Jerry L. Anderson (Drake University Law School) has posted Comparative Perspectives on Property Rights: The Right to Exclude on SSRN. I found it fascinating article on a comparison of the right to exclude others from your property as a very American property right that has its limitations here and is not as true world-wide.
I was familiar with the Loretto v. Teleprompter Manhattan CATV Corp. It was one of the few Supreme Court Takings cases that is straight-forward in its rule and application. If the government forces you to allow someone to place something on your property, no matter how minor, this is a taking and requires compensation.
Professor Anderson compares this to Britain's Countryside and Rights of Way Act of 2000, which declares private land that contains mountain, moor, heath or down to be "open country" on which the public is free to enter. Madonna had an issue with the public entering her 1000 acre estate in South Wiltshire. It seems her American sensibility of the keeping people off your land does carry across the Atlantic when she adopted her British accent.
The one part of the article that threw me off was Professor Anderson's attempt to link American obesity to the lack of access. "Perhaps the right to exclude also plays a role, by increasing the difficulty of walking from one place to another and by placing some of the most inviting territory for a hike off limits. Would it make a difference if you could start a hike by simply hiking across the fields near your house, rather than having to drive to a park or nature preserve many miles away?"
Thanks to Ben Barros at the Property Prof Blog for pointing out this article.
Saturday, September 29, 2007
Thursday, September 27, 2007
REIT Joint Ventures Unfazed By Credit Market Tumult
According to this article in Retail Traffic Magazine, REIT Joint Ventures Unfazed By Credit Market Tumult.
I have done a fair amount of work with REITs acting as private equity managers, leveraging their portfolio with institutional investors rather than public equity.
As Andy Sucoff points out, the REIT typically puts up 15% or 20% of the equity plus a promote for beating a target IRR. They also use higher leverage ratios than they do in their portfolio to maximize the return.
I have done a fair amount of work with REITs acting as private equity managers, leveraging their portfolio with institutional investors rather than public equity.
As Andy Sucoff points out, the REIT typically puts up 15% or 20% of the equity plus a promote for beating a target IRR. They also use higher leverage ratios than they do in their portfolio to maximize the return.
Thursday, September 20, 2007
Exceptions to Limited Liability
Last week I noted the story and decision of City of Springfield Code Enforcement v. Concerned Citizens for Springfield, Inc., et al. in which Housing Court Judge William H. Abrashkin ordered the individual manager (Shalom Segelman) of the property owning limited liability company to pay $1.3 million in relocation costs for the tenants in the sub-standard apartment complex.
After reviewing the case, it is not clear whether the judge was piercing the liability shield of the LLC or carving an exception to the liability shield.
M.G.L. C. 156C s. 22 provides that no ". . . member or manager of a limited liability company shall be personally liable, directly or indirectly, including, without limitation, by way of indemnification, contribution, assessment or otherwise, for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company." This is the liability shield for a limited liability company.
Judge Abrashkin looks to the definition of owner under the State Sanitary Code (105 CMR 400) that imposes obligations on the owner. The code has a very broad definition of owner:
"Owner means every person who alone or severally with others:
I disagree with a statement in the Judge's analysis: "Had this complex gone in the other direction Mr. Segelman would, rightly, have insisted upon reaping the rewards. With the benefits go the burden, and this one falls unavoidably, upon Mr. Segelman."
One the basic paradigm's of investing in real estate (and any business) is being able to limit your losses. If I went out and bought a share of Boston Properties, Inc. (BXP) I would pay the $104.37 that it costs (as of this morning). I have unlimited upside. The stock could triple in value and pay out enormous dividends. My downside is limited to the $104.37 that I paid for the share. As a shareholder, I would never expect to get a bill to contribute more capital to Boston Properties because one of their buildings is in disrepair.
I expect the same treatment if I were an individual investor in a limited liability company that directly owned an apartment building. I know my initial capital is at risk, but I should not have to put additional capital in (unless I agreed to under the limited liability company agreement). I could lose all of my investment. But I should not have to lose more than my investment.
That being said, there are some exceptions to this liability shield. In real estate, there is CERCLA's ability to look through entity for liability due to environmental contamination. (You can read this article by Daniel M. Darragh of Buchanan Ingersoll & Rooney PC on Indirect Owner/Operator Liability Under CERCLA). There is also the equitable remedy of piercing the corporate veil.
