Commercial Real Estate Financing 2017download.pli.edu/WebContent/chbs/185886/185886...g. Agent – Attorney in Fact.13 h. Doing Business under an assumed name.14 General Partnership

© Practising Law InstituteREAL ESTATE LAW AND PRACTICE

Course Handbook SeriesNumber N-652

To order this book, call (800) 260-4PLI or fax us at (800) 321-0093. Ask our Customer Service Department for PLI Order Number 185886, Dept. BAV5.

Practising Law Institute1177 Avenue of the Americas

New York, New York 10036

Commercial Real Estate Financing

2017

Co-ChairsSteven R. Davidson

Joshua Stein Everett S. Ward

© Practising Law Institute

8

Mortgage Loan Opinion Due Diligence Checklist

Gregory P. Pressman

Schulte Roth & Zabel LLP

This checklist is intended to be utilized as a companion to the 1998 Mortgage Loan Opinion Report jointly prepared by the New York State Bar Association and the Association of the Bar of the City of New York issued June 1, 1998. Much of the content of this checklist was adapted from materials originally authored by John E. Blyth, Esq. including an article entitled “Due Diligence When Dealing with Selected Investment Entities.”

If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.

239


240


3

OPINION 1 – VALIDLY EXISTING

Corporation

1. Review certified copy of Certificate of Incorporation.2 a. All amendments. b. All filing receipts.

2. Review Certificate of Good Standing from State of incorporation.3 a. Domestic Corporation – Certificate of Good Standing. b. Foreign Corporation – Certificate of Authority.

3. Obtain franchise tax search. a. Shows whether corporation is delinquent in filing franchise tax

returns and payments.4 b. A corporation may be in good standing even though it owes

franchise taxes or franchise tax reports because it has not yet been dissolved.

4. Determine whether the corporation is qualified to do business in new York State. a. Automatic for domestic corporations. b. Foreign corporations must w4eek authorization from Depart-

ment of State.5 5. Duly Organized.6

a. Requires review of all due diligence above.

2. Certified copies must come from the Department of State. 3. Shows that the corporation is validly existing (i.e., the corporation is not dissolved or

period of duration has not expired). 4. Unpaid franchise taxes are a lien against the real and personal property of a corpo-

ration. New York Tax law §§180-219(a), 1092 and 1450-1519. 5. Failure to qualify in New York means that the foreign corporation may not sue within

New York, but may be sued. 6. Not required by the Model Opinion. See footnote 22 to the Model Opinion (“duly

organized” opinions can be onerous or even impossible if the actions were taken a long time ago…”). The Model Opinion also points out that these opinions may not always be “necessary and appropriate and should not be routinely requested”. Id.

241


4

b. Review executed copies of initial actions: (i) of Incorporator (ii) of Board of Directors

c. Require evidence of: (i) Issuance of shares and receipt of payment for consid-

eration for such issuance. (ii) Election of Directors and Officers. (iii) Acceptance of Directorships. (iv) Adoption of By-Laws.

Individual

1. Must be physically present for execution and delivery of documents. 2. Implement safeguards against forgery; identification from inde-

pendent, third party source. 3. Capacity:

a. All citizens of the United States may own real property in New York.7

b. All aliens may buy and sell real property in New York State.8

c. Incompetents (e.g., minor, mentally retarded person or a per-son of unsound mind) may not buy and well real property).9

d. Impaired person (e.g., advanced age, illness, infirmity, mental weakness, alcohol abuse, addiction to drugs, other causes).10

e. Minor or Infant (e.g., under 18 years of age).11

7. Real Property Law §10(1). 8. Real Property Law §10(2). 9. Real Property Law §11. Generally represented by a court appointed committee. 10. Mental Hygiene Law §81.02 covers incapacitated persons. Former §77.01, covering

impaired persons, has been repealed. 11. General Obligations Law §3-101. Purchaser or sale is voidable by minor upon reach-

ing majority, unless no action taken within a “reasonable time.” Exception is a married minor. General Obligations Law §3-101(3). Purchase and sale done through a guard-ian with a court order, either in Surrogate’s Court or in Supreme Court. Acquisition of real or personal property permitted through a custodian under Uniform Transfer to Minors Act. Estates Powers and Trust Law §7-6.1.

242


5

f. Fiduciary.12 g. Agent – Attorney in Fact.13 h. Doing Business under an assumed name.14

General Partnership

1. A partnership is an association of two or more persons to carry on a business as co-owners for profit, and includes a registered limited liability partnership.15

2. A partnership is not established merely by a joint tenancy, ten-ancy in common, tenancy by the entireties, joint property, common property, part ownership, co-ownership nor a sharing of gross returns.16

3. Certificate of Partnership filed in each county where partnership does business.17 a. Failure to file constitutes a misdemeanor and prohibits partners

from suing in state courts but does not affect contractual rights, duties or liabilities of partners.18

4. Review copy of Partnership Agreement.19 5. Check applicable state law if not a New York general partnership.

12. Define in Estates Powers and Trust Law §11-1.1(a)(3). Commonly an executor,

administrator or trustee. Where two or more fiduciaries, check the statute to determine whether they may act separately or must act jointly (majority rule normally prevails). Does not include a donee of a power of attorney.

13. Statutory regulation is General Obligations Law §5-1502A. Power of Attorney should be recorded in accordance with Real Property Law §294. Revocation by (a) affirmative act of principal; (b) death of principal; or (c) incompetency of principal, unless durable: not revoked by subsequent disability or incompetence of the principal. General Obligations Law §5-1505(1).

