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Real Estate Finance and Development


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Describe the Timeline of a Real Estate Transaction
1) Decision to obtain a Mortgage Loan
2) Application for a Mortgage
3) Commitment (Contract)
4) Closing (Settlement)
5) Due Date (Law Day)
6) Foreclosure
7) End of Statutory Redemption
What is Anti-Clogging
A mortgagee cannot clog mortgagor's equity of redemption even through express contract. This rule is strictly enforced in the residential setting.
What is an Absolute Deed?
An absolute deed is a mortgage substitute where the debtor gives a deed to the lender in lieu of a mortgage, and the lender reconveys the deed when the dept is paid off. In these transactions, it appears that the debtor has sold the land to the lender, but he has actually really intended only to create a mortgage. The Intent of the parties is critical.
What are Conditional Sales?
Attempts by lenders to avoid giving mortgages and their corresponding equity of redemptions by utilizing a variety of conditional devices.
What is an Equitable Mortgage?
Courts will often step into situations where the lender has tried to avoid the standard mortgage/equity of redemption situation and will impose an equitable mortgage to protect the borrower.
What factors does a court look at when determining whether to grant an equitable mortgage?
1) Does a debt exist (essential element)
2) What is the relationship of the parties?
3) What legal assistance is available?
4) What was the sophistication and circumstances of each party?
5) Was the consideration adequate?
6) Who retained possession of the party?
7) What was the intent of the parties?

Courts will overstep the Statute of Frauds and Parole Evidence rules if necessary.
What is an Installment Land Contract?
Installment Land Contracts are the most common mortgage substitute and are used by buyers who need to make a very low down payment. The buyer maintains the taxes and the premises, but technically forfeits the land upon default. The Seller retains legal Title to the land and can assign the legal title as security for the loan. The buyer retains equitable title in the land.
What methods do courts take in determining forfeiture in Installment Land Contracts?
In order of strictness:

1) True forfeiture - if buyer defaults, he forfeits land absent unfairness that "shocks the conscience."
2) Waiver approach - forfeiture is allowed unless the lender accepts late payments, at which time the lender waives the right to enforce the default. This waiver creates and equity of redemption in the buyer.

3) Grace period statute - some states have enacted statutes whereby the buyer has a grace period in which he can tender late payments to the seller and the seller must accept the late payments and reinstate the contract if the buyer in fact pays.

4) Balancing of Equities - A middle approach under which the court looks at the equities that the buyer has built up, and if they are substantial, the court will not allow forfeiture.

5) Restitution - Forfeiture is allowed, but buyer gtes reimbursed for payments that exceed the seller's actual damages.

6) Equitable Mortgage & Foreclosure - Most lenient approach where ILCs are treated as mortgages and equity of redemption is required.
IF the market value of the land of a Installment Land Contract is less than the price, the seller might not want forfeiture. What other remedies are available?
1) Specific Performance - Payment using other assets that can satisfy the judgment
2) Foreclosure by sale
3) Strict foreclosure
4) Damage Suits
What is a negative Covenant?
A pledge that the borrower won't do certain things - namely encumber or transfer an interest in real estate.
What are the three different theories of title?
1) Title - Mortgagee has legal title to the property until the mortgage is satisfied or foreclosed. Mortgagee gets right to possession at the execution of the mortgage, but the MR gets a contract permitting the MR to stay on the land.

2) Intermediate - MR has legal title until default - following default, ME gets possession and rights to collect rents.

3) Lien - ME has a lien on the property only. MR has legal & equitable title to the land. ME doesn't get possession untile foreclosure. This is the most commonly followed approach.
What rights and liabilities does a Mortgagee have when he takes possession of property?
1) ME must maintain property as a reasonabvle prudent owner.

2) ME can collect rents as long as the lease was senior to the mortgage. IF the lease was junior it has to be renegotiated.

3) Has advantages of rents and disadvantages of destruction of junior leases.
What is the Assignment of Rents?
MR and ME agree that during foreclosure, the ME has the right to collect rents on the property, though not possess the land. This provides additional security to the lender.
What are the mortgagee's rights in an Assignment of Rents?
1) Security Interest - the Lender does not get an immediate right to collect, though she has an immediate interest in the rents. (most jurisdictions require default plus other requirements.)

