by on Wednesday, June 12, 2013 Leave a Comment

The Amp bus system could change the face of real estate on West End

The AmpNashville has been abuzz in recent weeks regarding Mayor Karl Dean‘s call to spend $7.5 million to continue development of a bus rapid transit system that would run approximately seven miles from Five Points in East Nashville to the White Bridge Road area in West Nashville. The project, known as The Amp (yet another reference to Nashville’s musical tradition), is intended to help relieve traffic congestion and provide improved mass transit along the West End corridor.

If federal funding is available, The Amp could be operational by 2016. Mayor Dean believes this type of long-term planning is needed as the Nashville area adds a projected one million new residents over the next two decades.

Rapid transit and light rail have been proven to create positive economic development in other cities. In Atlanta, development of what is called the Beltline has created new commercial real estate development in areas that were previously abandoned by the recession. The Beltline also paved the way for the development of the highly anticipated Ponce City Market in Midtown Atlanta. The Ponce City Market is a redevelopment of a 2-million-square-foot, 80-year-old building that was essentially abandoned into a mixed-use commercial development with apartments, shops and office space. Denver, whose first rail line brought new businesses and residents to the West in the 1800s, is anticipating similar growth and development as a result of its new light rail line. Charlotte, a city that is sometimes compared to Nashville as representative of the New South, is yet another city that has seen great benefits from its light rail system. Within a year of completion, $1.8 billion of new commercial development was announced along Charlotte’s light rail line.

If results in Atlanta, Denver and Charlotte are any indication, an investment in mass transit could pay significant dividends for Nashville and its real estate community. Commercial real estate development has been the major beneficiary of mass transit development in every city.

How will the Amp change the West End corridor? There is a good chance increased density will result in more sidewalks and bike lanes. Without question, I would expect more hotel, Class A office and multi-family development along the Amp corridor.

Could Nashville’s urban core become more like Boston or San Francisco, in the sense that both cities foster the pedestrian experience and can be considered “walking cities?” There are a couple of common denominators that every world-class city shares: mass transit and walkability. The Amp may deliver both to Nashville.

This post was first published by the Nashville Business Journal on May 23, 2013.  To read more commercial real estate articles by Walt Burton at the Nashville Business Journal, click here>

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by on Friday, May 24, 2013 Leave a Comment

Nashville’s Shifting Intown Neighborhoods

NeighborhoodEverywhere you look in Nashville’s intown neighborhoods, developers are building multi-family housing or replatting existing lots for greater density. One can see this all over Green Hills, Music Row, Hillsboro Village, West End, East Nashville, 12South, Sylvan Park, Germantown and other intown neighborhoods.

The market speaks for itself. This type of urban-infill development is doing very well. For example, in Hillsboro Village, there are plans for an 18-unit residential development. 12 South Flats, a retail and apartment development by H.G. Hills Realty Co. and Southeast Venture that is currently under construction, already has85 percent of its retail space leased. The development’s marketing materials describe it as “an urban location with neighborhood charm.”

With increased density, it is vital that the city, developers, and builders act carefully and thoughtfully. Increased density creates many issues that must be dealt with prudently to ensure success for all involved, including affected neighborhoods. Traffic is the most obvious issue. What alternative transportation options are available in Nashville? Not many. Given the high cost per rider of mass transit and our aversion to city buses, the most obvious options to me are more sidewalks and greater use of bike lanes.

Installing sidewalks and allowing people to feel safe walking on the streets would encourage more walkable neighborhoods, which has many benefits other than decreased traffic. People who want to live intown want easy access to retail, dining, and entertainment. What is easier than walking out your front door and strolling to dinner? No car required.

Encouraging walkable neighborhoods also solves other problems associated with density. With greater density comes greater demand for parking. Using 12South as an example again, two 12South restaurants have already sued Metro Nashville for approving permit-only parking. Proper handling of these issues requires collaboration by the city, the developers, the residents, and the businesses. Thriving businesses in high-density areas will promote higher property values and, therefore, more tax revenue for the city. Cooperation is key.

Density is what the market demands. We should use this opportunity to improve the urban landscape to make it more friendly to alternative means of transportation and walkability.

