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Real Estate Transactions and Finance
University of North Carolina School of Law
Oliver, Samuel T. "Ted"

 
REAL ESTATE TRANSACTIONS                                              
Professor SAMUEL OLIVER                                             
Fall 2014
 
 
 
Modern Real Estate Transactions- Fifth Edition
 
Exam:
·         Identify 20-25 terms- short answers of  2-4 sentences; 20 easy, 5 hard
·         3 essay questions, pick 2 [along the lines of  “what advice, what would you recommend?” [may include a loan document, and identify things that aren’t enforceable or things you would change] [may include a DoT, and you identify things that you want to change as borrower or lender] ·         Cap rate to decide what building; or what factors would effect the cap rate or value of the property?
·         2 hrs, closed book
·         [added in bankruptcy. Which was not in the reading, see chapter 18 in book, aka see bankruptcy outline]  
PART I: FUNDAMENTALS OF LAND TRANSFER
 
Chapter 1: The Nature of Modern Real Estate Transactions [Introduction] 1.       Role of the Lawyer
a.       Legislators/Philosophers
b.       Business Consultants
c.        Technical Experts
2.       Real Estate Lawyers are more than legal document drafters and require the knowledge to counsel their clients on numerous topics: [VALUE ADDED LAWYERING] a.       Contracts for acquisition, design and construction;            
b.        land use;                
c.        Zoning and subdivision control
d.       Condominium and cooperative forms of ownership;              
e.        Environmental impact;              
f.        Joint venture structures, partnerships, corporations and trusts;              
g.        Title and conveyance matters;              
h.       Leasing, ground leases and sale-leasebacks;            
i.         Financing from conventional lenders, pension funds and foreign investors;              
j.         Federal and state tax issues; and              
k.       Federal and state securities laws. 
3.       Notes and Questions
a.       Transaction Costs à Transaction Value shift
b.       “Never ask a lawyer or accountant for business advice. They are trained to find problems, not solutions.” Assuming that clients want advice about business matters, should real estate lawyers provide it? What are the dangers if they do so? 
                                                               i.      Some things they cannot opine on; especially if its in another state or for a lender
c.        Declining role of lawyers in residential real estate transactions
4.       Commercial Real Estate Development Cycle
A.      Start with Vision – What are your goals?
Ø Land use – Develop land yourself
·         Cash Flow Stream – Rent Role
Ø Option Contract   – Obtain option to purchase the property at a fixed price at a future time
Ø If NOT income producing, NOT commercial real estate
B.      First Phase
Ø Contract
Ø Permanent  Mortgage
·         First thing developer does is get this
·         Need this to be able to get a construction mortgage
·         Mortgage financing in place for Holding Period
·         More focused on Net Operating Income of project
Ø Construction Mortgage
·         Want to make sure there is a cash source to take them out (permanent mortgage)
·         Short term loan…Commercial bank
Ø Construction
 
C.      Second Phase
Ø Take Out (Buy/Sale Document)
Ø Project Management (leasing/upkeep)
Ø Disposition
PART II: FUNDAMENTALS OF REAL ESTATE FINANCE
 
