From Barns to Big Boxes Redux 2012 New Laws, New Economy Commercial Development Financing DEVELOPMENT FINANCING
DEVELOPMENT FINANCING: The Lender s Perspective Loan vs. Owner s Policy Special coverages & endorsements, might include: Future Advance / Revolving Credit Mechanics Liens Survey issues Governmental Issues Subdivision & Zoning Entities Initial Development Loan Closing Whom do you represent the lender or the developer? How are Declarant rights addressed in: Deed of Trust Loan Agreement and documents Your attorney s title opinion to the lender BE CAREFUL WHAT YOU OPINE!! How are marketing materials, Public Offering Statement or HUD Reports, releases, approval/consents to development documents addressed? Subordinations of potential lien claimants Future advance terms
Development Loan Documentation Scenarios MiniDoc Lending pre-printed basic documents MidstreamDoc Lending FullDoc Lending retained counsel to assure all issues addressed, including: Detailed release provisions Assignment of development rights and special declarant s rights, development plans & specs, etc. Review/approval rights What do Deed of Trust, Loan Agreement & other recorded & unrecorded closing documents address? All right title and interest to the Land & appurtenant interests (save & except released parcels) CONTRAST: Just individual units General, nonspecific assignment Development rights Declarant rights All rights under the Declaration Specific itemization Consent to Declaration, Future Annexation Liabilities for common areas / improvements
Solutions Get developer to assign declarant rights, even though they are no longer involved Problem: They won t cooperate They are in bankruptcy They are dissolved or otherwise gone 3 CRITICAL TIMES To Analyze Title, Development and Title Insurance ORIGINAL DEVELOPMENT LAND ACQUISITION & LOAN FORECLOSURE OR DEED IN LIEU POST- FORECLOSURE SALE TO NEW DEVELOPER(S) OR LOT PURCHASERS
The Deed of Trust Critical Elements Drafter & Drafting Preparer s name must be shown on face of the deed or deed of trust, no matter where prepared. GS 47-17.1 Abstracting title, drafting legal documents & giving legal advice is practice of law. Unauthorized practice of law: Civil Liability GS 84-10.1 Disallowance of fees GS 84-10.1 Criminal Liability GS 84-8 Exclusion: State vs. Pledger (bank counsel drafting docs to which it is a party)
Trustee on Deed of Trust (GS 45-10 & GS 45-45.3 ) Deed of Trust not invalid if: No Trustee Named Trustee same as beneficiary Cure = Substitution of Trustee (not markup) Session Law 2011-312 ******** Trustee no longer required as party to: Releases Subordinations Modifications Satisfactions Civil actions, condemnations, bankruptcy, special proceedings & PENALTY for joinder Exceptions: TRUSTEE STILL REQUIRED FOR FORECLOSURE Where Deed of Trust requires joinder of Trustee Future Advance / Construction Loans (G.S. 45-68) Deed of Trust must state: 1. Max. principal amount 2. Given wholly or partly secure future advances &/OR future obligations, & renewals, extensions, modifications - In Re Foreclosure of Hall 3. Period within which such future obligations may be incurred -- not longer than 30 years Alternative -- Contrast: GS 45-82 (Equity Line of Credit)
Future Advance (Art. 7) Equity Line of Credit (Art. 9) Open end (revolving line of credit) OR Closed end (construction loan) Dragnet or spreader Show on its face: For future advances &/or obligations Maximum principal amount secured at any one time Future advances/obligations within 30 years of date Revolving line of credit only Future advances under original obligation only not future obligations Show on its face: Equity line of credit under Art 9, Ch. 45 of the NC Gen. Statutes Maximum principal amount secured at any one time Future Advance Deeds of Trust Changes (G.S. Ch. 45, Art. 7) Obligations secured can be specifically or generally described To extent balance outstanding exceeds maximum, it is secured but does not have priority over subsequent liens Exclusion: advances to protect collateral retain priority
