Contributed By McGuireWoods LLP
Similar to financing in other States, acquisitions of commercial real estate in Virginia are usually financed through both debt and equity transactions. Installment sales and sale leasebacks are not commonly used for financing transactions. Sources of debt include commercial banks, insurance companies, investment funds and other lending institutions that provide term loans, bridge loans, lines of credit and construction loans. Loans are secured by liens on real estate and other related assets. Equity can come from various sources, including REITs, equity investors, funds and individual investors. Subordinate and mezzanine debt are also common in large real estate financing transactions.
Commercial real estate loans are typically secured by a deed of trust, which creates a lien on the real property and permit non-judicial foreclosure actions, rather than a mortgage, which requires a longer judicial foreclosure process. Deeds of trust and mortgages are both filed in the land records of the County or City where the real property is located. Deeds of trust and mortgages also typically include an assignment of leases and rents, although separate assignment documents may also be recorded in the land records. Depending on the type of loan, lenders may also take assignments of construction agreements and construction-related documents, management agreements, etc. In addition to a real property lien, lenders also take a security interest in the personal property related to the real property. Liens on personal property are perfected by filing a UCC financing statement filed at the State level and in the County land records for fixtures (although the deed of trust can also be used as a fixture filing). The Virginia Code specifies certain document requirements for deeds of trust and mortgages. Most lenders also require guaranties in connection with commercial real estate loans in Virginia.
A foreign out-of-state lender who just makes a loan in Virginia is not deemed to be doing business in Virginia. A foreign lender would not have to qualify to do business in Virginia and there are no restrictions that would apply to foreign lenders. However, other actions may result in a lender being deemed to be doing business in Virginia.
Subject to limited exemptions, the recording of most deeds, including deeds of trust and mortgages, requires the payment of recording tax in Virginia (at a rate of 25 cents on every $100 or fraction thereof of the principal amount secured, as such rate reduces incrementally for each $10 million up to $40 million, and thereafter at 13 cents) plus local recording tax equal to one third of the state recording tax. On deeds of trust or mortgages securing the refinancing of an existing debt secured by a deed of trust or mortgage on which the tax was paid, the rate for the state recording tax is 18 cents on each $100 of the principal amount secured, declining to 10 cents for amounts at or above $40 million, plus the local tax equal to one third of the state tax. In addition, there are administrative filing fees charged by the recording offices. In connection with enforcing its lien, a lender will incur administrative fees and attorneys’ fees, and will often need to cure any unpaid taxes.
Granting a security interest in both real and personal property is subject to typical legal requirements and the requirements of the borrowing entity’s organizational documents, such as receiving consideration, having legal capacity and authority, taking all necessary action to authorize the grant of a security interest, and having a valid interest in the real property. For individual borrowers, spousal counsel rules apply.
Both the non-judicial foreclosure of a deed of trust and the judicial foreclosure of a mortgage must comply with the applicable Virginia Code procedural requirements, including notice of default and acceleration, applicable opportunities to cure, and public sale notices. Judicial foreclosure proceedings are less common, as deeds of trust are used most commonly in Virginia. In addition, default notices must comply with the requirements of the applicable loan financing documents.
Existing lenders can agree to subordinate their debt and lien rights to newly created debt. Such arrangements may be done by various agreements, such as subordination agreements or intercreditor agreements. Although not lenders, mechanics’ and materialmen’s liens in Virginia can gain priority over a pre-existing recorded deed of trust or mortgage. Tax liens also have priority over liens of existing lenders.
Similar to other States, lenders who take title to real property through foreclosure have potential liability as an owner of a property with environmental liability, or as a lender if they actively participate in the management of the property. Such liability under federal and Virginia law is subject to standard exemptions available to lenders. Most lenders will obtain an updated environmental review of the real property prior to taking title to the property by foreclosure. Most commercial loan documents require both borrower and guarantor to indemnify the lender for all environmental matters, and such indemnity survives both foreclosure or payment in full of the loan.
If a borrower becomes insolvent, it will typically be the subject of a bankruptcy action, the filing of which creates an automatic stay to any foreclosure or enforcement action being taken by a lender. The lender should be able to get relief from the automatic stay as a secured creditor with a valid lien on the real property. A lender should protect itself from any challenges by avoiding being under-secured and not actively managing the property before foreclosure to avoid lender liability claim.