In his order, Judge Abrashkin did not discuss any of the factors for piercing the corporate veil. So I am left to assume that the Massachusetts state sanitary code is an exception to the limited liability of an entity.
After reviewing the case, it is not clear whether the judge was piercing the liability shield of the LLC or carving an exception to the liability shield.
M.G.L. C. 156C s. 22 provides that no ". . . member or manager of a limited liability company shall be personally liable, directly or indirectly, including, without limitation, by way of indemnification, contribution, assessment or otherwise, for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company." This is the liability shield for a limited liability company.
Judge Abrashkin looks to the definition of owner under the State Sanitary Code (105 CMR 400) that imposes obligations on the owner. The code has a very broad definition of owner:
"Owner means every person who alone or severally with others:
(1) has legal title to any dwelling, dwelling unit, mobile dwelling unit, or parcel of land,vacant or otherwise, including a mobile home park; orMy reading of Judge Abrashkin's decision is that this definition of owner is an exception to the liability shield of M.G.L. C. 156C s. 22.
(2) has care, charge or control of any dwelling, dwelling unit, mobile dwelling unit or parcel of land, vacant or otherwise, including a mobile home park, in any capacity including but not limited to agent, executor, executrix, administrator, administratrix, trustee or guardian of the estate of the holder of legal title; or
(3) is a mortgagee in possession of any such property; or
(4) is an agent, trustee or other person appointed by the courts and vested with possession or control of any such property; or
(5) is an officer or trustee of the association of unit owners of a condominium.
Each such person is bound to comply with the provisions of these minimum standards as if he were the owner. Owner also means every person who operates a rooming house."
I disagree with a statement in the Judge's analysis: "Had this complex gone in the other direction Mr. Segelman would, rightly, have insisted upon reaping the rewards. With the benefits go the burden, and this one falls unavoidably, upon Mr. Segelman."
One the basic paradigm's of investing in real estate (and any business) is being able to limit your losses. If I went out and bought a share of Boston Properties, Inc. (BXP) I would pay the $104.37 that it costs (as of this morning). I have unlimited upside. The stock could triple in value and pay out enormous dividends. My downside is limited to the $104.37 that I paid for the share. As a shareholder, I would never expect to get a bill to contribute more capital to Boston Properties because one of their buildings is in disrepair.
I expect the same treatment if I were an individual investor in a limited liability company that directly owned an apartment building. I know my initial capital is at risk, but I should not have to put additional capital in (unless I agreed to under the limited liability company agreement). I could lose all of my investment. But I should not have to lose more than my investment.
That being said, there are some exceptions to this liability shield. In real estate, there is CERCLA's ability to look through entity for liability due to environmental contamination. (You can read this article by Daniel M. Darragh of Buchanan Ingersoll & Rooney PC on Indirect Owner/Operator Liability Under CERCLA). There is also the equitable remedy of piercing the corporate veil.
In his order, Judge Abrashkin did not discuss any of the factors for piercing the corporate veil. So I am left to assume that the Massachusetts state sanitary code is an exception to the limited liability of an entity.
Monday, September 17, 2007
Reasonable Efforts versus Best Efforts
Ken Adams, author of A Manual of style for Contract Drafting, published this article in The Practical Lawyer: Understanding Best Efforts and Its Variants.
I particularly liked his chart of the different "effort" phrases used in contracts filed with the SEC in 2004:
I particularly liked his chart of the different "effort" phrases used in contracts filed with the SEC in 2004:
Tuesday, September 11, 2007
Piercing the Corporate Veil of a Real Estate Investor
The Housing Court just came down with a troubling decision, piercing the corporate veil of a real estate investor: City of Springfield Code Enforcement v. Concerned Citizens for Springfield, Inc., et al., (Lawyers Weekly No. 17-005-07). It is only a Housing Court decision so it is not binding law in the Commonwealth.
According the article in Massachusetts Lawyers Weekly (sub reqd.), Housing Court Judge William H. Abrashkin ordered the individual manager of the property owning limited liability company to pay $1.3 million in relocation costs for the tenants in the sub-standard apartment complex.
This is a horrific case from a human perspective and a legal perspective. The property manager, Shalom Segelman, is being charged with failing to maintain the property forcing his tenants to live in sub-standard conditions. Since he owned 192 of the 211 units in the Longhill Gardens Condominium complex, his failure to fund common repairs also forced the tenants in the other 19 units to live in sub-standard conditions. Mr. Segelman served jail time for civil contempt for failing to set aside funds for repairs.