This post was first published by the Nashville Business Journal on May 23, 2013.  To read more commercial real estate articles by Walt Burton at the Nashville Business Journal, click here>

 

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by on Wednesday, May 8, 2013 Leave a Comment

Is Nashville’s Brand What We Want it to Be?

NashvilleIn January, the New York Times acknowledged Nashville’s spot as the newest “it” city. Billboards and commercials across America showcase the city while advertising ABC’s hit series “Nashville.” On the business front, Nashville is leading the nation in job growth. Given these trends, Nashville must be doing something right.

According to the New York Times, Nashville was “once embarrassed by its Grand Ole Opry roots,” yet those roots seem to be precisely why Nashville is so popular. Nashville, it seems, is now starting to embrace its musical heritage and unique culture. Look no further than the $623 million Music City Center downtown, which will provide ample opportunity for increased visitors and visibility for the city. The Music City Center itself harkens back to Nashville’s musical roots, with its main section being shaped like a guitar. There has even been talk of a guitar-shaped office tower in recent years.

The question becomes, then, “What is Nashville’s brand now, and is that brand what we want?” If the purpose of branding is to distinguish oneself, we must wonder how Nashville can continue to stand out and capitalize on recent national publicity. It would seem Nashville should embrace the past, which it has done, while also looking to the future. Nashville’s extensive commercial real estate developments along West End, the Gulch, the Sobro district and other downtown neighborhoods reflects these values. Nashville has embraced its “Grand Ole Opry roots,” while also focusing on creating a business-friendly environment and varied business sectors that have kept Nashville successful during the economic downturn.

Nashville’s recent real estate development reflects a Southern city that is becoming more modern. The fact that Nashville’s finest and most well-known honky-tonks can be located down the street from a world-class Symphony Center and Nashville’s most prominent office towers seems to be precisely the brand that Nashville’s boosters should want to create — something unique, cool and different.

The new Omni Nashville Hotel, opening in October, is doing just that. It will feature both Bongo Java, a local coffeehouse, and a honky-tonk called Barlines. The ability to simultaneously attract hipsters and honky-tonkers is exactly what makes Nashville stand out. Nashville International Airport showcases live music, which my out-of-town friends always reference approvingly. If Nashville can continue fostering its unique brand of “cool” for the creative class, while also making itself an attractive business destination, then we can expect much more of the positive attention we have been receiving lately.

This post was first published by the Nashville Business Journal on May 7, 2013.  To read more commercial real estate articles by Walt Burton at the Nashville Business Journal, click here>

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by on Monday, April 29, 2013 Leave a Comment

Avoid This Costly Mistake When Signing Leases and Other Documents

Tennessee Leasing LawyerOne of the main reasons small business owners decide to incorporate is to limit personal liability for business debts. Lawyers usually advise clients to do certain things to maintain limited liability.  Those things are not difficult, but they must be done properly. The typical advice is to open a separate bank account, enact and follow corporate bylaws, hold regular board and shareholder meetings, keep a stock ledger and observe general corporate formalities.

This is all great advice, but sometimes lawyers forget to advise their clients regarding the simplest things: how to properly execute legal documents on behalf of the corporation. A recent opinion by the Tennessee Court of Appeals serves as a great reminder to business owners on just how important the proper execution of legal documents can be.

Mudd v. Goostree involves a fairly standard commercial lease in which Mudd Properties is identified as the “landlord” and (ostensibly) Liberty Cabinets & Millworks Inc. (Liberty) is identified as the “tenant” in the body of the lease. In the signature block, Rexford Goodtree, the primary shareholder of Liberty, signed (italics where handwritten) as follows:

TENANT:

REX GOOSTREE, JR.
By Rex Goostree, Jr.

After Liberty got behind on its rent, the landlord filed suit against Liberty and Mr. Goostree. Mr. Goostree argued that he should not be held personally liable because his company, rather than him individually, was named as the tenant in the body of the lease. The court was unpersuaded and held that by signing his name individually and not as “president,” or whatever corporate title he held in Liberty, it was a “clear and unambiguous designation of Mr. Goostree as the tenant on the lease agreement.”

It is extremely important with commercial leases, or any other legal document, to always make it clear that the contracting party is the corporate entity–not the individual.  Corporate officers should always list their corporate title adjacent to or below their name when acting in their official corporate capacity. It is clear from this case and many others that courts will not bail you out of a simple mistake unless intent is crystal clear.

