Real Estate Finance in a Nutshell
Author:
Lindsey, Vada Waters
Edition:
7th
Copyright Date:
2018
19 chapters
have results for real estate
Chapter 13 Advanced Tax Issues 31 results (showing 5 best matches)
- Prior to the enactment of the Tax Reform Act of 1986, the at risk rules did not apply to real estate. The rules were made applicable to real estate after the explosion of tax shelters. This explosion was made possible because the Supreme Court in determined that nonrecourse indebtedness was included in an owner’s adjusted basis. The real impact of did not take effect until Congress accelerated depreciation deductions which allowed for higher deductions in the earlier years after the property was placed in service. As a result, many individuals began investing in real estate for its tax benefits rather than the income derived from the real estate holding.
- This chapter explains the important concepts of adjusted basis, the tax shelter aspect of real estate, depreciation, choice of form for real estate holdings, limitations on deductions, like kind exchanges, installment sales, sale and leasebacks, sale of a principal residence and character of gain or loss. In addition, this chapter discusses the tax considerations of these concepts where the property is encumbered by a mortgage.
- Under the Internal Revenue Code, if more than one half of a taxpayer’s personal services are devoted to real property trades or businesses that the taxpayer materially participates and the taxpayer performs more than 750 hours of service, then the passive activity limitation rule does not apply to the taxpayer’s rental real estate activities for the year. . Under this exception, each of a taxpayer’s interest in rental real estate is treated as a separate activity unless the taxpayer elects to treat all real estate activities as one activity.
- REAL ESTATE AS A TAX SHELTER
- Disadvantages of Corporate Form for Owning Commercial Real Estate
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Chapter 10 Priorities 16 results (showing 5 best matches)
- Statutes in most states impose a lien on real estate to secure the payment of taxes or assessments levied on the real estate. Usually these real estate tax and assessment liens are allowed to leapfrog existing encumbrances to the first lien priority position. (2016) (real estate tax liens are prior to all liens except liens held by the state and for taxes accruing in prior years); (2016) (lien for taxes is prior to other liens with a lien for state taxes ranking above county real estate taxes); (2016) (real estate tax liens are prior and superior to all other liens); (2017) (real estate taxes and special assessments given priority over other liens). To minimize the risk of losing priority to subsequent tax liens, mortgagees commonly require the mortgagor to escrow funds for the payment of real property taxes.
- Id. (citations omitted). For a greater discussion of the constitutionality of mechanic’s liens, see Nelson, Whitman, Burkhart & Freyermuth, Real Estate Finance 1074–1083 (West 6th ed. 2015).
- State and Local Real Estate Tax Liens
- Under common law, a lis pendens provides constructive notice of claims asserted against the real estate in the pending litigation. . It alerts lenders, creditors, prospective purchasers and others that title to real estate is subject to litigation. Therefore, one who acquires an interest in real estate involved in litigation is bound by the court’s judgment or decree.
- The tax lien arises by operation of law, attaches to all real and personal property of the taxpayer and is perfected against the taxpayer even if the government has not filed a Notice of Federal Tax Lien.
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Chapter 5 Mortgage Market 25 results (showing 5 best matches)
- Real estate investment trusts (REITs) are a product of federal tax legislation of the early 1960s designed to give the small investor an opportunity to participate in sophisticated and diverse real estate investments. If a REIT meets a number of tax requirements, it will not be taxed on income and capital gains distributed to its shareholders.
- The real estate market suffered a terrible collapse from 2007–2011 that was known as the Great Recession. The Great Recession was caused by many factors. It affected the real estate market, stock market, investment banks and credit market. Several investment banks such as Bear Stearns and powerhouse Lehman Brothers failed. An extremely roiled mortgage environment, particularly its subprime sector, marked by a spate of foreclosures severely weakened the financial well-being of some mortgage lenders. This section focuses on four significant causes of the financial crisis.
- The principles of real estate finance law discussed in this book are meaningful only when considered in light of the practical aspects of mortgage lending. This chapter, therefore, deals with the structure and operation of the mortgage market.
- A construction mortgage loan, sometimes referred to as an interim loan, is a short-term loan to an owner-developer for the construction of improvements on the real estate that secures the loan. A take-out provision intends to ensure construction lenders are paid once construction is completed.