Future Advance Deeds of Trust Changes In Re: Foreclosure of Hall Deed of Trust secured identified specific notes, present advance of -0- & future advances through date certain (April 18, 2008) Did not include future obligations, renewals, modifications or extensions Hypothecation Addendum included present or future indebtedness, obligation... or any extension, modification or renewal thereof RESULT: Since no advances were made prior to April 18, 2008, and given the lack of sufficient dragnet language of the deed of trust itself, a purported renewal and advance made after that date were NOT SECURED BY THE DEED OF TRUST MORAL: Include broad dragnet or spreader language & make draws / renewals within stated limited periods. Future Advance Deeds of Trust Changes Other Cases 2003 deed of trust securing a 2003 Note & all renewals or extensions of any obligation was held to also secure the 2005 refinance Note, even though that 2005 Note was clearly to be secured by a new recorded 2005 Deed of trust. -Branch Banking and Trust Co. v. Chicago Title Ins. Co. An extension granted after the period for advances had expired lost priority vis-à-vis intervening liens. -McNeary s Arborists, Inc. v. Capital Group
Hypothecated Securities Current or future obligation referenced in deed of trust to incorrect borrower, held not secured. -In re Enderle -Trustee Services, Inc. v. R.C. Koonts & Sons Masonry Tenancy by entireties property Loan to and Note from Husband only Deed of trust and Note undated Both initialed and signed DOT, identified Note as from both (ERROR), but had provision that co-signer only to mortgage grant and convey their interest RESULT: Despite errors, this was sufficient to be clear which Note intended -In re Beckhart Equity Line of Credit (G.S. 45, Art. 9) Substantially re-written Definitions NO Prepayment penalty G.S. 45-82.4 Exclusion: Termed out equity line balance G.S. 24-9(c) Advances to protect collateral retain priority -- G.S. 45-82 Extending period for advances G.S. 45-82.1 Termination of equity lines G.S. 45-82.2 Cancellation of deed of trust G.S. 45-82.3
Action From Lender Requirement Notice re: Future Advances G.S. 45-82.3 Borrower (or legal representative) Attorney for Borrower Title insurance company insuring property Attorney or Bank for sale or refi Owner of the property Qualified lienholder (subsequent, but not intended to be subordinate) (1) Either terminate advances or provide not secured by the property (2) Provide balance to the requester to release the property (3) Satisfy deed of trust of record when paid in full *Notice to Borrower (?) Release Provisions Developer plans to convey portions of the land to other developers: - Condo developers - Retail developers Does the Deed of Trust contain provisions obligating lender to release these lots or units from the lien of the deed of trust on specific conditions?
Common Release Conditions No Event of Default then exists Delivery to the Lender of the form of release instrument Lot or Parcel to be released Ingress, egress, and utilities In form and substance satisfactory to the Lender Delivery to Lender of a copy of the final recorded plat Approved by the appropriate Governmental Authorities Satisfactory to Lender Delivery to the Lender of: Closing statement for the applicable Lot Payment of a release fee [per calculation set out in loan docs] Assignments of Leases Schedule A should NOT insure assignment of leases, which is a personal property interest even though exception in Sch. B.
HUD Regulatory Agreements Can add to deed of trust identification provision in Schedule A as affected by [HUD Regulatory Agreement] Schedule B: We are not insuring the validity, enforceability or priority of the HUD regulatory agreements notwithstanding that they appear in Schedule A. Searching Buyer-Borrower Info: Let Us Count Some Why s Properly identifying entities Judgments in favor of US PMDT Preempted under US Code IRS Tax Liens Slodov case No instantaneous seisin for construction loans Information may affect vesting Use of new entity, SPE or tenancy-by-entireties Subordinate matters potential problems for sale or refinance Lack of competency to hold title Commercial Broker Liens Business Personal Property Taxes
The American Land Title Association Policies & Endorsements ALTA Underwriting Philosophy Owner s vs. Loan ALTA Owner s Policy (6-17-06) ALTA Loan Policy (6-17-06)
