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50 Cards in this Set
- Front
- Back
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leveraged transaction
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one in which a substantial portion of the investor’s fund is borrowed
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taxes as part of the appraisal of property
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Taxes and insurance must be included since they will affect any amortization effort
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Upfront Refi expenses
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New title insurance, new mortgage, new apprasial
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Keys to Refinancing
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a. rate spread: higher the spread, more benefit in adjustable rate mortgage if your only goal is to have more purchasing power
b. total cost to refinance c. length of time the homeowner expects to remain in the home |
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Deductibility of Interest
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1. Section 163 of the IRC authorizes a deduction for interest paid by a taxpayer on a residential mortgage.
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1. Fixed Rate Mortgage
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a. Same rate for 30 years; least amount of risk for consumer
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2. Adjustable Rate Mortgages (ARM)
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a. New mortgage instruments that link the mortgagor’s interest rate to some index of interest rate
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7. Buy Down Rates
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A borrower could agree to pay $X in interest in advance and 5% as a nominal interest rate for the life of the loan. The prepaid interest is a “buy down” of the rate
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ii. Constant payment self-amortizing
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4. constant payment refers to the fact that the monthly payment is computed so that same payment is made each month throughout the term of the loan, and ‘self amortizing’ refers to the fact that each month some principal is paid so that at the end of the term of the loan the entire principal is paid
5. you pay the same amount every month with the payment paying accrued interest and some portion of the amount owed |
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Arithmetic of Interest Rates
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a. Actuarial
i. Loan interest is calculated on the reduced balance of the loan after each monthly payment b. Add On i. 1000 principal at 6%; add the 6% onto the 1000 (60$) = $1060/12 = monthly payment of $88.34 c. Discount: discount method loans; borrow 1000, but 6%is deducted an you receive $940. i. Discount rate is computed as if the whole 1,000 is available for the term, but you only receive the $940. |
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a. brokers have unilateral K with seller
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“produce a willing, able and ready buyer and I will pay you a fee”
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duty of loyalty
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real estate brokers have traditionally served as agents for sellers and owe the fiduciary duties of care and loyalty to their seller clients. Specific illustrations of loyalty:
1. cannot disclose to others information that prejudiced client 2. disclosure of all material information to seller 3. no self dealing |
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ii. Types of Seller-Broker Arrangements:
1. CL Rule |
There is no limit to how long after the agreement expires, as long as jury is convinced that the listing was sold due to solid work of the broker during the time of the listing agreement, even if the property is sold after the agreement expires, the broker is still owed a fee.
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2. Net Listing
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broker gets a % or all of the purchase price in excess of Seller’s minimum acceptable price
a. This is barred in most states because there is a big conflict interest potential |
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3. Open Listing
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if seller accepts a K from the broker, a commission is due; must have terms of date; price to be sold; commission fee; the property to be sold
a. Owner has the right to sell b. Broker must be procuring cause to get commission. |
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4. Exclusive Agency
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When principal is not foreclosed from competing with the broker (SEE PAR § 6 and §7)
a. Owner right to sell b. Other brokers barred c. B must be procuring cause, B only doesn’t get fee if owner is seller. B will still get fee if another broker sells. |
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5. Exclusive right to sell
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Broker is sole person with right to sell
a. Owner may not sell b. No matter who causes sale, B gets paid as long as it is within the time period |
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2. Broker’s Duties:
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a. Dual Agency
i. Licensee = agent for both seller/buyer in same transaction (written consent) ii. Dual agents owe duties of: iii. Taking no action that is adverse or detrimental to either party’s interests in the transaction iv. Making continuous and gf effort to find a buyer for the property and a property for the buyer v. Confidentiality (except with regard to material defects) b. Designated Agency: i. employing broker may elect other licensees from RE company to represent you ii. take reasonable care to protect confidential information iii. take responsibility to direct and supervise the business activites of the licensees who represent the seller and buyer while taking no action adverse or detrimental to either party’s interests c. Transaction Licensee i. Broker/salesperson who provides communication or document preparation services or performs other acts for which license is required without being the agent or advocate for either seller/landlord or the buyer/tenant. ii. Limited confidentiality. d. Seller’s Agency: Duties that broker owes to seller – Broker is agent of seller e. Buyer’s Agency – same as above but for buyer f. Exclusive Agency: Broker owes duties to buyer - but may also owe duties to sellers g. Non-Exclusive Agency: Broker and buyer are not obligated to work for one another |
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a. Hypo #1: Changed Mind
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i. Broker does not present ready willing and able buyer b/c the objective of hiring the broker was never achieved – no ready, willing and able buyer b/c buyer didn’t execute a K