From the legal perspective, I hate to hear that the liability shield of a limited liability company has been pierced. Massachusetts has an old and slightly out of date limited liability company statute. [It was one of the last states to allow for a single member limited liability company.] I would hate to find out that our courts are trashing the entity liability shield offered by them.
I will find out more when a copy of the case shows up.
UPDATE: Mr. Segelman's lawyer pointed out that he was not found criminally neglect. He was found to be in civil contempt. I have edited the third paragraph from the original post.
According the article in Massachusetts Lawyers Weekly (sub reqd.), Housing Court Judge William H. Abrashkin ordered the individual manager of the property owning limited liability company to pay $1.3 million in relocation costs for the tenants in the sub-standard apartment complex.
This is a horrific case from a human perspective and a legal perspective. The property manager, Shalom Segelman, is being charged with failing to maintain the property forcing his tenants to live in sub-standard conditions. Since he owned 192 of the 211 units in the Longhill Gardens Condominium complex, his failure to fund common repairs also forced the tenants in the other 19 units to live in sub-standard conditions. Mr. Segelman served jail time for civil contempt for failing to set aside funds for repairs.
From the legal perspective, I hate to hear that the liability shield of a limited liability company has been pierced. Massachusetts has an old and slightly out of date limited liability company statute. [It was one of the last states to allow for a single member limited liability company.] I would hate to find out that our courts are trashing the entity liability shield offered by them.
I will find out more when a copy of the case shows up.
UPDATE: Mr. Segelman's lawyer pointed out that he was not found criminally neglect. He was found to be in civil contempt. I have edited the third paragraph from the original post.
Monday, September 10, 2007
Discharging Old Mortgages
When browsing through Massachusetts Lawyers Weekly, I came across Kowalczyk, et al. v. Estate of Smiarowski (Lawyers Weekly No. 14-087-07) (6 pages) (Sands, J.) (Land Court) (Misc. Case No. 245456) (July 31, 2007) (subscription required).
It cited M.G.L.c.240, section 15, which provides for a discharge of a mortgage that is 20 years past its expiration date. I had not run across this statute before, but it looks like a useful method to discharge old mortgages. The 20 years is a long time frame. With a typical 10 year commercial mortgage or 30 year residential mortgage, the old, undischarged mortgage would have to be very old to fall under the statute.
M.G.L.c.240, section 15 states:
(b) If the record title of land or of easements or rights in land is encumbered by an undischarged mortgage or a mortgage not properly or legally discharged of record, and the mortgagor or the mortgagor’s heirs, successors or assigns do not have actual or direct evidence of full payment or satisfaction of the mortgage but the mortgagor, or the mortgagor’s heirs, successors or assigns have been in uninterrupted possession of the land or exercising the rights in easements or other rights in the land, either: (1) in the case of a successor or assign who is a bona fide purchaser for value or who is an heir, successor or assign of the bona fide purchaser for value, for any period of 20 years after the recording of a deed from the mortgagor or his heirs or devisees to the bona fide purchaser, which deed did not evidence that title was taken subject to the mortgage or that the purchaser assumed or agreed to pay the mortgage; or (2) in the case of the mortgagor, or the mortgagor’s heirs, devisees or successors by operation of law, for any period of 1 year after the expiration of the time limited in the mortgage for the full performance of the condition thereof, or for any period of 20 years after the date of a mortgage not given to secure the payment of money or a debt but to secure the mortgagee against a contingent liability which has so ceased to exist that no person will be prejudiced by the discharge thereof, the mortgagor, or the mortgagor’s heirs, successors or assigns, or any person exercising the rights in easements or any person described in section 11, may file a petition in the land court or, except in the case of registered land, in the superior court for the county in which the land is located; and if, after such notice by publication or otherwise as the court orders, no evidence is offered of a payment on account of the debt secured by the mortgage within the relevant period of uninterrupted possession or of any other act within the time in recognition of its existence as a valid mortgage, or if the court finds that the contingent liability has ceased to exist and that the mortgage ought to be discharged, it may enter a decree discharging the mortgage, which decree, when duly recorded in the registry of deeds for the county or district where the land lies or, in the case of registered land, when duly noted on the memorandum of encumbrances of the relevant certificate of title, shall operate as a discharge of the mortgage and no action to enforce a title under the mortgage shall thereafter be maintained.