2) Absolute Interest - Mortgagee can automatically collect upondefault.

3) Inchoate Interest - Not a present interest, but can become a right in the future if the ME does something at default
What is a receivership?
Judicial appointment of a third party to take possession of the mortgage property, to repair or preserve the property and collect rents. The receiver can be appointed when a foreclosure suit is instigated.
What is the standard for appointment of a receivership?
Insolvency of the MR or inadequacy of security are not enought to get a receiver. Courts look to:

1) Default
2) Security Adequate to cover the loan
3) Degree of waste
4) Contract for a receivership/Clause in the mortgage
5) Solvency of the MR
What is considered Waste?
Physical destruction or damage of mortgaged premises, including failure to make repairs that reduce value of property. ME can either get damages for the amount that his security interest in the property is damaged, obtain an injuction, or foreclose on the property.
What is CERCLA?
CERCLA originally increased liability of ME for environmental hazards - lenders freaked an pressed for a change. When in 1996, it was amended, the pendulum swung back and made it so the ME typically doesn't have any liability for hazardous waste.
How is insurance handled between the ME and MR?
Most ME Require that the MR carry insurance on the property. Most policies pay ME for loss or damage to property, but if it doesnt then the court will probably look to the intent of the parties when deciding who has to pay for damage.
How are property taxes handled between the ME and MR?
ME doesn't want non-payments and back property taxes, which create liens that can jump up in the priority list and usually require that taxes be placed in escrow.
How may the mortgagor transfer his interest?
1) Take over title "subject to" the old mortgage - There is no personal liability to pay the mortgage debt, only threat is loss of equity in property in the even of foreclosure.

2) Assume old mortgage - grantee is personally liabile for mortgage debt

In determining whether a grantee assumes or takes subject to an existing mortgage, courts look at the situation of the parties, the face of the instrument, and the object of the parties' transaction.
Must the ME consent to the transfer of the MR's interest?
If ME does not authorize the borrower to transfer the property, ME can call in a loan if a due-on-sale clause is placed in the agreement. ME might also charge an assumption fee
What is a surety?
A surety is one who is secondarily liable. A grantor is a surety when property is granted to GE subject to a mortgage, meaning that he has to pay if grantee defaults. A surety is discharged when the mortgagee changes the deal without MR consen in a way that impairs the surety's position.
What is a reservation of rights clause?
Clause under which a ME reserves the right to change agreement in the contract. Courts are split on whether or not the ME can change the deal later.
What is a due on sale clause?
A restriction on the transfer by the MR. The ME has the right to accelerate the amount due on the loan if the land is sold. This protects the ME from transfers that endanger the mortgage or increase the risk of default.
May the Mortgagee transfer his interest?
Yes, the ME can use the note & mortgage to sell or borrow money.

There are four transfer situations:

1) Sale to investor - transfer the whole loan to an entity that will hold it for the term.

2) Pledge to lender - ME borrows money from another lender and can pledge the whole loan as security for repayment.

3) Sale of Participations - ME can divide the loan and sell fractional shares to multiple investors.

4) Securitization of the loan - ME can pool mortgages and sell securities to the public that are collateralized by the pool of loans.
What are the assignee's rights once the ME has transfered his interest?
The assignee of a properly transferred note and mortgage is entitled to collect payment of the debt from the mortgagor and in the even of default is empowered to foreclose the mortgage.
What defenses does the MR have against the assignee's rights?
The assignees rights are subject to the defenses that maybe available against the assignee by the MR.

1) Negotiable Note - A note where the obligation is negotiable. The defenses the MR can exercise depend on whether or not the assignee is a holder in due course. If so, then MR cannot assert personal defenses (consideration, payment, fraud in the inducement) but can assert real defenses (incapacity, duress, infancy, fraud in the act.) If the assignee is not a holder in due course, the MR can assert all defenses.