This post was first published by the Nashville Business Journal on April 23, 2013.  To read more of Walt Burton’s commercial real estate articles at the Nashville Business Journal, click here>

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by on Monday, April 1, 2013 Leave a Comment

Tennessee Real Estate Transfer Tax and Exemptions (Tenn. Code Ann. § 67-4-409)

Tennessee Transfer TaxThe Tennessee Real Estate Transfer Tax is codified at Tennessee Code Annotated § 67-4-409.  TCA 67-4-409(a) requires that “all transfers of realty, whether by deed, court deed, decree, partition deed, or other instrument evidencing transfer of any interest in real estate” are subject, upon recordation, to a tax of $0.37 per $100.00 (the “Transfer Tax”) calculated based on the greater of “the consideration for the transfer;” or “the value of the property” (“Transfer Tax Formula”).  The Transfer Tax is paid in consideration of the privilege of recordation and applies to both residential and commercial transactions.

As in most states, there are several exemptions from the requirement to pay the Transfer Tax, including transfer of a leasehold estate, creation or dissolution of a tenancy by the entirety, deeds of division in kind of realty formerly held by tenants in common, release of a life estate to the beneficiaries of the remainder interest, deeds executed by an executor to implement a testamentary devise, domestic settlement decrees, transfers by a transferor of real estate to a revocable living trust created by the same transferor or by a spouse of the transferor, or deeds executed by the trustee of a revocable living trust to implement a testamentary devise by the trustor of the trust. TCA 67-4-409(a)(2)-(3). A transfer of real estate will not be subject to the recordation tax if the transfer is only in the ownership of the entity that owns the realty, such as a stock transfer.  TCA 67-4-409(e).  Also, the recording and re-recording of all transfers of realty in which a municipality is the grantee are exempt from the Transfer Tax.

For purposes of calculating the Transfer Tax in connection with recording of a Quit Claim Deed, the actual consideration shall be used rather than the above Transfer Tax Formula.  TCA 67-4-409(a)(4).

Warranty deeds being sent for recordation in Tennessee must contain an oath regarding the amount of the Transfer Tax due based on the Transfer Tax Formula.  TCA 67-4-409(a)(6)(A).  Affidavits of value are usually placed below the signature blocks of the deed and state: “I hereby swear that the actual consideration of value, whichever is greater, for this transfer is $_______.”  Misrepresentation of value is considered perjury.  Tennessee does not require a separate form, like the Georgia PT-61 Transfer Tax Form, to be completed at the time of conveyance.

 The grantee party usually pays the Transfer Tax, but this can be negotiated between the parties.  The tax is collected by the register of the county in which the instrument is being recorded.  The Transfer Tax shall not exceed $100,000.00 in the aggregate for each transaction.  67-4-409(h)(1).

If you need assistance with calculation of your Transfer Tax or any other component of your commercial real estate transaction, please contact the commercial real estate attorneys at Thompson Burton PLLC.

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by on Sunday, March 3, 2013 Leave a Comment

Commercial Leasing – Top Strategies for Prospective Tenants

Leasing Lawyer

1.  Do a Thorough Review of Your Prospective Tenant Needs.  Prior to starting the property search, perform an evaluation of your overall business strategy and needs.  Ideally, give yourself at least 9-12 months to complete your review and identify the location of your future lease premises.  How much space do you need?  Is telecommuting or flex time an option for your employees?  How important is location?  Do you need to be close to your customers?  Where are your employees located?  Do they need mass transit access?  Is parking a major issue?  Is visibility (from major roadways) important to the success of your business?  What about signage?  Are you willing to execute a long-term lease?  Do you need a termination right?  How quickly is your business growing?  Do you need an expansion strategy?  Do you need use restrictions on the non-leased premises at the property to be successful?

