Real Estate Finance

Friday, December 08, 2006

2:04 PM
Residential Transactions
I.

Brokers
a.
Seller usually signs a Broker's Listing Agreement (2A)
i.
Gives broker exclusive right to sell during a state time period
ii.
Even if seller finds buyer on their own the broker gets paid
b. In MA the broker does not get paid unless the sale is consummated unless seller and broker specifically agree to this in the BLA - Currier
v. Kosinski
i.
Must be enough specificity to alert the seller to the fact that he
might have to pay even if there is no sale
c. Although the broker will get compensated if a deal falls through, can
be compensated if the reason the deal falls through is wrongful
interference on the part of the seller - Tristam's Landing v. Wait
d. Broker can represent both the buyer and the seller but must disclose
his dual role and get written consent from all the parties
e. "Facilitator" - no fiduciary duty to either party, just brings buyer and
seller to the table - never used
f.

II.

Brokers can be sued for treble damages for misrepresentations under

Chapter 93A of the CPA because they are "persons in the business" of
selling homes - Mongeau v. Boutelle

Offers
a.
Offers can become binding contracts - compare 7A, 7B and 7C
i.
If the offer leaves no material terms undeclared it can be
binding
ii.

Use the language "This is sole remedy at law and equity"

1.
"No further recourse" is not clear enough

b. Usually a seller will want a pre-approval for a mortgage with an offer

i.
Don't want to waste their time and take the house off the
market if the buyer is not going to be able to get a mortgage
and the deal is going to fall through
c. Conditions in offers
i.
Home inspection
ii.
Pest inspection
iii.
Mortgage contingency
iv.
Lead paint
III.

Purchase and Sale Agreements

a.
b.

Adjust clauses depending on whether you are a buyer or seller

Include different riders

c. Handout on additional clauses favoring buyer (HO2) (look at this

if you see any of these issues)
i.
Parties in Possession, Mechanic's Lien, Notice of Contract
1. Parties in Possession: no parties in possession at premises
(adverse!)
2. Mechanics Lien:contractors work performed must be
considered to be a fixture or financial benefit to increase the
value of real property. For example, dental equipment, dish
satellites, lawn mowing, property security, etc. would not
increase the value of the property. Lawn mowing simply helps
the aesthetic appeal of the property, property security provides
a benefit to the owner and perhaps the contents within the
property, and dental equipment is a benefit to the dentist but
certainly not the property. Now, if sod had been planted or
security cameras had been added, that would have improved
the value of the property.
ii.
Non-foreign status
iii.
Sellers deliverables - all documents required to get title
insurance
iv.
If Seller is a Trust
v.
Title
vi.
Warranties for Labor and Fixtures
vii.
Flood Plain
viii.
Storage Tanks
ix.
Appraisal for Buyer's Lender
x.
State Sanitary and Building Codes
xi.
Keys and Garage Door Openers
xii.
Cooperation with Buyer in obtaining mortgage financing
xiii.
Seller's Representations
1. No notice of zoning or other violations
xiv.
IV.
V.

If tenants - Rent Roll, Lease Estoppel

Mortgages
Condominiums
a.
Created by a:
i.
Master Deed
ii.
Declaration of Trust
b. A buyer wants to be certain that there are no assessments when they
buy and none on the horizon
i.
Put this in P&S agreement - see last page of 30B

VI.

Closing
a.
Document 23 is a checklist for a closing

Commercial Transaction

I.

Commercial Offering

II.

Lock up the property - have already conducted some due diligence

a.
Usually with an option to buy
i.
Maintains control
ii.
Buys developer time
iii.
Can be used in an attempt to pull multiple parcels together
iv.
Bank may not give full funding up front - option lets the
developer get funding to start development without buying the
land
b.
Sometime right of first refusal - more often part of a lease however
i.
If buyer declines to exercise this right, then the other deal falls
through, this right is often revived
ii.
Often gives the developer the right to apply for permits on
behalf of the seller
c.
Sometimes an offer in a smaller transaction

III.

Due Diligence - or more due diligence - checklist document 63

a. 4 things that you need to determine:
1. Who is the borrower - lender wants to know this
-What type of entity - see documents 57-60
-Lawyer might have to give due authorization opinion (61A)
2. Are the existing real estate improvements what the lender
wants them to be - are they sufficient to ensure the bank has
some secured interest?
3. Environmental regulations must be currently being complied
with
i.
Borrowers council will have to get opinions about this
4. All the permits you are planning to apply for - wants to make
sure they are realistic and you applying for the right ones
b. As the lawyer, you want to sit down with everyone early on in the
process (architects, developer, engineers) and determine what needs
to be done and by when
i.
What do we need to make this profitable?
ii.
How much profit will we need for the bank to give us a loan?
iii.
What are the current leases
iv.
Do we need a zoning change?
v.
A special permit?
vi.
Are there historic district issues?
vii.
What dates will everything need to be done by?
c. Leases - this is the value of the property
i.
Initiated through a letter of intent that sets out basic terms
ii.