- : A mortgagor is a real estate developer who wishes to build an apartment building on land the mortgagor already owns. A mortgagee loans the mortgagor money to construct the project, to be disbursed as construction progresses. The loan, secured by a mortgage on the land and improvements, is due in eighteen months. The mortgagee collects only interest during the eighteen months. This is a simplified construction mortgage loan.
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Chapter 11 Foreclosure 12 results (showing 5 best matches)
- A valid foreclosure of a mortgage terminates all interests in the foreclosed real estate that are junior in the mortgage being foreclosed and whose holders are properly joined or notified under applicable law. Foreclosure does not terminate interests in the foreclosed real estate that are senior to the mortgage being foreclosed.
- Third, relief from the automatic stay will be granted when elements regarding a “single asset real estate” are met.
- , the trial court had granted a motion from the purchaser at the foreclosure sale that a portion of the surplus should be paid to the purchaser for unpaid real estate taxes. Id. at 72–73. In its reversal, the court of appeals noted that the trial court abused its discretion by granting the request because a purchaser of property was required to take it subject to any prior liens, including the lien for unpaid real estate taxes. Id. at 76. The court of appeals found additional support for its decision in the “Notice of Sheriff’s Sale” which stated that the property was conveyed “AS IS” and subject to prior mortgages of record and all general real estate taxes which were a lien on the property.
- . One statutory approach is to prohibit deficiency judgments in certain situations, such as in the case of purchase money mortgages. The standard purchase money transaction is where the seller retains an interest in the real estate sold to secure payment of the purchase price. . Some jurisdictions consider purchase money mortgages to include not only seller financed situations but also security interests granted to lenders on the mortgagor’s purchase of real estate and may prohibit deficiencies.
- There is also a question of who is entitled to possession during the statutory redemption period. As a general rule, the mortgagor may retain possession of the mortgaged real estate during the statutory redemption period. (providing a one-year redemption period and allowing the mortgagor to possess the real property);
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Chapter 6 Federal Government Involvement in Financing Process 13 results (showing 5 best matches)
- Many real estate credit transactions are governed by Truth in Lending. Although business or commercial real estate loans are, of course, exempt, the Act applies to consumer real estate loans regardless of amount. The $25,000 ceiling was removed from this type of transaction so that the average homebuyer is protected when embarking upon the only large-scale financing arrangement that person may ever enter.
- As a general matter, the creditor in a standard real estate credit transaction must make the usual disclosure for closed-end transactions including a statement of the amount financed, the finance charge, and the annual percentage rate. Significant differences exist, however, between its disclosure obligations and those of a creditor in a non-real estate transaction. For example, the items to be included in computing the finance charge differ. Moreover, the real estate creditor must state whether the mortgage loan may be assumed. Further, in certain real estate credit transactions the borrower has a right to rescind that must be disclosed. If the transaction creates a lien on the debtor’s principal dwelling that secures a non-acquisition or non-construction loan, the consumer may rescind the transaction within three business days after closing or after the rescission right and other material matters are disclosed, whichever is later.
- Long before the Great Recession, Congress frequently addressed housing concerns and other matters related to mortgage law and real estate finance. Its activity in these areas has had a considerable impact on the mortgage market. This chapter discusses the federal government’s involvement in the real estate financing process via housing subsidies, mortgage insurance, secondary mortgage market support institutions, and various legislative measures, particularly those intended to address predatory lending and the other causes of the Great Recession and the subprime loan crisis.
- Congress also has created several institutions designed to maintain a national secondary market for residential mortgages. The policy underlying this secondary mortgage market approach is that the support institutions can promote the even distribution of real estate investment capital throughout the country by buying mortgages from originators and selling them to investors. Distinguish the secondary mortgage market which involves the sale of first mortgages from the separate concept of secondary financing, addressed earlier this chapter, which involves the creation of junior mortgages on already encumbered real estate.
- Some Congressional action in the real estate finance area is designed to produce more and better housing for low-and-moderate-income families through housing subsidies administered by the Department of Housing and Urban Development. The form of the subsidy varies greatly from program to program.
