Construction and Development Financing v1 & v2

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Construction and Development Financing v1 & v2

Marshall E. Tracht

New York Law School

Alvin L. Arnold

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CONSTRUCTION

AND DEVELOPMENT

FINANCING

Law • Practice • Forms

THIRD EDITION

ALVIN L. ARNOLD

Member, New York Bar

and

MARSHALL E. TRACHT

Professor of Law and Director of Graduate

Real Estate Programs,

Mat #41580118

New York Law School

November 2015 Edition

Issued in November 2015

Volume 1

prepared by

ALVIN L. ARNOLD

and

MARSHALL E.

TR~

YORK

For authorization to photocopy, please contact the Copyright Clearance Center at 222 Rosewood Drive, Danvers, MA 01923, USA (978) 750-8400; fax (978) 646-8600 or West's Copyright Services at 610 Opperman Drive, Eagan, MN 55123, fax (651) 687-7551. Please outline the specific material involved, the number of copies you wish to distribute and the purpose or format of the use.

This publication was created to provide you with accurate and authoritative in-formation concerning the subject matter covered; however, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other profes-sional advice and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the ser-vices of a competent attorney or other professional.

Nothing contained herein is intended or written to be used for the purposes of 1) avoiding penalties imposed under the federal Internal Revenue Code, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

ISBN 978-0-314-64396-4 ISSN 2329-4485

2015-2016 Authors' Highlights

New features and recent developments in this

Novem-ber 2015 Edition of Construction and Development

Financ-ing include:

New § 2:51 Underwriting, administrative, and legal

considerations-The pervasive effect of governmental

regulations-Public opposition to new projects-Disparate

Impact under the Fair Housing Act

New § 4:159 The hotel/motel construction loan-Hotel

condominiums

New § 4:160 The hotel/motel construction loan-Hotel

condominiums-Luxury markets

New § 4:161 The hotel/motel construction loan-Hotel

condominiums-Loan underwriting

New § 4:162 The hotel/motel construction loan-Hotel

Condominiums-Pre-sale requirements

New § 4:163 The hotel/motel construction loan-Hotel

condominiums-Regulatory issues

New § 4:164 The hotel/motel construction loan-Hotel

condominiums-Securities laws

New§ 7:10 Real estate development without mortgage

financing-Tax benefits from conservation

easements-Regul~tory

approvals as consideration

New § 7:44 Lease transactions involving the

improve-ment of landlord's property-Build-to-suit lease-In

gen-eral

New § 7:45 Lease transactions involving the

improve-ment of landlord's property-Build-to-suit lease-Lease

term

New

§

7:46 Lease transactions involving the

improve-ment of landlord's property-Build-to-suit lease-Sample

commencement date clause

New

§

7:47 Lease transactions involving the

improve-ment of landlord's property-Build-to-suit lease-Sample

substantial completion clause

New

§

7:48 Lease transactions involving the

improve-ment of landlord's property-Build-to-suit

lease-Construction Agreement

New

§

7:49 Lease transactions involving the

improve-ment of landlord's property-Build-to-suit lease-Rent

pro-visions

Preface

The process of financing real estate land development-from

raw acreage to finished building-presents the borrower/developer

and its financier with great risk. The legal and business

procedures of land development and construction finance are the

most complex aspects of real estate finance, and perhaps of

com-mercial finance in general. This revised edition examines and

explains the financing of the entire range of the land

develop-ment and construction process, from raw land to finished

build-ing, with separate treatment of each type of financing loan: the

land loan, development loan, construction loan, and permanent

loan.

The lawyer for the construction lender and developer is

confronted with many legal problems throughout the

develop-ment process that counsel for a lender making a loan on the

secu-rity of a finished building is not faced with. Land development is

carried on by many diverse participants whose interests and

rights vary, and each is compensated separately and in

accor-dance with different guidelines. The seller of raw land, the

engineer, the architect, the surveyor, the general and

subcontrac-tors, the leasing agents, and the salespeople all have legal rights

established by contract and in many instances conferred by law.

The attorney for developer and lender must be aware of the rights

and duties of each party and see that these are recognized in the

legal instruments that form the structure of the development

process. Land development and finance is uniquely an area where

business and legal problems go hand in hand. The borrower and

its counsel must be familiar with the development process and

concepts of real estate credit.

As the decade of the 1990 begins, the construction lending

process is undergoing some of its most significant changes in

many years. Among the causes of these changes are the demise

of the savings and loan industry as a result of years of unsound

loan practice, the tremendous influx of capital to pension funds

and the desire to invest a portion of these funds in real estate,

and the rise in importance of commercial banks, which see real

estate loans, both construction and permanent, as the way to

replace lost markets in corporate lending (as a result of the much

greater use by corporations of commercial paper) and in lending

v

to underdeveloped countries.

An additional factor affecting the construction finance

industry is the move toward more conservative underwriting

resulting from excessive building in the 1980's that led to

extremely high vacancy rates and a large number of loan defaults.

For the foreseeable future, developers can anticipate permanent

and construction loan commitments that involve (1) lower

loan-to-value ratios; (2) imposition of some or all resource (personel)

li-ability; and (3) substantial preleasing requirements.

Perhaps the most significant fact relating to construction

finance as this edition goes to press is the sharp increase in the

market share of construction loan originations made by

com-mercial banks, now by far the leading source of construction

loans in all major lending categories. Commercial banks now

ac-count for about 93 percent of all construction financing on

com-mercial projects, about 80 percent on multifamily projects, and

82 percent of all land development loans. About one half of all

loans made on commercial projects are now held by the 300

larg-est banks.

Which institutions gave up the market share now held by

commercial banks? The most obvious decline in originations is by

thrift institutions which, in all three categories of construction

loans, more than doubled their shares between 1980 and 1984

(following the Depository Institutions Act of 1982, which gave

thrifts much broader lending powers). In the last few years the

market shares of the thrifts declined to a point below the 1980

levels.

Mortgage companies are a second type of lender that lost

sig-nificant market share in commercial construction financing. Many

of these firms were bought by commercial banks, which is one

cause of the shift in market share from the mortgage companies

to the banks. In the case of multifamily housing, the sharpest

decline in market share is by state and local housing finance

companies which, from a peak of just under 18 percent in 1986

fell to only 3

.

5 percent in 1989 as a result of restricts on

tax-exempt financing imposed by Congress.

At the present time, virtually no lenders other than

com-mercial banks play a significant role in the construction loan

market. Given the banks current exposure in long-term mortgage

markets, the ability of commercial banks to continue to provide

this level of construction financing becomes more difficult until

vi

PREFACE

nonbank institutional lenders resume their traditional functions

of providing permanent takeout commitments.

vii

Acknowledgments

I wish to express my appreciation to Jayne Allen, who acted

as a most effective book editor in connection with this revision.

Her comments and suggestions about organization of material

and completeness of coverage were most helpful.

J o Ann Drew type and retyped many pages of manuscript

with her usual patience and good nature.

Manhasset, New York

August 1990

ALVIN L. ARNOLD

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Summary of Contents

Volume 1

Chapter 1. The Land Loan

Chapter 2. The Land Development Loan

Chapter 3. The Construction Loan: Application, Underwriting

Approval, and Commitment

Chapter 4. The Construction Loan

Volume 2

Chapter 5. The Construction Loan "Takeout" or Permanent

Loan

Chapter 6. Construction Loan Defaults, Enforcement, and

Workouts

Chapter 7. Other Construction-Financing Transactions

Chapter 8. Environmental Risks in Construction Financing

Chapter 9. Uniform Laws, Public Policy, and Tax Issues

Affecting the Construction Lender

Appendices

APPENDIX A.