Claims Comparison Owner s Policy Lender s Policy Title defect may result in an immediate monetary claim by owner/insured. e.g. fence encroachment and subsequent removal Title defect results in a claim ONLY when: 1. Debt accelerated by lender 2. Lender foreclosed or exhausted remedies 3. Lender has not received full payment of amount owed 4. Lender shows that covered title defect caused the shortfall in recovery (See Marble Bank) Core Coverages Comparison OWNER S POLICY LOAN POLICY 1. Title not vested as shown 2. Any defect, lien or encumbrance on title (forgery, fraud, unauthorized conveyance, invalid POA, unrecorded document, taxes due or payable, certain encroachments) 3. Unmarketable title 4. Lack of right of access to and from the land 5. Zoning, ordinance or gov. regulation violation, exercise of policy power or eminent domain filed in Public Records. 6. Previous creditors rights violation or untimely recording. 1-6 similar to Owners. 7. Insured Mortgage not property created, signed, acknowledged, delivered 8. Priority of any lien/encumbrance over Insured Mortgage 9. Lack of priority over mechanics liens contracted or commenced prior to Date of Policy or for construction loan 10.Lack of priority over assessments for street improvements under construction or completed 11.Invalidity of Assignments shown in the policy
EXTENDED COVERAGE = No General Exceptions for: 1. Taxes and assessments not shown on the records of the taxing authority or the public records. 2. Rights or claims of parties in possession not shown by the public records and which could be ascertained by an inspection of the property. Includes: i. tenants with unrecorded leases ii. iii. those claiming by adverse possession those who are in possession and claiming under some other theory 3. Unrecorded easements or claims of easements or encumbrances 4. Encroachments, overlaps, shortage of area, boundary line disputes and any other matter which would be disclosed by an accurate survey of the property. 5. Unpatented mining claims, reservations in patents, water rights, claims or title to water. 6. Any rights to mechanics' and materialmen's liens not shown by public records Exclusions from Coverage ALTA Loan Policy (6/17/06)
Exclusions from Coverage - continued Common Myth and Urban Legend A Loan policy automatically becomes owner s coverage post-foreclosure if the insured lender purchases
Title Insurance: Coverage vs. Exception Standard coverages for title matters - EXAMPLES: Access Specific property described the Land Ownership Affirmative coverages specifically crafted based on the situation Affirmative coverage continuing loan policy coverage (limitations) in post-foreclosure owner s policy Exceptions Does not imply affirmatively covered EXAMPLES: Plats Declarations (incl. HOA dues, easements, ARC) Easements Any matters that cannot clearly be identified as no longer applicable Survey matters, especially post-closing changes Exclusions from Coverage Matters known and not disclosed to title insurer (from lender-relationship with borrower) Matters suffered, assumed or agreed by insured (consents, reviews) Title Insurance Coverages Owner Loan Priority HOA Dues Current No Yes Title to & description of No (unless condo) No (unless condo) common elements Access Yes Yes Creditors rights this No No transaction Creditors rights prior Yes Yes transaction Property described Yes Yes Appurtenances, generally No No
Title Insurance Coverages (if requirements met) Owner Loan Priority No rights of other parties in possession (unless exception) Yes Yes Needed utility easements If certified If certified Mechanics Liens Yes Yes Common element improvements No No Title Insurance Coverages (if requirements met) Owner Loan Priority Prior deeds of trust Yes Yes Roads No No public/accepted Association No No operation/standing Declarant s Rights See discussion See discussion Development Rights See discussion See discussion
Title Insurance Exceptions Declarations consented or ratified Declarations extinguished by foreclosure Owner Yes Removed if requirements met Loan Priority Yes Removed if requirements met Plats Yes Yes Common elements Yes Yes Creditors Rights Coverage NOT on this transaction to be insured (if not caused by delayed or ineffective recording) DOES apply for prior transactions RECOMMENDATION: Pre-approval by title insurer counsel of deed in lieu (obligation forgiven) or foreclosure (high bid) Within last 4 years VS. FMV of property (current appraisals)