2) Non-Negotiable note - if the note is an uncidition promise to pay a "sum certain," the note and mortgage are subject to any defense that the MR had against the ME.
How does the assignee become a holder in due course?
Concept that deals with the manner in which the note was transferred. Requires:

1) original physical paper must be transferred to the holder
2) holder must take for value
3) holder must take in good faith and be without notice that the note has been dishondered
4) There can be no "close connectedness" between the transferror and the purchasor.
How does the MR pay off his note when it is assigned?
Problems can arise if the ME transfers his interest and MR tries to pay off the loan. IF the note is negotiable, proper payment can only be made to the HDC and the MR bears the risk of mistaken payment. If the note is non-negotiable, then the MR pays the ME until he receives notice of the assigment
May a MR voluntarily prepay their mortgage?
The general rule is that prepayment is not allowed absent a contract clause expressly permitting it. (this is the majority rule.) In some jurisdictions, however, allowing for prepay is considered default.
Can a MR be forced to involuntarily prepay?
Yes, courts typically uphold language that forces MRs to pay prepayment fees even if the ME has chosen to accelerate the debt.
Are late fees allowed in mortgages?
Though MEs put these in to induce prompt payment, courts typically limit the fines to what can reasonable be connected to actual damages. Some Jx have allowed for implied grace periods before acceleration is allowed.
What is a Merger?
When the same person has the title and mortgage to the property, the smaller one is swallowed up by the larger one. Obviously you cannot have a mortgage on your own property.
What happens when a mortgagee takes a deed in lieu of foreclosure?
If there are junior liens on the property and the mortgagee takes the deed in lieu of foreclosure, the original mortgage is eaten up and the junior lien pops up in priority. The mortgagee could become liable for the junior lien.
What is a deed in lieu of foreclosure?
Normally, you'd have equity redemption that would allow the mortgagor to get bakc the property. Under a DILOF, the parties are canceling the deal and the mortgagor is giving the mortgagee the deed back.

Benefits for Mortgagor: Stays off the credit rating, avoid being liable for deficiency judgment if the property cannot payoff the mortgage debt.

Benefits to Mortgagee - can get the land back w/o having to go through the whole foreclosure process.
What is an acceleration clause?
Clause in mortgage contract permitting the morgagee to accelerate the entire debt upon MR default of montly payment or in performance of an obligation. The clauses should be included in both the note and the mortgage. Courts are split on how to approach them. Some strictly enforce while others use a balancing approach.
What is marshaling?
Equitable doctrine that may dictate order in which ME must foreclose when mortgage covers more than one parcel of land in order to preserve junior interests.
What is the two funds rule?
If Senior ME has claim against two funds and Junior ME has claim only against one, the SR ME must enforce claim so as to best preserve the value of the JR claim.
What are the methods of foreclosure?
1) Judicial foreclosure - the most comon
2) Non-judicial foreclosure - Power of Sale
3) STrict foreclosure - there is no judicial sale, MR gets period of time to pay debt, fialure to tender entire debt results in title to property vesting in ME without sale. The MR would have right to excess value of the property.
What is Scire Facias?
an order for the MR to show cause why the land shouldn't be taken in a strict foreclosure.
What are the elements of a Judicial Foreclosure?
First, the court determines which parties are necessary (anyone who has the right to redeem) and proper (people you want to have around, but who are not necessary.

Then the sale occurs. Important questions are what can be sold, what is the effect of the foreclosure on a second ME and what happens to omitted parties.
What is the effect of foreclosure on a second ME?
If 1st ME foreclose, than the 2nd ME has the right to "redeem" and can pay off the 1st mtg and get an assignment of the rights. If the 2nd ME redeems, he can control the foreclosure process.
What happens when a necessary party is ommitted from a judicial foreclosure?
If a necessary person is left out of a foreclosure sale his rights of redemption are the same as before the foreclosure suit.