Requirements for Plan Confirmation Under

Bankruptcy Code

APPENDIX

B.

Determination of Plan's Fairness Under

Bankruptcy Code

APPENDIX C.

The Americans with Disabilities Act of 1990

Title III-Public Accommodations and Services

Operated by Private Entities

Table of Cases

Index

Table of Contents

CHAPTER

1.

THE LAND LOAN

§ 1:1 § 1:2 § 1:3 § 1:4 § 1:5 § 1:6 § 1:7 § 1:8 § 1:9 § 1:10 § 1:11 § 1:12 § 1:13 § 1:14 § 1:15 § 1:16 § 1:17 § 1:18

Raw land as the basis of the real estate development process

Initial considerations when acquiring raw land The speculator's role in the real estate development

process

-Land investors seek high returns

--Predicting growth paths --Utilizing vacant urban land

--Due process: contract breach by state Duty to disclose to'participant

The speculator's role in the real estate development process-Capital gain or ordinary income?

-Capital gain or ordinary income?-Qualifying for capital gain

- -Capital gain on inventoried land -Amortizing land costs

-Opportunity funds look at brownfields -The new immigrant gateways

-Charitable deduction for tainted property

-Direct grants and liability protection for brownfields -Liability of landowner knowing of contamination Donated land and the public purpose doctrine

I. ACQUISITION AND WAREHOUSING OF LAND

BY DEVELOPERS

§ 1:19 § 1:20 § 1:21 § 1:22 § 1:23 § 1:24

The warehousing process Dangers of warehousing Current market strategies Real options analysis

Exchanging development rights Conventional sources of land financing

II. INSTITUTIONAL LAND FINANCING

§ 1:25

§ 1:26 § 1:27

§ 1:28

Underwriting considerations -Rating commercial land loans -New lending standards -Excluded transactions

§ 1:29 § 1:30 § 1:31 § 1:32 § 1:33 § 1:34 § 1:35 § 1:36 § 1:37 § 1:38 § 1:39 § 1:40 § 1:41 § 1:42 § 1:43 § 1:44 § 1:45 § 1:46 § 1:47 § 1:48 § 1:49 § 1:50 § 1:51 § 1:52 § 1:53 § 1:54 § 1:55 § 1:56 § 1:57 § 1:58 § 1:59 § 1:60 § 1:61 § 1:62 § 1:63 § 1:64 § 1:65 § 1:66 § 1:67 XVl

-Warning to regulated lenders Three-party financing ofland

Investments: land purchase-leasebacks First-mortgage land loans

-Drafting partial release provisions -Partial release after default

Land warehousing by third-party ownership - Predevelopment land syndicates

Land banks

Land lease replacing equity Land financing with options

-Options by speculator or developer -Option drafting

--Drafting a rolling option

-Real estate purchase agreement as option -Tax advantages and disadvanta~es

-New rules for real estate options and contract rights

Installment land-purchase contracts -Types of land-purchase contracts -Enforcement

-Legal problems -Tax aspects

--Payments received in year of sale --Computation and reporting of gain One-payment land-purchase contract with

subordination of seller's fee

Purchase-money mortgage transactions --Joint Venture Variations

Subordination provisions

-Amount of junior and senior indebtedness --Level of debt service

--Need for flexibility of senior debt

--Junior lender safeguards in connection with subordination arrangements

-Safeguards for the senior lender

-Coordinating the terms of junior and senior financing

-Legal problems of subordination agreements --Effect of subordination provisions on specific

enforcement of real estate sale contracts

--Specific enforcement of subordination provisions --Obligatory advance rule

--Modification of terms of senior debt to detriment of junior lienholder

TABLE oF CoNTENTS § 1:68 § 1:69 § 1:70 § 1:71 § 1:72 § 1:73 § 1:74 § 1:75 § 1:76 § 1:77 § 1:78 § 1:79 § 1:80 § 1:81 § 1:82 § 1:83 § 1:84 § 1:85 § 1:86 § 1:87 § 1:88 § 1:89 § 1:90 § 1:91 § 1:92 § 1:93 § 1:94 § 1:95 § 1:96 § 1:97 § 1:98 § 1:99 § 1:100 § 1:101 § 1:102

- -Duty of the construction lender to the subordinate lienholder

- -Cramdown in bankruptcy Using escrows in real estate closings -Land development and sale -Installment sale contracts -Land acquisition or assemblage -Escrowee indemnity clause

Escrow agent's duty to disclose fraud

The institutional lender's role in seller-financed land acquisitions

-Junior lien on fee title

-Security in purchaser's interest under installment-purchase contract

-Security in seller's interest under installment contract

Land-loan and contract defaults and the effect of bankruptcy

-Lender's objectives and strategy -Junior lender defenses

-Borrower defenses

-Retaining the borrower's participation -The effect of intervening bankruptcy --Bankruptcy of contract vendee --Bankruptcy of contract vendor --Mortgages as preferences Subdivision trust agreements Deducting interest on land loans

Land Financing Subject to Risk of Eminent Domain or Non-Compensable Taking-Risk of Exercise of Eminent Domain

Land financing subject to risk of eminent domain or non-compensable taking-Risk of non-compensable taking

21-month moratorium not taking Supreme Court expands public use New taking limits in nine states Aircraft noise not taking

Taking claim dismissed as not ripe When new finding of blight required Diminution in land value

Rezoning after permit was a taking

Acquisition after use restriction no bar to takings claim

No taking when use not restricted

§ 1:103 § 1:104 § 1:105 § 1:106 § 1:107 § 1:108 § 1:109 § 1:110 § 1:111 § 1:112 § 1:113 § 1:114 § 1:115 § 1:116 § 1:117 § 1:118 § 1:119 § 1:120

Taking upheld despite benefit to private party Taking as result of environmental regulation Consequential damages for loss of access Severance damages

Condemnation damages based on unity of land doctrine

Flood barricade not taking

Purchase agreement with option to purchase adjoining parcels

Phased-purchase installment land contract

Provisions for one-payment land-purchase contract Security agreement covering purchaser's interest

under an installment land-purchase contract Security agreement covering seller's interest under

an installment land-sale contract Seller's option to finance sale Fixed option agreement

Sale of ranch for real estate development

Three-cornered deferred exchange agreement with qualified intermediary

Like-kind exchange with pass-through entities Line of credit for site acquisitions

Development: using real options analysis

CHAPTER 2. THE LAND DEVELOPMENT

LOAN

§ 2:1 § 2:2 § 2:3 § 2:4 § 2:5 § 2:6 § 2:7 § 2:8 § 2:9 § 2:10 § 2:11 § 2:12 § 2:13 § 2:14 § 2:15 xviii

Land development and its place in the overall development process

-Land development by the developer who completes construction

-Land development by the developer who sells prior to construction

--Duty to disclose soil conditions --Residential lots

--The industrial park developer

-The Interstate Land Sales Full Disclosure Act --The improved lot exemption

--Unconditional obligation

--Exceptions to the unconditional obligation - -Habitable and usable requirement

--Manufactured homes may be considered residential buildings

--Parties liable under the act --Reservations

TABLE OF CONTENTS § 2:16 § 2:17 § 2:18 § 2:19 § 2:20 § 2:21 § 2:22 § 2:23 § 2:24 § 2:25 § 2:26 § 2:27 § 2:28 § 2:29 § 2:30 § 2:31 § 2:32 § 2:33 § 2:34 § 2:35 § 2:36 § 2:37 § 2:38 § 2:39 § 2:40 § 2:41 § 2:42 § 2:43 § 2:44 § 2:45 § 2:46 § 2:47 § 2:48 § 2:49 § 2:50 § 2:51 § 2:52