It cited M.G.L.c.240, section 15, which provides for a discharge of a mortgage that is 20 years past its expiration date. I had not run across this statute before, but it looks like a useful method to discharge old mortgages. The 20 years is a long time frame. With a typical 10 year commercial mortgage or 30 year residential mortgage, the old, undischarged mortgage would have to be very old to fall under the statute.
M.G.L.c.240, section 15 states:
(b) If the record title of land or of easements or rights in land is encumbered by an undischarged mortgage or a mortgage not properly or legally discharged of record, and the mortgagor or the mortgagor’s heirs, successors or assigns do not have actual or direct evidence of full payment or satisfaction of the mortgage but the mortgagor, or the mortgagor’s heirs, successors or assigns have been in uninterrupted possession of the land or exercising the rights in easements or other rights in the land, either: (1) in the case of a successor or assign who is a bona fide purchaser for value or who is an heir, successor or assign of the bona fide purchaser for value, for any period of 20 years after the recording of a deed from the mortgagor or his heirs or devisees to the bona fide purchaser, which deed did not evidence that title was taken subject to the mortgage or that the purchaser assumed or agreed to pay the mortgage; or (2) in the case of the mortgagor, or the mortgagor’s heirs, devisees or successors by operation of law, for any period of 1 year after the expiration of the time limited in the mortgage for the full performance of the condition thereof, or for any period of 20 years after the date of a mortgage not given to secure the payment of money or a debt but to secure the mortgagee against a contingent liability which has so ceased to exist that no person will be prejudiced by the discharge thereof, the mortgagor, or the mortgagor’s heirs, successors or assigns, or any person exercising the rights in easements or any person described in section 11, may file a petition in the land court or, except in the case of registered land, in the superior court for the county in which the land is located; and if, after such notice by publication or otherwise as the court orders, no evidence is offered of a payment on account of the debt secured by the mortgage within the relevant period of uninterrupted possession or of any other act within the time in recognition of its existence as a valid mortgage, or if the court finds that the contingent liability has ceased to exist and that the mortgage ought to be discharged, it may enter a decree discharging the mortgage, which decree, when duly recorded in the registry of deeds for the county or district where the land lies or, in the case of registered land, when duly noted on the memorandum of encumbrances of the relevant certificate of title, shall operate as a discharge of the mortgage and no action to enforce a title under the mortgage shall thereafter be maintained.
Friday, September 7, 2007
Real Estate Development From Beginning to End in Massachusetts
I will speaking as part of the seminar: Real Estate Development From Beginning to End in Massachusetts in Dedham on November 16, 2007.
Agenda
construction mortgage
Agenda
| 8:30 am – 9:30 am | Site Selection and General Due Diligence |
| Matthew J. Lawlor, Esq. | |
| 9:30 am – 10:30 am | Due Diligence – Land Use and Environmental Matters |
| Patrick M. Butler, Esq. | |
| 10:30 am – 10:40 am | Break |
| 10:40 am – 12:00 pm | Site Acquisition: Negotiating and Drafting the Purchase Agreement |
| Matthew J. Lawlor, Esq. | |
| 12:00 pm – 1:00 pm | Lunch (On Your Own) |
| 1:00 pm – 2:30 pm | Financing Your Acquisition and Construction |
| Douglas E. Cornelius, Esq. | |
| |
| 2:30 pm – 2:40 pm | Break |
| 2:40 pm – 3:30 pm | Comprehensive Regulatory Strategy: Expediting the Permitting Process |
| Patrick M. Butler, Esq. | |
| 3:30 pm – 4:10 pm | Project Planning and Permitting Process |
| Patrick M. Butler, Esq. | |
| 4:10 pm – 4:30 pm | Questions and Answers |
| Patrick M. Butler, Esq., Douglas E. Cornelius, Esq., and Matthew J. Lawlor, Esq. |
construction mortgage
Wednesday, September 5, 2007
Merideth & Grew Restructuring
From a press release that came out today:
Meredith & Grew announced today that it has completed the sale of an 80% interest in the firm to FirstService Corporation, a NASDAQ-listed, diversified property services company headquartered in Toronto, Ontario. The transaction is effective September 1, 2007. The existing Meredith & Grew shareholders in the firm will retain a 20% interest. The terms of the transaction were not disclosed.
...