2.  Engage a Commercial Real Estate Broker.  A good commercial real estate broker or representative can usually help tenants evaluate business needs and most importantly understand current market terms based on comparable deals.  This can save a prospective tenant potentially significant amounts of money, particularly given real estate is usually the second largest line-item on a company’s income statement.  Make sure the broker you select is familiar with your industry and market.  If you think representing yourself will save you money, think again.  Almost always landlords will pay an industry standard commission to be shared by both the landlord’s and tenant’s representative, whether there are two brokers or not.  Don’t think for a second that the landlord’s rep will look out for your interests.  Make sure you sign a written brokerage commission agreement that clearly states how the tenant rep will be compensated.

3.  Negotiate a Letter of Intent.  Once you identify a prospective location, negotiate a detailed “letter of intent” with the landlord before moving forward to negotiate definitive lease terms.  The letter of intent should include all material business terms, including description of leased premises, term, rental rates, security deposit (if any), operating expenses, parking rights, signage rights, description of any required landlord or tenant work to be performed prior to occupancy, any future rights (like right of first refusal or expansion option), and any termination rights.  A well negotiated letter of intent can usually save both landlord and tenant significant time and expense because it will let the parties know early on whether a deal is possible or not.  The letter of intent is usually signed by both the landlord and tenant and commits the parties to negotiate a written lease in good faith based on the terms of the letter of intent.  It would be unusual to see a binding letter of intent, so be careful that binding language is not contained in your letter of intent. Assuming the letter of intent is sufficiently detailed, it can save all parties money on legal fees by keeping lease negotiations focused.

4.  Understand the Key Financial Terms of Your Prospective Lease.  Before you execute the final letter of intent, make sure you understand how your lease will be structured.  Most importantly, make sure you understand what is covered by your rent.  Common terms in the commercial real estate industry are “gross” and “net” leases, with net leases being most common.  In a gross lease, the tenant pays rent, and all other expenses are generally the responsibility of the landlord.  A net lease, depending on the type of property and lease (single net, double net, or triple net), will require the tenant, in addition to rent, to pay for items such as taxes, insurance, maintenance, repairs, utilities, and other items related to operation of the property.  In multi-tenant properties (like shopping centers or office buildings), these expenses are almost always “passed through” to the tenants “pro-rata” based on total leased square footage.  If you are negotiating a ground lease, in addition to the requirements of the net lease, the ground lease may require you to actually make improvements to the property, including an obligation to re-build in the event of casualty.  If you are making significant improvements to the property or the term is lengthy, a Subordination, Non-Disturbance and Attornment Agreement (often referred to as an SNDA) is appropriate to protect your investment.

5.  Engage a Commercial Real Estate Attorney.  A commercial real estate attorney should be engaged early in the leasing process to assist with items #1 through #4 above, but the real value that a commercial real estate attorney can add will be during lease negotiations.  Commercial leases can be complex, and attorneys are trained to evaluate risk and structure the terms of the lease appropriately for the size, scope, use, and term of your lease.  I can’t tell you how many times I shake my head as I’m reading through a lease or other legal document at some of the unfair or non-market provisions that make there way into “Standard Form Leases.”  A tenant’s negotiating leverage will vary based on the size and type of transaction and marking conditions.  For instance, a landlord is going to  be more willing to negotiate a 100,000 sf lease than a 5,000 sf lease.  Also, depending on the type of lease (ground, in-line space, or office, etc.), the attorney can advise you regarding the appropriate due diligence to perform prior to entering into the lease.  The greater the size and complexity of your lease, the more important it is to ask an attorney to review the lease—as would be expected, bigger numbers tend to magnify mistakes in law and business.

6.  Understand the Pre-Possession Obligations Under Your Lease.  Now that your lease is negotiated, finalized, and executed, you will likely be responsible for some pre-occupancy obligations under the lease.  For instance, you may need to pay a security deposit and/or advance rent, deliver insurance certificates, and make improvements to the property.  Another common requirement is a “commencement date agreement,” which establishes critical dates that may not be clearly set out in the lease.  Your commercial real estate attorney can help you identify these pre-possession obligations and make sure satisfy them appropriately.

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by on Tuesday, February 5, 2013 Leave a Comment

Tennessee Mechanics’ and Materialmen’s Lien Statute Summary

Tennessee Materialmens' LienIn Tennessee, like most states, there is a statutory means by which a person or company who provides labor or materials for the improvement of real estate can secure payment for the work or materials.  Tennessee’s mechanics’ or materialmen’s lien statute was overhauled in 2007 to make it easier to understand and more simple; however, the statute remains full of potential pitfalls and rife with deadlines of various types that can be costly for the unwary.  We recommend hiring a commercial real estate attorney to ensure your rights are protected.