Land development and its place in the overall

development process-The Interstate Land Sales Full Disclosure Act-Penalties

--State laws

-Strong performance in single-family homebuilding --Elements of the homebuilding process

- -Sources of homebuilding returns --Homebuilding risks

-Asset management and the need for "exit strategies" --Determining need

--Positioning the property --Implementing the exit strategy

Underwriting, administrative, and legal considerations -Underwriting considerations

- -Loan balance

--Mechanic's-lien protection

--Criteria for evaluating development loans -Legal interests in the work of professionals --Lender's approval of professionals employed --Lien rights of professionals and disbursement

procedures

--Securing the lender's interest in the work product of professionals

-The pervasive effect of governmental regulations - -Seeking zoning changes

---Standing to sue city on rezoning ---Affordable housing denial upheld ---Due process and subdivision application ---Zoning denial not discrimination

---Zoning ordinances and the Americans With Disabilities Act

---When developer's property interest protected by due process

---Restricting development rate impermissible ---Taking of non-productive land

---Equitable estoppel of rezoning resolution ---Exemption for religious institutions --Rights in governmental applications and

proceedings

--Public opposition to new projects - --Downzoning held not discriminatory ---Supreme Court permits referendum on site

plan

---Disparate Impact under the Fair Housing Act --Township can challenge zoning relief

§ 2:53 § 2:54 § 2:55 § 2:56 § 2:57 § 2:58 § 2:59 § 2:60 § 2:61 § 2:62 § 2:63 § 2:64 § 2:65 § 2:66 § 2:67 § 2:68 § 2:69 § 2:70 § 2:71 § 2:72 § 2:73 § 2:74 § 2:75 § 2:76 § 2:77 § 2:78 § 2:79

--Strategic lawsuits against public participants --Development agreements

--Mediating land use disputes

---Mediation in the land use approval process ---Advantages and disadvantages of land use

mediation

---Using mediation to resolve development disputes

---Legal issues in land development mediation ---Using mediation to supplement the zoning

hearing process

--Historic preservation

---Historic preservation tax credits for hotels ---Historic preservation tax incentives -Subordination

-The revolving credit land development loan -Effect of wetlands regulation on land development --The federal manual for identifying and

delineating jurisdictional wetlands

--Obtaining a determination for potential sites - -MOA requirements for individual permits --Avoiding impact on wetlands

--Minimizing impact on wetlands --Compensating for impact on wetlands --Impact of the MOA

-Working with local agencies to develop wetlands --Inland wetlands agency

--Local planning commission --State agencies

-Qualified conservation easements Subdivision control ordinances

I. ORIGIN, STATUTORY BASIS, AND FUNCTION

OF SUBDIVISION CONTROL ORDINANCES

§ 2:80 § 2:81 § 2:82 § 2:83 § 2:84 § 2:85 § 2:86 § 2:87 § 2:88 § 2:89 XX Historical origin

Statutory basis for subdivision control ordinances Structure and function of local ordinances

Impact fees-Legal Framework -Types of impact fees

-Inclusionary Zoning Upheld -Tax treatment of impact fees

In-lieu fee substitutes for affordable housing Community benefits agreements

Financing and financial assurances required to comply with subdivision control legislation

TABLE OF CoNTENTS § 2:90 § 2:91 § 2:92 § 2:93 § 2:94 § 2:95 § 2:96 § 2:97 § 2:98 § 2:99 § 2:100 § 2:101 § 2:102 § 2:103 § 2:104

-Surety performance bonds

Lenders checklist for legal contest over bond proceeds -Cash deposits or escrows

-Property escrow -Letter of credit

--Fraud and the independence principle --Integrating the letter of credit with the land

development loan

--Letter-of-credit defenses and safeguards for municipality and lender

-Subdivision improvement agreement

-Standby letters of credit in the public sector Reimbursable subdivision exactions

Partial release clauses

Infrastructure financing: the California example Subdivision improvement agreement

Development rights purchase agreement

CHAPTER 3. THE CONSTRUCTION LOAN:

APPLICATION, UNDERWRITING

APPROVAL, AND COMMITMENT

I. THE CONSTRUCTION LOAN

§ 3:1 § 3:2 § 3:3 § 3:4 § 3:5 § 3:6 § 3:7 § 3:8 § 3:9 § 3:10 § 3:11 § 3:12 § 3:13

Definition and place in the development process Comparison to long-term mortgage and other

commercial loans -Short-term loans

-Payment of principal and interest -High, fluctuating interest rates Calculating construction loan yields

Special know-how required for construction lending -Construction loan underwriting

-Closed-end, Open-end and Gap Loans

Business and legal risks unique to construction lending

-Land and buildings under construction are the security

-Unforeseeable construction risks -Construction loans in CDOs

II. INTERVENING LIENS AND RIGHTS OF THIRD

PARTIES

§ 3:14 Mechanic's liens

§ 3:15 § 3:16 § 3:17 § 3:18 § 3:19 § 3:20 § 3:21 § 3:22 § 3:23 § 3:24 § 3:25 § 3:26 § 3:27 § 3:28 § 3:29 § 3:30 § 3:31 § 3:32 § 3:33 § 3:34 § 3:35 § 3:36 § 3:37

III.

§ 3:38 § 3:39 § 3:40 § 3:41 § 3:42 § 3:43 § 3:44 § 3:45 § 3:46 § 3:47 § 3:48 § 3:49 § 3:50 § 3:51 § 3:52 § 3:53 xxu Non-mechanic's-lien rights

Zoning and building requirements Loss of permanent financing Marketing the finished project Development over the next 25 years Construction loan underwriting

-Evaluation of the borrower/developer

- -Factors for evaluating the borrower/developer -Reducing risk through borrower screening -Lending to limited liability companies - -Characteristics of LLCs

--Authority

--Establishing formation, good standing, and qualification to do business

- -Determing the LLC's authority to enter into the transaction

- -Who :r:nay act for the LLC? --Legal opinion

--Execution of the documents - -Structuring the loan

--Taking collateral from an LLC

- -LLCs and personal guaranties of members --Executing on an LLC interest

- -LLCs and bankruptcy

--Summary of authorization documentation for LLCs

REVIEW OF THE PROJECT

Construction plans and costs Appraisals

The Interagency Appraisal Guidelines -Appraisal Review

-Deductions and Discounts -Tract Developments Underwriting summary Evaluation of the contractor Source and use of funds

Financial analysis of the finished project The takeout commitment

-Preferred takeout lenders -Evaluation of takeout lender The "open ended" construction loan Convertible mortgages

TABLE oF CoNTENTS § 3:54 § 3:55 § 3:56 § 3:57 § 3:58 § 3:59 § 3:60 § 3:61 § 3:62 § 3:63 § 3:64 § 3:65 § 3:66 § 3:67 § 3:68 § 3:69 § 3:70 § 3:71 § 3:72 § 3:73 § 3:74 § 3:75 § 3:76 § 3:77 § 3:78 § 3:79 § 3:80 § 3:81 § 3:82 § 3:83 § 3:84 § 3:85 § 3:86 § 3:87 § 3:88 § 3:89 § 3:90 § 3:91 § 3:92 § 3:93 § 3:94 § 3:95 § 3:96 -Disadvantages to borrower -Advantages to lender -Disadvantages to lender -Negotiating guidelines