Some jurisdictions will allow a senior lienor to strictly foreclose against a junior lienor when the senior had no knowledge of the junior and the junior knew but did not show at the sale.
What can be sold at the judicial foreclosure?
The mortgagor can only sell the title as it existed before he got it. Senior interest holders cannot be cut out of the process.
What is lis pendens?
Under this doctrine, parties who acquire an interest in the mortgaged property with notice of foreclosure proceedings are bound by the foreclosure decree just as if they had been named parties-defendant. If statutory redemption is available and the parties who have notice of the suit have their interest foreclosed, they can still redeem the property after foreclosure by paying the foreclosure sale price.
What are the elements of a power of sale foreclosure?
Generally, the property is sold without court supervision, based on mortgage provisions authorizing the sale without court involvement. The benefits are you don't have to worry about court costs and it is much faster. The Burdens are that the titles are less certain.
What standards are used for reviewing foreclosure sale and deficiency judgments?
1) Look at the conduct of the trustee and whether there was any harm inflicted on the mortgagor.

2) The price at the sale must "shock the conscious" to be overturned.

3) The mortgagee must act in good faith & use reasonable diligence to protect the interests of the MR
What is the constitutionality of power of sale transactions?
There may be 5th and 14th amendment due process violations because there is no opportunity for a hearing prior to foreclosure. The amendments only apply to public action so the government must be involved.
How are proceeds from the foreclosure sale distributed?
Proceeds from the foreclosure sale are distributed based on order of priority in time. Junior lieners must join in the foreclosure sale in order to get the proceeds. The Mortgagor is last in line and gets what is left over.
What is statutory redemption?
The statutory right to redeem property after foreclosure, when the equity of redemption period has ended, available in 26 states. The MR retains possesion of property during this period.

Advantages: Sale price at foreclosure sale is raised. MR gets another change to get property back. Purchaser does not get a windfall.

Disadvantages: Purchaser at foreclosure sale has to wait one year before they can retain property, but must manage property during the statutory period. If she improves the property, she loses value of improvements.
Who may exercise the right of statutory redemption?
MR, MR's successors and any junior lienor who joins in the foreclosure sale may exercise the statutory redemption right. You exercise the right by paying the buyer at the foreclosure sale the foreclosure sale price.
What methods are there fore statutory redemption?
Strict Priority - Order of redemption is based on priority liens, with MR having 1st priority.

Scramble Method - No order of priority in redemption.
What is the purpose of anti-deficiency legislation?
Traditional Approach - Once a loan goes into default, a ME has the option of suing on the note and enforcing it by leving upon MR property, then foreclosing for the balance, or Foreclosing and obtaining deficiency judgment. Usually the ME can do both.

Anti-deficiency legislation says that the ME is only allowed to foreclose by one method. Violation of the rule destroys the ME's right to a deficiency judgment.

Some states also put substantive limits on deficiency judgments. The most common, fair value statutes, define deficiency as the difference between the mortgage debt and the fair value of property.
What are some proposals for fore closure reform?
1) conduct the sale by customary commercial methods (using broker, advertisements etc.)

2) have an independent public official with expertise in real estate to conduct the sale and be given strong incentive for the highest price.

3) If trustee is used, give the trustee reasonable time to sell the property by usual commercial methods with an incentive for high price.
What are the different chapters of bankruptcy?
Chapter 7 - Straight Bankruptcy under which assets are liquidated and trustee is appointed to represent the unsecured creditors. The goal is to enlarge the asset pool as much as possible.

Chapter 11 - Business reorganization designed to rehabilitate the debtor. Debtor stays in control of property.

Chapter 13 - Wage Earner Plan - Usually provides a three year plan in which debtor organizes wages in such a way so as to pay off as much debt as possible for three years. Chapter 13 allows for deacceleration of a mortgage so the debtor does not have to pay all of it at once.
How does bankruptcy effect pre-bankruptcy foreclosures?
1) Fraudulent Conveyance - Courts have said the transfers made within a year of declaring bankruptcy fore below reasonably equivalent value are void. There has been a lot of litigation on whether or not this applies to foreclosures. (Most courts saying foreclosures don't apply unless the sale price shocks the conscious.)

2) Avoidable Preference - Trustees may set asid transactions in which the debtor prefers certain creditors to others. (Courts have held that there is no preference at the foreclosure sale because the creditor made thier profit at the second sale.)

3) Rents - Courts will look to state law to decide whether the ME has the right to rents from the property - Recording is really important in these decisions.
What is a Purchase Money Mortgage?
Mortgage used for the purchase of property that allow people to acquire property that they wouldn't otherwise have. PMM status is available only when the deed and the mortgage are components of a single transaction.