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Preface 3 results
- The seventh edition of this book examines the law of real estate finance. It is intended to be used as an introductory guide for lawyers and a general reference for law students who are enrolled in law school classes that address real estate finance issues. It discusses the fundamental rules related to various types of mortgage instruments, priority of encumbrances, loans in default and foreclosure. This book summarizes the law and relies on case and statutory law from various states to provide context to the application of rules that are fundamental to real estate finance.
- The tax consequences of issues related to real estate finance are critical. Therefore, this edition discusses various tax issues related to mortgages and real estate finance. It discusses the tax consequences of loan modifications, deeds in lieu of foreclosure and short sales. In addition, this edition includes a new chapter on advanced tax issues. That chapter outlines the fundamental tax issues, including the tax issues related to the inclusion of debt in an owner’s adjusted basis, depreciation, disposition of real property encumbered by a mortgage, form of ownership, limitations on deductions and character of gain or loss. This chapter also addresses the tax treatment of like kind exchanges, installment sales and sale and leaseback transactions.
- The seventh edition greatly expands the federal government’s involvement in real estate finance resulting from the subprime loan crisis and the Great Recession that was in its early stages when the prior edition of this book was written. The seventh edition includes a discussion of the changes in the regulatory landscape, including the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
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Chapter 1 Introduction to Law of Real Estate Finance 14 results (showing 5 best matches)
- This introductory chapter presents an overview of the fundamentals on real estate finance. Because the mortgage is the cornerstone of real estate finance, it is the focal point of this chapter and for that matter the entire book.
- A mortgage is the transfer of an interest in real estate as security, usually for the repayment of a loan, but occasionally for the performance of another obligation. The typical mortgage transaction is relatively uncomplicated. An individual borrows money from a lender and enters into a written agreement with the lender that the individual’s real estate is collateral for the loan. In legal terminology the individual is a mortgagor, the lender is a mortgagee, and the agreement is a mortgage. If the mortgagor defaults on the mortgage loan, the mortgagee may enforce its security interest by using appropriate foreclosure procedures to have the mortgaged real estate sold to satisfy the loan. A fundamental requirement of all mortgages is that the mortgagor must have the equitable right to redeem the mortgaged real estate prior to foreclosure by paying the outstanding loan balance and interest. In many jurisdictions, the mortgagor has the right to statutorily redeem the real estate after...
- Real estate finance is best understood by one who is thoroughly acquainted with the development of the mortgage concept. An abbreviated jaunt through legal history, therefore, is in order. During this excursion, note how the legal pendulum swings first in the mortgagee’s favor, then in the mortgagor’s direction, and so on, back and forth, throughout history.
- Strict foreclosure was inherently unfair to the mortgagor because the value of the mortgaged land acquired by the mortgagee frequently exceeded the debt. The legal pendulum, consequently, began to swing back in favor of mortgagors. This time our state courts played an active role. The rest of this chapter deals exclusively with the evolution of real estate finance law in this country.
- Although the mortgage is still the foundation of real estate finance, many sophisticated financing variations exist today. The complex financing formats that have evolved over the past several decades may employ a combination of mortgages, leases, installment land contracts, outright conveyances, or other arrangements. In subsequent chapters, you will become well acquainted with fundamental mortgage law and will be introduced to a wide variety of other real estate financing devices. The tax implications are critical in determining the best approach to structure a transaction. These tax implications will be addressed in this book because they are important for the purchaser, lender and seller of the property to consider.
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Chapter 7 Transfer of Mortgagor’s Interest 7 results (showing 5 best matches)
- The doctrine of merger provides that when successive real property interests come into the same hands, the lesser interest ends by merging into the greater interest. Thus, when the mortgagee acquires the mortgaged real estate, the mortgage normally merges into the fee. However, because merger is predicated on the actual or presumed intention of the owner of both interests, the mortgage generally is preserved if merger would be detrimental to the mortgagee.
- If the grantee does not assume the mortgage debt, the conveyance is merely “subject to” the mortgage. Upon default, the mortgagee may foreclose and have the encumbered real estate sold, but as a general rule the mortgagee may not proceed against the “subject to” grantee personally.
- Mortgagees today may freely enforce due-on-sale clauses upon most transfers of mortgaged real estate. A federal statute, discussed later in this section, so mandates. The current situation, however, is a product of years of litigation, regulation, and legislation on the subject. This historical background is traced below.
