Wednesday, October 24, 2007

Corporations Should Not Own Real Estate in Massachusetts

When a corporation sells real estate in Massachusetts there is the always the concern of whether there will be a three year, inchoate lien on the real estate. Under Massachusetts General Law Chapter 62C, Section 51:
At least five days prior to the sale or transfer. . . of all or substantially all of the assets situated in the commonwealth of a domestic or foreign business corporation, except in cases where a waiver shall be given as hereinafter provided, the corporation or any person in interest shall notify the commissioner in writing of the proposed sale or transfer, and of the price, terms and conditions thereof, and of the character and location of the assets and cause to be filed with the commissioner all such tax returns as may be necessary to determine the taxes due and to become due and payable to the commonwealth to and including the date of such sale or transfer, and shall pay to the commonwealth all such taxes owing to said date of sale or transfer. . . In the event of a failure to notify the commissioner and so to file such return or returns and pay such taxes at or before the time of such sale or transfer, the commonwealth shall have for its exclusive benefit a lien upon all of the assets of the corporation in the commonwealth effective immediately prior to such sale or transfer to the extent necessary to satisfy said taxes. Said lien shall terminate not later than three years after the date of said sale or transfer and until such termination may be enforced under and in accordance . . . .
If the real estate is not substantially all of the assets of the corporation in Massachusetts, you can just put a statement in the deed: "This deed is not a sale of all or substantially all of the assets of the corporation in the Commonwealth of Massachusetts."

But if that is not true and the sale of the real estate is all or substantially all of the assets of the corporation in Massachusetts, you need to get a waiver of the tax lien.

You can apply for a Certificate of Good Standing or Tax Compliance from the Massachusetts Department of Revenue. But the process can take weeks, if not months, for the DOR to issue the certificate.

It is quick and easy to set up a single member limited liability company to take title to the property. The corporation can be that single member.

Thursday, October 18, 2007

Looking ahead to 2008

According to the Urban Land Institutes's Emerging Trends Report it will be A Not So Great 2008, as reported in the National Real Estate Investor.

This report is a poll of 600 real estate experts. 78% thought there would be more stringent underwriting standards ahead (only 78%?) and there will be rising capitalization rates. They still expect the commercial real estate market to outperform the return from stocks and bonds.

The report also targets the top markets to watch:
  • New York. Ranked as the hottest commercial real estate market in the country. Low vacancy rates and skyrocketing pricing.
  • Seattle. Growth controls and geographic barriers have led to concentrated high-density, mixed-use development, which has drawn residents to new downtown neighborhoods. Seattle has become a 24-hour city on Asian commerce routes. It has a highly diversified economy.
  • Washington D.C. The government never stops and provides a cushion for real estate owners against abrupt downturns.
  • Los Angeles. High prices have driven some business and residents to seek shelter in lower cost states. The Orange County office market has softened. The office market in West LA has never been better. LA/Long Beach remains the nation’s top port, but transportation routes are clogged, creating a hindrance to trade.
  • San Francisco. Technology businesses are thriving and taking up lots of space. View space is once again commanding over $100 per square foot, even as supply creeps upward.
  • Boston. As the greater Boston market rebounds from the “tech wreck” of the early 2000s, it is seeing resurgence in its offices. New industries, such as professional services firms and bio-tech companies, are beginning to recycle space left vacant by corporate headquarter departures in the recent past. But questions remain about the depth of Boston’s tenant population, causing investors to keep a close and wary eye on the market.
  • San Diego. San Diego is a leading indicator for a market correction. Office turnover and out-migration of prime business centers to Del Mar and Oceanside have left San Diego’s downtown looking for new growth opportunities.
  • Denver. The only non-coastal city in the top tier, Denver has retooled its downtown to create an “urban burb,” a hip and exciting urban core in the midst of a sprawling suburban area, connected to downtown via a light-rail transit.

Tuesday, October 16, 2007

Massachusetts Document Recording Standards

Massachusetts is finally jumping on the formatting standard bandwagon. The registries had originally planned to implement the requirement on January 1, 2007. Now the new deadline is January 1, 2008.

Documents recorded after January 1, 2008 must meet the following requirements:

1. Be on white paper of sufficient weight to reproduce in registry scanners.

2. All document pages and attachments must be on paper that is no larger than 8.5 inches by 14 inches.

3. Printing on one side only; double-sided pages will not be accepted.

4. Documents that contain printing, writing or other markings must be sufficiently dark in appearance to be legibly reproduced on standard registry scanners.

5. All printing and writing on a document must be of sufficient size to be legibly reproduced on standard registry scanners.

6. Margins on all sides of all document pages must be of sufficient size to be legibly reproduced on standard registry scanners.

7. The first page of all documents must contain a “recording information area” in the upper right hand corner measuring three inches from the top edge of the document and three inches from the right edge of the document that is free from all writing or printing.

8. Documents that do not comply with Formatting Standard 7 above may still be recorded when attached to an official registry Document Cover Sheet or through the use of some other method adopted by the registry.

I was surprised that the registrars did not set more bright-line tests like half inch margins. I am also surprised that they are taking legal sized documents.

Thanks to Dick Howe of the Essex South Registry of Deeds for pointing this out.

Friday, October 5, 2007

A CMBS and CDO Primer

Parke Chapman wrote a primer in the National Real Estate Investor on CMBS, CDO and the commercial debt markets.

