doing business in california real estate transactions
TRANSCRIPT
36 Offices in 17 Countries
DOING BUSINESS IN CALIFORNIAReal Estate Transactions
Part 3 – Basics of Deed of Trust Financing Transactions
Presented by:Noriyuki ShimodaAdmitted in Japan and CaliforniaSquire Sanders (US) LLPPhone: 415-393-9894Email: [email protected]
April 18, and May 9, 2012Palo Alto Office
Presentation for Japanese Business Persons:
2
Introduction
•Three major areas of real estate
transactions
Office Lease – Seminar Part 1
Sale and Purchase – Seminar Part 2
Deed of Trust/Mortgage Financings – Seminar
Part 3
3
Basic Vocabulary
Real Property (Land, Building, and Fixtures)(不動産、土地、建物、定着物)
Personal Property (Tangible or Intangible)(動産、有体動産、無体動産)
A Fee (A Fee Simple, A fee simple absolute) (不動産所
有権)
Preliminary Title Report (タイトルリポート)
Security/Lien(担保権)
Mechanic’s Lien(工事請負人の法定担保権)
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Basic Vocabulary
Pledge(動産質権)
Encumbrance(不動産上の負担、担保権もその一種)
Deed of Trust (Trustor, Trustee, and Beneficiary) (信託
証書ー抵当権)
Mortgage (Mortgagor and Mortgagee) (抵当権、抵当権
設定者、抵当権者)
Assignment of Leases and Rents (リースと家賃債権の譲
渡)
5
Basic Vocabulary
Debt/Indebtedness/Obligation (債務・債権)
Lender/Creditor/Obligee (債権者)
Debtor/Borrower/Obligor (債務者)
Secured Obligations (被担保債権)
Collateral (担保物)
Real Estate Security Interest First Principle (不動産担保
権実行優先の原則)
6
Basic Vocabulary
One Action Rule (一回のアクションの原則)
Wozab Letter (ウオザブ・レター)
Foreclosures (judicial or non-judicial) (抵当権実行-裁判
上、裁判外)
Redemption Right(買戻し請求権)
Deficiency Judgment (残額請求判決)
Non-recourse loan (ノンリコース・ローン)
7
Basic Vocabulary
Recourse loan (リコースローン)
Promissory Note (unsecured or secured) (約束手形,
無担保または担保権付)
Prime Rate (プライムレート)
LIBOR (London Inter Bank Offered Rate) (ロンドン銀行間
取引金利)
TIBOR (Tokyo Inter Bank Offered Rate) (東京銀行間取引
金利)
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Basic Vocabulary
LTV or LTVR (Loan to Value Ratio)(不動産価値に対する
ローン額の割合ーloan Amount ÷ real estate value)
DSCR (Debt Service Coverage Ratio)(不動産からの年
間純利益に対する年間ローン返済額の割合ーannual net
revenue from real estate operation ÷ annual loan
repayment amount)
Recording (登記)
Fixture Filing (定着物登記)
UCC-1 Filing (UCC-1登録)
Basic Vocabulary
Purchase money deed of trust/mortgage (購入資金を被担保債権と
する抵当権)
Deposit Account Control Agreement (銀行口座管理契約)
Loan Title Insurance (ローン用タイトル保険)
Guaranty/Surety (保証)
Secured loan (担保付ローン)
Securitized loan (証券化されたローン)
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10
Typical Process
• Loan Application
• Loan Proposal
• Opening Escrow/Request Title Report
• Preliminary Due Diligence
• Loan Approval / Commitment Letter
• Negotiation of Loan Documents
• Further Due Diligence
• Execution of Documents
• Closing / Funding Process
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Loan Approval and Commitment
• Typical Contents of Loan
Approval/Commitment
Identification of Loan Amount, Term, Costs
and Collateral
Major Covenants, such as LTVR, and
DSCR
Requirement of guaranties or other
collateral
Allocation of Costs
Termination of Commitment
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Due Diligence
• Property Conditions
• Review of Rent Roll, or, for further due
diligence, review copies of Leases and tenant
estoppel certificates,
• Title Matters (Review of preliminary title report,
recorded documents and ALTA survey)
• Environmental Conditions
Phase I Investigation and Report
13
Closing
• Borrower’s Action
• Lender’s Action
• Escrow Agent’s Action
14
Closing – Borrower’s Action
• Delivery of Documents to Escrow Holder
Deed of Trust (signed and notarized)
Other recordable documents (subordination
nondisturbance agreements, assignment of leases)
Fixture filing documents and UCC-1 Financing
Statement
Other documents needed for title insurance
(resolutions of property owner to encumber property,
statements of identity, indemnity against mechanics’
liens, if work on the property is ongoing)
In loan transactions, other executed instruments
usually delivered outside of escrow, directly to
lender
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Closing – Lender’s Action
• Delivery of Money to Escrow Holder
Funds (sometimes including closing costs; other
times the borrower is required to fund closing costs
into escrow)
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Closing – Escrow Agent’s Action
• Required Actions
Recording of Deed of Trust and other instruments(UCC-1 Financing Statement and/or Fixture Filing)(as to recordation of the releases of prior liens beingpaid off in the refinancing or acquisition, titlecompanies often do not require actual reconveyancedocuments from institutional lenders, instead makingpayoffs in reliance on the payoff demands fromthem; sometimes this means that old, paid-off liensremain on the property, complicating latertransactions)
Disbursement of Funds
Issuance of Loan Title Insurance Policy to Lender
Disbursement of Documents to Lender
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Typical Alternatives for Foreclosures
• Strict foreclosure (forfeiture of the security without sale)
is prohibited in California.
