Contributed By Allen Matkins Leck Gamble Mallory & Natsis LLP
The classic real estate financing vehicle is a real property secured loan, which is secured by a first deed of trust. This technique is used for 95% of investments.
If an acquisition is large enough, there may also be pledges of ownership interest in the borrower as well, in addition to a first deed of trust; this makes it easier to foreclose. This is called mezzanine financing.
In addition to real property security interests, there are frequently security interests in personal property. If the real estate collateral is a hotel, the investor can take a Uniform Commercial Code (UCC) security interest in the personal property and intellectual property related to the hotel.
There are a host of regulations affecting foreign lenders and foreign-chartered banks.
Transfer taxes, or “documentary taxes,” are only applicable on transfer of ownership. Creation of collateral does not cause a taxable event, as creation of a deed of trust does not amount to a transfer of ownership interest.
Lenders must create a valid lien against the property by recording the security document – the deed of trust – in the official records of the county in which the deed is located.
Lenders must follow the proper procedural rules in enforcing their rights. They need to give notice of default and then sale, in addition to any rights given to the borrower in the loan documents. Borrowers typically have notice and opportunity to cure a default in five to ten business days. Once those have been exhausted, a lender can give a 90-day notice of default and thereafter a 21-day notice of sale. Other than a tax lien for non-payment of property taxes, the lender’s security interest takes priority over all after-acquired security interests.
It is possible for secured debt to become subordinated, but only under unusual circumstances, such as the modification of the debt when there is secured junior indebtedness. In that event, the senior lender may lose its priority, unless it gets the consent of the junior lender.
In general, the buyer of a real estate asset will be responsible for soil or environmental pollution, even if they did not cause it. Under California law, secured lenders can take steps to protect themselves from such liability.
Ordinarily, a borrower cannot create security interests after it has declared bankruptcy. Lenders cannot exercise remedies until allowed to do so by a federal bankruptcy court. Filing bankruptcy creates an automatic stay of all proceedings.