Although the statutory changes in 2007 require that the statute “be construed and applied liberally to secure the beneficial results, intents, and purposes” of the statute, “strict compliance” with the statute is still required.  Tenn. Code Ann. § 66-11-148; Sequatchie Concrete Co. v. Cutter Labs., 616 S.W.2d 162, 165 (Tenn. 1980).  To have a lien, the claimant must have improved the real estate in some way or have contributed to the improvement, such as by furnishing materials.  The statute defines “Improvement” and essentially states that improving real property means creating a change to it, cleaning it up, or enhancing or embellishing it.  Tenn. Code Ann. § 66-11-101(5).  Under the statutory definition, landscaping the property or activities of that nature qualify as improvements, so it does not have to be construction activity in the strictest sense to be considered an improvement under the statute.  The lien attaches automatically “from the time of the visible commencement of operations.” § 66-11-104(a).

A person or company who has a direct contract with the owner of the property, such as a general contractor, has 1 year from completion of the work (or from date of the last delivery of materials supplied) to file a lawsuit to enforce his lien.  § 66-11-106.  When the owner and direct lien claimant have a direct contract, the claimant does not have to serve or record any notice on the owner regarding the lien.  However, he does have to record a Notice of Lien in the register’s office within 90 days of competing the work to give notice of the existence of the lien to third parties.  § 66-11-112(a) (suggested form of notice of lien included in statute).

A remote contractor (or person or company who does not have a direct contract with the owner of the property) generally only has lien rights with respect to commercial real estate because indirect liens generally do not attach to “residential real property,” which is also a term defined in the statute.  § 66-11-146. A remote contractor must comply strictly with numerous statutory requirements to perfect and enforce his lien.  He must send a Notice of Nonpayment to both the owner and the contractor within 90 days of the last day of the month in which work, services, or materials not paid for were provided. § 66-11-145 (suggested form of notice of nonpayment included in statute).  The statute enumerates very specific information that must be included in the Notice of Nonpayment, which are listed below:

  1. The name of the remote contractor and the address to which the owner and the prime contractor in contractual relation with the remote contractor may send communications to the remote contractor;
  2. A general description of the work, labor, materials, services, equipment, or machinery provided;
  3. The amount owed as of the date of the notice;
  4. A statement of the last date the claimant performed work and/or provided labor or materials, services, equipment, or machinery in connection with the improvements; and
  5. A description sufficient to identify the real estate against which a lien may be claimed.

A remote contractor must also send a Notice of Lien within 90 days of the completion of the improvement or 90 days of the date on which materials were last supplied.  § 66-11-112.  The Notice of Lien must also be recorded in the land records to give notice of the lien to third parties.  A remote contractor has 90 days from the date of service of the Notice of Lien to commence his lawsuit to enforce the lien.  § 66-11-115.

An owner of residential or commercial real estate can force any potential lien holders to assert their lien after the project is completed.  The owner does so by filing a Notice of Completion to which any potential lienholders must respond within 10 days if the property is residential or 30 days for commercial real estate.  § 66-11-143.

Practice Pointers:

  • This area of the law is somewhat complex and requires strict compliance with the statute.  If you are faced with a situation involving a mechanics’ or materialmen’s lien, you may want to consider hiring a commercial real estate attorney with experience in this area to assist you.
  • Remote contractors have more difficulty complying with this statute.  They sometimes fail to send timely Notice of Nonpayment because they focus on the date that work was billed rather than when it was actually performed or when the materials were actually delivered.  Additionally, the Notice of Nonpayment must be served within the 90 day timeline, not mailed by the 90th day.  Whether you are a remote or direct contractor, strict compliance with the statute’s timeline is essential.  The time deadlines in the statute serve as a type of statute of limitations with respect to lien rights, so it is crucial to understand and follow all of the time deadlines.
  • It is also critical to commence the lawsuit to enforce the lien within the statutory time frame.  There is also a requirement that the complaint filed must be a verified complaint.  All of these specific requirements are why it is particularly important to involve a commercial real estate attorney or construction litigator in these types of matters.
  • Some contractors also lose their lien rights by failing to respond to a Notice of Completion.  Contractors must be familiar with the Notice of Completion and respond within the appropriate 10 or 30 day deadline to protect their rights.  From the owner standpoint, owners should use the Notice of Completion mechanism once their project is completed, if they believe there may be existing liens that could arise subsequently.  It is a valuable mechanism to resolve the lien issues efficiently once a project has been completed.
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by on Monday, January 28, 2013 Leave a Comment

