Seller Financing After Dodd-Frank

The provisions of Dodd-Frank have been in place just under a year and a half, having come into effect on January 10, 2014, and the provisions of the law that concern seller financing of real estate made significant changes as to how investors use seller financing in these transactions. Now that the rules have been in place for a while and the dust has settled, basic rules concerning private loans from sellers warrant a brief review. At the outset, it is worth noting that these regulations apply to sales only to owner occupants, not sales of commercial or investment properties. The new regulations treat anyone who performs the activities related to the origination of a residential mortgage loan as a “mortgage originator” by default. What this means is that sellers who finance their real estate transactions must be a licensed mortgage originator or include a licensed mortgage originator in the transaction. Financing sellers can be exempt from these rules, however, if certain criteria are met. First, the seller must provide financing for the sale of three or fewer properties in a 12-month period, and the property must have been owned by the seller and used as security for the loan. Second, the seller must not have constructed the residence or acted as a contractor in the construction as part of the ordinary course of their business. Finally, the loan must be fully paid off after a set duration (no balloon payments) and have a fixed interest rate or an adjustable rate that remains fixed for at least five years, and the seller must determine in good faith that the borrower will be able to pay the loan. If the rate does adjust, it must be tied to a widely-available index such as LIBOR or U.S. Treasury securities. Under these rules, a person, trust or business entity can act as a financing seller. Homeownership 2If the seller only finances one property in a year and is a natural person, an estate or a trust, the seller does not have to determine and document the borrower’s ability to pay, although the loan requirements remain the same. If the seller finances more than three properties, the mortgage originator provisions apply, as well as the specific limitations on the loan. Another important distinction to note is that, while the ability-to-pay provisions of Regulation Z[1] apply only to “creditors” as defined by that regulation – those who finance more than five “transactions secured by a dwelling”[2] in a year, Dodd-Frank applies the same provisions to those who finance three or more transactions to owner-occupants in a year. In other words, financing sellers who conduct only four transactions a year are exempt from the ability-to-pay portions of Regulation Z, but not from Dodd-Frank. Negotiating any seller-financing deal is tricky, but the provisions of Dodd-Frank add a new layer of complexity to the process. Let the attorneys of McBrayer, McGinnis, Leslie & Kirkland, PLLC make the process less difficult by providing guidance and assistance in the transaction. CRichardsonChristopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com. This article is intended as a summary of  federal and state law and does not constitute legal advice. [1] 12 C.F.R. § 1026.43 [2] 12 C.F.R. § 1026.2 (a)(17)(v)

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Infill and Adaptive Reuse – Is It Right For My Project?

Fewer words in the context of land use planning come with as negative a connotation as “sprawl.” There’s a good reason for this, as the term denotes a move outwards from the heart of a city, pushing communities further apart into low density suburbs while the core of the area falls into decay. Sprawl has been cited as the cause for everything from environmental damage to community segregation, with inherently negative consequences for cities that fail to plan for sustainable growth. To combat sprawl, however, communities have turned to creative and innovative revitalization efforts such as infill and adaptive reuse as a way to slow the outward push and revitalize existing residential, commercial and even industrial spaces.

A track hoe excavator using its claw thumb to tear down an old hotel to make way for a new commercial development

Infill is the process of identifying sites within existing and developed areas that are either vacant, or can be cleared and redeveloped with new projects. The benefits of an infill project to a community can be substantial: it reduces vacant or blighted land, typically utilizes already existing community infrastructure like roads and sewers, and can reinvigorate growth in stagnant or declining areas. Because of this, many communities encourage infill development by streamlining the process to obtain the approvals necessary to start building, reducing application fees, or providing tax incentives to developers.

Likewise, adaptive reuse projects have also become very popular. Adaptive reuse, in a nutshell, involves recycling an existing building to use it for a purpose other than for which it was built. Vacated warehouses and industrial spaces can find new life as entertainment complexes and craft distilleries and breweries, for example. This highly innovative form of development preserves existing structures and minimizes the new resources required for construction. Adaptive reuse can be highly valuable in areas where historic preservation and community character are paramount, allowing the character of the buildings to guide development, rather than merely the location of the property. Neighbors may be more accepting of adaptive reuse (as opposed to infill or new development) because it preserves the look and feel of their current neighborhood while encouraging growth and reducing vacant and deteriorating structures.