- The Federal Home Loan Bank Board in 1976 authorized federal savings and loan associations to freely enforce due-on-sale clauses upon most transfers of mortgaged real estate.
- Nelson, Whitman, Burkhart & Freyermuth, Real Estate Finance Law 352–353 (6th ed. 2015)
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Chapter 9 After Default and Before Foreclosure 19 results (showing 5 best matches)
- Mortgagees may request the appointment of a receiver to operate the mortgagor’s business pending foreclosure. A court generally will grant the request only if the business is either specifically covered by the mortgage or based primarily on the rental value of the mortgaged real estate, as in the case of an apartment building. For a greater discussion of whether a receiver can exercise control of the mortgagor’s business see Nelson, Whitman, Burkhart & Freyermuth, Real Estate Finance Law § 4.41, at 240–242 (West 2015).
- Title, intermediate, and lien mortgage theories are significant today primarily as they relate to possession of the mortgaged real estate. Possession is important because with it comes the right to rents and profits produced by the property.
- If the lease was executed after the mortgage, the mortgagee may take possession and thereby terminate the lease on the theory that the lessee can have no greater right to possession than the lessor. Although the mortgagee appears to be in a generally favorable position in this situation, it is really at an advantage only if it desires to terminate the junior lease. If the mortgagee wants to continue the junior lease and collect rent from the junior lessee, difficulty arises because the lessee is liable only to one with whom the lessee is in either privity of contract or privity of estate. The junior lessee clearly has no contractual obligation to the mortgagee. In addition, no privity of estate exists between the junior lessee and the mortgagee because the mortgage could not transfer the mortgagor’s reversion against a lessee not then in existence. The mortgagee, therefore, faces “Catch 22” of real estate finance law. Because the mortgagee cannot force the junior lessee to enter a...
- A mortgagee will frequently include as a default in the loan documents the mortgagor’s failure to pay property taxes and hazard insurance to protect the mortgagee’s security interest. If the mortgagor lacks hazard insurance and a fire destroys the mortgaged property, the mortgagee loses its security interest and can only sue the mortgagor for a deficiency upon default. In addition, if the mortgagor fails to pay state and local real estate taxes, the local and state governments can foreclose on the tax liens which may result in the mortgagee’s loss of its security interest.
- Even when the mortgagee has the right to possession of the mortgaged real estate upon default, it may want to have a receiver appointed rather than take possession itself. Several reasons support such an approach. First, the stringent accounting duties imposed on a mortgagee in possession are avoided. Second, the potential tort and contract liabilities of a mortgagee in possession are eliminated. Third, junior leases are preserved and rents may be collected under those leases even when there is no assignment of rents.
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Chapter 4 Underlying Obligation 8 results (showing 5 best matches)
- The mortgagor frequently is required to make monthly payments that cover not only principal and interest, but also build an escrow account from which the mortgagee may pay real estate taxes and insurance on the mortgaged property as they come due. The escrow account system originated during the Depression when many mortgagors were unable to pay real estate taxes or insurance premiums, and lenders were forced to pay these obligations in order to protect their security.
- The mortgagors’ attack on interest-free escrow accounts has achieved greater success outside the courtroom. Controversy fueled by their lawsuits has precipitated federal and state legislative action. The federal Real Estate Settlement Procedures Act limits the amount of funds that may be placed in escrow, and statutes in some states require the payment of interest on these accounts.
- Mortgagees generally are willing to make below-market-interest-rate loans if they receive sufficient upfront money to offset the reduced interest rate of return. A mortgage loan made on this basis is called a “buy-down.” Real estate developers and other sellers may use the buy-down technique to make their residential properties more marketable by paying an institutional lender to offer low-interest-rate financing to purchasers. In such case, the interest buy-down is typically for only a short term, such as a year or two; thereafter the interest rate returns to the market level.
- N.J. Stat. Ann. § 31:1–1 (West 2017). In addition, a purchase money mortgage loan taken by a seller of real estate is exempt in many jurisdictions on the theory that a buyer and seller are in substantially equal bargaining positions. Various other transactions, such as loans for business purposes, are sometimes given exempt status.