FDIC D&O Lawsuits Continue in Georgia

FDIC LawsuitsIn December, I wrote an article about the FDIC’s fervent pursuit of lawsuits against former directors and officers of failed banks in Georgia.  At the time, the FDIC had elected to sue directors and officers at 11 of the approximately 85 banks that have failed in Georgia during this economic downturn.  Since I published that article, the FDIC has continued its onslaught against the directors and officers of failed banks in Georgia by filing 2 additional lawsuits last month.

Both lawsuits were filed in the Northern District of Georgia against former directors and officers of First Security National Bank, which was based in Norcross, Georgia, and Rockbridge Commercial Bank, which was based in Atlanta, Georgia.  The complaints against the directors and officers of these banks are substantially similar to the complaint against the directors and officers of Buckhead Community Bank that I discussed previously.  In the case against First Security National Bank’s directors and officers, the only two causes of action are ordinary negligence and gross negligence.  The claims are also based primarily on the alleged failure to follow the bank’s own loan policies and procedures and failures in underwriting.  The claims against the directors and officers of Rockbridge Commercial Bank are essentially the same factually.  However, against the Rockbridge directors and officers, in addition to the ordinary and gross negligence claims, the FDIC has also brought a claim for breach of fiduciary duty.  The allegations with respect to this claim are standard common law breach of fiduciary duty allegations, alleging that the directors and officers were fiduciaries of the bank, that they breached that duty by “abus[ing] their discretion and/or act[ing] in bad faith in the performance of their respective duties as officers and/or directors of the Bank,” and that these breaches of fiduciary duties proximately damaged the bank.

From a litigation standpoint, it is worth noting that it appears that these D&O cases are being assigned to different judges within the Northern District of Georgia, so it will be interesting to see if the different judges handle these matters differently.  Additionally, the FDIC is using several different law firms to represent it in these lawsuits, so that may also result in slightly different strategies being used.

As I mentioned in my previous post on this topic, Georgia is proving to be a bellwether for the nation with respect to these D&O cases being brought by the FDIC throughout the country.  If the two additional filings in December and the general rate of the filings throughout 2012 are any indication, the FDIC intends to continue to vigorously pursue this type of action, and former directors and officers of failed banks throughout the country should take note.  Although my home state of Tennessee has only seen 3 bank failures since 2007, they have all been fairly recently, in 2012.  Based on the D&O lawsuits in Georgia, it seems that the FDIC has been waiting several years to file the D&O lawsuits after the banks’ failures.  As an example, First Security National Bank and Rockbridge Commercial Bank both failed in December 2009, and the lawsuits were brought almost exactly three years later, which is the relevant statute of limitations in Georgia.  Given this delay, it is likely that Tennessee will not see any of these D&O lawsuits brought by the FDIC in Tennessee in 2013, if it sees any at all.  That delay should give the Georgia cases more time to play out and allow any potential lawsuits in Tennessee of this nature to have the benefit of the rulings by the Northern District of Georgia on the cases existing there.

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by on Tuesday, January 22, 2013 Leave a Comment

What to Expect in a Commercial Real Estate Loan Sale

Commercial Real Estate Loan Sale ChecklistI’m currently advising a bank client regarding the purchase of a loan secured by distressed retail commercial real estate.  There are numerous reasons lenders decide to buy and sale loans.  Often, sellers are facing liquidity demands, regulatory pressure, lack of experience working out a specific type of distressed asset, or simple portfolio realignment.  Buyers often have excess capital to lend or invest, possess the experience to work out a distressed loan, or simply want to try and get control of the note to attempt to foreclose on the underlying commercial real estate.  Recently, it seems like most sales that I see are regulatory related, as banks are pressured to move underperforming or disfavored industry-specific loans (i.e. homebuilder, retail, leisure) out of their portfolios, sometimes at significant discounts.  Many loan sales occur after the FDIC has seized a lending institution and placed it into receivership.  Loan sales can include pools of multiple loans or individual loans, but most loan purchases follow a similar pattern and include the following general checklist items:

 

  1. Non-Disclosure and Confidentiality Agreement (NDA).  Typically, the selling party will require an NDA to be executed by the buyer prior to disclosing any documents or other confidential information about the loan.  This agreement protects both parties and provides for general agreement on safeguarding borrower- and guarantor-specific information.  In most cases, documents are disbursed via an online data room filled with loan documents and diligence materials (title, survey, environmental, financial statements, appraisals, etc.).
  2. Letter of Intent.  By the time a commercial real estate attorney gets involved, presumably the Letter of Intent has been signed memorializing the general business terms (purchase price, earnest money, due diligence period, closing date, etc.) of the deal.
  3. Loan Sale Agreement.  Typically, parties will enter into a loan sale agreement providing time for the buyer to conduct due diligence, prepare for closing.  Loan Sale Agreements usually include basic representations from the seller as well as acknowledgements from the buyer regarding the potential distressed nature of the loan.  If the sale is “as is” or deeply discounted, there may not be an extensive due diligence period, and the parties may move directly to close (sometimes actually signing the loan sale agreement as part of closing, if at all).  This is often the case in FDIC-related loan sale transactions.
  4. Due Diligence.  The due diligence checklist for a loan sale is similar to any initial loan checklist for indebtedness secured by commercial real estate.  The purchaser should perform a title examination, update the assigning lender’s survey (or obtain a no-change survey affidavit), update environmental due diligence, perform a lien search on the relevant parties, review all existing loan documents, review the seller’s correspondence file with the borrower, and generally identify any deficiencies with the loan documentation, security interest, or underlying collateral.  I always try and obtain borrower’s and tenant estoppels if possible to verify my expectations regarding the loan status and rent roll.  Usually, loan agreements and lease documents will require borrowers and tenants to deliver estoppels upon reasonable request.  I always advise my buyer clients to update all available diligence information.  Based on the size and nature of the transaction, clients will determine the time and expense they want to devote to due diligence.  At a minimum, loan purchasers should (and can cheaply in most states) obtain an ALTA assignment endorsement that insures the assignment document properly vests the security title in the loan purchaser.
  5. Closing. There are three key documents that are typically part of a commercial real estate loan sale closing: (i) allonge endorsement to note; (ii) assignment of security documents (this is usually in recordable form); and (iii) general (omnibus) assignment of loan documents.  Other deal-specific assignment documents (like assignments of declarant’s rights or entitlement rights) may be included depending on the specific facts and circumstances of the transaction.  Another document that is typically executed at closing is a “hello letter.”  The hello letter notifies the borrower of the transfer and directs the borrower to make future payments to the new owner of the note.

 

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by on Friday, January 11, 2013 Leave a Comment

Construction Lending–Do Lenders ever owe a Duty to Ensure Construction Funds are Used Properly?

Construction SiteI can count on one hand the number of times I’ve seen commercial real estate construction projects come in under budget.  It never fails that last minute changes, upgrades, or “surprises” cause costs to be higher than expected.  Most of the time, one’s construction budget has been pre-approved by the lender and all draw requests are made as one progresses from beginning to end of the project.  So what happens if the lender isn’t really paying attention, funds all draw requests, and construction funds run out while the project is only partially completed?  Whose fault is it?  A question raised by this perpetual problem is what obligation, if any, does your lender have to make sure that your project is progressing appropriately and that the money that the lender has provided for the project is being used appropriately or prudently.

Recently, the Tennessee Court of Appeals decided a case involving a construction loan obtained by Frank and Beverly Booker for the construction of a new home.  Suzich v. Booker, No. W2011-02583-COA-R3-CV, 2012 WL 3055991 (Tenn. Ct. App. July 27, 2012).  Even after increasing the principal amount of the loan from $1.35 to $1.7 million, the loan funds were used before the completion of the home.  The contractor filed notice of his claim for a materialmen’s lien against the property and filed a lawsuit to enforce it, naming the Bookers and the lending bank as defendants.  In response, the Bookers filed a cross-claim against the bank, alleging breach of contract.  The Bookers alleged that the bank breached the following provision of the construction loan agreement because the bank allegedly disbursed all of the loan funds without performing any of the inspections that were allegedly required by the provision:

8.         CONDITIONS PRECEDENT TO ALL LOAN DISBURSEMENTS.

The following conditions will be complied with before [the Bank] disburse[s] . . . and Loan reserves and proceeds. . . .