Net Lease = 2 types

1.
You new tenant will pay x% of the tax bill; or

2.

You new tenant will pay x% of the tax bill over the base
(???)

iii.

Net, net, net lease = every single operating expense is passed

on by landlord to tenants
1.
Only landlords in a very desirable market with a lot of
leverage can get these - not strip malls

iv.

When
1.
2.
3.
4.
5.

v.

analyzing a lease look at: HO6

The rent stream
The landlord's risk
Control
Marketability
Lease Administration

Estoppel Certificates

d. Do market studies
i.
Assemble demographics package to try to attract tenants (54
and 53)
e. Create a preliminary budget (56A) - is this the Pro Forma?
i.
Owner costs = land
ii.
Soft costs = studies, permitting, legal, etc.
iii.
Hard costs = build out, mitigation
iv.
IV.

Bank will want to see this budget when you apply for a loan

Commercial P&S (51) - HO8

i.
Outline of this is HO9
ii.
Like a residential but with additional clauses:
1.
Leases
2.
Personal property - maintenance equipment transferred
to buyer
3.
Seller agrees to sign any additional document that
buyers lender requires
4.
Seller makes a lot of warranties and representations
about the premises, the leases etc.
iii.

Also attach riders (52)

1.
Expand on above clauses
2.
Also put in contingencies:
a.
Hazardous waste
b.
Zoning
c.
Financing

iv.

Deposit is made through a letter of credit?

v.

Warranties and Representations - these are from

document 51
1.
Property is an independent facility - not dependent on
any other parcel
a.
Bank will want this in case they have to foreclose

2. Must update all of these warranties and representations

at the closing
V.

Zoning - this is really part of your due diligence

i.
Problem is a lot of this takes time
ii.

Need to determine how what you want to do can be done Zoning Analysis (72)
1.
As of right?

i.

2.

3.
4.

An as-of-right development complies with all

applicable zoning regulations and does not require
any discretionary action by the City Planning
Commission or Board of Standards and Appeals.
Most developments and enlargements in the city are
as-of-right.

With a special permit?

i.
Examples: commercial use (retail, office,
service), transfer of development rights (historic
building preservation), conversion of
manufacturing space to residential use,
development over easement/right of way, etc.
Variance?
Zoning change?

You'll want to encourage the developer to simplify things so as

to require as little of the above as possible (you don't want to
be trying to get 9 permits and a zone change)
iii.

Sit down with everyone and create a list of tasks that need to
be done (69A and 69B)

iv.

And create a timeline for when each will be done (71)

1.
Bank will want this

v.

Then when you get permits, you'll create a matrix that shows
what you've got, what conditions you'll have to satisfy before
you get a building permit, what conditions before an occupancy
permit, and the dates all conditions must be complied with by
1.
Bank wants to see all of this

vi.

As of right
1.
Still need a building permit
a.
Can be appealed by an abutter within 30 days?
(check date)
2.
Site plan approval
a.
Used in as of right building
b.
Have to get site plan approval from city
i.
But this is not discretionary - just have to
show that you meet the requirements
ii.
City can't ask for exactions

vii.

Special permits
1.
Make sure you the attorney prepares the application for
these
a.
Make sure all the relief you are asking for is in
there
2.
Standard is - "public convenience and welfare will
be substantially served"
a.
But this definition varies by community
3. Notice is given and a hearing held
a. Make sure that the members give reasons with
their votes
i.
Before the hearing lawyer should prepare
documents for the board which are almost
like instructions for the jury
ii.

(HO16) - explains everything you are

asking for and almost looks like a legal
brief

4. Permit granting authority must issue permit within 90

days or it is constructively approved
5. As a lawyer try to establish a relationship with the city
law departments
a. You want your handing in actually drafting the
permits because you will have to defend them
6. Appeal must be made within 20 days
a. Review is de novo
7. PENCUS
a. To expand alter or change you need a special
permit
b. Standard is - "will the result be substantially
more detrimental" than the current use? - highly
discretional
c. If the lot is nonconforming but the structure
conforms - "infectious invalidity" - the whole
thing is considered non-conforming - Bransford
viii.

ix.

Variance
1.
Standard is - size or topography of the lot is such
that restrictions impose a hardship
2.
Hardship can't be self imposed
a.
If you subdivide and create a lot that is too small
- that is a self imposed hardship
Change of zone - legislative action
1.
Decision must be made within 90 days

a.
b.

