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324 Cards in this Set

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economics of real estate investement:

§ If you can borrow at a rate less than the anticipated return, the effective return is greater than if had not borrowed money. Leverage can multiply the amount of money that you make and your return on the investment.
leverage and economic rewards:

concept of leverage
economics of real estate investment:

§ Example:
· Cash deal: 10% return on $100,000 = $10,000/$100,000
· Deal with 80% financed at 8% interest only: $10,000 - $6,400 interest = $3,600/$20,000 = 18% return
· Another way to calculate the advantages of leverage: Take amount of cash invested as having the 10% rate of return (1/5 or $20,000) and the remaining 4/5 each has a spread of 2% resulting in a total return of 18%.
leverage and economic rewards:

concept of leverage
economics of real estate investment:

§ Taxes benefits are also leveraged
§ Operating leverage increases the return based on inflation over the period of time.
· Inflation factors into future costs and income.
· Since the income is presumably higher than the costs, this causes net cash flows to increase over time, thereby increasing the value of the property over time.
leverage and economic rewards:

other impacts of leverage
economics of real estate investment:

present value of future cash flows minus initial investment cost plus present value of future expenditures. Positive NPV indicates investment flows exceed outflows. Negative NPV indicates outflows exceed inflows and should reject investment.
leverage and economic rewards:

Measuring Profitability: net present value analysis
economics of real estate investment:

Money that I spend and cash flows that are coming in. Discount rate that equates the Present Value of cash inflows with the present value of cash outflows.
§ This number tells us the rate of return on this investment.
§ Here we don’t choose the net interest rate because it is being chosen by the Internal Rate of Return.
leverage and economic rewards:

measuring profitability: internal rate of return
economics of real estate investment:

o Interest rate is compensation for the real interest rate and inflation and if we are lending money to the entity and there is some risk that they are not going to pay it back then we need to add in a risk factor to it.
o It is like the people that are buying a house, the person that has bad credit will get a higher interest rate because of the risk factor.
leverage and economic rewards:

interest rate
contracts for sale and the conveyancing process:

Broker earns commission when produces a ready, willing and able customer to buy on terms set forth by the principal. Does not matter if the deal closes.
contracts for sale: Real Estate Broker

General Rule
contracts for sale:

No liability for commission unless the title actually closes, unless failure to close is the fault of the principal.
real estate broker: minority view
contracts for sale:

If we have a contract signed in respect to a particular real estate then that is a ready, willing, and able buyer. § How do we prevent this: we put in the contract that they will be entitled to be paid when the sale closes and not when they find a ready, willing and able buyer.
real estate broker

Freeman Case
contracts for sale:

: If the seller did something to cause the deal not to close, even though the K says that the broker will get paid at the close, the broker can still collect his fee. If the seller did something in bad faith then the broker still gets paid.
real estate broker:

More rules
contracts for sale:

The seller agreed that this was a non-recourse loan (a loan where the person borrowing it does not have personal liability from the obligation). Then we have recourse against the collateral. Getting a lien against the real estate and nothing else. The difference between a recourse loan and a non-recourse loan is the interest rate, the non is a higher interest rate. Also we can sue the borrower in the recourse loan where as in the non recourse loan we cannot. Real Estate Broker code of ethics that they recommend that a person go to an attorney. “Realtors shall not engage in the activities constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it”. What can the broker do to solve the problem: inform the client that they need to talk to a lawyer. If I inform them to do it in writing then they will not be responsible.
real estate broker:

crutchley case
contracts for sale:

They have a fiduciary duty of care and they have to perform at a certain level.
real estate broker:

broker's have fiduciary duties
contracts for sale:

They can’t interpret things but they can fill out forms and this is not an unauthorized practice of law.
real estate broker:

brokers can fill out forms
contracts for sale:

when are they appropriate and what are the problems with printed forms.
role of lawyer in the contract:

pre printed formss
contracts for sale:

· Who is the buyer: use of clause that says Buyer is “X or Assigns”.
· Who is the Seller: Must make sure that the person stated actually has title to the property.
role of lawyer in the contract:

issues relating to particular contract terms
contracts for sale:

legal descriptions should be used; addresses can have mistakes and do not clearly define the property
role of lawyer in the contract:

description of the property
contracts for sale:

if do not know what these are can be a problem
· Obligations in covenants that have been made in respect to the real property.
· If this contract says that there is a covenant this could be a potential problem.
· How can this problem be solved?
o An acceptable solution for some deals and some property may be to obligate the buyer to take subject to restrictions not violated by the present improvements and uses of the property or by purchaser’s intended use of the property.
role of lawyer in the contract:

covenants, conditions and restrictsion of record
contracts for sale:

it is best to define what the remedies will be for title defects, what will be done with earnest money and whether further damages are available for the buyer and whether the broker is paid out of earnest money if the deal falls through
role of a lawyer in the contract:

Damages
contracts for sale:

should put clause in for the buyer that says the sale is contingent on getting financing
· Present mortgages: What does it mean to take “subject to” or to Assume a mortgage?
o Assume: assume the loan I am undertaking to pay the obligation and I have personal liability to pay.
o Subject To: the mortgagee (in which even the purchaser would not assume personal liability on the mortgage note.)
role of the lawyer in the contract:

financing contingencies
contracts for sale:

authorizing the lender to accelerate the mortgage indebtedness if the property is sold without its consent. Most real estate loan documents will have this. If this property is sold, the obligation that is owed accelerates and it is all due in payment now.
role of the lawyer in the contract:

due on sale clauses
contracts for sale:

the seller funds the noncash portion of the purchase price by means of a purchase money mortgage.
· What are the problems with specifying what type of financing the buyer must obtain and how can this be solved?
o The more detailed the financing contingency is the more of an out the buyer is going to get. From a seller perspective you don’t want a detailed finance condition.
role of the lawyer in the contract:

seller financing
contracts for sale:

· Another way to deal with this problem is for developer to take option to buy a property and get the approvals during the option period.
· What can the seller do: Option agreement – a right to buy or sell something in the future and it has a price. One of the ways that we can do this if I am the seller I can say that there is an option to buy the property and that option cost this amount of money.
role of the lawyer in the contract:

development approval requirements
contracts for sale:

unless the seller (or its agents) makes misrepresentations about the condition of the premises or fails to disclose latent defects known to the seller and not to the purchaser, the risk of any preexisting defect will be borne by the purchaser.
role of the lawyer in the contract:

right if inspection - caveat emptor
contracts for sale:

If you represent a buyer and you don’t provide a right of inspection on the property, what you should do is call our insurance company. It is essential that the purchaser have the right to inspect the property and that the parties agree on what representation and warranties, if any, the seller will make with respect to the condition not the premises, whether the seller’s promises will survive the closing of the transaction, and what remedies will be afforded to the purchaser in the even those promises are breached.
role of the lawyer in the contract:

right of inspection - right of inspection
contracts for sale:

· In which event the onus is on the purchaser to make a thorough inspection before it executes the contract.
role of the lawyer in the contract:

"AS IS" sales
contracts for sale:

· Is one that addresses which party should bear the risk of any casualty or condemnation loss before the closing date.
· Who generally has the risk of loss? The purchaser.
role of the lawyer in the contract:

risk of loss
contracts for sale:

Provides that the person in possession has the risk of loss because that party not only reaps the beneficial use of the property but normally is in a better position to protect the real estate against casual loss and to keep the premises insured pending the closing date.
role of the lawyer in the contract:

risk of loss - uniform act
contracts for sale:

Have 10 days from the loss to determine whether they want to go ahead with the deed.
role of the lawyer in the contract:

risk of loss - section 9 of the sample agreement
contracts for sale:

Absent language to the contract, the party in possession bears the risk of loss because that party not only reaps the beneficial use of the property but normally is in a better position to protect the real estate against casualty loss and to keep the premises insured pending the closing date.
role of the lawyer in the contract:

risk of loss - uniform vendor and purcahse risk act
contract for sale:

· Without a clause of this kind the courts tend not to enforce time requirements strictly
role of the lawyer in the contract:

time is of the essence
contracts for sale:

absent language to the contrary, K can be assigned by the buyer without the seller’s consent.
· Sample Agreement: not assignable without seller’s consent.
role of a lawyer in the contract:

assignments of a contract
contracts for sale:

the seller’s obligation that are not collateral or independent of the conveyance end when there is a seller’s acceptance of deed
· If I am a seller, when I deliver a deed to the other party are suppose to merge in this deed. When I have delivered that deed to the buyer all of my obligations merged into that deed and whatever obligations I had are there. Obligations to seller are over when the buyer gets the deed.
· Unless: The seller says something otherwise.
role of a lawyer in the contaract:

doctrine of merger
contracts for sale:

· General Rule: can represent multiple parties if believe will not adversely affect exercise of professional judgment and is consent after full disclosure.
role of a lawyer in the contract:

lawyer conflicts
contracts for sale:

· Baldasarre v. Butler pg. 35
o Possible rules: (1) Cannot represent both sides in connection with negotiation of the K: (2) Per Se Rule-no dual representation; (3) Simple transaction dual representation is O.K.
o Court Rule: cannot have dual representation in preparation and execution of contract.
o After this case the state supreme court created rule making it per se violation of ethics to represent multiple clients in real estate transactions where large sums at stake, there are complex contingencies or where options are numerous.
role of a lawyer in the contract:

lawyer conflicts case law
contracts for sale:

§ Required to provide marketable title. This is a reasonable person standard, which means that provided discretion.
§ Rule: Unless something said in K the Buyer is entitled to title free of record defects and encumbrances
marketable title
contracts for sale:

· Title necessary: must be free from reasonable doubt as to matters of law and fact and must be such that a reasonable purchaser would be willing to accept
marketable title
contracts for sale:

· Title does not have to be free from all possible defects, but free from those that are more then just remotely possible.
· We are not going to provide title that is free from every defect.
marketable title
contracts for sale:

need not have good title at the time the K entered into, only when the title is to be passed
· A transaction where I agree to pay x dollars to seller for a period of time. When I pay the last payment the seller is required to hand over the deed.
marketable title:

installment land sale contract
contracts for sale:

· Hazardous waste has nothing to do with title to the property. Existence of hazardous waste on the property has nothing to do with the title to the property. Title issues is something that is separate from use and value issues.
marketable title:

hazardous waste does not make unmarketable title
contracts for sale:

§ Van vliet v. Gaines Pg. 43
· Does the possibility of reverter makes title unmarketable? The possibility of reverter included in this covenant affects title and renders the title unmarketable.
marketable title case alw
contracts for sale:

§ McMaster v. Strickland Pg. 45
· Requiring marketable title is not the same as insuring use and value. The court says that the lower court was confused as to what marketable title is. Marketability and title has to do with who is on the record.
marketable title case law
contracts for sale:

· Silence: marketable title is then required.
· Title free of defects except as noted in ALTA title insurance policy and any new matters created by the owner
· Title free of defects other than those that are approved in the agreement.
three ways to deal with issue of marketable title in sales agreement
contracts for sale:

· Specialty warranty deed· General Warranty deed· Quitclaim deed
deeds and covenants for title: three general kinds of deeds.
contracts for sale:

o Contains effectively one covenant. One obligation that is that I as seller owner of the property have not placed so many encumbrances.
o Want a title insurance policy.
deeds and covenants for title:

special warranty deed
contracts for sale:

Provides the most protection for the buyer of the property. This time the deed includes a number I way. It acts as the point and time at the transfer of the property. This does not run with the land. This means that subsequent purchasers can’t take advantage or enforce this warranty. When does the cause of action for beach occur, when they are forced out.
deeds and covenants for title:

general warranty deed - Siesen
contracts for sale:

if I warrant the right to convey one of the secretary. It is a present covenant that I am making at the present sense in time. It does not run with the land.
deeds and covenatns for title:

general warranty deed - right to convey
contracts for sale:

I am warranting that things will not happen it he future.
deeds and covenatns for title:

general warranty deed - quit enjoyment
contracts for sale:

The first assurance covenant. This is a future obligation a obligation that is of the seller that extends.
deeds and coveantns for title:

general warranty deed - furtherance assurance covenant
contracts for sale:

just transfers whatever rights the grantor has and makes no covenants.
o Some states, like N.Y., say that unless specifically waive right to marketable title, you are entitled to it, so quitclaim transfers marketable title.
o Other states, the quitclaim is not assumed to give marketable title; just whatever title the seller has
deeds and coveantns for title:

quitclaim deed
Default Remedies:

o Maxton v. Lo Galbo Pg. 53
§ If the taxes are in excess of 3,500 then the deposit that was turned into escrow would be returned. They had three days in order to return the deposit. They did not cancel in writing within three days.
§ Rules:
· Traditional Rule: Defaulting party may not recover for part performance when default
· Modern Rule: allows recovery in excess of damages to the other party.
default remedies case law
defualt remedies:

o Lefemine v. Baron Pg. 57
§ Liquidated damages provision will be upheld as not a penalty if:
· Damages are not reasonably ascertainable
· Liquidated damages are not grossly disproportionate to damages reasonably expected.
§ Cake and Eat it To Clause: Clause that we say is that the deposit is liquidated damages and if we don’t like it then we can sue.
defualt remedies case law
default remedies:

§ If we have what is a proper liquidated damages clause then it is enforceable. If we have something that we label a penalty clause it is not enforceable.
liquidated damages provision
default remedies:

They need to be uncertain or ascertainable, this is at the time the contract was entered into. The damages consequent upon a breach must not be readily ascertainable. In the context of a real estate deal, it is going to be hard to figure out what the damages are going to be if one of the parties breaches.
liquidatd damages: two elements to a valid liquidated damages claim
default remedies:

· States liquidated damages have to be such then that the damages have to be reasonable. The sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages. This is an objective standard.
liquidiated damages: two elements to a valid liquidated damages claim
default remedies:

· One answer is that you are stuck with the liquidated damages. This is something
lquidated damages; what if actual damages exceed the liquidated damages amount
Title insurance:

o This is the principle title protection for buyers today: do not rely just on the deed. Title insurance companies will insure the state of a title.
title insurance
title insurance:

(look in manuals packet for forms)
§ This is a form of title policy that is typically used. It provides certain coverage for people who buy real estate.
alta policy
Title insurance:

· Vesting of Title: insures that title is vested in the purchaser of the property. Insuring that the buyer has fee simple absolute title to the property.
· Defect in or lien or encumbrances on the title: What is the scope of this provision? This means loans or any kind of encumbrance on the property.
· Marketability of the title: They are insuring that the person has the interest that they are expecting to get and that there are not any remote problems in the interest of the property.
· Lack of Right of access to and from the land.
alta policy: insuring provisions (four)
title insurance:

insures that title is vested in the purchaser of the property. Insuring that the buyer has fee simple absolute title to the property.
alta policy: insuring provisions - vesting of title
title isnurance:

What is the scope of this provision? This means loans or any kind of encumbrance on the property.
alta policy; insuring provisions - defect in or lien or encumbrances on the title
title insurance:

They are insuring that the person has the interest that they are expecting to get and that there are not any remote problems in the interest of the property.
alta policy: insuring provisions - marketability of title
title insurance:

· 1 and 2: exclude coverage for laws ordinances and public regulations, including zoning laws, eminent domain and environment regulations
alta policy: exclusions
title insurance:

· 3: excludes coverage of:
o Things known to the insured but not the insurer:
o Things that do not result in damage
o Matters occurring subsequent to the date of the policy. Title policies have a date and anything that happens after that date they have no responsibility for.
alta policy: exclusions
title insurance:

· 4. Matters resulting from bankruptcy: like fraudulent conveyance and similar claims.
alta policy: exclusions
title insurance:

· These things are about particular aspects or characteristics of particular party.
alta policy: exceptions
title insurance:

o Rights of parties in possession
o Encroachment, etc. that would be revealed by a survey.
o Easements not shown in public record.
o Mechanics Liens: they are statutory liens and someone who contracts, builds or fixes something on the real estate they have a lien against the real estate. People who do work on real estate can automatically get liens on real estate for the work that they did.
o Taxes not shown as encumbrances of record. This is like easements. Title companies do not want to insure something that is not clearly in public record.
alta policy: general exceptions (things that are not insured)
title insurance:

§ Important in exclusions like 3(b) that talk about knowledge
§ The world of constructive knowledge is much bigger then the world of actual knowledge. Actual Knowledge: they are talking about the more narrow sense of knowledge (it is something I actually know).
alta policy Exceptions:

Conditions and stipulations - knowledge is defined as actual knowledge, not constructive
title insurance:

§ But will also cover if make a warranty in sale of the property to a third person. Except that if I give warranties to something they insured my coverage continues with respect to the warranties.
alta policy; exceptions:

conditions and stipulations - coverage continues whille have interst in property
title insurance:

§ Prompt notice of claim made on the property: somebody is making a claim against the policy.
§ Notice of loss: when it appears that there is going to be a loss, then we have an obligation to give a notice of loss.
· Section 3: deals with notice of claims
· Section 5: deals with notice of loss.
§ The only time I have the obligation to do that above is when I have actual knowledge of the claim that is adverse to the policy is being made.
alta policy: exceptions:

conditions and stipulations - two kinds of notices must be made regarding claims, have to give notice to any cliam that we get knowlege of
title insurnace:

· 2 parts that will be written up: One policy will be written for the lender. Second will be the owner’s interest in the property. Also there will be an amount of coverage that will be stated. In the owners policy it is typically what they are paying for the property.
· If my policy is written in the amount I’m purchasing the property for eventually the amount will become irrelevant or much less then what is the value of the property.
conditions and stipulations
title insurance:

§ Amount of Coverage: determined by the policy (section 4,5,6, and 9).
§ Defense: if want attorney because of value of property is more valuable than the insurance, must hire your own.
· The insurer will cover you to the extent of the policy amount. If the property is worth 500k and your policy is for 300k, you the owner are going to have to get your own attorney to cover the rest of the property value.
conditions and stipulations
title insurance:

the insure gets the rights of the insured claimant when they pay claim
· So they may have claim against your seller under warranty deed or any other rights you would have against the seller.
· Subrogation is the substation of one person in the place of another with respect to a claim. When a title company pays a claim, it is subrogated to the rights and remedies of the insured claimant as against third parties resulting from the title defect.
conditions and stipulations:

subrogation
mortgages and mortgage substitutes:

first property security device
o Lender would lend money to the borrower and the borrower would transfer possession of property to the lender as security for the indebtedness
o Only works when “POSSESSION” of property is transferred.
pledge
mortgages and mortgage substitutes:

pledge requires oblige to have possession of property.
problem with pledge
mortgages and mortgage substitutes:

gives the mortgagee title to the property by deed while the mortgagor has the right to possession of the property until payment of the obligation, when the deed becomes void and title goes to the mortgagor.
mortgage
mortgage and mortgage substitutes:

o Difference is that the lenders have a right to possession but they do not use it, they have a right of possession and takes possession at default. What happens if I fail to pay, the mortgagee indefeasibly has the title to the property.
mortgage
mortages and mortgage substitutes:

Existing prior to foreclosure whereby the delinquent mortgagor can prevent foreclosure by paying the mortgage indebtedness
§ If I had an excuse for non payment, I will have a period where I can pay the defaulted amount. Can redeem the property after the default. This right became general and it developed that everyone has an equity of redemption.
mortgage - what is the equity of redemption
mortgage and mortgage substitutes:

§ Gives the mortgagor a specific time period to pay off the obligation or be foreclosed out.
mortgage - foreclosure allows the mortgagee to cut off (end) the equity of redemption
mortgage and mortgage substitues:

Mortgagee is regarded as merely obtaining a lien on the real estate to secure repayment of the indebtedness.
§ A mortgage is a security device, it is not a transfer of title or a right to possession, and it is transfer of a property to secure the repayment of debt. It is a lien.
theory of mortgage: lien theory
mortgage nad mortgage substitutes:

Mortgagee is regarded s obtaining both legal title and the right of possession of the mortgaged premises.
§ If I have title and the right to possession theoretically I have a right to the rents as well. California is not a title theory.
· Differences: Right to possession, in a lien theory state I don’t have title to a property but instead a lien to secure a repayment of a debt. In lien theory only have a right of possession on default.
theory of mortgage: title theory
mortgages and mortgage substitutes:

title is given to a trustee as security for the benefit of the beneficiary, the lender.
o This is a three party transaction: The trustor transfer title or lien, to third party and they hold the title or lien for the benefit of the mortgagee. This is three party transaction that accomplishes the same thing.
o Still are title, lien theory distinctions in these states.
deed of trust
mortgages and mortgage substitutes:

mortgagee keeps the property after foreclosure, regardless of its value
§ Infrequent. Foreclosure on the property as a lender and I get to keep the property and no one has the right to do anything else to it. No right to bid on the property.
types of foreclosure: strict
mortgages and mortgage substitutes:

§ Judicial: foreclosure done in legal proceeding.
· Requires an action in the court and sale set by the court.
§ Power of sale; self help where there is not judicial proceeding
· States that allow private self help sales of the real estate without any judicial help.
o In both of these cases there is going to be notice of the sale and people will have the opportunity to bid.
types of foreclosure: pubilc sales
mortgages and mortgage substitues:

statutory right (as oppose to the judicial equity redemption) to redeem for a period of time after the foreclosure sale
o The borrower has the right to redeem the property after the foreclosure is finished.
o Haw different from equity of redemption? This acts after default and before foreclosure, Statutory redemption these rights accrue after foreclosure has taken place.
statutory redemption
mortgage and mortgage substitutes:

an interest in property to secure repayment of a debt.
o The debt is going to be created somewhere else, because it does not represent a debt. Debt will be created in a note.
mortgage
mortgage and mortgage substitues:

§ A liquidated debt. Liquidated obligation is one that has a monetary value, un-liquidated obligation is one that is not readily ascertainable, we do not know the amount (it has an amount of money but we don’t know what it is).
mortgage - what kind of obigation can a mortgage secure
mortgage and mortgage substitues:

· Jeffrey Towers Case Pg. 85
o Case law indicates that mortgage can secure other than pure liquidated monetary obligations.
§ These are liquidated obligations that have an amount that can be transferred to monetary terms.
o Restatement of Property Section 1.4: mortgage can secure obligation that is measurable in terms of money or is readily reducible to monetary value at time of enforcement of the mortgage.
mortgage - what kind of obligation can a mortgage secure:

can a mortgage secure an un-liquidated oblilgation
mortgage and mortgage substitutes:

§ Contract requires consideration. I can make a gift or transfer property without there being consideration. Given the fact that mortgages are for securing an obligation there is going to have to be some consideration for this.
mortgage note as underlying obligation: is consideration necessary for mortgage
nature of mortgage:

§ Acceleration Clauses: reserves to the mortgagee the right to declare the entire balance of the indebtedness to be immediately due and payable in the event of a default by the mortgagor.
mortgage note as underlying obligation: note is the evidence of debt
nature of mortgage:
mortage note as underyling obligation: mortage must be supported by consideration
nature of mortgage:

Mortgage can properly secure advances to be made in the future so long as the mortgage states this and the amount of the advance is within the total amount stated in the mortgage.
· These are usually in construction loans. If I am the lender I don’t want this money going out the window, instead I am going to doll it out in increments at a time. The point is that construction loans are loans where there are future advances in the loan. A construction loan is almost always all future advances. So this is a loan that covers future advances is the kind of loan that we are going to see very frequently.
§ Mortgages that cover subsequent advances are called “open ended mortgages”
mortgage note as underlying obligation:

problems - future advances
nature of mortgage:

o Emporia State Bank v. Mounkes Pg. 89
§ What is a Dragnet Clause: it is a future advancement clause. This mortgage secures all of the amounts that I have loaned you so far plus any amounts that I have loaned you in the future. It is a broad species of future advance clauses that covers things that may be completely different from the underlying transaction. The modern trend is that courts look carefully at dragnet clauses and they find that they are not enforceable.
§ Rule: dragnet clause will be enforced only as to obligations of the same kind or quality, or that relate to the same transaction or series of transactions as the principle obligation, or if the subsequent note refers to the mortgage providing security.
subsequent notes
nature of mortgage:

mortgage can cover property acquired in the future, but: (I have to insure that I am perfected in the after acquired property. Under article 9 there are ways to do this in the original documentation.)
o If Personal Property, must perfect the interest in the personal property under Article 9 of the UCC
o If Real Property, unless subsequently record interest on the a/f acquired property, the party will only have an equitable lien and others will generally be able to get priority over your interest.
after acquired property
nature of mortage:

o Mortgage and Note stating no personal liability for deficiency is enforceable as written (Bedian v. Cohn Pg. 95)
personal liability of mortgagor
nature of mortgage:

no personal liability
· What language should be used to accomplish this? “borrower shall not be personally liable hereunder”, or “in the event of default, mortgagee will not seek a deficiency judgment against he borrower and recourse may only be had against the property”.
personal liability of mortgage; this is non-recourse lending
nature of mortgage:
buyer has personal liability for the obligation.
personal liablty of mortgagor: recourse lending is where there is liabiilty
nature of mortgage:

a loan where the borrower does not have personal liability for the loan. Only the property is liable for the loan.
personal liabiilty of mortgagor:

non recourse loan
nature of mortgage:

can deduct losses in excess of equity investment if non-recourse, but may not be able to if recourse.
personal liability of mortgagor:

tax consequences in limited partnerships
nature of mortgage:

o In equity a court may find an equitable mortgage where there has been no writing or a defective instrument
equitable mortgage
nature of mortgage:

can be seen as equitable mortgage even though on its face it appears to be an absolute transfer
· Must prove that it was intended to be security device and that was to end on repayment of money or other act
· What would be evidence of this? If the borrower keeps possession of the property. Act like the owner by insuring it and paying the property taxes. Wasn’t listed for sale with a broker.
equitable mortgage:

absolute deed
nature of mortgage:

BFP could take transfer of property and take priority over the grantor of the deed (the putative “mortgagor”).
equitable mortgage: problem
nature of mortgage:

§ Where we don’t have any documentation (oral agreement).
§ As a result of defective documentation of the transaction, the most typical thing that happens is that people intending to transfer a mortgage instead hands someone an unqualified deed to the property. Courts have said that this is an equitable mortgage and not an absolute deed.
· Problem: the lender can now sell the deed to a bonafide purchaser. Equitable mortgage does not protect you from a BFP because it is a secret lien.
equitable mortgage: equitable mortgage can arise in a nmber of circumstances
nature of mortgage:

where party agrees not to further encumber property – has been seen as equitable mortgage. Prevents other persons from taking a lien on the property.
equitable mortgage: negative lien
nature of mortgage:

§ Vendor may have Equitable lien where has transferred title, but not received payment or where Vendee has paid and not received title
· These interest will be subordinate to Trustee in BK, junior encumbrances and federal tax lien.
· Problem: is that they are not recorded interest in the property and BFP can take title to it.
equitable mortgage:

vendors and vendees
nature of mortgage:

if not law authorizing out of court sales, must foreclose through judicial process
deed of trust as mortgage substitute: mortgages
nature of mortgage:

Sale done by trustee without use of courts-less costly and quicker
§ Although there is little difference between mortgage and TD, the statutes that allow use of TDs may eliminate post foreclosure redemption rights and may give borrowers more protection from deficiency judgments.
deed of trust as mortgage substitute:

deed of trust
nature of mortgage:

§ The transfer in a Trust Deed is just a transfer of bare legal title and the equitable interest remains in the trustor (the party taking out the loan). Trust Deed which is recorded without a trustee also serves as notice to an Bonafied purchaser of the interest in the property
§ Interested Trustees: some courts have held this to be a problem and some statutes have specifically authorized interested trustees
deed of trust as mortgage substitute:

deed of trust lacking a designated trustee
nature of mortgage:

Agreement to transfer deed to property upon the payment of certain sums of money
installment land contract as mortgage substitutes Defined
nature of mortgage:

o Agree to pay a certain amount of money over time, at the time I will not get a deed, the seller will have legal title until the last payment is made to the seller. If I don’t pay I lose everything that I invested into the property. People that do land contract deals are often done by people with bad credit.
§ How are these agreements different from a Mortgage? (See section 8 of the installment land contract in the documents manual)
· Many modern courts have interpreted these as being like mortgage and have not enforced the forfeiture provisions
o Equity abhors a forfeiture
· Buyer not entitled to possession until full payment in the form in our materials
o Sometimes the contract will give possession to the buyer before there is full payment.
installment land contract as mortgage substitue
nature of mortage:

the interest of the mortgagor and all interests junior to the mortgage that is foreclosed upon are extinguished
mortgage in competition with other real estate interst:

upon foreclosure
nature of mortgages:

general rule is “first in time first in right”.
o Race Statutes: first in time to record in the real estate records
o Notice: first in time to obtain an interest without notice of a prior encumbrance regardless of the time of recording
o Race/Notice: first in time to record without notice of a prior interest
mortgage in competition with other real estate intersts:

priority rules
nature of mortgage:

Parties can agree to alter priorities by use of subordination agreements
o Party can agree that even though it is prior to another interest that it will fall behind the party in priority
o Attorney Agreement: lessee agrees that mortgagee will be new landlord if there is foreclosure and thus avoid being foreclosed out
§ In return, the mortgagee agrees not to disturb the lessee if here is foreclosure.
mortgage in competition with other real estate interest:

subordination and non-disturbance agreements
nature of mortgage:

o Defined
§ Direct: is on the fee interest
§ Indirect: encumbrances an interest that encumbers the fee
mortgage in competiion with other real estate interests:

direct/indirect encumbrances
preclosing terms and conditions:

generally taken out by post construction lender
o The commitment to provide this post construction loan is the real security for the construction lender – so they want a commitment before they lend
§ Post construction lender has buy/sell agreement under which it buys or takes out the construction loan.
§ Lending cycle: first get the post construction commitment, then the construction loan commitment.
pre financing issues:

construction financing
preclosing terms and conditions:

o Can go to jail if use this loan for anything other then using it for construction.
o These are loans that are short term and only for the life of the construction.
negotiating the mortgage loan commitmen:

construction loan
preclosing terms and conditions:

o These people agree to buy out the construction loan at the end of the construction process. Pays off the construction loan, the construction lenders tend to be lenders that want to have short term loans rather then long term loans.
negotiating the mortgage loan commitment:

permanent loan
preclosing terms and conditions:

o Pays off the construction loan. Tend to be fixed. Get your take out loan before you get your construction loan. This is the thing that they are going to look at for its protection. The people giving the construction loan will not do the loan because they will be afraid that they will not be paid therefore you take the take out loan first.
negotiating the mortgage loan commitment:

take out loan (first step)
preclosing terms and conditions:

o This letter is acceptance of the offer of the borrower to borrow money made in the loan application
o This is a binding contract, so do not take lightly
o Application is an offer to borrow money and the commitment letter is the acceptance or counter offer of what is asked for by the borrower.
o Commitment letter: probably the most important document in the whole process.
negotiating the mortage loan commitment:

commitment letter from the post construction lender is the first step in getting the project done
preclosing terms and conditions:

o Agreement of lender to loan specified amount
o Who is the borrower
o Terms of the loan
o Method of repayment
o Pre-payment privilege if any
o Description of the Collateral (piece of property that we are talking about).
negotiating the mortgage loan commitment:

essential elements of the commitment letter
preclosing terms and conditions:

o Title Insurance
o Documents that must be done and form
o Insurance
o Achievement of certain rental criteria
o Where there is construction loan:
§ Dates for commencement and completion of project
§ Approval of plans and specifications and completion of construction in accord with the plans.
other possible provisions in the commitment letter
preclosing termsn and conditions:

lenders typically charge 2% or more in case the borrower does not make use of the loan (take out loan)
o Protects against interest rate changes and is a fee for making the commitment
o Standby loan: borrower does not agree to take the loan, but lender agrees to make the loan. This type of loan is usually a last resort loan. Often very high fees for these types of loans.
negotiating the mortgage loan commitment:

commitment fee
preclosing terms and conditions:

- Teacher Insurance & Annuity Association of America v. Butler Pg. 124
o They breached the implied covenant of good faith and fair dealing of the terms of the loan. The court agreed with the analysis because the facts demonstrate that the buyer was trying to get out of the agreement.
o Prepayment provisions were boiler plates and in everyone’s agreements and this was perfectly normal.
§ Is it bad faith to require acceptance of new terms not previously discussed? If the provisions that you are asking for are typical boiler plate provisions then you are not going to have a problem.
§ What factors do we look at to determine this?
o Lesson: in commitment letter you should be precise about essential terms and especially any pre-payment rights or fees
o Provision that the Documents must be satisfactory to the lender-problem is illusoriness
§ Courts have not found these to create illusory promises, but have found obligation to use Good Faith in determining satisfaction.
negotiating the mortgage loan commitment case law
preclosing terms and conditiosn:

payment to cover the interest risk. (various types below)
remedies for breach of mortgage loan commitments:

commitment fees
preclosing terms and conditions:

o application is a fee that you pay to decide whether you are going to make a loan or not. Commitment fees are charged after it is determined that the financial institution is willing to make a loan. Commitment fees can be refundable or not refundable.
remedies for breach of mortgage loan commitments:

application fee v. commitment fee
preclosing terms and conditions:

the borrower is given the option of taking the loan and fee is payment for an option. Over some period of time. Lend me the money for a certain period of time. If it is a payment for an option.
§ This will not be refundable. Not refundable because we are paying for the option to stay open. If the commitment is an option then by definition it ought not to be refundable. So this is what a commitment fee could be.
§ This is a unilateral agreement; the lender is agreeing to lend the money and the borrower is not agreeing to borrow the money.
remedies for breach of mortgage loan commitments:

option consideration
preclosing terms and conditions:

like the one on p. 133-134
§ Is held as security for the actual damages of the lender if the borrower does not go forward. This is a bilateral agreement, the lender is agreeing to lend money and the borrower is agreeing to borrow money. The only way that you can keep the deposit is if you can prove damages.
remedies for breach of mortgage loan commitments:

security deposit against damages
preclosing terms and conditinos:

the fees are an estimate of the damages that the lender can keep if there is non-performance
§ The commitment fee is postulated to be an estimate of damages by the parties if the borrower does not go ahead and take the loan. This is a bilateral contract. Where both parties have an obligation. Estimate of the expected damages. This is not a deposit against damages, it is our estimate of what the damages would be. Unless, the liquidated damages does not comply with the law.
remediees for breach of mortgage loan commitments:

liquidated damages provision
preclosing terms and conditions:

o NCR Corp (pg. 135): lender made commitment and deposit was paid; the borrower then self-financed. If it is a bilateral agreement, in order to recover for damages you have to prove what your damages are. Lender has not proven what there damages are.
o Woodbridge (pg. 139): 3% standby deposit that was refundable when the loan closed. Why did the loan not close?
§ Deposit did not say what it was for.
§ Theories for lender keeping the deposit.
· Consideration for irrevocable offer to loan the money in the future – like an option
· Consideration is commitment fee for the commitment to loan the money in the future – compensates for the interest rate risk in committing to loan money in the future (bilateral commitment)
remedies for breach of mortgage loan commitments

breach of commitment by borrower Case law
preclsoing terms and conditions:

§ Agreement fails to characterize the deposit as any one of these:
· Option Agreement: is not clear that this is what was intended
· Looks like the agreement could be bilateral commitment-the borrower can be seen as obligated to go through with the deal. Some courts presume that ambiguous cases like this are a bilateral contract for loan while others presume it is an option.
· Drafter should suffer consequences of poor drafting so court views this as a damage provision.
§ Damage Provision: since it is interpreted as liquated damages provision, in order to enforce there must be a breach of the agreement
· Failure to meet a condition is not a breach of the agreement, but rather a failure to meet a condition precedent. Therefore, there is no right to damages.
remedies for breach of mortgage loan commitments

breach of commitment by borrower case law
preclosing terms and conditions:

§ Lesson: must make clear what a deposit is for and if expect to get damages, must be able to specify what provision of the agreement ahs bee breached.
§ A liquidated damages provision is not enforceable when it is not a reasonable estimate of what the damages ought to be in the future if the agreement is breached.
§ Conditions Precedent: means a condition must be met before the agreement is enforceable. The contract is valid, but if a condition is not met, then the contract is not enforceable. Have an obligation to act in good faith to meet those conditions.
remedies for breach of mortgage loan commitments

breach of commitment by borrower case law
preclosing terms and conditions:

will be damages for failure of borrower to complete the loan
remedies for breach of mortage loan commmitments:

overview: bilateral contract
preclosing terms and conditions:

in what circumstances can a liquidated damages clause be seen as an unenforceable penalty and what is the legal standard for determining this?
remedies for breach of mortgage loan commitments:

overview: deposit or commitment fees as liquidated damages
preclosing terms and conditions:

not limited by the amount of the deposit, can claim and prove greater damages.
remedies for breach of mortgage loan commitments:

overview: deposit can also be deposit against actual damages
preclosing terms and conditions:

· Penalties are not enforceable
· Valid Liquidated Damages clause are enforceable
· You make the distinction by
o Having a circumstance in which damages are difficult to determine
o The damages that we provided for is a reasonable estimate of what you through the damage might be (it has to be a reasonable estimate as of the date the estimate was made).
o If you can’t prove either, then it is a penalty clause
liquidated damages v. unenforceable penalties
preclosing terms and conditions:

If the borrower fails to complete, there is no breach and no damage
· But any deposit is consideration for the option and can be retained by the lender.
overview

option
preclosing terms and conditions:

K to lend money would not seem to be specifically enforceable because there is an adequate remedy at law
overview

specific performance
preclosing terms and conditions:

· Has borrowers been able to get specific performance remedy against the lender. Occasionally. Has the lender been able to get specific performance against the borrower. No.
· Lack of alternative financing may be exception circumstance allowing SP because law cannot compensate for consequential loses after foreclosure, like profits, new projects that might have occurred, etc.
overview

specific performance
preclosing terms and conditions:

· Detrimental reliance as exceptional circumstances.
· With respect to land acquisition loans, the piece of real estate as we know is unique, therefore we are entitled to specific performance.
· Circumstance where the buyer has detrimentally relied on the lender to lend the money. Borrower has gone out and done something in reliance of this loan commitment.
overview

specific performance
preclosing terms and conditions

· Option and the buyer does not perform the lender keeps the deposit for the fee.
· Bilateral: and it is a liquidated damages provision what is the case before the lender can keep the fee? There has to be a breach of the agreement.
overview:

optional v. bilateral
preclosing terms and conditions:

§ Damages need not be proven with absolute certainty-reasonable showing will suffice
remedies for breach: breach by lender:

damages for borrower
remedies for breach:

· Difference in interest that must pay over the life of the loan by virtue of the breach.
· Consequential Damages: additional title insurance, brokerage fees and the like necessary to get the new loan
· Lost profits: there is a split in court concerning whether this is recoverable: modern trend it is allowed
· Emotional distress and punitive damages have been allowed in some cases
breach by lender:

damages for borrower, elements for damages
remedies for breach:

§ Federally regulated, lenders can only loan up to certain percentage of value of property. Appraisals are therefore important
preclosing commitment terms and condition

Loan as pecent of appraised value
Remedies for breach:

· Income Method: net income/cap rate
· Replacement Cost
· Market: comparable properties
preclosing commitment terms nad conditions:

appraisal method
remedies for breach:

if take out loan commitment does not cover all construction costs will need to get gap financing to fill in the gap
loan as percent of appraised value:

gap finacing
preclosing terms and conditions:

lender has a contractual right to hold some of the loan back.
· Loans may also have floor and ceiling provisions-different levels of financing based on achievement of certain goals, like how much of the project is leased
gap financing
preclosing commitment terms and conditions:

take out lender relies on the developer and made loan to that entity, and so is not likely to want the loan to be assigned
· But construction lender is going to want the loan to be assignable to it in event of default: the permanent lenders often allow this
assignment of commitment
preclosing commitment terms and conditions:

typical take out loan requirement
· Whalen: Court finds substantial performance applies to condition of completion of project unless the contract requires 100% completion. This is majority view
· Changes to plans: will need to be approved by the lender and if do not get approval, lender may not provide the funds. But changes may be considered to be substantial performance of the contractual obligation
compeltino of improvmeent in accordance with plans
preclosing commitment terms and conditions:

form and substance must be approved by the lender
§ Best to get this done significant time before closing to avoid last minute problems
§ Standard for approval: generally imply an objective standard of reasonableness
§ Closing Costs: including attorney fees are for the borrower to pay.
approval of the security documents
preclosing commitment terms and conditions:

tripartite agreement in which the post construction lender agrees to buy the construction loan, the construction lender agrees to sell the loan, and the borrower agrees to go along with this.§ May provide for specific performance as a remedy
buy-sell agreement
preclosing commitment terms and conditions:

· Has cause of action against lender if the loan is not taken out because of the contract that says the permanent lender will buy the loan. If there is no buy-sell agreement, then there is no cause of action.
· If there is no buy-sell agreement, you might be able to assert rights under a third party beneficiary.
buy - sell agreement:

what does this do for the construction lender
preclosing commitment terms and conditions:
§ Pre-closing: have all the documents approved before the construction loan is made and before construction begins.
§ Problems: What if the construction loan is usurious or there are other problems? If it is, and a lender buys it, then you might have a usury clause. To avoid this, you need to know all the terms.
§ If not pre-closed, then the documents of the different lenders will not conform to each other and will then be refinancing the construction loan rather than just assignment of documents.
buy-sell agreement
preclsoing commiting terms and agreements:

§ How is one assured that these requirements are met? You get the reports from experts who do the work to make reports for you to determine if it meets all regulations.
§ Laws to worry about
· NEPA: are similar state laws in some states
· Clean air act: may require certain permits
· Clean water act: similar to clean air act re permits
· CERCLA: wide potential liability for lenders, owners, etc.
· Costal commissioners
· Endangered species act
compliance with land use and environmental regulations
preclosing commitment terms and conditions:

within the police power of the state, but are limits
§ The SC said that the government entities could put a lot of restrictions on property, short of a taking.
zoning regulations
preclosing commitment terms and conditions:

can get insurance that covers zoning restrictions, but it is expensive.
· When does the insurance company typically have liability on these policies? The zoning endorsements will not protect you if your complaint is that you can’t sell your property. This only covers zoning restrictions.
o No liability for failure of person to be able to sell the property or get a loan on it
o These policies provide only limited protection
zoning restrictions:

title insurance
preclosing commitment terms and conditions:

state that the building was designed and actually built within the plans, codes, and zoning laws. You want the to sign off that the property is done the way he drew it in accordance with zoning laws and building codes.
· Difficult for the architect to say that was actually built in accord with the plans and laws. Use “to the best of my knowledge” language
zoning restrictions:

architect certificat
preclosing commitment terms and conditions:

Lending obligation is generally subject to “as built” survey which serves what purpose? A survey that the building is owned and built on land that is owned by the property owner.
zoning restrictions:

survey
preclosing commitment terms and conditions:

· Will be primary report that the parties can review before the loan is made and raise issues at that time. The permanent lender wants title reports.
· Owner may want its own policy in addition to the one for the lender to protect himself from any possible liability to others.
zoning restrictions:

titile insurance for lender
preclosing commitment terms and conditions:

Lender will want provision that if borrower’s and lessee’s financial conditions (significant parties) have deteriorated, lender will not be required to go forward. You want a clause that says that if there is a material adverse change, then you can be excused. BK: Lender cannot be forced to loan money to entity in BK
zoning restrictions:

no material adverse change
Lawyers role in closing:

When the clients determine what the documents will say is called a pre-closing. Closing is when the clients sign the documents.
ethics in closing the loan
lawyers rule in closing:

· Wright: The lender’s attorney changed terms of the documents and during closing, Wright signed without reading the documents. Wright was refinancing the property and found out that the terms had been changed. Wright sued on fraud. (Fraud: misrepresentation, reliance, intent)
o Duty to disclose: lender’s attorney has obligation to disclose changes where are the drafting attorney
o Right to rely on representations of other parties’ attorney. The right existed because there was a pre-closing the day before, and the owner has a right to rely on the truthfulness to rely on the borrower’s attorney.
o Actual knowledge of falsity of representation: attorney knew of changes and failed to inform other party-could conclude fraudulent intent from this
ethics in closing the loan;

obligation to disclose changes in documents
lawyers role in closing:

· Changes to documents: provide redlined version of documents for other party
ethics in closing the loan:

attorney ethicial obligations
lawyers role in closing:

· Where no attorney on the other side may have obligation to explain the terms to other party, especially where one-sided documents (Belleville). An attorney may have obligation to explain. Some courts suggest that attorney has special obligation to explain if other party is not represented.
· Not all cases go this far and neither does the Restatement
· Make sure the other party understands that you are not representing their interests
ethics in closing the loan:

attorney ethical obliations
lawyers role in closing:

§ Lawyer for the borrower often has obligation to do opinion letters; sometimes other lawyers have obligation as well. The borrower’s attorney will do letter for lender.
· What ethical problems exist when give opinion to other parties? There may be a conflict of interest, and confidential information.
loan opinion letters
lawyers role in closing:

(the main point is that you don’t get sued over writing an opinion letter, so you want to write in such a way that things you are not sure about (limitations, exceptions and exclusions) you write it to limit it so you don’t have liability.
loan opinion letters:

form of opinion letter
lawyers role in closing:

· Identify the role of the attorney; who represent, etc.
· Documents reviewed
· Assumptions
· Practice limitation – you want to say what you are giving an opinion about (a real estate attorney, or bankruptcy attorney and it is limited to that area of law)
· Limitations and qualifications – exceptions, exclusions and so forth
· Who can rely on the opinion
loan opinion letters:

form of opinion letter
lawyers role in closing:

you are going to be saying things like the borrower is a corporation and has the right to do business and enter into the transaction and the person signing has the authority to sign.
loan opinion letters: what is the opinion about:

borrower status and ability to enter into the transaction
lawyers role in closing:

you want to talk about the construction loan, etc. is enforceable. The lender will want to be assured that there will be a lien or interest in property that will be secured for repayment. The opinions give an opinion as to the form of the document and that in its face it is in a form that it creates a lien in favor of the lender. The attorney will not say that these documents will in fact give a lien and the perfection of that lien. Should create and not that a lien is actually created. It will be perfected after it is recorded and so you are giving an opinion on the form of the documents.
loan opinion letters: what is the opinion about:

validity and enforceability of hte documents
lawyers role in closing:

· State that are in form sufficient to create a lien. But do not actually give opinion on the actual creation, perfection or priority of the lien. Is opinion as to the form of the documents, not the effect or impact of them
loan opinion letters:

form of opinion on the sufficiency of documents to create a lien
lawyers role in closing:

you don’t want to say anything about what BK attorneys or judges will do. You want to say that you are accepting or making and exception for BK and equitable principles.
loan opinion letter:

exceptions made for BK and equitable principles
role of lawyer at closing:

You should not since you are not authorized to practice law in another court, and you are not an expert in a different state’s law.
loan opinion letter:

what oof giving opinion on the law of another state
role of lawyer at closing:

This is not part of a typical lender’s opinion in a commercial transaction. If you are asked, then you could do it, but you want to get paid a lot since it is difficult.
loan opinion letters:

what of opinion on zoning, environmental laws
lawyers role at closing:

· Laundry list – limitations on stated default remedies such as any statutory right to reinstate the loan and any statutory restrictions on recovery of deficiency judgments; prepayment penalties (this is subject to a reasonableness rule); waivers of jury trials; arbitration clauses; and forum selection provisions.
· Generic qualification: may be provisions that are not enforceable, but the documents as a whole are enforceable. – P. 202 has example.
· Hybrid: combination of above two
loan opinion letters:

form of exceptions
lawyers role at closing:

· Note, mortgage, leases, assignments, and all other documents
· Title insurance binder
· Leases that need to be reviewed
· Inspection of property
· Insurance
· Environmental reports
mechanics of closing:

things that need to be dealt with before closing (check list)
pre closing terms of mortgage financing:

has fixed interest rate, plus the lender participates in the income from the property.
· Gross Income: lender will like this
· Net Income: this is better for the borrower, But what is the meaning of “net income”? Can be manipulated by the borrower and so lender must beware.
· Lender lends us money at a low fixed rate and they also have an equity kicker (they have a right to some portion of the income of the property or to the net funds after the sales or refinance).
alternative financing:

participating mortgage
post closing terms of mortgage financing:

· Typically used in a higher interest rate environment. Can get lender to fund 100% - 80% so higher. Lender will get the borrower to guarantee the debt to get this loan. This is the price that you pay for this type of financing.
· Often participate not only in ongoing income, but will also have rights in a portion of the sale proceeds of the property
o Lender will need to be concerned about the terms of any sale and make sure that it is at arm’s length transaction
· Lender Concerns: if property is sold they may not have same kind of management and their cut of Income might decline.
o Thus, they may want to prohibit sale or have restrictions on sale-like the lender must approve the sale.
alternative financing:

participating mortgage
post closing terms of mortgage financing:

this is debt with conventional fixed rate (lower than market however) with an option in the lender to purchase all or a portion of the property at some point in time.
· Legal problem of the idea that the lender has the right to purchase the property:
· May violate rule against “clogging the mortgagor’s equity of redemption”
o You are not suppose to put impendent in the way of the buyers rights to redeem the property. So the convertible mortgage can negatively impact the right to redeem the property. So different jurisdictions have different rules on this issue.
alternative financing:

convertible mortgage
post closing terms of mortgage financing:

· Giving the lender the right to buy the property separate from foreclosure negatively impacts the right of redemption.
· May be seen as a surrender of right to redeem the property.
o Different jurisdictions have different rules on this
· California permits these so long a the right in lender to buy the property is not based on a default by the borrower.
alternative financing:

convertible mortgage
post closing terms of mortgage financing:

lender takes an equity position as partner or limited partner in the project along with being lender
· Lender is the lender and has an equity interest in the project as joint venturers, there can be conflicts
o Joint ventureers have fiduciary duties to each other.
o Lender might have duty to try to refinance or even default on its own mortgage.
altnernative financing:

joint venture
post clsoing terms and mortgage financing:

There limits to the interest rates that can be charged.
usury laws
post closing terms:

· Loan
· Absolute, as opposed to contingent, obligation to repay
· Interest charged greater than allowed by law.
· Intent to violate statute: how is this shown?
usury laws elements
post closing terms:

§ There is quite a few exceptions to the usury laws: often corporate, business loans or loans over certain amounts are exempt
§ Penalties are often severe. Typical remedy you can pay triple the interest that the party was obligated to pay.
§ Unconsciousnability doctrine may also apply to interest rates in loans.
usury laws
post closing terms:

loan new money and agree to pay the underlying 1st mortgage, but charge a higher interest rate on the whole amount. Lender agrees to pay the 1st on the mortgage. What they do is not charge the borrower and the amount of money that would cover the first. This loan will be at an interest rate that is likely to be higher then the first. In addition they will be loaning money.
§ Why does this cause possible usury problems. These types of mortgages are used in high interest rates.
wraparound mortgages
post closing terms:

interest tied to some standard that changes over time.
§ These are tied to some measure of interest rates. As those measures go up your variable rate loan goes up.
variable rate mortgage
post closing terms:

term of loan is shorter than the amortization schedule: so there will be amount (the bullet) that is owed as a balloon at the end of the loan term.
§ This is like a balloon payment.
bullet loan
post closing terms:

combination construction and permanent loan that has a shorter term than usual take out loan.
§ A single loan that deals with the construction and some relatively short period of time to a fixed rate permanent loan once construction is completed.
mini perm
post closing terms:

variable interest rate with a cap on interest payments
§ Will be a balloon payment at the end of the term
bowtie loan
post closing terms:

short term, but with a feature that allows the loan to rollover and continue.
rollover loan
post closing terms:

§ Late Fee: compensates for the costs of administering a delinquent borrower.
§ Default Interest: compensation for increased risk of dealing with a defaulted borrower.
late payment fees and default interst
post closing terms:

§ Late Fee: Frequently use “reasonableness” standard used regarding liquidated damages clauses
· Default Interest: use unconscionability standard of exorbitance.
o But some use the reasonableness standard here as well
· In Bankruptcy: generally subject to reasonable standard.
how to analyze legal rules
Non - Recourse Lenders: Carve Outs for Recourse:

o Sale or subsequent encumbrance
o BK or other contested enforcement proceedings (like where the borrower contests foreclosure). May be problems with enforceability of these provisions in BK.
o Environmental liabilities make the loan recourse
o Fraud in procuring the loan
types of carve outs:

complete loss of non-recourse status may be in documents for
non-recourse lenders: defaults for recourse:

(not total loss of non-recourse status):
o Failure to apply insurance or condemnation proceeds
o Diversion of security deposits and prepaid rents
o Misuse of revenue after default: where funds from property is not used to repay the debt
types of carve outs:

liability for damages
non recourse lenders: carve out for recourse:

where the entity that owns the property is single purpose entity (it just owns the real estate), other parties may have guaranties of the obligations of this entity in the event that certain things occur, like filing BK or contested foreclosure.
types of carve outs:

exploding guaranties
non recourse lenders: carve out for recourse:

may also be basis for damages or for loss of recourse status.
types of carve outs:

waste
prepayment privileges:

Defaulted on the loan which it is before the loan has matured it is going to be a prepayment. Is a prepayment that is involuntary going to be subject to the prepayment charges? The cases are split on this issue, you have to pay the prepayment penalty even though the prepayment is involuntary as a result of default or as a result of condemnation of the property.
prepayment
prepayment privilege:

They are trying to get the full yield of what has been promised to them in the loan amount. There are two alternatives: if there is a prepayment and the lender cannot get a prepayment fee then the lender is going to take a risk that they are not going to be able to get the yield that they originally expected. If there is a prepayment then the borrower is taking the risk in the prepayment of the loan. One of these parties is going to bear a risk when there is an involuntary prepayment. In absence of language, borrower does not have right to prepay
point of prepayment provision
prepayment privilege:

are often placed in these loans, often a percentage of the loan amount.
§ But there is modern trend to provide “yield equivalent” or “yield maintenance” provisions that require the borrower to buy treasury bonds or other instruments that will ensure that the lender gets the payments that it was expecting under the loan.
§ These prepayment charges are also generally payable when there is a default by the borrower and acceleration of the loan amount.
§ Involuntary sales of property, like condemnation are often subject to these prepayment penalties
prepayment charges
prepayment penalities:
o Lazzereschi v. SF federal savings Pg. 242
§ Court Says: In case of a prepayment penalty there is no breach by virtue of prepayment. There is no breach here, therefore the reasonableness standard does not apply.
§ In BK these provisions are often subjected to reasonableness inquiry under Section 506(b) of the Bankruptcy Code
· Even some yield maintenance provisions have been struck down in BK.
§ Should the analysis of these prepayment provisions differ if the triggering event is involuntary?
§ Restatement of Property Section 6.3 states that prepayment charges should not be enforced in these circumstance.
prepayment charges case law
prepayment penalties:

This is not an unusual provision and is customarily in the practice. Is this way out of line from what we will see elsewhere and it is not.
prepayment penalty under the palpably exorbant standard
prepayment penalties:

provision of section 506(b) of the bankruptcy code – is about secured claims, these are claims that are secured by collateral. My secured claim includes reasonable fees, charges and expenses of the lender. This includes attorney’s fees of the lender. Any fees and charge that I add to my secured claim. In the context of a bankruptcy case we are going to have a reasonableness standard to a prepayment penalty.
is there a context in which we will seee the courts provide a reasonableness standard to a prepayment panealty
prepayment penalty:

o Mortgages often have clauses requiring borrower to pay in advance each month to the lender the amount necessary to cover insurance and taxes on the property.
§ Sometimes a borrower may have enough clout to not have such a clause
§ Sometimes the escrow is just an option of the lender, like in the example provision on p. 249
payment of taxes and insurance: escrows
prepayment penalties:

majority view rejects obligation of lender to pay interest on escrows absent a provision to that effect.
payment of taxes and insurance: escrows

Interest on the funds
prepayment penalties:

o Borrowers are required to insure premises and often the mortgage will provide that the proceeds of any such insurance are payable to the lender under a mortgagee clause
hazard insurance
prepayment penalty:

§ Sometimes there is an option to either apply to funds to reduce the debt or allow the rebuilding of the premises.
§ Similar clauses require that condemnation proceeds be paid to the lender
hazard insurance
prepayment penalty:

§ Sevarese v. Ohio Farmers Insurance Pg. 251
· Court Says that the mortgagee is correct. The lender is entitled to any proceeds that have been payable whether or not there has been any damage to the collateral/value of the property.
· A standard average Clause: the total amount of the loss in this case was 4200 but the lender didn’t get 4200. An insurer does not have to pay the full amount of coverage if the property is underinsured.
· What if the borrower repairs the premises to pre-loss condition, does the lender still have the right to the proceeds of insurance?
o Mortgagor suffered no loss because the property is in pre-loss condition
o Mortgagee clause however is effectively like a separate policy of insurance for the mortgagee
· Restatement of Real Property Law Section 254 gives the lender the option to either take the funds or allow the property to be repaired.
hazard insurance case law
prepayment penalty:

a common provision relating to cases where the property is underinsured that provides that insurer only has liability to extent of the ration of amount insured to 80% of the value of the property. The point of these things is that people do not carry enough for the property.
hazard insurance:

effect of standard average clause in insurance policy re-payment to mortgagees
prepayment penalty:

lender is subject to any defenses the mortgagor would be subject to. Most that the they can get back is the amount of the loan. They are not entitled to the profit (equity).
hazard insurance: loss
prepayment penalty:

the mortgagee is not subject to defenses against the borrower and can collect even if loss is the fault of the mortgagor.
· But mortgagee is not protected if premiums not paid.
hazard insurnace: loss payable clauses:

new york standard
prepayment penalty:

insurance policies generally state that if change of ownership insurance company must be notified so they can determine if want to continue to take the risk.
· If loss follows the foreclosure, courts generally say that the mortgagee can recover since the mortgagee was effectively covered by the insurance.
· If loss before the foreclosure, the results are the opposite: idea is that the insurance is predicated on a debtor creditor relationship and that is over when the property is foreclosed upon. Mortgagee cannot recover.
· This ignores independent nature of the insurance contract in favor of the lender.
· California court said that there is a presumption that the money is going to be used to repair the building.
hazard insurance: loss payable clauses:

change of ownership by the foreclosure
prepayment penalties:

lenders have been unable to reach these proceeds unless the contract provides that the lender is to be a loss payee of such additional insurance.
hazard insurance loss payable clauses:

insurnace proceeds from insurance not required by mortgage
prepayment penalties:

these are generally payable to the lender as well
· Section 6 of the sample mortgage does not deal with reduced debt service if there is partial taking – as borrowers counsel you might want to have provision relating to this
hazard insurance: loss payable clauses:

condemnation proceeds
prohibition on junior financing:

§ Some clauses will allow junior liens on certain conditions, like:
· Lien will not affect rights of any tenants
· Rents will be applied first to the senior mortgage
· Notice is given of foreclosure by junior lien holder
§ Are similar “Due on Wrap” clauses:
due on encumbrances clause accelerates the loan if there is further encumbrances of the property
prohibition of junior financing:

o La Sala:
§ What is the basis of the challenge to the Due on Encumbrance clause? This is not a per se illegal restrain on alienation. A due on encumbrance clause an illegal restraint on alienation in circumstances where it does not endanger the lenders security. We will enforce a due on encumbrance clause when there is an endanger on the lender’s security and the opposite.
§ Invalid restraint on alienation: Whether there is reasonable danger to the lenders security or the lender’s collateral.
§ Whether can enforce such clause will depend on case by case determination of whether enforcement is “reasonably necessary” to protect the security.
§ We do not have a bright line rule here.
prohibition of junior financing case law
prohibition of junior financing:

makes due on sales clauses enforceable as a matter of federal law. This is a federal law that deals with due on sale clauses. Create because there is great dispute among different jurisdictions on how to del with do on sales clause. With respect to due on sales clauses they are not enforceable. In commercial mortgages due on sale clauses are surely enforceable.
§ Invalidates due on encumbrances clauses on residential real property
§ Commercial properties: the answer is unclear
· What does the language of the statute seem to say: indicates that due on sale clauses include due on encumbrance clauses and thus they should be enforceable.
garn st. germaine act
right to sell property:

accelerate debt on sale of property without consent of lender or require assumption by purchaser at current interest rates. Accelerates the debt to be entirely due and payable on the event of sale of property.
right to sell property:

typical due on sale clauses
right to sell property:

Can declare that part of the debt must be paid down on sale.
due on sale clauses:

pay down clauses
right to sell property:

says that if you sell the property without our consent then the debt is due.
due on sale clauses:

due on sale clauses
right to sell property:

Something that puts burdens on me when I sell it such that they are so burdensome that it puts a restraint on the seller’s ability to sell.
· Lenders argument: is that it is not a restraint on alienation, because I’m not telling you that you cannot sell it and all I’m telling you is that you have to pay if you do sell it.
due on sale clauses:

illegal restraint on alienation
right to sell property:

Intended to make the law consistent among the states with due on sales clause.
garn st. germaine act
right to sell property:

· Majority found that due on sale clauses are enforceable and were not improper restraint on alienation: they do not restrain alienation, just cause the acceleration of the debt.
· Due on sale clause is enforceable.
· Minority view sees as restraint on alienation.
garn st. germaine act: debate
right to sell property:

· Clause accelerating debt on sale or other transfer of interest in property. Law makes these clauses enforceable
· But defines as clauses relating to sale without consent: so these clauses will generally have a consent provision, which raises the following issue: what is unreasonable withholding of consent?
· Is reasonableness implied if there is not “reasonableness” language
o No they do not apply a reasonableness standard.
garn st. germaine act: what is a due on sale clause
right to sell property:

· Mortgages on property of less then 5 dwelling units. Does not say due on sale clauses are not enforceable, but instead says that due on encumbrances clauses are not enforceable. With respect to residential mortgages cannot have a due on encumbrances clauses.
garn st. germaine act:

exceptions for residential mortgages
right to sell property:

· Slevin and LDH say that since it is involuntary acceleration at the behest of the lender, it is not a “prepayment” and thus not subject to the prepayment provisions
o Prepayment clauses are voluntary.
o The lender is deciding that it is going to accelerate.
garn st. germaine act:

can enforce due on sale and prepayment penalty
right to sell property:

· If is subject to prepayment, this might then constitute a restraint on alienation – is more than just acceleration (Nobours)
· What if sell majority interest in corporation that owns the property: should not be trigger to due on sale clause – can put this in the contract to make sure if it is not a problem. Depends on the contract and the definition of sale. Property can be transferred with a mortgage being on the property in a number of ways:
o Transfer and let the buyer assume the mortgage. Transfer the property and don’t pay off the mortgage and taking the property subject to the mortgage.
garn st. germaine act:

can enforce due on sale and prepayment penalty
right to sell property:

§ Assumption: the new mortgagor becomes personally liable on the debt.
§ Subject to: original mortgagor and the property liable for the debt, but the buyer is not
assumption and "subject to" sale
construction financing:

§ Short term
· We want to match our assets with our liability. Banks usually have short term obligations, these are people who put money in the bank. Obligations of banks tend to be short term.
§ Variable interest rate
§ Higher rate than permanent lending (b/c of the risk return).
§ Personal liability: result of no income from property and higher risk of this loan
construction financing (no value until its done)
construction financing:

§ No amortization of principal: (interest only loans, do not pay off the principal until we get the post construction loan).
§ Again b/c there is not income from the property
§ Loan includes amounts necessary to pay interest
§ Recourse loan, therefore there is personal liability.
construction financing (no value until its done)
construction financing:

§ Permanent Loan
§ Long Term
· These are people like life insurance companies. People who have long term obligations.
§ Fixed interest rate
§ Nonrecourse often
§ Amortized (we pay not only the interest but we pay the principal).
post construction financing (completed building)
construction financing:

o Construction gets done properly
§ Permanent lender needs this because the property is its security and wants to have the collateral that it bargained for.
o Funds invested according to commitment
o Construction loan paid on completion of project
o Permanent lender gets security it contemplated
common interest
construction financing:

- Advance approvals by the post construction lender the construction lender will want as much as possible approved by the post construction lender at the time of the commitment: like surveys, leases, title, plans, etc.
o Things that generally cannot be approved: final surveys, engineer’s reports, final title search, finalized leases.
construction financing
construction financing:

often necessary, particularly real estate offices
gap financing
construction financing:

pays off construction lender after the shell is completed
§ Permanent lender will not advance more money until is completed structure. § Thus, must get gap financing to do the tenant improvements and generally get this from the construction lender as second priority funding.
gap financing:

floor loan
construction loan:

what are the concerns:
§ Creditworthiness of the borrower
§ Market and project fundamentals
§ Cannot rely entirely on the take out loan, post construction lender may find a way out of the commitment.
gap financing:

construction loan underwriting
terms and conditions of construction loan:

o Application (make an application)
o Commitment Letter (lender responds): counteroffer to the application
procedures for coming to loan terms
terms and conditions of construction financing:

· The amount of the obligation
· Relating to Disbursement of funds
· Identification of the collateral
· Nature of the document (personal deeds, trust deeds, etc)
· Construction Schedule
· Required pre leasing agreements.
· Insurance
· Deadlines for plans and specifications.
· Required surveys.
· Specified legal opinions that may be necessary.
procedures for coming to loan terms:

matters covered by the commitment letter
terms and conditions of construction financing:

§ Hard: the costs of construction: labor and materials.
§ Soft: intangible costs like attorney and professional fees, insurance, brokers, recording taxes. Interest can be a soft costs
loan amount and other payments terms:

hard and soft costs
terms and condition of construction financing:

construction financing without the requirement of take out loan
§ This is longer term construction financing. This kind of financing tends to be expensive.
loan amount and other payment terms:

open ended construction financing
terms and conditions of construction financing:

§ Match Funding: construction lender gets loans for the amount to be funded at lower interest rate than charging to the developer
§ Interest rate swaps: swap variable rates for fixed rates with someone who has exposure to fixed rates.
loan amount and other payments terms:

hedging strategies
terms and conditiosn of consruction financing:

· First in time rule still applied
· Mechanics Liens generally date from the time of beginning of construction, even if material man or mechanic begins his work long after this time.
loan amount and other payments terms:

prioerity against mechanics liens: prioerity issues
terms and conditions of construction financing:

§ Construction Loan often pays off the cost of the land and costs incurred for streets, sewers, etc.
lan amount and other payment terms:

priority against mechanics liens
tersm and conditions of construction financing:

Statutory liens that are created by state legislature in favor of people that they happen to like. These are automatic liens that are created by statute. The mechanics lien is enforced against the general contractor and not the owner of the property, but there is still a lien on the property
prioerity against mechanics liens:

mechanics lien
terms and conditions of construction financing:

· Work starts on the property. Laws generally require that I either give notice to the owner or report something in the real estate worker, to give notice that I am doing work. 3 weeks after I commence work I have to give notice. If I wait 2 months to give notice will only get a mechanics lien from the 3 weeks prior work. In order to enforce a mechanics lien will have to file a lawsuit. Need to do this right or else the mechanics lien will not be enforced.
priority against mechanics liens:

the way i get a mechanics lien
terms and conditions of constructio loan:

· Mortgage gets priority over late filed Mechanics Liens. Mortgage priority over mechanics liens as to all disbursements in some jurisdictions (see detailed discussion later and the optional/obligatory doctrine. Mechanic Liens relate back to time of commencement of construction when is this considered to occur? When the work begun is conspicuous and substantial enough to make it reasonably apparent that improvements are intended to be constructed at the site. Mechanic’s Liens have priority as to the structure but not the land
priority against mechanics liens:

priority rules relating to meachnics liens
terms and conditions of construction loans:

You want a provision that requires mechanics lien leases from all the people that did work on the property. Another thing that we can do; Bonds, can go to a bond company and say that we want a bond to cover all the construction workers and if any of these subcontractors don’t get paid the bond company will pay them. Therefore releasing the owner from all obligation and putting it on the bond contractor.
prioerity against mechanics liens:

as lender, what provisions might you want in the loan contract with mechanics liens
terms and conditions of construction financing:

I as a construction lender have agreed to loan amount money for certain disbursements in the future. With respect to all advances that I am obligated to make under the construction loan agreement I will have priority from the date of the recording of my mortgage. If I record my mortgage after the commencement of construction I am behind mechanics liens. If I record before I am ahead of mechanics liens.
§ Post construction lenders are generally by law given priority for their future advances dating from the time the mortgage is recorded, not the time of the advance
§ Mortgage for future advances that is prior to mechanics liens takes priority.
optinoal/obligatory doctrine
terms and conditions of construction financing:

If my advance is an optional one its priority would date from the time the advance was made and not the date the mortgage was made.
optional doctrine
terms and conditions of consruction financing:

§ National Bank v. Equity Investors pg.
· General rule is that the lender must have notice of the mechanics lien to be subject to it. Notice must be actual rather than constructive in most jurisdictions. Why is there this requirement of notice? Fixing the problem before more money is advanced. Have to give notice 20 days after the commencement of work.
· How do we figure out whether we have an optional or obligatory advance: It is a question of discretion and whether the lender has a discretion in advancing the money. If we are obligated to advance the money then it is obligatory and if not then it is optional. What is the problem with this standard? It is not a bright line rule and therefore it is open to litigation. This standard compels the person to make sure that everyone is getting paid.
optional/obgliatory doctrine case law
terms and conditions of construction financing:

§ Irwin Concrete: This case says that that advances were obligatory. The fact that the agreement had typical requirements did not make this obligatory. The word “shall disperse” made this more obligatory then optional.
optional v. obligatory case law
terms and conditions of construction financing:

some states have created laws which get rid of the doctrine and just protected the construction lender
· Florida Law: broad protection of advances. Unlike Washington Law, Florida does not require that the advances be used to improve the property
optional/obligatory:

statutory responses
terms and conditions of construction financing:

not requiring complete compliance with the terms of the agreement in order to get advances can convert otherwise obligatory advances into option
· Like where allow to use building materials inferior to those called for by the contract (p 292. n.4)
optional/obligatory:

working with the borrower
terms and conditions of construction financing:

optional advances doctrine-since the lender gets actual notice of the liens, it can decide if it wants to lend further money knowing that it will be in second position
optional/obligatory:

policy
terms and conditions of construction financing:

agreements or law often provide that the borrower can limit the amount of the construction funds that take priority by giving notice setting maximum amount of advances that will take priority. This can be either part of the agreement or the law. The borrower can state the maximum amount that is going to have priority over mechanics liens. Allows the borrower to sell or get financing based on a set amount of prior debt.
optional/obligatory:

cutoff notice provisions
terms and conditions of construction financing:
it provides that the borrower and mechanic’s lien claimants can file a notice of commencement of construction n to particular project.
UCLA uniform constructino lien act
terms and conditions of construction financign:
· Very high variation in the laws relating to mechanic’s liens
· Who can obtain a lien: suppliers of services and materials for improvements
UCLA

state mechanic's lien laws
terms and conditiosn of construction financing:
: usually from commencement or visible commencement provided the claimant records a lien within some period of time form the date that claimant work on the project.
· Time period: 2 to 18 months from completion.
· This effectively gives a secret lien for some period of time.
§ Some date the priority from date of recording of the lien by the claimant but this gives grading contractor and other early workers an advantage. Some date from date of contract for the improvements. Some from date form recording of the prime contract or notice of it.
UCLA:

date of prioerity of mechanics liens under state law
terms and conditions of construction financing:

priority for all mechanic’s liens claimants generally from the date of recording of a notice of commencement
UCLA
terms and conditions of construction financing:

priority from the time of the filing of the notice, even if commencement occurred earlier
· But claimant file individual lien within 90 days of claimant finishing work on the project
UCLA:

if notice of commencement filed
terms and conditions of construction financing:

priority from earlier of date of visible commencement or when the individual claimant’s lien is filed
· What constitutes visible commencement? Section 208(d) If anyone of three things listed below:
o Materials are delivered in preparation of construction
o Excavation
o Other Thing????
UCLA:

if no notice
terms and conditions of construction financing:

so long as recorded prior to any of the priority dates of the mechanics lien claimants (Section 210). Notice before commencement then the future monies are protected.
UCLA:

construction lender lien is prior to mechanics lien
terms and conditions of construction financing:

Uniform law does not follow optional/obligatory doctrine, if you have priority by notice of commencement if underlying Mechanic Lien any advances will have priority over mechanics lien so long as advances fit in one of three Categories.
· (1) Advance made in payment of the price of the agreed improvements
· (2) Advance to protect the security interest in the real estate, like taxes or insurance.
· (3) Advance to pay prior lien on the property.
o The above rejects the distinction between obligatory and optional advances: priority given to all advances that meet one of the above requirements.
UCLA:

future advances also have priority if
terms and conditions of construction financing:
§ If Construction commenced before mortgage is recorded, then all the ML would have priority over construction loan. Under the UCLA, the construction lender would have priority over the ML if it is recorded before the ML’s notice of commencement. Want to record before visible construction occurs.
UCLA
mechanics liens:

Provided more protection for lender.
§ General Coverage: Protect first priority of the construction lender against others, ML’s claimants. Only covers against those liens that were recorded before the date of the policy.§ Endorsements: Provide specific coverage depending on the law of the particular state.
title insurance
mechanis liens:

Protects only against ML’s for services prior to a particular date. This is appropriate in a state where priority is given to intervening ML’s or where subsequent advances are option. (States where optional advances in future, and where ML can get priority over construction lender for such advances).
title insurance:

endorsement a
mechanics liens:

Where there are optional/obligatory advance rules and mortgage recorded before construction is commenced. (Aimed at optional/obligatory doctrine state).
title insurance:

endorsement b
mechancis liens:

: covers optional advances made before the recording of ML’s and appropriate in sate that give priority to Ml’s as of date of recording.
title insurance:

endorsement c
mechanics liens:

Appropriate in a state that gives priority to all advances as of the recording of the mortgage, so title company can be confident that the mortgage will be superior to any later filed ML’s. (State that says if you are before ML, then you will be before no matter what kind of advances are made).
title insurance:

endorsement d
mechanics liens:

Coverage does not extend to matters resulting from the failure of insured to comply with the law or the contract of the loan. Title Insurance not insured by breach of failure by the construction lender.
title insurance:

second paragraph of endorsements
mechanics liens:

§ If make loan such that fail to provide sufficient funds to complete construction or withhold fund necessary to complete construction, may be in violation of this provision and lose priority.
§ Loan policy is actually superior to the construction policy.
title insurance
meachnics liens:

Can get bond to cover any payments necessary for claimants who might have ML’s. Not often used because they are expensive.
bonds
mechanics liens:

The lender can require that all possible MLs claimants provide waiver of thief liens before advance any money or future advances. Construction lender wants to get waivers from all ML claimants. In California every claimant individually must do the waiver.
· To find out who is possible ML claimants have to ask the owner or developer. Owner can lie so say owner must tell the lender who all the ML claimants are under penalty of perjury.
lien waiver
mechanics liens:

it’s a way to get a lien without filing properly. Court of equity grants liens on other peoples property. Equitable lien theory applies to anyone who can assert a lien, those who have done work and have not been paid. Can be for general contractor or any other claimant. Lien can be on proceeds of the loan or if there are no proceeds remaining, on the property itself. Equitable lien theory is independent of the mechanic’s lien laws.
equitable lien theory
mechanics liens:

· Unjust Enrichment: Lender has gotten the benefit of the work of the contractor an there should be a lien on the property for the value of the work performed.
· Third Party Beneficiary Theory: Claimant is third party beneficiary of the loan contract and should get a lien for this reason. Ex: construction loan had to pay the Ml claimant and the claimant did not get paid.
theories for equitable lien theory
mechanics liens:

Some states allow the claimant to file stop notice and end construction and enforce their claim against construction loan proceeds: effectively a prejudgment attachment on the loan proceeds.
equitable lien theory:

stop notices
mechanics liens:

Condition of post construction loans that construction is completed in accordance with plans and specifications. Lender will look at all the plans and approve them to insure the correct completion.
assurance of completion
mechanics liens:

develop the plans that you want and then you hand out the plans to a number of contractors for bids. This is a fixed price contract. How protect against overruns? Holdbacks, in the express k, there will be changes to the plan and this will cost money. You want to protect yourself by providing that 100% will not be given and some of it will be held back. You also want changes approved by both lenders. The bottom line is to monitor the cost closely.
assurance of completion: types of building contracts:

fixed price
mechanics liens:

going to pay you the cost of the contract plus something. This contract is good for the contractor. This kind of contract can be fairly dangerous for the owner. Cost control from the beginning of the contract; involve contractor and architect in the process of estimating costs; keep track of costs and get estimates of future costs; look at alternate designs and materials.
assurance of completion: types of building contracts:

cost plus
mechanics liens:

where construction starts before the plans and specifications are finished. It will be hard to get a loan because plans are not completed
assurnace of cmopletion: types of building contracts:

fast track
mechanics liens:

building contract where the contractor designs and builds the project.
assurance of completion: types of building contracts:

design
mechanics liens:

· Payment: guarantees payment of bills that might result in mechanics liens. This is a bond that will say if the contractor or subcontractors do not get paid we will pay.
· Performance Bond: guarantees that the contractor will actually perform the construction obligation. If the work does not get completed we are going to see to it that the work is completed.
assurance of completion:

surety bond types
mechanics liens:

· Cost: they cost money and we don’t want to spend the extra money.
· Defenses: bonds limited to guarantying performance as in the original plans; losses caused by things outside of the contract (like using part of holdback) or due to breaches of the contract
· Who is bonded? If covers subcontractor, surely may argue someone other than the subcontractor caused the problem.
· Los Angeles Clause: only liable if everyone else lives up to their obligation. Only liable as long as everyone else does what they are suppose to do and if there is a loss.
assurnace of completion:

problems with surety bonds
mechancis liens:

contractor agrees to perform from construction loans funds even if the owner defaults.
assurance of completion:

guaranty of the contractor
mechanics liens:

Three party transaction. Under a letter of credit a person wants to be assured that another party is going to pay. So to make sure that the other party is going to pay, so you tell the other party to go to the bank and tell them to buy an obligation of that bank to pay me. Banks obligation under letters of credit, if the bank agrees to pay under a letter of credit they have to pay if I give them the right documents. Usually the bank will let the person put up collateral if not cash.
assurance of completion:

letter of credit
mechanics liens:

they agree to disburse money to the persons owed money.
§ Holdbacks: Look above. These are universal.
assurance of compeltion:

title insurance company disbursement deals
closing and dispusing funds:

§ Warrants that all advances will have priority over intervening liens.
· But the borrower may not have control over these things because optional advance rule, etc.
§ Warrants that work will be done on schedule and in first class workmanlike manner. A warranty is only as good as the person you gave it to.
representation and warranties of hte borrower
closing and dispursing funds:

· Can be in stages or on monthly basis
· Lender will require for disbursement of funds, that the work has been done previously and that everyone involved has been paid. Want the borrower to give me a list for everyone who has done work on the property. So I’m going to want names and addresses from everyone involved and lien waivers from those people. Title insurance.
pre-disbursement requirements:

borrower makes request for payment
closing and disbursing funds:

Borrower will need to cover these or get agreement of contractors to not take full payment until end of project
pre disbursement requirements:

holdbacks
closing and disbursing funds:
§ Sometimes make payments jointly to borrower and the contractor to insure payment of the contractor. Danger: if lender controls payments very closely this may create fiduciary duties to the developer and lender will be subject to suit if the funds are not used, as they should have been.
pre disbursement requirements
closing and disbursing funds:

o Lender will require right to approve changes and should get approval of the permanent lender. If cost overrun, lender should retain right to discontinue payment of “soft” costs like interest payments, etc. so that “hard” costs get paid. The attorney’s fees and the like will not get paid.
cost overruns
closing and disbursing funds:

will require the following
o Final lien waivers
o Certificate of substantial completion and certificate of occupancy
o Approvals of all government agencies
o Letter from the permanent lender that everything has been done according to contract and that the commitment is still in place
final loan advance
ownership entity:

what form of ownership do we use for the entity doing the project? Who is the developer doing the project?
- Tax:
- Financing: liability, etc:
- Legal: splitting income, liability structure, formation
Issues
ownership entity:

the entity is considered just the sum of its parts. The money flows to the owners, the losses and deprecations get flowed to the owners, and does not get taxed at the entity we created level.
o Entity is just a conduit and the constituent owners are the entities taxed
types of entities for tax purposes:

Aggregate
ownership enttity:

the juridical entity is treated as a taxable entity separate from the owners.
types of entties for tax purposes:

entity
ownership entity:

a mechanism for investing in real estate. Books says that no one uses it as a vehicle for investment in real estate. When I sell a piece of property if it went up in value there is a capital gain and you get taxed on it. Their things are not popular vehicles for real estate development.
possible forms of ownership:

tenancy in common
ownership entity:

o Characteristics:
§ Death of tenant: property must go through estate of deceased
§ Unanimous consent necessary for actions to be taken on property.
o Advantages:
§ Each tenant ma choose own tax treatment
§ Each tenant does own tax return-no entity level tax return
o Disadvantages:
§ Tax attributes must be allocated according to ownership interests; cannot agree to different allocation
§ Possibility of tenancy in common being treated as a partnership
possible forms of ownership:

tenancy in common
ownership entity:

all partners liable for debts of the partnership, jointly and severely.
possible forms of ownership:

general partnership
ownership entity;

Limited partners do not have personal liability unless:
possible forms of ownership:

limited partnership
ownership entity:

LP can have liability for debts if has “control” over the partnership. What is “control”? interpreted fairly broadly, just giving advice to the partnership can get you personal liability.
possible forms of ownership: Limited partnership:

ULPA 1916: uniform limited partnership act
ownership entity:

In what circumstances does this law allow the limited partners to exercise control without creating liability? Note that LP only has liability, even where there is control, to a party who thinks that limited partner is a general partner. If I want to claim that a limited partner has liability have to allege that the limited partner in question was in fact a general partner.
Limited partnership:

RULPA 1985
ownership entity:

: no liability even if have control, but there is liability if the wrongful conduct of the limited partner caused the damage or if party can “pierce the veil”.
limited partnership;

ULPA 2001
ownership entity:

2 circumstances; where we can apply alter ego (the real person behind this thing is) or a limited partner can also have liability for acts that the limited partner did.
possible forms of ownership: Limited partnership;

limited partnership interest are not very liquid
ownership entity:

This means that the entity itself does not get taxed, instead partners get taxed.
possible forms of ownership:

partnership has tax advantages of being an aggregate entity
ownership entity:

· Distribution are only taxed once-to the partner
· Losses are also passed to the individual partners
· Can agree among partners concerning how the tax attributes will be distributed among the partners so long as they accurately reflect the economic reality of the entity.
· Basis in property for limited partners can include an allocated share of the debt of the partnership if it is qualifying non-recourse financing what is necessary to be qualifying financing? The partnership has to borrower at a non-recourse basis. This debt can be distributed among the limited partners and increases the basis of the property. Only works with non-recourse debt.
possible forms of ownership:

partnership has tax advantages of being an aggregate entity
ownership entity:

Depends on control, like if we have passive investors. If you have people that want to be involved then we will do a general partnership, but if you want to raise money from people who do not want to be involved then limited.
possible forms of ownership:

when would one choose general partnership and when would one choose limited partnership
ownership entity:

o Owners have Limited liability: shareholders are not liable for corporate debt.
o Allows many investors and liquidity of investment.
o Exemption from usury laws as borrower
o Taxation; subject to double taxation: the corporate entity is taxed and any distributions to shareholders are also taxed.
possible forms of ownership:

subchapter C corporations
ownership entity:

o Limited liability of corporation and gives you most but not all of the tax benefits of a partnership. Taxing occurs only on the shareholders. Do not get a step up in basis in a subchapter S corporation.
o Treated as partnership with respect to many issues of taxation; is treated as non-taxable conduit and can pass through tax losses to shareholders
§ But with respect to losses, the rules on the amount of losses that a shareholder can deduct are more limited than in the case of a limited partner in a limited partnership due to different rules on calculating basis in property.
o Problems:
§ Limit on the number of shareholders
§ Shareholders must be individuals (have to be human)
§ Cannot have non-resident alien as shareholder (humans)
§ Cannot have more than one class of stock.
possible forms of ownership:

subchapter S corporation
ownership entity:

o Partnership taxation
o Limited liability corporation
o Shareholder can have partnership type control of the company . you can choose to have a limited liability company that has members that act like partners in a partnership that make decisions in the entity.
o Problems:
§ Since these are new entities, the law is uncertain concerning many issues, but not with respect to most of the important tax issues.
§ State laws vary on the requirement for LLC’s
possible forms of ownership:

limited liability companies
ownership entity:

allow partnership and LLCs to choose the type of taxation they wish-corporate or partnership.
possible forms of ownership:

check to box tax rules
commercial leasing:

base rent plus a percentage of revenue or income.
percentage rent
commercial leasing:

o Used often-in shopping center and other retail leases. This would not be residential leases or office renting, or industrial leasing. So there is going to be a base rent and there is going to be a percentage of net income or base income and this is what we are going to pay in rent. Base rent will be lower then normal rental value. Landlord wants to do this because they want people to come and they are hoping that they will make money from it. These are long-term leases.
percentage rent
commercial leasing:

o Why would a landlord want to do it this way? As a matter of inflation we are going to assume that the amount of there net income or gross sales will go up over time because of inflation. Potential to have higher gains.
o What about the Lessee? Rent obligation is determined on whether the company is making money. Therefore if they are not making money they get to pay rent cheap.
o What issues are they’re concerning how the percentage should be calculated?
§ Is it based on gross sales, net income?
§ Does it include amounts that are collected as taxes? Exchanged or returned inventory? Internet sales?
percentage rent
commercial leasing:

It would be problematic if a party just leaves the place empty even though they pay rent. You protect against his by putting a clause in the lease that the person owes rent and that to continue operating the business on the property.
covenants of continuous operation: can a party let a location go dark
commercial leasing:

o Lagrew: base plus percentage rent lease. They didn’t want to operate the pharmacy there so they closed and just kept paying the rent. There was no clause to keep the place open. Landlord argues that even though there is no express clause there is an implied provision to keep the place open.
covenants of continous operation case law
commercial leasing:

· Must be basis in the express contract of the parties making it necessary to imply a duty in order to carry out the intent of the parties. Looking at intent when it is implied.
covenatns of continous operation: when will implied covenants be found to exist
commercial leasing:

o Is the base rent below market?
o Are percentage of rent payments significant in relation to the base rent?
o Is lease lengthy? Longer more likely that you intended it to be occupied.
o Does tenant have a right to fixtures? Factor against there being an obligation to stay.
o Is there a non-competition clause? Suggest that continuous operation was expected.
covenants of continous operation:

when will an implied covenant be found to exist. facts to consider
commercial leasing:

§ What was the courts analysis in the case and what did it look at in determining that there was an implied covenant of continuous operation in the lease?
§ Although the P won here, in may cases courts have not implied such covenants.
§ What are the remedies for breach of such a covenant? Specific Performance. Legal remedy would be: the fair rental value of the property. Fair Rental Value: Base rent plus something (historical data, experts telling us what the property will rent for, etc.). Is there any reason the court may not grant specific performance? Specific performance will not be granted if it will require a great deal of supervision by the court.
covenants of continous operation
commercial leasing:

tenant has the exclusive right with respect to a certain kind of business. This is for a lease on the property.
restrictive covenants: exlclusive agreemens
commercial leasing:

Landlord may also agree not to rent to similar business within a certain radius.
restrictive covenants: radius clause
commercial leasing:

cannot sublet to certain types of business. Property can only be used for certain purposes. Usually based on exclusive agreements with other tenants.
restrictive covenants:

use clauses
commercial leasing:

Furniture showroom project was intended, but the lessor leased to others when the furniture business went south, so rented to other people not into the furniture showroom business.
o Issue is whether there is a restrictive use covenant that says the landlord can only rent to furniture showrooms
o This is to be determined from the lease generally, not just specific provision that relates to use of the property.
o How does the court determine that there is use restriction in this lease? The court is not implying this, the court is finding that it exist and that there is an explicit term. They are doing this by putting together the bits and pieces of the agreement. This shows that the lessee can be restricted in the use and the landlord can be restricted with respect to whom they can lease too.
restrictive covenants case law
assignments and sublets:

absent contract restriction, lessee can assign or sublet
- Courts have enforced restrictions on subletting and assignment, even if arbitrarily applied by the landlord
common law
assignments and sublets:

lease has provision that requires the lessor’s consent to subleasing of the property
o Rule: Absent a specific provision that allows the lessor to decline to consent for any reason, consent can only be withheld if there is a good faith and reasonable objection to the sublease
newman
assignments and sublets:

§ Financial responsibility of sublessee
§ Assignee’s suitability for particular property
§ Legality of use
§ Need for alteration of premises
§ Nature of the use
newman: factors in determining reasonabbleness
assignments and sublets:

- Best Case:
o Cal. Civil Code Section 1995.240: allows restrictions on transfer of tenant’s interest in lease, including provisions that allow the landlord to get some or all of the excess rent received.
§ The right of the landlord is based on the increase in the rental value of the premises, not the value of the business itself. What was the consideration to the landlord based on here?
assignments and sublets: case law
assignments and sublets:

o The Court is saying: You can only may a claim to rent increases that you get, the landlord cannot get a piece of the sales price of what is effectively the business, and can only ask for excess rent.
assignments and sublets case law: best case
assignments and sublets:

if clause in contract is unconscionable, then the court may refuse to enforce the clause, etc. Can say a provision unconscionable even if it fits in the statute.
§ Unconscionability defined: Has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms, which are unreasonably favorable to the other party.
§ Procedural and substantive unconscionability:
· Procedural: inequality of bargaining power and hidden terms in pre-printed form drafted by the other party
· Substantive: one sided unjustified provisions
· Analyze these elements on a sliding scale: the more procedural unconscionability, the less substantive is necessary and vice versa
§ How did the court come out on this issue?
assignments and sublets:

Unconscionability