D.         Inspection.  [The Bank] or [the Bank’s] consulting architect will have inspected the Project and have found the Project at that time reflects good quality work and materials, complies with the Plans and Specifications and completes that construction stage.

The bank answered and denied that it failed to inspect the construction and also denied that it owed any duty to the Bookers to inspect the construction.  Regarding the bank’s alleged duty to inspect the construction, among other provisions, the bank referred the court to the following provision:

13.       AGREEMENTS. Until the Loan and all related debts, liabilities and obligations are paid and discharged, [the Bookers] will comply with the following terms, unless [the Bank] waive[s] compliance in writing. . . .

L.         Lender’s Actions Only for Lender’s Protection.  [The Bookers] agree that [the Bank] and your consulting architect are not obligated to inspect, supervise, prevent Construction Liens, or inform [the Bookers] about the Project’s progress or performance.  [The Bank] and your consulting architect act for your protection when inspecting the Project, procuring sworn statements and waivers of liens, approving change orders and similar actions.  An Inspection for or by [the Bank] does not waive any default and is not a representation that I have complied with this Agreement, any applicable laws or that the Project is free from defective materials or labor.

The trial court entered summary judgment in the bank’s favor, finding that the bank had no duty under the construction loan agreement to inspect the construction of the Bookers’ home for the Bookers’ benefit.  The Court of Appeals affirmed the trial court’s ruling on the bank’s summary judgment motion.

“In the absence of a contrary agreement between the parties, the general rule in Tennessee is that a lender owes no duty to a borrower to disburse loan proceeds for the borrower’s benefit.”  Goodner v. Lawson, 232 S.W.2d 587, 589-590 (Tenn. Ct. App. 1950).  However, an exception to the general rule arises when a lender assumes such a duty by express or implied agreement.  The Tennessee Court of Appeals and courts in other jurisdictions have determined that, under those circumstances, the construction loan agreement governs the lender’s duty.  See, e.g., Lomax v. Headley Homes, No. 02A01-9607-CH-00163, 1997 WL 269432 (Tenn. Ct. App. May 22, 1997).

In Suzich v. Booker, both the trial court and the Court of Appeals upheld summary judgment for the bank and determined that the bank did not have a duty under the terms of the construction loan agreement to inspect the property for the Bookers’ benefit.  The Court of Appeals noted that the construction loan agreement provided that the bank was obligated to disburse advances as long as the Bookers “have complied with all conditions precedent required for each advance.”  The Court of Appeals also noted the provision of the agreement cited by the bank, stating that the bank’s inspections were for its benefit only.

Practice Pointers:

  • Lenders should avoid assuming any duties to disburse funds directly to contractors or other third parties.  If possible the lender should either disburse directly to the borrower upon satisfaction of various conditions or disburse to through a third-party agent (title company).
  • This case demonstrates the importance of reading one’s loan contracts in their entirety to understand the rights and obligations of each party clearly or to be represented by counsel who specializes in real estate finance.  It is vital to be properly represented by counsel in negotiating these types of contracts, especially when the amount financed is considerable, to ensure that your interests are properly protected and to make sure that you understand the risk that you are undertaking in connection with the loan and the contract.  Whether you are the lender or the borrower, it is important to understand each party’s role and clearly lay out each parties duties under the agreement.
  • Construction of large commercial real estate projects (or even an individual’s home) can involve many parties, many loans, and a lot of money.  These projects can be very complicated and many additional complications are certain to arise during the course of the project.  This is why it is so important to involve professional legal counsel from the outset who is trained to anticipate each eventuality and provide for those in the contracts, such as Thompson Burton PLLC.
Filed Under: Real Estate Finance, Tennessee Commercial Real Estate Tagged With: , , , , , , ,
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