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Technical Aspect of K breaks the deal
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i. Buyer is willing to buy but seller insists on using a specific title company (e.g. not customary) – if seller insists on something that isn’t customary that causes the buyer not to sign the K, the broker still has presented a ready willing and able buyer
ii. The seller cannot change the CL, unless other terms are negotiated |
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Most Close to Earn Commission
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i. Buyer gets wet feet and defaults after K is signed. Broker’s K provides the fee is earned only upon closing
ii. They changed the common law rule to a K term that said commission only if closed iii. Under CL, broker would get commission b/c they produced the buyer |
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: Seller’s Conduct Causes Default
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i. Same facts as above except that buyer terminates the K b/c title is not marketable due to undisclosed easement:
ii. An intent question . . . do contract provisions assume marketable title? Intent question iii. RULE – A seller may not take advantage of a situation he has created. The seller’s Act cannot make closing impossible. If the buyer backs out because the title is not marketable due to seller’s act – then broker STILL gets the fee. |
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Contract Language is Explicit
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i. “no commission unless cash in hand from buyer”
ii. Be explicit . . . iii. If the K between the seller and broker is explicit, then you must follow the language – then broker won’t get commission until condition is satisfied – he know what he is getting into. |
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3. Buyer Default/Risk Allocation:
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i. The deposit is used to protect seller in case of buyer back- out. 10% is regarded as liquidated damages, in most transactions, as safe, enforceable and necessary to avoid people walking out on contractual obligations
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1. Crutchley v. First Trust
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professional negligence issue: broker should have advised clients to find an attorney on an issue (non recourse provision) that they did not fully understand and, consequently, did not fully disclose, advice to clients
a. Brokers, for that reason, avoid saying a lot – usually advise to find an attorney b. Brokers may also require sellers to produce a disclosure statement – regulatory approach to compel seller and expose seller to liability with respect to closing what they know about the house |
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1. Listing Contract
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Provisions of Contract
a. Background information b. Economic terms c. Deadline d. Authority to broker e. Info about what is for sale f. Promise of broker to seller g. Compensation of broker h. MLS i. Boiler plate j. Duty of seller to broker or others |
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c. Contracts for Sale of Real Estate: Lawyer’s Role
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iii. The contract sets the a) purchase price, b) states the terms, c) establishes a time and place for closing, d) specifies situations that may allow one party or the other to withdraw from the deal (e.g. b/c financing cannot be obtained) e) describes just which title exceptions will be acceptable to buyer and which won’t and f) describes the rights if, prior to closing, surprises occur like the building burning down
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e. Damage: Title Defects
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i. If seller is unable to give good and marketable title … buyer will
ii. Accept property iii. Terminate this agreement, with written notice, return deposit to buyer . . . |
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f. Damages: Seller’s Default
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i. The author suggests that agreements sometimes provide that the buyer’s only recourse, if the seller gets cold feet and simply refuses to comply, is to get the deposit back.
ii. Such provisions are not common b/c they are patently unfair to buyers. Typical situation is to protect the seller to some extent if title is unmarketable but to leave to the common law a buyer’s remedies if seller refuses to close |
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g. Damages: Broker’s Commissio
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i. Under the common law, a broker earns the commission when seller accepts the offer and, thereby, accepts the buyer as ready, willing and able. If reach agreement and does not close, broker gets its 6%.
ii. Typically, buyer will put down a 10% deposit and if buyer defaults, seller can keep the deposit as liquidated damages |
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h. Damages: Buyer’s Default
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i. Custom: limit seller damage to 10%
ii. Election provision, paragraph 29: 1 |
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1. Components
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a. Sellers:
b. Description: might not be accurate (check address etc.) c. Covenants, Conditions, and Restrictions of Record d. Title: e. Damage: Title Defects (19D of PAR) ** SEE MARKETABLE TITLE SECTION BELOW** f. Damages: Seller’s Default g. Damages: Broker’s Commission h. Damages: Buyer’s Default i. Closing Date: j. Financing Contingency: k. Approval Contingency: Inspection Contingency Options l. Risk of Loss a. Assignment b. Merger c. Options: d. Remedies: e. Representations |
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NPV
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Present value of future cash flows minus (initial investment cost plus present value of future expenditures)
Tax benefits must be incorporated |
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IRR
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Internal rate of return
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NOI
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NOI divided by the cap rate is the "income approach to real estate"
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Crane Doctrine
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The correct use of the term property is the entire property regardless of mortgage (not equity)
-When property is acquired with a mortgage and cash the tax basis is the total of those regardless of liability |
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Depreciation deduction
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Turns ordinary income into long-term capital gain
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I. Construction Lending – CHAPTER 6
a. Traditional Way for Owner To UnderTake Project |