• Private Sales/Non-Judicial Foreclosures
Advantages: Quicker (usually about 4 months) and
no need for lawsuit so less expensive.
Disadvantages: Recourse is limited to proceeds of
the sale – no deficiency judgment is allowed (though
might be able to recover more from guarantors).
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Typical Alternatives for Foreclosures
• Judicial Foreclosures
Advantages: Only way to get a deficiency judgment
against the borrower, in the absence of fraud, waste
of the property and other unusual circumstances.
Disadvantages: Need to file (and incur the
expenses of) a lawsuit, which is more complicated
than most: prove your case, wait for the marshal to
sell the property, hold a fair value hearing, then get
the deficiency judgment; subject to one year
redemption right for the borrower applies to judicial
foreclosures, tending to depress resale prices.
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Common Documents for Deed of TrustTransactions
• Loan Agreement
• Promissory Note
• Deed of Trust.
• Fixture Filing Document
• Assignment of Rents and Leases
• Subordination Nondisturbance Agreements
• Environmental Indemnity Agreement
• Legal Opinion
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Other Documents
• Security Agreement
• UCC-1 Financing Statement
• Deposit Account Control Agreement
• Guaranty Agreement
• Construction Loan Assignments
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• Loan Agreement – not always needed if the
loan is a single disbursement, but it is needed
if there are multiple or construction
disbursements and if there are complex
covenants and conditions.
Common Documents for Deed of TrustTransactions
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• Promissory Note – common to virtually all real
estate loans
• Basic Terms of Promissory Note
Payment
Reference to security in deed of trust
Cross default with deed of trust
Covenant to maintain collateral
Common Documents for Deed of TrustTransactions
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• Deed of Trust – standard form used in
California to create a security interest on real
property.
Borrower grants the property to a trustee to hold for
the benefit of the lender (the trustee does not have to
accept the trust; usually a title company is named
without prior consent or consultation). Typical
covenants include maintenance obligation, obligation
to insure, obligation to pay taxes and keep the
property free and clear of liens.
Common Documents for Deed of TrustTransactions
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• Assignment of Rents and Leases – commonly
used although there is no compelling legal
need for a separate assignment of rents and
leases; those clauses can also be in the deed
of trust. Assignment of rents is especially
important in judicial foreclosures, to preclude
borrower from skimming off rents after it has
defaulted.
Common Documents for Deed of TrustTransactions
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• Subordination Nondisturbance Agreements –
Tenant agrees to subordination while securing
a tenant’s right to continue the use of the
premises as long as there is no default.
Common Documents for Deed of TrustTransactions
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• Fixture Filing Document – Deed of trust can
usually have a fixture filing; there is no
compelling legal need for a separate fixture
filing, which adds the further complication of
expiring after 5 years unless continued, just as
other UCC filings.
Common Documents for Deed of TrustTransactions
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• Environmental Indemnity Agreement– two types
commonly exist.
• One continues to exist after the loan is paid off or
foreclosed, requiring borrower to indemnify lender for
any costs of environmental cleanup that lender or its
foreclosure purchaser must bear. This is often a
separate document and described as “unsecured” to try
to avoid application of the one action rule.
• Another follows sections of the Civil Code, as to
environmental liabilities during the course of the loan.
This is often in the text of the deed of trust itself.
Common Documents for Deed of TrustTransactions
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• Legal Opinion – typically covers due authorization,
existence, due execution, all necessary acts taken to
make the loan documents binding, and enforceability.
Priority of the deed of trust is typically not covered, as
the lender should rely on title insurance. Out of state
lenders sometimes require more complex and far-
reaching legal opinions, some of which are not
appropriate, such as general compliance with all laws
and all permits (to be fair, how can the attorney know
that?).
Common Documents for Deed of TrustTransactions
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• Security Agreement – Deed of trust usually has a limited
security agreement, as to matters closely connected
with the real property. Borrowers need to be wary of
signing broad, blanket security agreements for lenders
that are only financing the real estate – either the
borrower will probably be in breach of its other financing
obligations or will have difficulty obtaining other
financing.
Other Documents
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• UCC-1 Financing Statement – Necessary for
perfecting security interest in personal property
other than fixtures. If filed in the County, will
perfect the security interest as to fixtures, but
nothing else.
Other Documents
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• Deposit Account Control Agreement – required
after the 2001 amendments to the UCC in
order to give the lender a security interest in
deposit accounts of the borrower. If the lender
is the depositary bank, no need for an
agreement. More depositary banks are
becoming difficult about agreeing to control
agreements, so do not assume that a loan
requirement of a deposit account control
agreement can be easily satisfied.
Other Documents
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• Guaranty Agreement – Guaranties are often required for
real estate loans. Usually, guarantors can be held liable
but there is some legal uncertainty over whether
guarantors can assert the defenses of a borrower (for
instance, avoiding liability if the lender chose to
foreclose by private sale).
• Limited guaranties are sometimes used, especially in
securitization loans – guarantees/indemnifies for losses
due to fraud, waste and other “bad boy” acts, not
guaranties for the entire principal and interest.
Other Documents
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