REALWorld Law

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Depending on the state in which any mortgaged property is located and whether any portion of the mortgaged property is designated for residential use, a foreign lender may need to obtain a license in order to lend in such state. While lending activity is generally not implicated, in certain circumstances a federal statutory requirement to file a national security clearance process overseen by the US federal government body known as the Committee on Foreign Investment in the United States (CFIUS) may be required.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Mortgage instruments as well as all documents intended to be recorded in the public records require the acknowledgment/notarization of the parties executing such document. The nominal amount charged by notaries, in each case licensed by the applicable states, may vary.

The amount of mortgage fees and taxes also vary from state to state (and local jurisdictions within each state). Unlike notarial fees, mortgage recording taxes may amount to substantial sums. For instance, under New York state law, for loans of a certain size, a mortgage recording tax of nearly 3% of the principal balance secured must be paid when a new mortgage is created and recorded against a property.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

As with all corporate transactions, the granting of a security interest in property requires the officers of such entity to comply with its applicable articles of incorporation and by-laws, the laws or regulations of the state governing such transaction and those of the federal government, and any contract that the corporation has with another party. The debtor should also obtain a copy of a resolution of the board of directors authorizing the corporation to grant the security over its real estate assets.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Depending on the state in which any mortgaged property is located and whether any portion of the mortgaged property is designated for residential use, a foreign lender may need to obtain a license in order to lend and receive repayment due under the loan documents. While lending activity is generally not implicated, in certain circumstances a federal statutory requirement to file a national security clearance process overseen by the US federal government body known as the Committee on Foreign Investment in the United States (CFIUS) may be required.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

A creditor can agree to subordinate its security interest to that of another creditor by agreement. The applicable agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement as between the two contracting parties.

Liens resulting from a property owner’s failure to pay real estate taxes levied by local authorities or common area charges due under a condominium regime may have ‘super-priority’ over liens for mortgage debt, notwithstanding the fact that such mortgage lien may have been granted prior in time to the filing of such tax or condominium lien. In addition, local laws vary as to the priority given to a ‘mechanic’s lien’ filed as a result of an owner’s failure to pay contractors making improvements to a property.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Each state has its own rules regarding conflicts of laws. In many instances, the validity of a provision stating that a foreign law should govern an agreement will be ascertainable only in light of the facts and circumstances of the individual case indicating the strength of the nexus to the foreign jurisdiction.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Recordation of a mortgage is generally a prerequisite to a validly perfected mortgage lien in real estate. However, failure to perfect the lien does not in fact make such lien invalid. The lien could be perfected at a later date subject to arguments that upon a bankruptcy filing of the mortgagor, the granting of such mortgage constituted a fraudulent conveyance.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

A lender holding security over real estate does not normally incur environmental liability relating to the making of a mortgage loan, provided the lender does not itself cause or knowingly permit environmental damage to the subject property. The lender also may be exempt from liability because the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) exempts from liability anyone ‘who, without participating in the management of a … facility, holds indicia of ownership primarily to protect his security interest in the … facility.’

Notwithstanding this exemption, the lender may face potential liability for clean-up costs as an owner or operator under CERCLA if it takes possession of a contaminated site upon default of the owner’s underlying loan obligation or subsequently acquires title to such a site through foreclosure or deed in lieu of foreclosure.

In 1996, Congress restricted the meaning of ‘participating in the management of a … facility’ to limit the risk of liability for foreclosing lenders. Even with these measures in place, it is common for commercial mortgage lenders to receive an indemnity from the principal of the property owner or arrange for environmental insurance coverage to mitigate any potential liability.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Each state and local jurisdiction imposes different procedural hurdles before a security interest in real estate can be enforced. Some states require judicial intervention while others permit non-judicial remedies.

In most cases, the borrower must be given notice of default and prescribed notice periods must be complied with before a lender can enforce a security interest in real estate. Statutory notice periods vary in each jurisdiction but generally 30 days' notice will be required before a lender can enforce its remedies over such real estate security (such as exercising its power of sale).

Loan agreements and security documents will typically describe the events of default that trigger a lender’s right to enforce its remedies. Events of default will usually include failure to repay the loan or any periodic payment due on time, and breaches of warranties or covenants.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Lenders to troubled real estate owners may, to the extent the mortgage agreement provides, appoint a receiver or agent to collect rents and manage the property so as to protect the relevant collateral. The receiver, though not actually an agent of the lender, will serve to preserve the asset while foreclosure proceedings may be pursued.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Generally, the onset of a borrower’s insolvency does not affect the validity of a mortgage granted to secure an obligation. However, the filing of any form of bankruptcy petition automatically stays foreclosure proceedings against the borrower. Nonetheless, courts may grant the lender relief from the automatic stay and the lender’s security may be enforced pursuant to the general enforcement rules.

Last modified 22 Mar 2024

What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?

Following the commencement of insolvency proceedings, creditors of the bankrupt debtor will be paid-off in the order of their lien priority. The principle of ‘prior in time, prior in right’ determines the order of priority, unless a subsequent creditor fits within the protection of the local recording statute or the creditors have otherwise agreed pursuant to a separate agreement. In a ‘notice’ jurisdiction, a subsequent creditor has priority if it does not have notice of the prior interest. In a ‘race’ jurisdiction, a subsequent creditor has priority if its lien has been recorded first. In a ‘race-notice’ jurisdiction, a subsequent creditor has priority if its lien has been recorded first and such creditor has no notice of any prior interest.

Last modified 22 Mar 2024