-Underwriting guidelines for convertible mortgages --Case study

Private real estate equity funds -"Phantom equity" approach -Financing plus joint venture -Sale and leaseback

-Straight joint venture -Straight sale

-Guidelines for Negotiating the Equity Investment -How entity financing helps developers

Overview of commercial real estate loan underwriting -Underwriting ratios and measures

-Required documents -Repayment sources

Covered bonds: two jurisdictions Underwriting apartment projects

Capital Requirements for "High Volatility CRE" Sources of construction loans-Commercial banks --Real estate company bank loan ratings -Thrift institutions

-Mortgage bankers

-Real estate investment trusts --Increased use of REITs

--Expanding role of nonbank sources in 2015 -Using REITs to fund construction loans for

single-family housing

--Underwriting difficulties --Traditional development cycle

--Mismatch of interest and principal duration --The REIT mechanism

--Indemnification feature --Pricing

--Conservative debt/equity configuration -Insurance companies and pension trusts EB-5 regional centers

Sources of construction loans-Federal government assisted financing

--Community Reinvestment Act

--Investing in low-income housing tax credits ---Update of housing tax credit program Federal construction program

§ 3:97 § 3:98 § 3:99 § 3:100 § 3:101 § 3:102 § 3:103 § 3:104 § 3:105

Sources of construction loans-Federal government assisted financing-Investing in low-income housing tax credits-Tax-deferred exit for limited partners ---Construction outlook

- - - T a x credit transactions as reportable tax shelters

--New Markets Tax Credit program

---Programs under New Markets Tax Credit - -HUD financing of nursing homes

--Financing with HUD 108 loan guarantees - -FNMA affordable housing program

--Negotiating low-income tax-credit partnership agreements

IV. BOND FINANCING BY STATE AND LOCAL

FINANCING AGENCIES

§ 3:106 § 3:107 § 3:108 § 3:109 § 3:110 § 3:111 § 3:112 § 3:113 § 3:114 § 3:115 § 3:116 § 3:117 § 3:118 § 3:119 § 3:120 § 3:121 § 3:122 § 3:123 § 3:124 § 3:125 § 3:126 § 3:127 § 3:128 § 3:129 § 3:130 § 3:131 § 3:132 § 3:133 xxiv

State housing finance agencies

State and local industrial development bonds Taxable housing bonds

Tax anticipation notes

Loan presentation by developers -Underwriting criteria

-Packaging a loan

Nontraditional loan funding -New money sources

-Using participating leases for financing Financing real estate with commercial paper Financing with letters of credit

-New loan sources for home builders -Pension fund financing

-Private debt offerings -Public offerings

Structuring joint ventures with pension funds -Relationship between plan and manager --Performance fee arrangements --Computing performance fee --Anticipated rates of return

-Prohibited transactions with parties in interest -Developer as ERISA fiduciary

-Other issues

Structuring publidprivate partnerships -Benefits-Developers

--Local governments --Lenders

TABLE oF CoNTENTS § 3:134 § 3:135 § 3:136 § 3:137 § 3:138 § 3:139 § 3:140 § 3:141 § 3:142 § 3:143 § 3:144 § 3:145 § 3:146 § 3:147 § 3:148 § 3:149 § 3:150 § 3:151 § 3:152 § 3:153 § 3:154 § 3:155 § 3:156 § 3:157 § 3:158 § 3:159 § 3:160 § 3:161 § 3:162 § 3:163 § 3:164 § 3:165 § 3:166 § 3:167 § 3:168 § 3:169 § 3:170 § 3:171 § 3:172 § 3:173 §3:174

-Problems unique to public/private partnerships -State law issues

-Tax incentives

-Financing·alternatives -Tax-increment financing --Job retention

- -TIF triggers prevailing wage requirement --Increasing popularity of tax-increment financing --Constitutional debt limit not violated by TIF --Public purpose defined

-Securing TIF financing

-Public agency participation structures -A public/private multifamily venture --The property

--The financing

--The developer's returns Wraparound mortgage financing

-Legal considerations for borrowers and lenders -Analysis of economics of wraparound loans -How wraparound loans can increase investment

yield

Leasehold mortgage financing

-Leasehold mortgage lender's considerations -Negotiating the leasehold mortgage

Construction loan application and approval process -Standard loan application

-Non-standard loan presentation

--Non-standard construction loan application -Letter of intent to make loan

-The lender's internal approval process --Levels of loan approval authority --The presentation for loan approval The construction loan commitment Commitment letter: unclear terms

The construction loan commitment-Negotiating and drafting the construction loan commitment

-Drafting a mortgage loan commitment from the lender's perspective

--Construction loan commitment preparation -Points often overlooked

--Interest rate ceiling --Deadline dates

--Limiting lender's attorney fees and other expenses

--Commitment fees

§ 3:175 § 3:176 § 3:177 § 3:178 § 3:179 § 3:180 § 3:181 § 3:182 § 3:183 § 3:184 § 3:185 § 3:186 § 3:187 § 3:188 § 3:189 --Consents --Guaranties

--Determining whether a loan commitment is a binding agreement

-Agreed-on procedures

--Specific requirements of the new standards Enforcement of construction loan commitments:

borrower versus lender

-Contract-Law defenses of lender --Lack of sufficient definiteness --Lack of authority of issuer --Lack of consideration --Lack of legal authority

---Guidelines for pre-loan negotiations

--Lack of strict compliance with conditions of loan commitment

Construction loan commitments

Liquidated damage subject to reasonable test

V. REMEDIES FOR THE BORROWER

§ 3:190 § 3:191 § 3:192 § 3:193 § 3:194 § 3:195 § 3:196 § 3:197 § 3:198 § 3:199 § 3:200 § 3:201 § 3:202 § 3:203 § 3:204 § 3:205 § 3:206 § 3:207 § 3:208 § 3:209 XXVl

Money damages generally Lost profits

Specific performance

Liability under Bank Holding Company Act Enforcement of construction loan commitments:

lender versus borrower

-Commitment fees and standby deposits as impermissible penalties

-Fees paid for lender's readiness to make the loan -Commitment fees as usury

-Lender's lost profits

-Suggestions for drafting and counseling to retain fees and deposits

-Specific performance

Validity and enforceability of the oral construction loan commitment

-Third -party beneficiary -Promissory estoppel

Tax deductibility of commitment fees Bankruptcy of borrower prior to funding

Accounting for real estate acquisition, development, or construction arrangements

Accounting for loan origination and acquisition fees -Loan origination fees and costs

TABLE oF CoNTENTS § 3:210 § 3:211 § 3:212 § 3:213 § 3:214 § 3:215 § 3:216

-Construction phase cost sheet

-Construction and permanent loan application -Presentation to loan committee on tract-housing

development

-Recommendation to senior loan officer on office building construction loan

-Construction loan commitment

-General terms and conditions for construction commitment letter

-Construction loan commitment with commentary

CHAPTER 4. THE CONSTRUCTION LOAN

§ 4:1 The construction loan note

§ 4:2 -Statement of loan amount

§ 4:3 -Principal repayment

§ 4:4 -Incorporating other loan documents by reference

§ 4:5 Nominee agreement to avoid possible usury

I.