Lender s Instructions Prior to authorizing funding, Lender shall receive pro-forma extended coverage loan policy Deed of Trust recorded Commitment Requirements satisfied Deed of Trust is first lien on the real property Future advances insured No exception for unfiled mechanics & materialmen s liens Subject only to the Permitted Exceptions Commit to issue ALTA Loan Policy (6-17-06) with requested endorsements In strict accordance with requirements in lender s letter Failure to timely record: Violates Good Funds Settlement Act (residential) & Probably RPC 191 Mark-ups and Pro Formas Marked Commitment Once requirements marked as met, document information inserted, premium paid and gap exception marked deleted, Pro Forma Policy NOT an actual policy nor a confirmation that requirements met. Company committed to issue policy in conformity with markup Just a pro forma of what will be issued when and if requirements met
Gap Exclusion from Coverage Defects, liens, encumbrances, adverse claims or other matters, if any, created first appearing in the public records or attaching subsequent to Commitment effective date but prior to the recording (the date the proposed Insured acquires for value of record the estate or interest or mortgage thereon) Lender Gap Requirement Title Company hereby irrevocably commits to: issue title insurance policy to Lender, ISAOA dated as of later of (i) time of the recording or (ii) funding containing recording information identical to the marked title commitment or pro forma policy & endorsements with gap coverage (between funding & recording)
ALTA Endorsements for Lenders Typical Commercial Endorsements (the Lender Laundry List ) 3 Zoning (unimproved) 3.1 improved and in compliance 3.2 construction plans & specs 4 Condominium 5 Planned Unit Development 6 Variable Rate Mortgage 8.2 Environmental [COMMERCIAL] 9 series Restrictions, Encroachments, Minerals (for Lenders) 10 Assignment of Mortgage 10.1 with downdate 11 Modifications 11.1 with downdate 12 Aggregation or Tie-in 13.1 Leasehold Loan
Typical Commercial Endorsements (the Lender Laundry List ) cont d 14 Future Advances 14.1 can be used but less coverage because excepts knowledge of lender 14.2 is for letter of credit 15 s Nonimputation Just transferring entity interests; no deed so no priority protection by recording 16 Mezzanine Financing No deed of trust; endorsement to owner s policy but benefits lender 17 Access (direct) 17.1 Access over insured easement 17.2 Utility access 18 Single Tax Parcel 18.1 Multiple tax parcels (might include easements) 19 Contiguity of multiple parcels 19.1 Contiguity of single parcel with other parcels/easements/roads not insured Typical Commercial Endorsements (the Lender Laundry List ) cont d 20 First Loss (multiple parcels) 22 Location (address & use) 23 Co-insurance (rather than mirror image policies with another insurer) only on LARGE transactions, national level approval of premiums and coverages 24 Lender doing business 25 Same as survey 25.1 Same as portion of survey 26 Subdivision compliance 27 Usury (only if entities, not individuals)
Typical Commercial Endorsements (the Lender Laundry List ) cont d 28 Easement encroachment; useful for blanket easements affirmative coverage 29 s Interest Rate Swaps (yes, the D word derivatives) 30 Shared Appreciation (1-4 Family Residential) 30.1 Shared Appreciation Commercial 32 & 33 Construction & disbursement In NC we would probably do our own version combining the downdate and the amount of disbursements The ALTA 32 forms do not fit cleanly with our mechanics lien priority statute if we have obtained appropriate subordinations at original closing as required Typical Commercial Endorsements (the Lender Laundry List ) cont d 34 Identified Risk Coverage (Affirmative Coverage) 35 Mineral and Other Subsurface Substances (Buildings) 35.1 Mineral and Other Subsurface Substances (Improvements) 35.2 Mineral and Other Subsurface Substances (Described improvements)
Governmental Regulation ALTA Standard Policy Exception: Exclusion from coverage for loss or damages sustained by reason of any law, ordinance or governmental regulation which restricts, regulates or prohibits the occupancy or use and enjoyment of the land as well as the character or location of improvements situated on the insured property. ZONING AND SUBDIVISION!!!!!!! ALTA Endorsement Form 3 & 3.1 Zoning Permitted Uses
How to Get the Information For the Zoning Endorsement New ALTA/ACSM surveys say title companies provide??? Cities won t give compliance letters Engineering firm? Surveyor? Attorney? CAUTION: Risky to opine on who is entitled to notice without full title exam ALTA Endorsement Forms 8.1-06 (Residential) and 8.2-06 (Commercial): Environmental Protection Lien Title certification should confirm that no liens were found in the county Public Records. If any, consult Chicago Title NC counsel.