While infill and adaptive reuse can offer exciting and unique opportunities, developers should be conscious of the risks and costs potentially associated with these strategies. Though infill does allow existing infrastructure to be utilized, there needs to be a determination whether this infrastructure can handle uses likely never contemplated when it was installed. Similarly, before starting an adaptive reuse project, developers need to truly evaluate the costs and benefits of such a project. Renovation and rehabilitation costs may exceed the expense of new building, or environmental contamination may prove too high a barrier. Buildings designed without regard for energy conservation may pose a problem for energy-conscious developers as well.

It is also crucial for communities to develop responsible infill and adaptive reuse policies. Unregulated infill policies can alter the character of neighborhoods, can see historic structures destroyed or inexorably altered, and may even displace residents. A neighborhood may delighted to hear that a vacant, unkempt parcel is going to be developed, only to later decry the used car lot built on the property that floods their homes with lights used to highlight the inventory at night. Adaptive reuse can also pose problems, as reused facilities may incorporate uses never envisioned when the property was originally developed. These new uses may negatively impact traffic and parking, and may require communities to upgrade infrastructure sooner than planned.

Infill and adaptive reuse are valuable tools for both developers and communities – but as with any tool, these may not always be the correct choices for the job at hand. Both methods can strengthen the core of a city while preventing sprawl, but the costs and benefits to both communities and developers must be evaluated before undertaking such a project. Responsible policies should be adopted by cities in accord with their comprehensive vision for the community. Developers may find that community inducements make infill development attractive, but should consider whether the benefits offered outweigh the costs associated, and whether these types of development are right for their project.

So, is infill development or adaptive reuse right for your project? For more information on the costs and benefits of these development strategies for your specific project, contact the attorneys at McBrayer, McGinnis, Leslie & Kirkland, PLLC.

Jacob C. WalbournJacob C. Walbourn is an associate in McBrayer’s Lexington office. Mr. Walbourn focuses his area of practice on planning and zoning law handling a wide variety of land use matters for clients in the private sector. His responsibilities include attending Planning Commission and Board of Adjustment hearings and working with developers, business owners, and government agencies on land use applications, zoning ordinance text amendments, comprehensive plan updates and other land use issues. He can be reached at jwalbourn@mmlk.com or (859) 231-8780, ext. 102.

The Basics of Commercial Real Estate Transactions: Important Contract Contingencies

Prior posts have discussed initial considerations in the purchase of commercial real estate and conducting due diligence prior to closing the deal. Today’s focus will now turn to contingencies often found in commercial real estate contracts.

Macro image of a commercial real estate sign with shallow depth of field. ** Note: Shallow depth of fieldThere are several key buyer’s contingencies that find their way into offers and contracts for commercial real estate, and like every contract provision, the terms of these contingencies can be written in such a way as to favor either the buyer or the seller. These terms predicate the sale on the fulfillment of certain conditions with plenty of strings attached, giving a party an escape from the deal if expectations aren’t met. The following are some of the most common contingencies and a brief discussion of each.

Financing

Maybe the most common contingency clause in a real estate agreement concerns financing. This provision will state that the offer to purchase a property is contingent upon the buyer’s ability to procure financing for the property. Often, this contingency will spell out the terms of the required financing to keep the buyer from getting locked into a deal even if financing only comes at unreasonable rates. Sellers, however, prefer and should request more broad terms, such as financing under “commercially reasonable terms.” Buyers should always include a financing contingency unless they plan on paying cash for the property, and even when a loan has already been acquired.

Zoning/Land Use

Commercial real estate is only as valuable to a purchaser as it fulfills the intended uses of that purchaser, so zoning or land use contingencies play a valuable role. Commercial real estate may require changes in zoning or a variance, and these can be uncertain acquisitions at best. Any change in the intended use of the property from the current use should come with a zoning/land use contingency to preserve the buyer’s ability to use the property in the manner expected. Any special permits or approvals should be included in a buyer’s zoning/land use contingency, but sellers should demand that such approvals be requested in a timely fashion, setting specific limits for doing so.