But appeal period is 120 days

Because appeal period is so long, if you are
getting a zone change for new development
lawyer will have to write a zoning opinion for the
bank explaining that this will be upheld on appeal

2. Make sure you the attorney draft the proposal

3. Have to watch out for:
a. Spot Zoning - to prove its not:
i.
If there are a variety of uses in the area?
ii.
Has the site historically been treated
differently than other sites in the area?
iii.
As a result of this zone change will there
be public benefits, and do they mitigate
the impact of this change of zone?
b. Contract Zoning
i.
He indicates that as long as the legislature
acts before the inducement is given then
it is okay

VI.

ii.

In other words if Sylvania had given the

city benefits before the zone was changed,
this would be illegal because it would have
bound the city

iii.

He says agreements must be executed

subsequent to the vote

Financing
i.
You can't get financing until all of your permitting is done
1.
But appeal periods may not be exhausted, that is why
you write opinions
ii.

Bank wants a completely secure loan

1.
Mortgage on the property
2.
Security in all the intangibles
a.
Leases assignable to them
b.
They can step in to your role in development if
you default

iii.

Construction Loans - usually 2 types

1.
Requires you to have permanent financing in place
before you can enter into a construction loan
a.
Permanent lender signs a buy-sell agreement
2. The construction loan converts to permanent financing
at the end of its term
#1 is more commmon

iv.

Commitment letter for construction loan - HO12

v.

Construction loan checklist - 82

vi.

Construction Loan Agreement is document 84

1.
Outline of a Construction Loan/Commitment Letter HO13

vii.

Your expenses and what the bank agrees to pay for each will be
listed in the commitment letter

viii.

When you need money you make draw requests

1.
Bank will require certain things at each draw:
a.
Updated survey
b.
Appraisals
c.
Title insurance
d.
plans
e.
Opinions, etc.
2. Bank will also withhold 10% of each draw and put it in a
reserve fund in order to balance the loan
a. Sometimes the price of materials can go up, and
bank wants to ensure that they can balance the
loan accordingly - so they have this reserve fund
i.
Your contractors have to understand that
they are only getting 90% up front
b. They may also from time to time require the
borrower to infuse this reserve fund with capital

VII.

Opinion Letters
i.
Assurance to the bank
1.
Bank will always want more and more assurances
2.
Your firm committee will want to give less and less - so
there is tension
ii.

Be very concerned about the scope:

1.
Make clear it is an opinion for only one entity - don't
want anyone else relying on this
2.
Make clear the scope of the property that it is covering
3. Schedule A "Exceptions and Limitations" (HO15) explicitly states what you are not giving an opinion
about

iii.

Outline of an opinion letter (see document 104B)

1.
Who the opinion is for
2.
Detailed description of the property that the opinion
covers
3.
Assumptions
a.
All signatures on documents are accurate, etc.
b.
Things you don't have time to investigate

4. All of the documents you rely on - listed

5. The Opinion
a. Have everybody else say as much as possible
(architects, engineers) so that you the lawyer say
as little as possible
b. "Based on the architects certificate"
i.
Couch your opinion in reliance on these
other consultants
c. Say as little as possible - "court of competent
jurisdiction could uphold the validity of the
building permit"
VIII.
Ethical Issues
7 Ethical issues
1. Borrower wants the banks lawyer to represent him as well
i.
His opinion is don't do it
ii.
But if you obtain a consent and waiver letter you can go
forward
a. Example of consent and waiver letter is
document 29
2. Two partners have longstanding clients that they don't want to
lose - but they end up being the borrower and the lender in a
deal
i.
You can do it, but you need to get informed consent
ii.
And set up an ethical screen - with all the computer
things (HO2)
3. Unrepresented parties - obligation to tell people in a
partnership that you represent, that you don't represent them
individually
i.
Follow it up with a written letter
4. Multiple developers who are interested in a property call you to
help with a bid - want to put your name on the application
i.
Business part of this - if you decide to go forward with
one person, you've put your eggs in basket A - can't
represent another person
ii.

To get around this you tell the first developer that you
are happy to help, but don't put my name on it
1.
I am going to talk to A, B, and C as well and give
them the same advice
2.
If that is okay I am going to go forward with it
3.
If you say no, I will not help you and only help
them

5. Title insurance

i.

The same lawyer can represent borrower, lender, and

title insurance company
1. Could lead to huge problems but it is allowed, but
he would never do it

6. Hidden conflicts - a firm has 2 longstanding clients

i.
All of the sudden a conflict shows up
ii.
You are required to withdraw representation from both,
without informing either why you are doing that
1. But in practice usually the client who has been
there longer stays on
2. Or they keep both and set up the ethical screen
7. If we discover something that could affect a 3rd party, we are
required to notify the third party
i.
You discover oil on property - you tell the client you
must tell the bank and the neighbors
ii.
Client says no - you withdraw your representation
1. And then you still go ahead and tell the bank and
the neighbors