Modifications Must possess all elements necessary for contract In writing Identify parties Consideration Delivery and Acceptance Description of land affected Daniel Boone Complex, Inc. v. Furst Recordation for priority vis-à-vis third parties (unless not a novation or future advance/equity line protection) GS 47-20; GS 45-68, GS 45-81 CAUTION: Modifications with Structural Changes Transfer/assumption/guarantees New or additional parties Release of obligors Capitalizing interest Additional caps or advances Changes in interest rate Maturity of existing lien expired Advance/Obligations period expired Additional collateral Released collateral change in size of project
ALTA Endorsement Form 11 & 11.1: Modifications New exceptions Subordinate (still) Priority (if risk of novation) Creditors rights exception Record within 30 days ALTA Endorsement Form 14 Future Advance Future Advance Mortgage Requires compliance with N.C.G.S. 45-68 or N.C.G.S. 45-81 Re-advances
Date Down Bring policy effective date forward Add intervening items as Schedule B-2 subordinate matters For Lender s information only / peace of mind Any advance made forty-five (45) days or more following the filing of a Notice of Federal Tax Lien is subordinate to the FTL. See 26 U.S.C. 6321-6323(c)(4) Future Advance Endorsements ALTA Endorsement Form 14 ( Future Advance - Priority) Assures continued priority of future advances. Preferred for North Carolina Knowledge of intervening defect, lien, encumbrance won t render advance uninsured ALTA Endorsement Form 14.1 (Future Advance - Knowledge) Provides the same coverage as Form 14, but excludes coverage for advances made after insured has knowledge of an intervening lien, encumbrance or other matter affecting title.
Policy Language (in addition to Future Advance Endorsements) Pending disbursement of the full proceeds of the loan secured by the deed of trust insured, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without knowledge of any defects in, or objections to the title, up to the face amount of the policy. NOTE: DOES NOT ADDRESS COVERAGE OF POST-POLICY MATTERS!!! REQUEST ALTA 14!! ALTA Endorsement Forms 17-06 & 17.1-06 Access ALTA Endorsement Form 17 (Direct) Access and Entry Owner & Lender Requires: Survey Direct Access COMPARE: ALTA Endorsement Form 17.1 (Easement)
Insuring Access Actual vehicular access vs. Bare legal access ALTA Endorsement 17-06 (Access and Entry) Assures PEDESTRIAN and ACTUAL VEHICULAR access Requires verification and current survey reflecting: Name of the public street Street is in fact physically open public street, maintained by a public authority (city or state) Land abuts street Access is not prohibited or limited, either legally (such as controlled access) or physically (i.e. no physical impediment to vehicular or pedestrian access) Right to use existing curb cuts or entries
ALTA Endorsement 17.1-06 (Indirect Access and Entry) Assures INDIRECT access across an easement tract Verification and current survey reflecting: Identification of private access easement to be insured Name of the public street to which easement provides access Recorded easement instrument Title certification of easement -- exceptions in Schedule B including easement instrument & matters affecting easement Street is in fact physically open public street, maintained by a public authority (city or state) Land abuts easement & easement abuts street Access over easement onto street is not prohibited or limited legally (such as controlled access) or physically (i.e. no physical impediment to vehicular or pedestrian access) Right to use existing curb cuts or entries, if any, along the easement or street. Access Easement 50 INGRESS/EGRESS EASEMENT
Controlled Access Highway Tract G adjoins a controlled access highway. Tract G is otherwise landlocked. Condemnation Insurable Access? ALTA Endorsement Forms 18-06 & 18.1-06 Tax Parcel(s) Certification from attorney that: 1. all of insured land is covered within the tax parcel number(s) assigned to said land and 2. the number(s) do(es) not include any additional land. NOTE: ALTA 18.1 provides some assurances regarding easements.