i. Owner Developer (OD) engages investors, equity in the deal
ii. OD engages design professionals (preliminary plans) iii. OD engages prime/general contractor (GC) iv. GC engages subcontractors v. Two Levels of Disbursement 1. Construction lender funds OD 2. OD funds GC 3. Warning: as money winds down, people can drop the ball |
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b. Priority Against Mechanics Liens
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5.09: Liens
1. The Project shall be kept free and clear of all liens and encumbrances of every nature and description other than Permitted Exceptions ii. S5.12: 1. Lender has the right to acquire owner to produce all materialmen, or laborers, contractors . . . . Owner must give Lender notice of any notice of funds not paid (anyone that could claim common law statutory lien) iii. Majority Rule: when lien is field, the lien attaches to the property in an amount that is capped at the remaining funds due to the prime contractor 1. modest risk: if lien goes on with 2/3 funded, the most you can risk is at least 1/3 iv. PA Rule: you risk everything; you get no credit for advances; theoretically, you could pay all the money to the prime contractor and if no one advanced their funds, you could be left with liens in full amount of construction price and you’d owe to pay for building a second time v. Commencement of Construction: Many, if not most states (priority states) provide that mechanics liens relate back to the date of commencement of construction 1. General Rule: construction commences when the work begun is conspicuous and substantial enough to make it reasonably apparent that improvements are intended to be constructed at the site a. Visible of a nature that tells you construction has started vi. Mechanics Lien Statute: (gets rid of OOD) 1. construction lender subordinates to the mechanics lien |
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a. Optional Obligatory Doctrine (common law)
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i. subordinates an otherwise prior mortgage lien to a mechanics lien or materialmen lien to the extent that the mortgage loan advances are merely optional
1. Rule No. 1: Complete Advances are Protected 2. Rule No. 1: Later Advances: Construction Loan advances were made after the lender receives notice of an intervening mechanics lien (a second advance) are subordinate to the mechanics lien if advances are optional a. you do need notice . . . ii. Effect of Waiver of Defaults 1. suppose early work in the job costs more than you thought (belly up in the cash flow) 2. ask owner for additional cash – he’ll advance you cash (optional) but he loses his priority 3. creates a problem: good, prudent management, most likely to minimize difficulty is penalized (lose priority) a. lender finds self in a position where he doesn’t have any le-way to help contractor out |
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ii. Filing of Mechanics Liens:
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1. remember: if subs start to file mechanics lien, construction lender priority is maintained as long as they advance to the owner to pay toward the K
2. sub has to give 30 days notice of intent to file and has to file within 5 months of stoppage of work a. in construction of work, lien relates back to commencement of work b. in repairs/alterations, it arises only when field |
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iii. Lien Waivers
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1. old law: owner could get the general to agree, as part of the K, that the general will not file any mechanics liens
a. waive in advance the right to file ML 2. June, 2007: a. In all commercial construction, no advance waivers are enforceable; designed as against public policy and don’t work b. In residential, construction less than 1M (total K price) permits an advance waiver; 1M or more, advance waiver not permitted |
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iv. Payment Bonds:
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1. ones that guarantee payment of the bills of suppliers of labor and materials and is designed to reduce significantly the risk of mechanics liens
a. How should relationships be worked out to ensure that people get paid? i. Before owner pays GC to pay subs, owner might require that the sheetrocker says he’s been paid previously 1. any time there is a draw, all subs have to come up and say that they’ve been paid a. get an endorsement from both parties |
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Tax issue with refi
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Income is taxable but borrowed money is not so refi is a good source of tax free money
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Wrap around mortgages
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A wrap-around mortgage, more-commonly known as a "wrap", is a form of secondary financing for the purchase of real property. The seller extends to the buyer a junior mortgage which wraps around and exists in addition to any superior mortgages already secured by the property. Under a wrap, a seller accepts a secured promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.
The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee(s). Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property. Typically, the seller also charges a spread. For example, a seller may have a mortgage at 6% and sell the property at a rate of 8% on a wraparound mortgage. He then would be making a 2% spread on the payments each month (roughly, anyway. The difference in principal amounts and amortization schedules will affect the actual spread made). As title is actually transferred from seller to buyer, wraparound mortgage transactions will violate the due-on-sale clause of the underlying mortgage, if such a clause is present. |
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Gap financing
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Gap Financing is a term mostly associated with mortgage loans or property loans. It is an interim loan given to finance the difference between the floor loan and the maximum permanent loan as committed.
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Mezz Finance
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refers to non-mortgage financing secured by equity pledged in the ownership entity
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Partners re Mezz
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Cannot be general partner or managing member
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parties in mezz
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Mezz lender will have to be in communication with the mortgage lender
-Deed in lieu and other foreclosure actions are a threat to mezz lender so they will want them agreed to by mortgage lender |
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Tax escrow
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Can take front lien holder out so they require escrow
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