 
Chapter 3: The Nature of a Mortgage and Mortgage Substitutes
 
1.       Master Hypothetical
a.       Dan Developer
                                                   i.      33 Million Project, 8m for land, 25m in construction/transaction costs
                                                  ii.      25 Million in institutional lending, 8m elsewhere
b.       Jan 1à Developer applies for $25m postconstruction loan, at a fixed rate of 10% for 15 year term, with closing date of December of next year (takeout commitment)
                                                   i.      Developer plans to get 25m for construction loan from another lender with the commitment from institutional lender for postconstruction
2.       Historical Overview of Mortgage Law
a.       Mortgage: mortgage is the transfer of an interest in land as security for the repayment of money or for the performance of some other obligation that is measurable by money. 
b.       Pledge/Pawn
c.        CL Mortgage, because real property can be used and transferred at the same time
                                                   i.      Eventually recording statutes were added
                                                  ii.      Equity Courts would settle redemption acts when the mortgagee had a valid reason
d.       Equity of Redemption: you always have a right to pay off the mortgage as the owner of the property subject to the agreement
1.       If the lender forecloses and gets more money than is owed at sale, the foreclosed upon debtor gets the additional equity.
e.        Statutory Redemption:
                                                   i.      In NC, 10 days after foreclosure the debtor can still pay the debt and reclaim title [states vary on length, longer historically in farming states for crop cycles] f.        Lien Theory States à mortgage is a lien on the property
                                                   i.       
g.        Title Theory States à mortgage passes title
                                                   i.      NC: when a deed of trust is conveyed, they literally convey legal title, owner maintains beneficial ownership [trustee holds the title]                                                   ii.      Why Deed of Trusts?
1.       Advantages:  a power of sale, absent judicial proceeding, to initiate foreclosure
a.       Permissible for lender to bid in on their own foreclosure sale because there is a third party trustee; also, well settled body of law regarding deed of trusts, its predictable
3.       The Nature of a Mortgage
a.       The Mortgage as a Security for the Mortgagor’s performance of an Obligation
                                                   i.      Can a mortgage require more by the mortgagor’s obligation to pay? à Yes
1.       Application of Jeffery Towers,Inc.: The court concludes that in the absence of defects such as illegality (zoning consent questionable), unliquidated promises in the nature of those presented in this case may be secured by a mortgage. It follows, therefore, that such promises must be fulfilled to entitle petitioner to a discharge of the mortgage. [driveway, and sewer construction].
2.       Restatement: The Restatement (Third) of Property (Mortgages) § 1.4 (1997) states the rule as “[ a] mortgage is enforceable only if the obligation whose performance it secures is measurable in terms of money or is readily reducible to a monetary value at the time of enforcement of the mortgage.” 
b.       The Mortgage Note as the Underlying Obligation
                                                   i.      Restatement (Third) of Property (Mortgages) § 2.1 (1997) states the general rule that advances made after the mortgage becomes effective are secured by the mortgage if the mortgage provides that future advances are secured or if the mortgage states a money amount to be secured and the future advances are within that maximum amount.  [OPEN-ENDED MORTGAGES FOR FUTURE ADVANCES]                                                   ii.       Subsequent Notes. Are they secured by a previous mortgage? [Dragnet Provisions] 1.       Emporia State Bank v Mounkes: P had note on house, got a subsequent loan to help son start a restaurant. Bank initiated proceedings to foreclose upon house and the subsequent debt.
a.       In summary, we hold that in the absence of clear, supportive evidence of a contrary intention a mortgage containing a dragnet type clause will not be extended to cover future advances unless the advances are of the same kind and quality or relate to the same transaction or series of transactions as the principal obligation secured or unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor.
c.        Personal Liability of the Mortgagor
                                                   i.      Whether the mortgagor must be personally liable for the performance of the obligation that the mortgage secures. 
1.       Bedian v. Cohn: we hold that a mortgage and note are evidence of a debt, but an agreement therein that the collection of the debt is limited to the property pledged, without personal liability on the maker, is valid and will be enforced according to the expressed terms. [non-recourse debt] 2.       So to make it recourse, they have to bargain for it [the default is non-recourse] d.       Equitable Mortgages
                                                   i.      The equitable mortgage doctrine holds that equity will interpret what is a defective security agreement (such as a mortgage instrument that fails under the Statute of Frauds or the recording statutes) or what purports to be a nonsecurity transaction (such as a deed absolute) according to the intentions of the parties, and, as between the parties, such arrangement will be given effect as a lien or other security interest even though it does not meet the technical requirements for a legal mortgage. 
                                                  ii.      Judicial foreclosure is how an equitable mortgagor would collect, and this is arduous process
                                                iii.      Not really an issue in commercial real estate; however note that some courts treat sale leasebacks as disguised mortgages
                                                iv.      Absolute Deed as Disguised Mortgage: we don’t really like them because they are secret liens [this is basically giving the deed and a promise to convey it back once indebtedness had been paid] e.        After-Acquired Property Clauses in Mortgages
                                                   i.     

    Altering Priorities by Agreement: Subordination and Non- disturbance Agreements
9.       Direct v. Indirect Encumbrances
a.       Indirect encumbrance → is an interest that does not directly encumber the fee but merely encumbers an interests that does encumber that original fee (basically a lien on a leasehold that was leased upon the fee)
10.    Lenders Risk Assessment
a.       Lender always will want to get paid first
b.       Wants to make sure costs and repairs to my secured property is done before paying anyone else
c.        Wants to make as small of a loan as relative to the secured property as possible
                                                   i.      Small equity cushion; loan to value ration is as little as possible
d.       Expand sources of repayment beyond property itself
                                                   i.      e.g. Personal guaranties from borrowers or others
                                                  ii.      Have a borrower who has other assets to secure
e.        Credit enhancements à specifically those for particular risks; A method whereby a company attempts to improve its debt or credit worthiness. Through credit enhancement, the lender is provided with reassurance that the borrower will honor the obligation through additional collateral, insurance, or a third party guarantee
                                                   i.      Leasing commissions à what the fuck is this? Tenant escrows or something, It seems like a rent roll collection agent
f.        Always know that the bank only lends
11.    Borrowers Risk Assessment
a.       Wants as small of a cash input; and thus smaller equity cushion [why isn’t this riskier? à
b.       Limit liability à how you structure the ownership of the property à creating entities to own the property, i.e. the only asset they own is the property, hence no other risk
                                                   i.      Make it so its nonrecourse loan, but these all have high loan : value ratio
c.        Spread your exposure à have other investors; so rather than having sole investors and placing all individual significant assets, the risk is shared, trade off with shared profits
d.       Do we want to guaranty these personally? Maybe to a limited amount; limit it to a percentage; limiting/restricting guaranty for affecting specific assets (i.e. you cant attach a personal house)
e.        Always know that the bank only makes money when they lend money
 
Chapter 4: Terms And Conditions Of The Mortgage Loan Commitment
 
1.       Pre-financing Considerations
a.       Selection of Real Estate
b.       Function of Post-Construction Financing
                                                               i.      Commercial Lending Cycle
1.       Begins with developer solicitation to a postconstruction lender for a loan commitment and ends with the closing of the loan
2.       Once you get the postconstruction loan commitment you then use that to get your construction loan commitment  [sometimes a buy-sell agreement will be used here and postconstruction lender will agree to buy the construction loan once construction is completed] 3.       Construction Loan extended and mortgage granted to construction lender, funds used to build commercial building using advanced progress payments
4.       See figure on page 134 for diagram
                                                              ii.      Selection of Postconstruction Lender
1.       Banks usually are short term where as life insurance are usually long term lenders
2.       Negotiating the Mortgage Loan Commitment
a.       Commitment Letter → a lengthy contract that constitutes the lender’s agreement to make the loan on the terms specified
                                                               i.      So the loan application is the offer by the prospective borrower and the commitment is the lender’s acceptance of the offer. So if the application and the commitment vary materially it is a counteroffer and not an acceptance.