THE CONSTRUCTION LOAN MORTGAGE

§ 4:6 § 4:7 § 4:8 § 4:9 § 4:10 § 4:11 § 4:12 § 4:13 § 4:14 § 4:15 § 4:16 § 4:17 § 4:18 § 4:19 § 4:20 § 4:21 § 4:22 § 4:23 § 4:24 § 4:25 § 4:26 § 4:27 § 4:28

Comparison to other mortgages

-Ten frequently neglected mortgage terms

Fixture priorities and qualification as a construction mortgage under the uniform commercial code Interest payment and rate

-Usury

--Interest on undisbursed amounts --Federal preemption for some loans - -Savings clause

-Matched funding

--Certificate of deposit rate --Euro-currency loans -Multiple interest rate options

-Maximum, minimum, and average interest rate provisions

-Hedging construction loan interest rates -Deducting construction loan interest --Final regulations on capitalizing interest - --The avoided cost method

---Unit of property

---Production period of a unit of property - - - D e minimis exception

- - -Suspension period Interest rate swap agreements

-Loan documentation for interest rate swaps

§ 4:29 § 4:30 § 4:31 § 4:32 § 4:33 § 4:34 § 4:35 § 4:36 § 4:37 § 4:38 § 4:39 § 4:40 § 4:41 § 4:42 § 4:43 § 4:44 § 4:45 § 4:46 § 4:47 § 4:48 § 4:49 § 4:50 § 4:51 § 4:52 § 4:53 § 4:54 § 4:55 § 4:56 § 4:57 § 4:58 § 4:59 § 4:60 § 4:61 § 4:62 § 4:63 § 4:64 § 4:65 § 4:66 § 4:67 § 4:68 XXVlll

-Provisions for default

-Quantifying the lender's reimbursement -Consequences of prepayment

--Liberalized prepayment provisions in swap-linked financing

-Securing and insuring breakage -Interest rate cap agreements -Legal obligation of a counterparty The "preclosed" loan

-Business and legal advantages -Business and legal disadvantages

-Integrating the construction and permanent loan documents-Buy-sell agreement needed

--Making the note evidence the construction and permanent loans

- -The mortgage for the preclosed loan

The comprehensive construction loan agreement -Construction loan agreement provisions The small construction loan

Total project finance -Advantages -Disadvantages -Loan documents

--Representations and warranties

--Division of loan proceeds by development phase --Conditions precedent to disbursement of loan for

various phases

--Disbursement procedures

--Balancing each phase of the loan - -Retainages and final disbursement ---Understanding retainage

--Inclusion of letter of credit provisions -Priority of acquisition and development loans The residential subdivision construction loan -Unique legal problems and business risks --Speculative nature of home building --Loan repayment from sale of homes --Loan periods and development complexity -Defining "home" and "model home"

-Revolving credit

-The need to regulate the pace of borrower's development

-Assignment of purchase contracts -Home purchaser financing

TABLE OF CONTENTS § 4:69

§ 4:70

-Partial releases for home sales

-Lender's monitoring of compliance with development requisites

II.

MODEL HOMES

§ 4:71 § 4:72 § 4:73 § 4:74 § 4:75 § 4:76 § 4:77 § 4:78 § 4:79 § 4:80 § 4:81 § 4:82 § 4:83 § 4:84 § 4:85 § 4:86 § 4:87 § 4:88 § 4:89 § 4:90 § 4:91 § 4:92 § 4:93 § 4:94 § 4:95 § 4:96 § 4:97 § 4:98 § 4:99 § 4:100 § 4:101 § 4:102 § 4:103 § 4:104

Financing by the construction lender Financing by another lender

Sale-leaseback of model homes Depreciation of model homes

Priority between the residential construction lender and the home purchaser

The growth of "New Urbanism" The planned community development -Development strategy

-Home building: right to disclaim implied warranties

Home building: mandatory arbitration

The planned community development-Community association structure and operation

-Use restrictions -Development rights -Regulation

Financing senior housing developments -Types of senior housing

-Growth and new formats of senior housing -Financing senior housing

Phased projects -High front-end costs

-Different lenders for different phases -Mechanic's-lien problems

-Permanent-loan takeout problems The shopping center construction loan -Development with multiple owners -Financing the mall space

-Tenant improvement holdbacks -Shopping center expansion

-Component financing and other multiple lender arrangements

-Financing parking structures

-Increase in retail construction applications -Converting shopping centers into technical and

continuing education centers -De-mailing a shopping center The condominium construction loan

§ 4:105 § 4:106 § 4:107 § 4:108 § 4:109 § 4:110 § 4:111 § 4:112 § 4:113 § 4:114 § 4:115 § 4:116 § 4:117 § 4:118 § 4:119 § 4:120 § 4:121 § 4:122 § 4:123 § 4:124 § 4:125 § 4:126 § 4:127 § 4:128 § 4:129 § 4:130 § 4:131 § 4:132 § 4:133 § 4:134 § 4:135 § 4:136 § 4:137 § 4:138 § 4:139 § 4:140 -Underwriting considerations -Financing terms

-Loan terms and provisions

- -Timing and prerequisites for advances --Timing of lender consent or subordination to

condominium declaration

--Lender approval requirements --Prohibition of block sales

--Assigning the sale contracts to the construction lender

--Partial release of units -Loans to unit purchasers

-Government-assisted condominium financing -Cooperative apartment financing

-Rating cooperative mortgage loans

-Priority between the condominium construction lender and unit purchasers

--Foreclosure sale proceeds go first to lender --The condominium construction loan: sell-back

agreement

-The uniform condominium act

-Minimizing liability and litigation on condominium projects

--Drafting homeowners association CC&Rs to minimize liability '

--Using construction contracts to reduce a developer's liability

--Careful use of the plans and specifications --Long-range insurance planning

--No liability for defective construction -The zero unit condominium

- - Subdividing the rights, not the land

--Raising capital with the zero unit condominium --Conveyances

--Objections to the zero unit condominium Condominium conversion financing

-Underwriting considerations -Financing needs

- Rating condominium conversion loans Condominium developer purchases Condominiums: tighter financing Condominiums: new FHA rules

Rising demand for medical office buildings

III. METHODS OF FINANCING

§ 4:141 Use of existing financing

TABLE OF CoNTENTS § 4:142 § 4:143 § 4:144 § 4:145 § 4:146 § 4:147 § 4:148 § 4:149 § 4:150 § 4:151 § 4:152 § 4:153 § 4:154 § 4:155 § 4:156 § 4:157 § 4:158 § 4:159 § 4:160 § 4:161 § 4:162 § 4:163 § 4:164 § 4:165 § 4:166 § 4:167 § 4:168 § 4:169 § 4:170 § 4:171 § 4:172 § 4:173 § 4:174 § 4:175 § 4:176 § 4:177 § 4:178 § 4:179 § 4:180 § 4:181 § 4:182 § 4:183

New conversion loan -Rating conversion loans

Multiple loans on individual units Conversion financing by the seller Loans secured by monthly charges Loan disbursement and administration Cash flow in a condominium conversion Obligation to convert and continue rental Statutory compliance

Tenant litigation

The hotel/motel construction loan -Franchising

-Equipment financing --Complete subordination --Lease and option assignment --Secondary security interest

--The importance of advance planning -Hotel condominiums

--Luxury markets --Loan underwriting

-Hotel Condominiums-Pre-sale requirements -Hotel condominiums-Regulatory issues --Securities laws