- The Depository Institutions Deregulation and Monetary Control Act of 1980 preempted several aspects of state usury law. The most significant provision for real estate financing purposes is that portion of the Act which exempts most residential first mortgage loans from state interest rate limits.
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Chapter 3 Mortgaged Property 15 results (showing 5 best matches)
- A mortgage containing an after-acquired property clause is outside the chain of title of real estate subsequently obtained by the mortgagor. Hence, purchasers or lienors of such real estate from the mortgagor generally will not be on record notice of the mortgagee’s equitable lien. The mortgagee, therefore, must take further action to preserve the priority of its lien. It may by mortgage provision require the mortgagor to execute recordable mortgage amendments specifically describing after-acquired land as it is obtained.
- Any transferable interest in realty may be mortgaged. Thus, a fee simple, joint tenancy interest, leasehold, life estate, reversion, and remainder are all mortgageable interests. It is important to note that the mortgage is to the extent of the mortgagor’s interest in the mortgaged property. For example, if the mortgagor possesses a life estate interest in real estate and grants a mortgage to a bank, the security is on the life estate only. Hence, if the bank forecloses and is the highest bidder at the foreclosure sale, the bank has a life estate for the life of the mortgagor (pur autre vie). Upon the mortgagor’s death, the bank’s interest passes to the holder of the future interest by operation of law.
- The mortgagee may seek to extend the mortgage lien to land the mortgagor subsequently obtains. The mortgagee usually may achieve this result by inserting an after-acquired property clause in the mortgage. The Restatement defines an after-acquired property clause as “any language in a mortgage that purports to be effective against any other parcel of real estate that mortgagor subsequently acquires.” Restatement (Third) of Property, Mortgages § 7.5(a) (1997). As a general rule, the clause creates an equitable lien on all real estate the mortgagor acquires after the execution of the mortgage.
- A fixture is an item of tangible personal property that becomes realty by its attachment to land with the intent it remains permanently affixed. The fixture concept presents several real estate finance problems.
- Once the mortgagee has accepted the real estate as adequate security for the debt, it is concerned, of course, that the mortgagor maintains the mortgaged premises so that the property does not decrease in value. The mortgagor’s duties in this regard are generally governed by the doctrine of waste, the principle that prohibits a lawful possessor from physically damaging or destroying the property occupied.
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Title Page 1 result
Outline 11 results (showing 5 best matches)
Center Title 1 result
Chapter 2 Real Estate Financing Devices 13 results (showing 5 best matches)
- : A seller owns a parcel of land. The seller enters a binding real estate contract to convey the land to a purchaser. The purchaser makes a $3,000 down payment. The seller breaches the contract by not having a marketable title as agreed. The purchaser has a $3,000 equitable vendee’s lien on the property.
- Treatment of the installment land contract as a contract, not a mortgage, caused it to become a popular means of real estate financing. It remains a viable arrangement in many areas of the country. Most jurisdictions still recognize the traditional contract approach, at least in limited circumstances.
- The lease plays an important part in real estate finance, particularly in the area of commercial development. Leases may be used in a variety of ways, frequently in conjunction with another financing device.
- (defining a purchase money mortgage as any mortgage given for the price of real property); Wis. Stat. § 708.09 (2017) (providing that a purchase money mortgage is any mortgage given to a vendor or a 3rd party on the purchase of real estate). Md. Code Ann., Real Property § 7–104 (2017);
- The mortgage is the most common means of effectuating real estate financing. It is both relatively uncomplicated and flexible. The mortgage is between two individuals, the mortgagee/lender and the mortgagor. A mortgage can secure the mortgagor’s debts or the debts of a third party if the mortgagor is willing to secure the debt with mortgagor’s property. It can also secure an antecedent debt. Most states have a statutory mortgage form that may be expanded as the parties desire. In addition, because the mortgage is a time-tested financing device, the rights and obligations of the parties are generally well established within each state.
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Chapter 8 Transfer of Mortgagee’s Interest 12 results (showing 5 best matches)
- Legal problems that arise from the transfer of the mortgagee’s interest are some of the most complicated in real estate finance. This is primarily because the mortgagee’s interest in the mortgage loan consists of two types of property—the obligation which is personalty and the mortgage which is realty. The material in this chapter is more easily understood if the reader remains constantly aware of this duality.