Some highlights:

Q: What led to the formation of the first commercial real estate CDO in 1999?
A: Commercial real estate CDOs were a major innovation in part driven by the need to diversify risk after the 1998 Russian financial crisis sparked a global liquidity crunch. Unlike CMBS, which adhere to strict rules on the type and quality of collateral, the commercial real estate CDO market allowed lenders and investors to introduce a debt vehicle with more flexibility. What this means is that commercial real estate CDO managers can swap collateral out of the pool, making these highly managed pools of debt.
Q: What types of loans back CMBS and commercial real estate CDOs?
A: Two key differences center on the fixed- and floating-rate nature of the collateral. Commercial real estate CDOs are typically backed by floating-rate loans whereas CMBS collateral is backed by first-mortgage loans. A commercial real estate CDO can be backed by all sorts of collateral. CMBS, preferred equity and construction loans are commonly held by commercial real estate CDOs. REIT bonds and various other types of exotic debt such as second-lien loans and unsecured debt can get lumped into these pools.

Wednesday, October 3, 2007

Guarantee Liability with Mezzanine Loans and Mortgages

With mezzanine financing, there is a potential guarantee liability to the principals of the developer that they may not foresee. The issue arises in a financing that has a mortgage loan with springing guarantees combined with a mezzanine loan secured by a pledge of interests in the mortgage borrower.

Generally, the principals of a mortgage borrower give a bad boy springing guarantee to the mortgage lender. The principals agree to be personally liable for the mortgage loan if the borrower declares bankruptcy or does other "bad" things. Principals of the borrower give these guarantees because they control the borrower and have an economic interest in the borrower. They are essentially agreeing that in exchange for a non-recourse loan, they will not fight the lender's efforts to take the collateral if the loan defaults.

The problem arises when the mezzanine lender forecloses on the pledge of interests in the mortgage borrower. After foreclosure, the mezzanine lender controls the mortgage borrower. Meanwhile, the springing guarantor has lost its economic interest in and management control of the mortgage borrower, but still has the liability under the guarantee for "bad acts" of the mortgage borrower.

If there is a mezzanine loan that goes into default, followed by a foreclosure by the mezzanine lender, the mezzanine lender controls the borrower, not the guarantor. The mezzanine lender can then threaten to bankrupt the mortgage borrower and trigger the personal liability for the mortgage debt. In the end, the guarantor may be forced to repay the mezzanine lender on its loan; in effect, the mezzanine loan had become a recourse obligation.

Mezzanine borrowers/bad boy guarantors should require the mezzanine lenders to obtain either (i) a release of the bad boy guarantor from the mortgage lender (usually by replacing the bad boy guarantee with one from the mezzanine lender) or (ii) an appropriate indemnity from the mezzanine lender for liability under the bad boy guarantee that the mezzanine lender creates post foreclosure. In each case, this should be a condition to permitting the foreclosure of the mezzanine position.

Tuesday, October 2, 2007

Housing Authority Has Stronger Powers to Evict For Criminal Behavior of Tenants

In Boston Housing Authority v. Garcia (SJC-09753) (August 17, 2007), the Massachusetts Supreme Judicial Court clarified the position after United States Supreme Court's ruling in Department of Hous. & Urban Dev. v. Rucker, 535 U.S. 125, 130 (2002).

Rucker provided that Federal housing law, 42 U.S.C. § 1437d (1)(6) (2000), "unambiguously" requires lease terms "that vest local public housing authorities with the discretion to evict tenants for the drug-related activity of household members and guests whether or not the tenant knew, or should have known, about the activity."

In the Garcia case, a Housing Court judge ruled "that the innocent tenant defense was no longer available under Massachusetts law to Doris Garcia, a BHA tenant, in light of the Rucker decision, and declined to admit evidence that she could not have foreseen or prevented the criminal conduct of two of her sons. " The SJC agreed with the "Housing Court judge that Federal housing law preempts Massachusetts law that would otherwise permit a public housing tenant to defeat a lease termination based on the acts of a household member, by establishing that he or she could not have foreseen or prevented the misconduct."

"The stated public housing policy of the United States is to "promote the goal of providing decent and affordable housing for all citizens through the efforts and encouragement of Federal, State, and local governments, and by the independent and collective actions of private citizens, organizations, and the private sector." 42 U.S.C. § 1437 (a)(4) (2000). Consistent with this policy, Congress enacted the Anti-Drug Abuse Act of 1988, with the objective of reducing drug-related crime in public housing and ensuring "public and other federally assisted low- income housing that is decent, safe, and free from illegal drugs." Rucker, supra at 134, quoting 42 U.S.C. § 11901 (1) (1994). Specifically, Congress (through 42 U.S.C. § 1437d [1][6], and HUD (through its implementing regulations) have required that housing authorities use clauses in their leases that permit the termination of a tenant's lease for crimes committed by household members, even where a tenant had no knowledge of and was not at fault for a household member's criminal activity.(12) As the Rucker Court noted, the lodging of such discretionary authority with the housing authorities is integral to the accomplishment of the congressional objective because "[s]trict liability maximizes deterrence and eases enforcement difficulties." Rucker, supra, citing Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 14 (1991).(13)"

"With respect to the application of the requirement of cause in this case, the lease signed by Garcia permits eviction for the drug-related criminal activity of household members regardless of the tenant's knowledge or ability to prevent the conduct. The judge found that Garcia's sons were members of Garcia's household at the time each engaged in drug-related criminal activity prohibited by the terms of the lease. Consequently, the judge found that Garcia had violated her lease."