Modern Real Estate Transaction

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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 t: 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 ca: 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 in: 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 in: 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 o: 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: leverage and economic rewards:

interest rate
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: 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: 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: 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 canâ€™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: Â· Who is the buyer: use of clause that says Buyer is â€œX or Assignsâ€. Â· 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.: 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: 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 Â· Present mortgages: What does it mean to take â€œsubject toâ€ or to Assume a mortgage? o Assume: assume the loan I am und: 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 a: 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?: role of the lawyer in the contract:

seller financing
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 bor: role of the lawyer in the contract:

right if inspection - caveat emptor
contracts for sale: If you represent a buyer and you donâ€™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 th: 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 kee: 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 ca: 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 sellerâ€™s consent. Â· Sample Agreement: not assignable without sellerâ€™s consent.: role of a lawyer in the contract:

assignments of a contract
contracts for sale: the sellerâ€™s obligation that are not collateral or independent of the conveyance end when there is a sellerâ€™s acceptance of deed Â· If I am a seller, when I deliver a deed to the other party are suppose to merge in: 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.: 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 encumb: 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 req: 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 i: 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: 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 ap: 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 subsequ: 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: 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: 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 reaso: 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 ha: 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 f: 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 sc: 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 anyt: 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: 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 kn: 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.: 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: Â· 2 parts that will be written up: One policy will be written for the lender. Second will be the ownerâ€™s interest in the property. Also there will be an amount of coverage that will be stated. In the owners policy it is typ: 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 y: 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 s: 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 â€œP: 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 h: 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: 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, an: 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: 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: 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 els: 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 t: 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 finish: 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: Â§ 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 donâ: 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 trans: 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 con: 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 l: 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 t: 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 Pr: 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 Â· What language should be used to accomplish this? â€œborrower shall not be personally liable hereunderâ€, or â€œin the event of default, mortgagee will not seek a deficiency judgment against he: 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 · Wh: equitable mortgage:

absolute deed
nature of mortgage: BFP could take transfer of property and take priority over the grantor of the deed (the putative â€œmortgagorâ€).: equitable mortgage: problem
nature of mortgage: Â§ Where we donâ€™t have any documentation (oral agreement). Â§ As a result of defective documentation of the transaction, the most typical thing that happens is that people intending to transfer a mortgage instead ha: equitable mortgage: equitable mortgage can arise in a nmber of circumstances
nature of mortgage: where party agrees not to further encumber property â€“ 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 fe: 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: 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: 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 donâ€™t pay I lose everything that I invested into t: 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 â€œfirst in time first in rightâ€. 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 regardle: 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: less: 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 â€“ so they want a commitment before they lend: 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 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 const: 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: 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 p: 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 completio: 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:: 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 b: 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: 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 wi: 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 borro: 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 ahea: 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. Lende: 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 borro: 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 enforceabl: 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 d: 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 financ: 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. ·: 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 b: 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 p: 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 p: 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 t: 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: 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 objecti: approval of the security documents
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: 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: 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: 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 yo: 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: zoning restrictions:

architect certificat
preclosing commitment terms and conditions: Lending obligation is generally subject to â€œas builtâ€ 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 additio: zoning restrictions:

titile insurance for lender
preclosing commitment terms and conditions: Lender will want provision that if borrowerâ€™s and lesseeâ€™s financial conditions (significant parties) have deteriorated, lender will not be required to go forward. You want a clause that says tha: 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: Â· Wright: The lenderâ€™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. Wrig: 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 at: ethics in closing the loan:

attorney ethical obliations
lawyers role in closing: Â§ Lawyer for the borrower often has obligation to do opinion letters; sometimes other lawyers have obligation as well. The borrowerâ€™s attorney will do letter for lender. Â· What ethical problems exist when give: loan opinion letters
lawyers role in closing: (the main point is that you donâ€™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 yo: loan opinion letters:

form of opinion letter
lawyers role in closing: Â· Identify the role of the attorney; who represent, etc. Â· Documents reviewed Â· Assumptions Â· Practice limitation â€“ you want to say what you are giving an opinion about (a real estate attorney, or: 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 a: 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 o: loan opinion letters:

form of opinion on the sufficiency of documents to create a lien
lawyers role in closing: you donâ€™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 stateâ€™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 lenderâ€™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: Â· Laundry list â€“ 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: 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 m: 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: alternative financing:

participating 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: 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 part: 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 mon: 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 o: 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: Â§ Late Fee: Frequently use â€œreasonablenessâ€ standard used regarding liquidated damages clauses Â· Default Interest: use unconscionability standard of exorbitance. o But some use the reasonableness standard he: 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 B: 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: wh: 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: 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: 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: point of prepayment provision
prepayment penalities: o Lazzereschi v. SF federal savings Pg. 242 Â§ 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. Â: 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 â€“ 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: 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: 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: 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: 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 tha: 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 Â· Section 6 of the sample mortgage does not deal with reduced debt service if there is partial taking â€“ as borrowers counsel you might want to have provision relat: 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 fore: 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 cir: 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 wi: 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 sellerâ€™s ability to sell. Â· Lenders argument: is that it is not a restraint on alienation, becau: 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 enforceab: 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: 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: garn st. germaine act:

exceptions for residential mortgages
right to sell property: Â· Slevin and LDH say that since it is involuntary acceleration at the behest of the lender, it is not a â€œprepaymentâ€ and thus not subject to the prepayment provisions o Prepayment clauses are voluntary.: garn st. germaine act:

can enforce due on sale and prepayment penalty
right to sell property: Â· If is subject to prepayment, this might then constitute a restraint on alienation â€“ is more than just acceleration (Nobours) Â· What if sell majority interest in corporation that owns the property: should not: 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: 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 necess: 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 onl: 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 Co: 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.<: 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 ge: 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) · Constr: 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: 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 th: 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 c: 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/obligator: 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 t: 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: 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: optional/obgliatory doctrine case law
terms and conditions of construction financing: Â§ 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 â€œshall disperseâ€ made this mo: 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 r: 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: 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

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