downs.

There is an obvious gap between what commercial properties are currently worth and the amount of the loans encumbering the assets.  Some estimate that there is $1.4 trillion of commercial-real-estate debt coming due by the end of 2014 and more than half of it is on underwater properties. 

When lenders are either unable or unwilling to restructure property debt, often times, the best business decision may be to give the property back.  Sometimes, it may make sense to walk even if lenders are willing to restructure the debt.  However, each property and loan must be evaluated on a case by case basis with a full understanding of all of the borrower’s legal obligations and potential exposure.

As part of any analysis to walk from a commercial loan, property owners should consider:

• Recourse liability.  The existence (if any) and terms of personal or corporate guaranties. Although many commercial mortgages are “nonrecourse” loans, complex lending transactions are rarely that simple and often times even nonrecourse loans have carve-outs and exceptions that may result in liability for borrowers or their principals.
• Potential Restructuring.  Would it make sense to continue to own the property even if your lender modified or extended the loan terms?  In some cases, properties continue to provide considerable cash flow despite a decline in “value” and careful consideration must be given to the amount of current and potential cash flow for an asset.  What terms would need to be changed in order to make sense to keep the property.
• Investor Obligations.  Do you have investors or an ownership structure that would expose you to liability from shareholders if you were to forfeit the property? Or if you failed to forfeit the property, when forfeiture would be the prudent business decision?
• Lender Relationship.  Even where loans may not be legally cross-collateralized, if a borrower has multiple loans with the same lender, a strategic default on one loan may cause extensive damage to a relationship and make it hard to maintain a working relationship on other “performing” loans.  Likewise, in market with a limited availability of traditional financing, borrowers must take in account whether they will need to come back to this same lender for future financing.

 We assist real estate owners in all aspects of their commercial real estate and have successfully assisted and counseled borrows to work with their lenders to modify their commercial loans and mitigate personal and corporate liability.

Are Your Investors Still “Accredited”?

Are Your Investors Still “Accredited”?

Washington D.C.’s attempt to fix Wall Street may cause some road blocks on Main Street for opportunistic real estate investors seeking to acquire distressed properties and turnaround opportunities and other startups and entrepreneurs raising private capital for other business ventures. While much of the impact of the massive Dodd-Frank Wall Street Reform and Consumer Protection Act (all 2,300 pages of it) is unknown at this time, the Act brings immediate changes to the types of individuals from whom funds can be raised.

Through changes to Regulation D of Rule 501 in the Securities Act of 1933, commonly known as “Reg D”, the Act modifies the definition of an “Accredited Investor” – the individual from whom companies may raise money without first registering with the Securities and Exchange Commission. Up until now, qualifying as an Accredited Investor meant either (i) having earned $200,000 during each of the previous two years (with the likelihood of earning the same during the forthcoming year) OR (ii) having at least $1 million of net worth – including ALL investments and the investor’s own home. The new Act immediately removes the value of an investor’s primary home residence when calculating the $1 million net worth limit. This means that individual investors must now have true investments in excess of $1 million. Fortunately, this change does not apply retroactively so existing investors no longer able to meet the newer standards are not be forced to redeem their holdings. But any new money going forward will have to come from Accredited Investors meeting the new standard. The SEC has also reserved the right to increase the $1 million threshold in four (4) years to account for inflation. Nevertheless, venture capital funds are overall feeling good about the new Act given that earlier versions of the proposed legislation would have required that all venture capital funds register with the SEC.

It is critical that individuals and companies embarking on new real estate and investment opportunities be aware of the change in the legal definition when approaching potential investors seeking to invest in real estate and other business ventures. Most importantly, it is crucial that recycled, previously used, or “form” legal documents and marketing materials be updated and revised by qualified legal counsel to ensure current compliance with the law.

 We have a broad range of transactional experience assisting clients with the structuring and negotiation of their private offerings and realted agreements to thrive in any market and achieve their objectives. For more information please call (480) 889-8948, send an email to info@steinlawplc.com or visit www.SteinLawPLC.com.