-Handling disaster claims

The office building construction loan -Loan allocation and disbursement - -The dual allocation approach --Dual loans

-Title insurance problems Wind farms

Student housing growth ahead Construction loan guaranties

-The value and function of construction loan guaranties

-Types of construction loan guaranties --Guaranty of debt repayment

--Guaranty of construction completion

---Specific performance of completion guaranty - - -Scope of guaranty and lender remedies --Categories of guaranties

-Enforcement of construction loan guaranties -Risk of guarantor's bankruptcy to enforcement of

the construction loan

-Enforcement of construction loan guaranties-Lender's breach of construction loan agreement

§ 4:184 § 4:185 § 4:186 § 4:187 § 4:188 § 4:189 § 4:190 § 4:191 § 4:192 § 4:193 § 4:194 § 4:195 § 4:196 § 4:197 § 4:198 § 4:199 § 4:200 § 4:201 § 4:202 § 4:203

--Lender's action impairing guarantor's position ---Guarantee not voided by lender's failure to

disclose

--Guarantor's liability on underlying nonrecourse note

--Oral modification of guarantee agreement binding on lender

-Drafting to avoid guarantor defenses

-Compliance with the Equal Credit Opportunity Act Letters of credit

-Drawing on a letter of credit --Draw by third-party beneficiary --Construction: contractor as third-party

beneficiary

-Drafting letters of credit

-Letters of credit for tax-exempt bonds

Alternatives to construction loan guaranties, letters of credit, and surety bonds

-Bank guarantee -Comfort letter -Put agreement

-Two-party nonbank letters of credit Performance and payment bonds -Mechanic's-lien bonds

-Construction bonds

IV.

CONSTRUCTION CONTRACTS AND

ARCHITECT'S AGREEMENTS

§ 4:204 § 4:205 § 4:206 § 4:207 § 4:208 § 4:209 § 4:210 § 4:211 § 4:212 § 4:213 § 4:214 § 4:215 § 4:216 xxxu Loan underwriting

Lender certification requirements Abandonment of construction contract Coordination of construction contract and

construction loan agreement

Securing the continued performance of architects and contractors after default

-Assignment of construction contract -Assignment of plans and specifications and

architect's agreement -Assignment of other rights

Construction lender's rights against vendors -The economic loss doctrine

-Enforcing an Assignment of Payment

Agreement among contractor, construction lender, and borrower

TABLE oF CoNTENTS § 4:217 § 4:218 § 4:219 § 4:220 § 4:221 § 4:222 § 4:223 § 4:224

Hazard and liability insurance -Hazard insurance

-Flood hazard insurance

--Identifying flood hazard areas and maintaining insurance records

- Liability insurance

--Landowner's potential liability for contractor's employees

--Additional-insured indemnification for lessors --Stiffer underwriting standards

V. ENSURING THE PRIORITY OF THE

CONSTRUCTION MORTGAGE LIEN

§ 4:225 § 4:226 § 4:227 § 4:228 § 4:229 § 4:230 § 4:231 § 4:232 § 4:233 § 4:234

Priority vis-a-vis mechanic's lien claims -Choice of Law Provisions

-Equitable Subrogation

-Lender's inadvertent waiver of priority Construction loan title insurance

-The American Land Title Association loan policy-1970 (amended October 17, policy-1970)

-The American Land Title Association construction loan policy-1975

-1987 ALTA loan policy

Priority vis-a-vis mechanic's lien claims-Circular Priority Problems

Construction loan participations

VI. BUSINESS REASONS

§ 4:235 § 4:236 § 4:237

VII.

§ 4:238 § 4:239 § 4:240 § 4:241 § 4:242 § 4:243

VIII.

§ 4:244 Commercial banks Mortgage bankers

Participations with permanent lenders

STRUCTURING THE PARTICIPATION

Pari passu

Phased contributions Subordination Loan default

Put and call provisions Compensating the lead lender

LEAD-LENDER AUTHORITY AND

RESPONSIBILITY

Lead-lender authority

§ 4:245

§ 4:246

Lead-lender standard of care Lead-lender liability to participant

IX.

CONSTRUCTION LOAN ADMINISTRATION

§ 4:247 § 4:248 § 4:249 § 4:250 § 4:251 § 4:252 § 4:253 § 4:254

Definition and objectives of construction loan administration

Monitoring of construction loans -Contractor selection

-Project shop drawings -Project change orders -Project schedule

-Coordination and communication -Dispute resolution

X. RESPONSIBILITY FOR CONSTRUCTION LOAN

ADMINISTRATION

§ 4:255 § 4:256 § 4:257 § 4:258 § 4:259 § 4:260 § 4:261 § 4:262 § 4:263 § 4:264 § 4:265 § 4:266 § 4:267 § 4:268 § 4:269 § 4:270 § 4:271 § 4:272 § 4:273 § 4:274 § 4:275 § 4:276 § 4:277 § 4:278 § 4:279 § 4:280 XXXIV Lender's attorney Loan administrator

Construction loan disbursement administration -Application for disbursement

-Architect's certificate

-General contractor's certificate -Monitoring contract changes -Monitoring the interest reserve -Title continuation

-Final disbursement

Methods of loan disbursement -Voucher method

-Direct payment method -Joint checks

-Construction escrow Project inspections

-Responsibility for inspections

--Bank's duty to oversee construction -Functions of the inspection

--Inspection of project site

Bankruptcy of construction loan borrower

Attempts by third parties to reach construction loan funds or construction lender's security

- Garnishment -Escrow

-Third-party beneficiary -Equitable lien

TABLE OF CoNTENTS § 4:281 § 4:282 § 4:283 § 4:284 § 4:285 § 4:286 § 4:287 § 4:288 § 4:289 § 4:290 § 4:291 § 4:292 § 4:293 § 4:294 § 4:295 § 4:296 § 4:297 § 4:298

--Equitable lien based on establishment of loan fund

--Equitable lien based on affirmative conduct of lender or others

--Equitable lien based on unjust enrichment of lender

--The FHA cases and the "Trans-Bay doctrine"

--Right to prejudgment interest when equitable lien awarded on undisbursed construction loan proceeds

-Constructive trust, unjust enrichment, and the degree of project completion

--Advance for claimant's work already made by construction lender

--Full project completion as determining unjust enrichment

-Construction loan proceeds as trust fund - -Express trust

--Statutory construction trusts -Estoppel

-Guaranty

-Promissory estoppel -Surety claim

"Stop notice" statutes requiring construction lender to make direct disbursement to contractors

"Stop notice" statute declared unconstitutional Prompt pay acts

XI. LIABILITY OF CONSTRUCTION LENDER TO

THIRD PARTIES

§ 4:299 § 4:300 § 4:301 § 4:302 § 4:303 § 4:304 § 4:305 § 4:306 § 4:307 § 4:308 Construction defects Other grounds

-Construction lender's duty to subordinate purchase-money lienholders

-Construction lender's duty to contract vendees -Construction lender's negligence or breach of duty

in loan disbursement

--Bank's duty to oversee construction -Construction lender and borrower as joint

venturers

-Construction lender's assumption of project control -Construction lender's duty to disclose certain

information to third parties

-Construction lender's duty to disclose adverse information to buyer of real estate loan