Meredith & Grew also announced that effective immediately, Thomas J. Hynes, Jr. and Kevin C. Phelan have been appointed Chairman, and President of the firm, respectively. Additionally, Ronald K. Perry has been named Head of Meredith & Grew’s Brokerage Group, which includes the Boston Brokerage, Suburban Brokerage and Retail Brokerage teams.
Secured Real Estate Mezzanine Lending
I just received a copy of an article by James D. Pendergast, Senior Vice President and the General Counsel of the U.C.C. Division of the First American Corporation: Secured Real Estate Mezzanine Lending (with Form).
Mr. Pendergast proposes that a mezzanine lender have their borrower opt into Article 8 of the U.C.C. and have the equity interest in the borrower entity be certificated. This will have the pledge equity interest be a security for purposes of Article 8 and investment property for Article 9. Therefore control of the certificates will be the best method of perfection, trumping a perfection by filing a financing statement.
He also advocates having the borrower deliver an irrevocable proxy granting the lender the right to vote the pledged equity interest in all matters related to Article 8 of the U.C.C. This would be a defense against the borrower opting back out of Article 8. At a minimum, the organizational documents of the borrower should prohibit the borrower from opting-out of Article 8.
He further advocates having the mezzanine lender file a financing statement under Article 9 of the U.C.C. against the pledged equity interest. This would put a future lender on notice that there is an adverse claim against the borrower and prevent this future lender from trumping the mezzanine lender (if the borrower is up to some shenanigans).
As an employee of U.C.C. insurance company, he of course advocates that the mezzanine lender obtain U.C.C. insurance.
None of this should be new information to anyone who engages in mezzanine lending or borrowing. I liked Mr. Pendergast's approach of showing the pros and cons of each position. He also walks through the steps a sneaky borrower might take.
Mr. Pendergast proposes that a mezzanine lender have their borrower opt into Article 8 of the U.C.C. and have the equity interest in the borrower entity be certificated. This will have the pledge equity interest be a security for purposes of Article 8 and investment property for Article 9. Therefore control of the certificates will be the best method of perfection, trumping a perfection by filing a financing statement.
He also advocates having the borrower deliver an irrevocable proxy granting the lender the right to vote the pledged equity interest in all matters related to Article 8 of the U.C.C. This would be a defense against the borrower opting back out of Article 8. At a minimum, the organizational documents of the borrower should prohibit the borrower from opting-out of Article 8.
He further advocates having the mezzanine lender file a financing statement under Article 9 of the U.C.C. against the pledged equity interest. This would put a future lender on notice that there is an adverse claim against the borrower and prevent this future lender from trumping the mezzanine lender (if the borrower is up to some shenanigans).
As an employee of U.C.C. insurance company, he of course advocates that the mezzanine lender obtain U.C.C. insurance.
None of this should be new information to anyone who engages in mezzanine lending or borrowing. I liked Mr. Pendergast's approach of showing the pros and cons of each position. He also walks through the steps a sneaky borrower might take.
Saturday, September 1, 2007
New Predatory Lending Regulations - (18) Prohibiting Discrimination
The Attorney General is proposing new regulations under the Consumer Protection Act (M.G.L. 93A). The new regulations add new prohibited activities as provisions (15), (16), (17) and (18) under 940 C.M.R 8.06.
The new prohibited activity in item (18) of the proposed regulations prohibits a lender from discriminating among similar borrowers. "It is an unfair or deceptive act or practice for a lender (a) to use a pricing model for its mortgage loans which treats borrowers with similar credit criteria and bona fide qualification criteria differently; or (b) to make a mortgage loan when any or all of the cost features of the mortgage loan are based on criteria other than the borrower’s credit and other bona fide qualification criteria."
Although this regulation has a good purpose in preventing lenders from discriminating among borrowers, no two borrowers or properties are the same. The regulation gives no safe harbor for a lender to show that it is not discriminating.
The new prohibited activity in item (18) of the proposed regulations prohibits a lender from discriminating among similar borrowers. "It is an unfair or deceptive act or practice for a lender (a) to use a pricing model for its mortgage loans which treats borrowers with similar credit criteria and bona fide qualification criteria differently; or (b) to make a mortgage loan when any or all of the cost features of the mortgage loan are based on criteria other than the borrower’s credit and other bona fide qualification criteria."
Although this regulation has a good purpose in preventing lenders from discriminating among borrowers, no two borrowers or properties are the same. The regulation gives no safe harbor for a lender to show that it is not discriminating.
Subscribe to:
Posts (Atom)