PMM Mortgages take precedent over prior judgment liens, mechanics liens because these lienors would not have anything to lien against if the PMM ME had not financed the acquisition of the property. (Senior Mortgages will staill be superior to PMM)
How are junior lienholders affected with senior lienholders replace or modify their mortgages?
Replacement - If a Sr. ME releases on mortgage and replaces it w/ another then they retain priority over junior lienholders. However, if the new mortgage's terms disadvantage the junior lienholder, then the junior jumps the senior.

Modification - If the SR makes material changes to the detriment of the Jr., Jr. jumps up in priority.
What is subrogation?
Courts use of equity to compensate MEs for problems in the recording process that are outside their control. For instance, if a title searcher misses a first mortgage, ME pays off second and thinks they are first in line when the other mortgage pops up, the Court will place them in first if at no fault of their own.
What are fixtures and who has priority over them?
Fixtures are otherwise moveable chattel that have been annexed or affixed to real estate. Courts typically focus on whether the party intended the item to become part of the real estate.

Priority - Who gets priority? The lender who helped the person buy the item or the ME who has security on the entire estate. The accepted rule is that the interest holder will retain priority so long as she records her loan in the real estate records w/in 20 days of the MR putting the item on the land.
What is a wrap-around mortgage?
MR obtains a refinancing second loan when her property has appreciated in value in order to recover in cash some of the increased value of the property. The owner can use the proceeds from the increased value to pay off part of the 1st mtg. MR gives second ME a mortgage in exchange for a slightly higher interest rate, and 2nd ME uses part of the mtg payments to pay mtg payments to 1st ME.
What is predatory lending?
1) Loans structured to result in seriously disproportionate net harm to borrowers.

2) Harmful rent seeking

3) Loans involvin fraud or deceptive practices

4) Other forms of lack of transparency in laons that are not actionable as fraud and

5) Loans that require borrowers to waive meaningful legal recdress
How do lenders minimize the defaul rates on their mortgages?
1) Careful loan selections - assess the credit worthiness of the borrower

2) Loan to value ratio - Make sure that the security will cover the amount of the loan.

3) Insurance - Either government or private insurance companies used to protect ME (but drives up cost of mortgage.)
What are the different types of subdividers?
1) Remote - The land is far away from a major urban area - marketed towards vacation/summer use.

2) Suburban Lot Seller - Closer to the city & desirable for immediate residential use.

3) Merchant Builder - Similar to suburban lot seller, but also build the houses on the subdivision.
What are the steps to subdividing?
1) Developer Research
2) Choosing a Site
3) Tie-up land - planning and engineering of subdivision takes place as well as environmental impact reports. Developer holds the land either through an option or a contract
4) Rezoning - Local government must approve
5) Financing Commitments
6) Execution of the Contract
7) Platting
8) Construction begins
9) Construction completed
What are the steps for financing a subdivision?
1) Construction Loan - Money is needed to build on the site, often taken out chunks at a time as the project progresses

2) Permanent Loan - As each piece gets sold, the developer will use this moeny to pay back the construction loan

3) Comittments - Written promises by the lenders in question to make the loans when certain conditions are met. (includes loans to subdivision buyers etc.)
How is subordination used to build a subdivision?
The seller of the land has a first lien on the property when it is sold to the developer when he takes back a purchase money mortgage. However, in order for the construction lender to grant a needed loan, the developer must get the seller to subordinate his interest so that the lender can have first lien on the property. This is risky for the seller, but they will often do it because the property will be very valuable after the subdivision is constructed.

Subordination can be accomplished through 1) Express subordination (express agreement after construction loan is obtained) 2) Automatic subordination (subordination agreement before construction loan but clause automatically subrogating once construction loan is granted) 3) subordination through timed recording 4) Conditional subordination (Subordination once various conditions are met.)
What is a mechanics lien?
State statutes allow workers to recover money for work they've done on the real property. These statutes are incredibly diverse. The goal is to preven unjust enrichment by the property owner.

These liens have been found not to violate due process.