Environmental

Environmental contingencies condition the closing of the sale on a satisfactory report on the environmental conditions affecting the property. These provisions are generally important, but become increasingly so when there are potential environmental hazards from prior uses or if the future use of the property may be environmentally sensitive. A buyer’s contingency should remain as broad as possible and require the seller to furnish other environmental reports related to the property. A seller, on the other hand, should limit as much as possible the buyer’s discretion in deciding what a “satisfactory” environmental report is, including specificity as to the terms of such a report whenever possible.

Inspection

A buyer can include a contingency that makes the deal subject to an inspection period of the property. During this time, the buyer can bring in experts to assess the property and determine its fitness for the intended use as well as any necessary repairs or upgrades. This contingency is usually open-ended, allowing the buyer to back out of the deal for any reason during this time.

Title and Survey

Finally, a buyer has a right to know that what he or she is receiving in the purchase is what the seller is actually providing. Buyers should include a contingency that conditions the sale on a thorough title and survey report that provides the buyer with complete knowledge of the extent of the property and the ownership interest being conveyed in the deal. A buyer should want this language to be detailed and thorough to protect against a host of potential issues. A seller, however, can prevent the buyer from having an absolute right to terminate the agreement, limiting the contingency to a reasonableness standard and giving the seller an opportunity to cure problems before termination.

For more information on commercial real estate contract provisions, contact the attorneys at McBrayer, McGinnis, Leslie & Kirkland, PLLC.

BMacGregorBrittany MacGregor is an associate attorney practicing in the Lexington office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She is a graduate of Transylvania University and the University of Kentucky College of Law. Ms. MacGregor’s practice focuses on real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, and lease negotiation and preparation. She may be reached at bmacgregor@mmlk.com or at (859) 231-8780.

This article is intended as a summary of federal and state law activities and does not constitute legal advice.

The Dangerous Path of Property through Intestacy: The Need for Estate Planning with Respect to Real Estate

Winding up an estate is a difficult task, one that can take a toll on a group of the decedent’s family and loved ones. This process, however, is exponentially more challenging when a person dies intestate. Real property is particularly difficult to distribute without a definitive statement of intent on the part of the deceased. The various methods of descent in intestacy create tangled estates as families grow in complexity, and so many conflicts might be resolved otherwise through the careful act of creating an estate plan.

House Exterior. Entrance Porch And Front Yard ViewIn Kentucky, undevised property passes through a system of intestacy that is at least facially regarded as trying to distribute the property in a manner the deceased would have intended. First of all, a surviving spouse takes a ½ share of the estate.[1] KRS 391.010 then sets out the line of descent, where property passes first to the children of the decedent and their descendants, then to the parents if there are no children, then to siblings if there are no parents, then to the surviving spouse, if there are no children, parents or siblings.The line continues from there to an ever-expanding array of kindred. This descent seems straightforward, but in practice, the results can be tricky. Take, for instance, a woman with four children from a prior marriage who purchases a house with a man as tenants in common. They later marry, then she dies intestate. As tenants in common, each spouse is entitled to an equal share of the property, so the husband retains his share. The other share, however, passes through intestate succession. The husband receives then a right to half of the remaining half of the property as a surviving spouse, and the decedent’s children receive the other half. Suddenly, the husband owns a ¾ interest in the house, with the decedent’s children splitting a ¼ interest between them. If one of the children died before the decedent leaving three children, those children then split their parent’s 1/16th interest, each taking a 1/48th interest in the property. Is this really the result the decedent would have wanted?

One of the greatest gifts an owner of any kind of property can give her or his loved ones is a well-drafted estate plan. As demonstrated above, intestacy is a complex, messy and ultimately undesirable path that can put an already grieving family through another unpleasant experience. The attorneys of McBrayer can help you draft a thorough and careful estate plan to ensure that your wishes with regard to your beneficiaries are well-settled.

MHagginMary Estes Haggin is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC.  Ms. Haggin practices in virtually every aspect of real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, lease negotiation and preparation, and any and all other needs related to residential and commercial real estate matters.  She is located in the firm’s Lexington office and can be reached at  mehaggin@mmlk.com or at (859) 231-8780.

This article is intended as a summary of  federal and state law and does not constitute legal advice.

[1] KRS 392.020