DOING BUSINESS IN CALIFORNIA Real Estate Transactions

Transcription

1 Presentation for Japanese Business Persons: DOING BUSINESS IN CALIFORNIA Real Estate Transactions Part 3 Basics of Deed of Trust Financing Transactions Presented by: Noriyuki Shimoda Admitted in Japan and California Squire Sanders (US) LLP Phone: noriyuki.shimoda@squiresanders.com April 18, and May 16, 2012 Palo Alto Office 36 Offices in 17 Countries

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 2

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) 有 権 ) ( 不 動 産 所 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 ) 3

4 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 ) Assignment of Leases and Rents (リースと 家 賃 債 権 の 譲 渡 ) Pledge ( 動 産 質 権 担 保 権 ) 4

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 ) 5

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) 6

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 ) 7

8 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 ) 8

9 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) Limited Guaranty ( 限 定 的 保 証 ) 9

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 10

11 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 11

12 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 12

13 Closing Borrower s Action Lender s Action Escrow Agent s Action 13

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 14

15 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) In some counties, such as Los Angeles, funds must be received by the escrow the day before the recording of the documents, since title companies are only permitted to record once, first thing in the morning 15

16 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 being paid off in the refinancing or acquisition, title companies often do not require actual reconveyance documents from institutional lenders, instead making payoffs in reliance on the payoff demands from them; sometimes this means that old, paid-off liens remain on the property, complicating later transactions) Disbursement of Funds Issuance of Loan Title Insurance Policy to Lender Disbursement of Documents to Lender 16

17 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). 17

18 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. 18

19 Common Documents for Deed of Trust Transactions Loan Agreement Promissory Note Deed of Trust. Fixture Filing Document Assignment of Rents and Leases Subordination Nondisturbance Agreements Environmental Indemnity Agreement Legal Opinion 19

20 Other Documents Security Agreement UCC-1 Financing Statement Deposit Account Control Agreement Guaranty Agreement Construction Loan Assignments 20

21 Common Documents for Deed of Trust Transactions 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. 21

22 Common Documents for Deed of Trust Transactions 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 22

23 Common Documents for Deed of Trust Transactions 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. 23

24 Common Documents for Deed of Trust Transactions 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. 24

25 Common Documents for Deed of Trust Transactions 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. 25

26 Common Documents for Deed of Trust Transactions 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. 26

27 Common Documents for Deed of Trust Transactions 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. 27

28 Common Documents for Deed of Trust Transactions 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 farreaching 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?). 28

29 Other Documents 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. 29

30 Other Documents 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. 30

31 Other Documents 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. 31

32 Other Documents 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. 32

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