Owners will often try to protect themselves by getting lien waivers, paying subcontractors directly, and retaining a percentage of each payment to make sure the mechanics liens get paid.
What are the different Mechanics' lien systems?
1) New York System - the amount recovered is capped by the amount due under the original contract.

2) Pennsylvania System - No cap that the property would have to pay - anyone who works on the project is entitled to full payment.

3) Variations - Some states will limit the amount to twice the amount of the original contract.
How do you create a mechanic's lien?
1. Give Notice
2. Half year to file the lien.
3. Typically get priority based on when construction began
What is a future advance mortgage?
Mortgage in which not all funds secured by the mortgage are dispursed immediately, but advanced later as needed with expectation that the original mortgage will secure the additional balance. Examples of these types of loans are construction and home equity loans.
What is a dragnet clause?
The property which is covered by the mortgage will stand as security not only for the loan now being made, but also for any other indebtedness on which the borrower may now be liable or may become liable to the lender in the future until the mortgage is satisfied. Courts have been reluctant to enforce dragnet clauses unless there is a specific connection to the original loan.
What are the different types of future advances?
1. Obligatory - The lender has to give the additional funds to the borrower while the lender retains priority over subsequent liens.

2. Optional - the lender has the choice of whether to give additional funds to the borrower or not - the lender might lose priority to subseuqnet liens that pop-up before disbursement of funds. (Sometimes optional advances retain their priority if the lender doesnt have notice of the junior liens.)

3) Statutory intervention - In some states the legislature has eliminated this distinction and said that all future advances have priority.
When can loans that were thought to be obligatory actually be found to be optional?
1) Too much discretion - If the lender retains too much control over whether they will loan out more money, courts will treat all advances as optional.

2) Failure to utilize protections in the agreement - If the lender ignores the protections they put in the agreement, the future advance is optional.

3) Continued funding of over-budgte project - When the project is going over-budget and the lender keeps doling out more money, the extra money could be considered optional to things like mechanics/junior liens.
What are the general features of Condos?
Condo owners hold title to both a fee simple, and are tenants in common at the same time. They have fee simple in the actual unit and a percentage interest in the common areas and are owned as tenants in comon.
What are the past and present problems with condos?
1) Additional Units - Used to be some issues that would come up when developers wanted to add on to the condo

2) Governance of Common Areas (usually solved with mandated associations.)
What is a condo's owner's association?
Control entity that takes care of maintenancy, repair and management - no ownership. Every owner is a member and the board is elected by the members. Unit owners have to pay a fee to the association. (Developer usually control the owner's association until all the units are sold.)
What are assessment liens?
If condo owners don't pay their dues to the Owners' Association, the OA can get a lien on their property. Some states give this lien priority over all others.
What is a Cooperative Apartment?
All tenants own shares in a corporation and have a proprietary lease on the apartment they occupy. The corporation finances the entire structure and gets its money via rent charges.
What are the advantages and disadvantages of a Cooperative Apartment?
Disadvantages - The presence of a blanket mortgage precludes the kind of flexible financing which would be possible if each apartment was considered seperate real estate. Also there is heavy reliance and trust each member must place with the others.

Advantages - Greater control over who will be the co-owners. The corporation can raise money by borrowing against its assets (usually at a good rate). Each unit owner enjoys limited liability that comes from operating in the corporate form.
What is a planned community?
A combination of land and housing types is planned as a unit; variety of housing types within one development with planned recreational facilities, residential units are clustered in groups, and usually has increased density over standard subdivisions. Common areas are dealt with in a variety of ways (usually conveyed to a homeowners' association).
What happens when rental housing is converted to condos?
The process of converting a multi-unit apartment building into condo form of ownership, whereby each unit is purchased and owned individually, and the common space in the building is held in joint ownership by all unit owners.
Whare the problem areas in conversion of rental housing?
1) Consumer abuses and tenant rights - because of lack of preparedness of state and local levels on how to regulate this new type of transaction

2) Displacement of renters - How do you protect them? Notice, right of first refusal, postpone eviction, tenant approval, local vacancy rates or proportion of rental housing in the total housing stock.
What are the general characteristics of resort projects?
Most follow a general time share concept and have checked history.

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