- Under the traditional approach, if the underlying obligation is nonnegotiable, priority among assignees is generally governed by applicable real estate recording statutes. This means that the first assignee prevails unless a subsequent assignee fits within the protection afforded by the local recording statute.
- Courts may imply an assignment of the mortgage by operation of law under the equitable doctrine of subrogation. In real estate finance law, subrogation is the substitution of one who pays the mortgage debt to the position of the mortgagee.
- Upon conveying away the mortgaged real estate subject to the mortgage, the mortgagor becomes a surety. If the grantee fails to pay the obligation and the mortgagor is forced to do so, justice demands that the mortgagor be subrogated to the rights of the mortgagee.
- : A mortgagor executes a nonnegotiable note and a mortgage to a mortgagee. The mortgagee sells, assigns, and delivers the documents to a first assignee who records the mortgage assignment. The mortgagee then sells and assigns to a second assignee, but, of course, cannot deliver the documents. The first assignee and the second assignee each claim ownership of the mortgage documents. The first assignee prevails over the second assignee, because the first assignee recorded first and the second assignee received constructive notice of the first mortgagee’s prior assignment from the real estate records. The second mortgagee also received inquiry notice from the mortgagee’s failure to deliver the documents.
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Index 6 results (showing 5 best matches)
Chapter 12 Financing Cooperatives and Condominiums 7 results (showing 5 best matches)
- The cooperative and the condominium pose unique real estate finance problems. These issues are explored in this chapter, but first it is necessary to review the general legal principles underlying each form of development.
- A condominium is created when a developer records a formal declaration that the developer submits certain real estate to the local condominium act. The property may consist of various kinds of development, such as a single high-rise structure, a number of garden apartment buildings, or a series of row houses. The contents of the declaration for a condominium is determined by the jurisdiction. For example, in North Carolina, the declaration must contain several items, including the name of the condominium (which must include the term “condominium”), the county, a legal description of the real estate, maximum units, use and occupancy restrictions, alienability restrictions, and allocation of common elements, expenses and votes. N.C. Gen. Stat. §§ 47C–2–105 & 47C–2–107 (2017). In every state, each condominium unit is identified in the declaration.
- This book is designed to present the fundamentals of real estate finance, not an exhaustive analysis of condominium law. Hence, the remainder of this section treats only the narrow area of condominium financing.
- Condominium development achieved prominence in the United States only relatively recently. Changes in economic, political, and social conditions precipitated dramatic condominium growth in this country since the early 1960s. The combination of a land shortage in populous regions, legislation in each state establishing guidelines for the creation of condominiums, and the possibility of insuring mortgages on individual condominium units caused condominium developments to spring up in such number that they now occupy a significant position in the overall housing picture. Commercial condominiums are also quite common. As might be expected, the cooperative dwindled in importance in the real estate marketplace as the condominium rose in popularity.
- Owners of rental apartment buildings or other structures often convert their property to condominiums as a means to profitably dispose of real estate. The condominium conversion process presents some financing problems. The existing mortgagee may be unwilling to cooperate with the conversion and grant partial releases as the condominium units are sold. In this event, the owner must obtain short-term mortgage financing from another source in order to bridge the conversion period. The proceeds of the new mortgage loan are used to satisfy the original mortgage debt. The owner then organizes the condominium and sells the units. The transition from the interim loan to permanent financing is accomplished as described in the preceding section on construction financing.
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- Publication Date: November 20th, 2017
- ISBN: 9781683282631
- Subject: Real Estate Transactions
- Series: Nutshells
- Type: Overviews
- Description: This work presents a thorough overview of the law of real estate finance. It covers introductory matters, the mortgage market, real estate financing devices, the underlying obligation, mortgaged property, transfer of both the mortgagor's interest and the mortgagee's interest, and financing cooperatives and condominiums. It reviews the government involvement in the financing process. In addition, the volume provides an expansive review of rights and obligations after default and before foreclosure, priorities and foreclosure. It covers the tax consequences of the acquisition, owning and disposition of real estate. Legal principles and relevant caselaw are stated along with their underlying theories to enhance understanding of the law of real estate finance.