§ 4:309 § 4:310 § 4:311 § 4:312 § 4:313 § 4:314 § 4:315 § 4:316 § 4:317 § 4:318 § 4:319 § 4:320 § 4:321 § 4:322 § 4:323 § 4:324 § 4:325 § 4:326 § 4:327 § 4:328 § 4:329 § 4:330 § 4:331 § 4:332 § 4:333 § 4:334 § 4:335 § 4:336 § 4:337 § 4:338 § 4:339 § 4:340 § 4:341 § 4:342 xxxvi

-Construction lender's duty to disclose facts to real estate buyer

Construction lender's duty and liability to construction borrower

-Breach of fair dealing

-Willful diversion or suspension of loan disbursements

--Implied obligation of good faith when disbursing funds

--Lender liability for fraud and non-disclosure --Course of conduct modifies loan agreement -Careful loan administration

-Tortious conduct

-Negligent misrepresentation as jury issue -Misrepresentation claim survives foreclosure -Misappropriation of confidential information from

borrower

-Lender liable to developer for defamation -Fraudulent inducement

-Lender action for its own protection only -Funding project overruns

-RICO liability

-Lender's counterclaims: developer liability --Misallocation of funds and false statements --Lender liability for improper disclosure Construction fraud: How to mitigate

Construction lender's duty and liability to construction borrower-Lender's counterclaims: developer liability-Bank officer bribery

--The nominee loan and false entries

- -Disclosure during workout negotiations

--The examination process and lender's obligation to report suspected crimes

--Punitive Damages for Failure to Pay Property Taxes

Construction lender's right to apply loan disbursements to construction

-Assignment by borrower of construction loan funds -Setoff of borrower's debt against construction loan

funds

Oral modification of loan agreements

-Written agreement overrides alleged oral promise Mortgage note for construction loan

Mortgage note with multiple interest rate options Construction loan agreement provisions for

TABLE oF CoNTENTS § 4:343 § 4:344 § 4:345 § 4:346 § 4:347 § 4:348 § 4:349 § 4:350 § 4:351 § 4:352 § 4:353 § 4:354 § 4:355 § 4:356 § 4:357 § 4:358 § 4:359 § 4:360 § 4:361 § 4:362 § 4:363 § 4:364 § 4:365 § 4:366 § 4:367 § 4:368 § 4:369 § 4:370 § 4:371 § 4:372 § 4:373 § 4:374

Interest rate swap agreement between party and intermediary bank

Construction loan agreement

Single-family-home construction loan agreement Guaranty of repayment of construction debt Unconditional, continuing guaranty of loan

documents

Construction completion guaranty

Assignment of construction contract with contractor's agreement to continue

Assurance letter for tri-party agreement among borrower, lender, and contractor

ALTA loan policy requirements

Construction loan participation agreement

Lead lender's subordination of its receipt of principal and interest to participant's receipt

Subordination of interest of participant declining to contribute its share of loan advances or expenses Participants' rights and responsibilities in

management and sale of collateral after its acquisition

Participant's right to "Put" its interest to lead lender Lead lender's right to "Call" participant's interest Application for construction loan disbursement Construction escrow agreement

Construction status report

Borrower's request for inspection services of architect Construction inspection-Outside consultant's report

to lender-Sample letter

Construction/permanent note rider to be used with standard Fannie Mae/Freddie Mac promissory notes Combination construction/permanent loan agreement to be used with standard Fannie Mae/Freddie Mac promissory notes

Selected provisions in condominium declaration for a zero unit condominium

Additional covenants in condominium construction mortgage

Commitment letter for construction loan-Fee project Cooperative apartment loan commitment

Cooperative apartment loan note

Cooperative apartment loan security agreement Assignment of proprietary lease

Recognition agreement Participation agreement Project account agreement

§ 4:375 § 4:376 § 4:377 § 4:378 § 4:379 XXXVlll

-Labor and Material Payment Bond -Performance Bond

-Construction and completion guaranty: guarantor's representations, warranties, and waiver of certain defenses

Covenant that property will not be declared a condominium

CONSTRUCTION

AND DEVELOPMENT

FINANCING

Law • Practice • Forms

THIRD EDITION

ALVIN L. ARNOLD

Member, New York Bar

and

MARSHALL E. TRACHT

Professor of Law and Director of

Graduate

Real Estate Programs,

Mat #41580121

New York Law

School

November 2015 Edition

Issued in November 2015

Volume 2

prepared by

ALVIN L. ARNOLD

and

MARSHALL E. TRACHT

NE~JYORK

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Table of Contents

CHAPTER 5. THE CONSTRUCTION LOAN

''TAKEOUT'' OR PERMANENT LOAN

§ 5:1 Definition and function of the takeout

I. TYPES OF TAKEOUTS

§ 5:2 § 5:3 § 5:4 § 5:5 § 5:6 § 5:7 § 5:8 § 5:9 § 5:10 § 5:11 § 5:12 § 5:13 § 5:14 § 5:15 § 5:16 § 5:17 § 5:18 § 5:19 § 5:20 § 5:21 § 5:22 § 5:23 § 5:24 § 5:25 § 5:26 § 5:27 § 5:28 § 5:29 § 5:30 § 5:31 § 5:32 § 5:33

Construction lender converting to intermediate- or long-term lender

Long-term amortizing loan by a "permanent lender" -Accrual loans

--Case study

-Debt service coverage ratios and rising interest rates Intermediate-term loan

-Mini-perm rollovers Standby commitments -Underwriting guidelines --Case study

-Mortgage commitment issues for borrower Gap loans

-The mezzanine loan

--The growth of mezzanine --Rating mezzanine loans

--Mezzanine financing exit strategies -Preferred equity

-How subordinate debt impacts senior debt rating - -Intercreditor agreement

Sale of the completed project as the takeout Sale-leasebacks

-Tax problems in sale-leasebacks

-Recharacterization in state court or bankruptcy Joint ventures

-Interim joint ventures

-Tenant-developer joint ventures (equity leases) -Landowner-developer joint ventures

--Example of a residential subdivision joint venture --The joint venture agreement

-Breaking joint venture deadlocks --Joint ventures between developers Outright sale

§ 5:34 § 5:35 § 5:.36 § 5:37 § 5:38 § 5:39 § 5:40 §5:41 § 5:42 § 5:43 § 5:44 § 5:45 § 5:46 § 5:47 §5:48 § 5:49 § 5:50 § 5:51 § 5:52 § 5:53 § 5:54 § 5:55 § 5:56 § 5:57 § 5:58 § 5:59 § 5:60 § 5:61 § 5:62 § 5:63 § 5:64 § 5:65 § 5:66 § 5:67 § 5:68 § 5:69 § 5:70 § 5:71 viii

CoNSTRUCTION AND DEVELOPMENT FINANCING

Sale to partnerships Standby commitments -Types of standbys

-Bankable standby commitments

Forward commitment with two-tier participation Life company mortgage loans

Breach of a mortgage commitment Equity standby commitments

-Use of an equity standby commitment -Terms of the equity standby

-Lender's perspective -Developer's perspective

-Equity standby investor's perspective Case study of equity/debt financing -"Phantom equity" approach -Financing plus joint venture -Sale and leaseback

-Straight joint venture -Straight sale

Negotiating with a securitizing lender -The rating process for mortgage securities -Rating construction loans for securitization -Disadvantages of securitization