ALTA Endorsement Forms 19-06 & 19.1-06 Contiguity ALTA Endorsement Form 19 (Contiguity-Multiple Parcels) Contiguity between multiple insured separate parcels Owner & Lender Requires: Multiple parcels Survey COMPARE: ALTA Endorsement Form 19.1 Contiguity-Single Parcel - Contiguity between insured parcel and some other parcel ALTA Endorsement Forms 24-06: Doing Business Mortgage and deed of trust entered into by unlicensed mortgage broker in violation of the Mortgage Lending Act was not void as a matter of law, such that the note and deed of trust were illegal and unenforceable, but were subject to being declared unenforceable for public policy reasons, and required remand for the trial court to determine whether the note and deed of trust were unenforceable under the facts and circumstances of the case. N.C.G.S. 53-243.14 now G.S. 53-244.112 In re Foreclosure of Bradburn Compare, N.C.G.S. 53-166(d), Consumer Financing Act (loans under $10,000; void if violates act)
ALTA Endorsement Forms 25-06 Survey Endorsement a.k.a. Same as Survey 1. Legal description matches survey OR 2. Certification from the attorney or from the surveyor that the property shown on the survey and described in the composite legal description is the same property as that described in the multiple legal descriptions covered by the prior policy. Same as Survey Endorsement Owner & Lender Requires...Survey!
Survey Coverage Lender survey coverage without a survey - Underwriting Philosophy - Risk Survey required to give lender coverage - amount of loan - certain endorsements Survey Access Contiguity Easements others
General Survey Exception discrepancies conflicts access shortages in area or boundary lines, encroachments, overlaps, setbacks, easements or claims of easements, riparian rights, and or other matters title to land within roads, ways, railroads, watercourses, burial grounds, marshes, dredged or filled areas or land below the mean highwater mark or within the bounds of any adjoining body of water which would be revealed by a current inspection and accurate survey of the land. Surveyor s Statement on Survey
Governmental Regulation ALTA Standard Policy Exception: Exclusion from coverage for loss or damages sustained by reason of any law, ordinance or governmental regulation which restricts, regulates or prohibits the occupancy or use and enjoyment of the land as well as the character or location of improvements situated on the insured property. ZONING AND SUBDIVISION!!!!!!! ALTA Endorsement Forms 26-06: Subdivision Endorsement Require: Attorney's or surveyor's opinion that the property is in compliance with applicable ordinances, unless: 1. Greater than 10 acres & no street right-of-way dedication is involved (exempt from subdivision regulation under N.C.G.S. 153A-335, Counties, and N.C.G.S. 160A-376, Cities and Towns); or 2. Separate parcel for many years through multiple conveyances.
ALTA Endorsement Forms 28-06: Easement - Damage or Enforced Removal (Rev. 2/3/10) Coverage assurances for insured lender or owner for damage to or enforced removal or alteration of an existing building on the Land which encroaches into or over an easement identified by exception number in Schedule B Exceptions of the policy solely as a result of the exercise of the right of use or maintenance of the specified easement according to its terms. Title insurer will want to review survey and the particular easement instrument. Best New Endorsement: ALTA 34 - IDENTIFIED RISK COVERAGE All purpose basic format for affirmative coverage, conforming to Alliance case Requirement draft: For issuance of ALTA Endorsement Form 34-06 Identified Risk Coverage (Adopted 8/1/11): Verification of the particular "Identified Risk" for which affirmative coverage is requested, and determination on appropriate coverage based on applicable Company underwriting procedures, including but not limited to review and approval by Company counsel.
Affirmative Coverages Company insures that the easement will not interfere with the intended use of the land or the improvements located thereon for an easement. Company insures that the easement will not adversely affect the land and that the improvements are not located within the easement. Company insures that the exercise, maintenance or attempted enforcement of the easement will not cause loss or damage. Company insures against forced removal of improvements constructed or to be constructed on the property as a result of the enforcement of the easement. Mergers, Name Changes, Conversions N.C.G.S. 55D-26 Vested Title Actual Legal Entity Name Zippy Development Limited Partnership a Georgia Limited Partnership Zippy Development LLC a Georgia Limited Partnership
Conform to filings with the NC Secretary of State Review Operating Agreement Titles Manager PLAN Member-Manager AHEAD!! Officers (of corporation, NOT LLC or partnership) Appropriate consents and resolutions since typically not ordinary course of business Powers of Attorney Fiduciaries & Delegating Power An entity can appoint an attorney in fact to act on its behalf with regard to a certain matter or certain types of matters if authorized by: corporation through its board of directors limited liability company through its members, partnership by resolution signed by the partners required under the partnership agreement