-Special provisions required by securitizing lenders --Credit tenant lease loans

Yield maintenance premiums -Enforceability under state law

Yield maintenance premium-Enforceability in Bankruptcy

Sample yield maintenance premium provision Refinancing conduit loans

The construction lender's business and legal relationship to the takeout lender

-Review and administration of the takeout commitment

-Takeout provisions to be avoided

-Administration of the takeout as construction progresses

--Construction lender duty to reveal financial data -Legally linking the takeout lender to the

construction lender

--The tri-party or buy-sell agreement

--Assignment of permanent loan commitment to construction lender

§ 5:72 § 5:73 § 5:74 § 5:75 § 5:76 § 5:77 § 5:78 § 5:79 § 5:80 § 5:81 § 5:82 § 5:83 § 5:84 § 5:85 § 5:86 § 5:87 § 5:88 § 5:89

--Permanent loan commitment issued directly to construction lender

--Construction lender's relationship to a takeout investor committing to make an equity investment --Construction lender's relationship to a takeout lender that is also an equity owner of the property --Quadripartite agreements

-Construction lender's enforcement of the permanent loan commitment

-Borrower's enforcement of the permanent loan commitment-Defenses of lender

-Resolving disputes between borrower and lender -Borrower's claim of economic distress

Transferring the loan to the takeout lender

Delivery of a loan to a permanent lender (assuming that the same set of mortgage documents will be used)

Tri-party agreement

Equity funding conditions letter

Quadripartite agreement-With convertible loan documents

-Without convertible loan documents

Escrow agreement for construction loan delivery to permanent lender

Representation and estoppel certificate of construction lender and borrower to permanent lender

Construction lender's attorney's legal opinion to permanent lender

Letter of intent to make a permanent loan

CHAPTER 6.

CONSTRUCTION

LOAN

DEFAULTS, ENFORCEMENT, AND

WORKOUTS

§ 6:1 § 6:2 § 6:3 § 6:4 § 6:5 § 6:6 § 6:7 § 6:8 § 6:9 § 6:10 § 6:11

The unique problems of construction loan defaults -Changing perceptions and approaches toward

workouts

--Default myths

--Current realities concerning defaults Default danger signals

-Defaults other than the failure to make payments --Loan out of balance; probable cost overruns --Construction delay

--Diversion of loan proceeds --Poor marketing results --Borrower bankruptcy

§ 6:12 § 6:13 § 6:14 § 6:15 § 6:16 § 6:17 § 6:18 § 6:19 § 6:20 § 6:21 § 6:22 § 6:23 § 6:24 § 6:25 § 6:26 § 6:27 § 6:28 § 6:29 § 6:30 § 6:31 § 6:32 § 6:33

CoNsTRUCTION AND DEVELOPMENT FINANCING

--Borrower difficulty on other projects --Contractor bankruptcy or default

---Property owner not liable to subcontractor -Equivocal defaults and equitable defenses Objectives after a default-The lender's objective:

completion of construction Construction lender remedies

Objectives after a default-The borrower's objectives --The continuation of the project

--The termination of the project --Both strategies

--The ability to borrow again Foreclosure of the mortgage -Borrower's foreclosure defenses

--Negligence or breach of contract in the course of loan administration

--Breach of agreement to lend additional funds --Usury

--Lender waiver or acquiescence in borrower default - - Payment

--Lender's obligations during foreclosure -Foreclosure defenses of parties having junior

interests in the collateral --Classes of claimants --Common defenses

I. METHODS OF FORECLOSURE

§ 6:34 § 6:35 § 6:36 § 6:37 § 6:38 § 6:39 §6:40 § 6:41 § 6:42 Equity action Nonjudicial foreclosure Receivership

Sale by receiver "free and clear" Mortgagee-in-possession status Agreements between lenders

Tax consequences of foreclosure-Nonrecourse foreclosure gain

-Tax results to borrower Deed in lieu of foreclosure

II. ADVANTAGES FOR THE LENDER

§ 6:43 Continuation of construction and sales

§ 6:44 Inexpensive and nonpublic

III.

DISADVANTAGES FOR THE LENDER

§ 6:45 Concessions to the borrower

§6:46 § 6:47 § 6:48

IV.

§ 6:49 § 6:50 § 6:51 § 6:52 § 6:53 § 6:54 § 6:55 § 6:56 § 6:57 § 6:58 § 6:59 § 6:60 § 6:61 § 6:62 § 6:63 § 6:64 § 6:65 § 6:66 § 6:67 § 6:68 § 6:69 § 6:70 § 6:71 § 6:72 § 6:73 § 6:74 § 6:75 § 6:76 § 6:77 § 6:78 § 6:79 § 6:80 § 6:81

May be construed as an equitable mortgage Merger and promotion of the interests of junior

lienholders

Preference or fraudulent transfer in bankruptcy

THE TRANSACTION

Borrower's and lender's conflicting interests Preventing merger and preserving lien priority Avoiding equitable mortgage construction Avoiding bankruptcy problems

-Special purpose bankruptcy remote entities Broker's commissions

Title insurance

-Due Diligence When Taking Deed in Lieu Lease assumption in lieu of foreclosure Workouts with the existing borrower -The preworkout agreement

-Legal audit of a loan default

-Adjustments to aid the distressed borrower --Loan-term extensions

--Interest adjustments

--Continued and additional funding --Sources of additional funds

-Adjustments improving the lender's position --Lender control

--Additional collateral and cross-collateralization --Cross-default provisions

--Subordination of borrower's profits --Guaranties

--Limitations on project scope

--Automatic transfer of property to lender without further borrower consent

- - -Cases holding that executory deed transactions are really security transactions requiring foreclosure ---Cases holding that executory deed transactions

are not equitable mortgages and do not clog the borrower's equity of redemption

---Suggestions to improve the likelihood of enforcement of the executory deed transaction --Bankruptcy waivers

---Restraints on filing ---"Bad faith" stipulations ---Automatic stay waivers ---Springing Guaranties

§ 6:82 § 6:83

CONSTRUCTION AND DEVELOPMENT FINANCING --Springing Guaranties (Nonrecourse Carveouts)

-The multiple lender workout

V. LEGAL PROBLEMS OF LOAN MODIFICATIONS

AND WORKOUTS WITH THE EXISTING

BORROWER

§ 6:84 § 6:85 § 6:86 § 6:87 § 6:88 § 6:89 § 6:90 § 6:91 § 6:92 § 6:93 § 6:94 § 6:95 § 6:96 § 6:97 § 6:98 § 6:99 § 6:100 § 6:101 § 6:102 § 6:103 § 6:104 § 6:105 § 6:106 § 6:107 § 6:108 § 6:109 § 6:110 § 6:111 § 6:112 Xll

Promoting the priority of subordinate liens and other interests

Dealing with the circuity of liens problem Mortgage has priority over liens

Lender liability for undue control of borrower's affairs Problems of the obligatory advance rule

Bankruptcy

Validity and enforceability of an oral workout agreement

Business problems of loan modifications and workouts with the existing borrower

The borrower's approach to construction loan workouts

Tax consequences of workouts

-Excusing a portion of the mortgage debt -Reducing the interest rate

-Debt-equity swaps and other loan modifications When to "board up" distressed real estate

-Conventional methods of dealing with distressed real estate

-The measurement criterion for the decision to board up

Workout strategies for troubled real estate properties -Elements of a workout

-Preparing the workout proposal -Presenting the workout plan -When workouts fail

Workouts with a "new borrower" -Completion by a "new borrower"

-Structuring the new-borrower transaction --Contract

--Conveyance to the new borrower with a purchase-money mortgage

--Performance standards and control for project completion and sale

Other sources of construction lender recovery after default