14. General Business Law §130 requires an individual to file an assumed name with the local county clerk. Failure to file constitutes a misdemeanor but does not affect indi-vidual’s liability to third parties.

15. Partnership Law §10(1). 16. Partnership Law §11(2). Partnership Law §11(3). 17. General Business Law §130. 18. General Business Law §§130(8) and (9). 19. Agreement need not be written. If written, review executed version and all

amendments.

243


6

6. Check for limitations in Partnership Agreement of applicable state law.20

7. Check authorization/certification of partners to act. 8. Determine whether there has been a dissolution of a general part-

nership. Typical causes of dissolution are as follows:21 a. Termination of the definite term;22 b. Express will of any partner, if no term specified; c. Express will of all partners; d. Death, bankruptcy of any partners; e. Decree of court under Partnership Law §63.

Limited Partnership23

1. Corporate General Partner.24 2. Review limited partnership agreement with all amendments for

compliance with Partnership Law.25 3. Check for filing of Certificate of Limited Partnership.26

a. Pre July 1, 1991.27 b. July 1, 1991 and after.28

20. Require a certificate of compliance if any limitations are found. 21. Dissolution of partnership: a change in the relation of the partnership caused by

any partner ceasing to be associated in the carrying on as distinguished from the winding up of a the business. Partnership Law§60.

22. Dissolution does not constitute termination; partnership must first wind up its affairs. Partnership Law §61.

23. Governed by Revised Limited Partnership Act (RLPA) prior to July 1, 1991 and by Revised Uniform Limited Partnership Act (RULPA) from and after July 1, 1991. Contained in New York Partnership Law.

24. If general partner is a corporation, repeat corporate due diligence. 25. Substantial good faith compliance with Partnership Law §91 is sufficient; governs

the formalities of formation; contents of partnership certificate. Partnership agreement for a Limited Partnership must be in writing. Partnership Law §121-201(b).

26. Limited partnership is formed when the Certificate is filed with the Department of State. Partnership Law §121-110(b).

27. Certificate filed in the County Clerk’s Office where LP has its principal office. Partnership Law §91(b).

28. Certificate filed with the Department of State. Partnership Law §121-201(a).

244


7

4. Confirm publication of Certificate of Limited Partnership.29 a. Pre July 1, 1991.30 b. July 1, 1991 and after.31

5. Review Certificate of Authority for Foreign Limited Partnership.32 6. Duly Organized.33 7. Confirm there has been no dissolution of the partnership. Typical

dissolution events include the following: a. Events listed in Partnership Law §121-801.34 b. Judicial Dissolution.35 c. Cessation of purpose where purpose is limited in the

Partnership Agreement.36

Limited Liability Company

1. Review executed or certified copies of Articles of Organization.37

29. Failure to complete publication or to file affidavit of publication prevents access to

the courts by the Limited Partnership, but it may nevertheless be sued for its acts within the State. Partnership Law §121-201(c).

30. Filed in the County Clerk’s Office. 31. Filed with the Department of State. 32. Partnership Law §120-902; §121-904. 33. Not required by the Model Opinion. See footnote 22 to the Model Opinion. Failure

to make a contribution by a partner does not per se affect the due organization of the Limited Partnership. Review limited partnership agreement.

34. E.g., filing of certificate of dissolution, happening of event specified in the part-nership agreement, written consent of all general partners and majority in interest of the limited partners, withdrawal of the general partner unless the limited partnership is continued within ninety (90) days.

35. §121-802 of the Partnership Law permits dissolution where it is not reasonably practicable to carry on the business of the partnership in conformity with the partner-ship agreement.

36. A general partner may not do any act which would make it impossible to carry on the ordinary business of the partnership. Partnership Law §98(1)(b). The same is true under RULPA because a general partner is subject to the same restrictions of a partnership without limited partners (Partnership Law §121-403(b)), and a general partner in a general partnership may not do any act which would make it impossible to carry on the ordinary business of the partnership. Partnership Law §20(3)(c).

37. Defined at Limited Liability Company Law §102(a).

245


8

2. Articles of Organization are effective when filed with the Depart-ment of State, or at later specified time, not to exceed 60 days.38 a. Signed by an “organizer”. b. May be signed by a done of a power of attorney, and it is not

necessary to file the power of attorney with Department of State.39

3. Obtain Certificate of Good Standing from Department of State. 4. Confirm publication of Articles of Organization.40 5. Obtain franchise tax search.41 6. Duly Organized.42

a. Review same documents as for good standing. b. Review Articles of Organization. c. Review Operating Agreement.43

7. Check for Dissolution. Typical dissolution events are as follows: a. Termination in accordance with organizational documents.44 b. Involuntary termination, such as bankruptcy, death, dissolu-

tion, expulsion, incapacity or withdrawal of any member or other events, unless LLC is continued within 180 days.45

c. Articles of Dissolution must be filed with Department of State within 90 days of dissolution and commencement

38. Limited Liability Company Law §203(d). Articles of Organization are not filed with

the County Clerk, but rather the Department of State. Limited Liability Company Law §209.

39. Limited Liability Company Law §207(b). 40. Limited Liability Company Law §206(b)(3), (4). LLC may be sued, not cannot use

New York courts to sue if affidavits of publication are not timely filed. 41. Not ordinarily required unless the LLC has elected to be treated as a corporation.

Note: Unpaid applicable annual fee does not become a lien upon real property and personal property assets of LLC.

42. Not required by the Model Opinion. See footnote 22 to the Model Opinion. Review Articles of Organization.

43. Defined at Limited Liability Company Law §102(u). 44. Latest date provided in Articles of Organization, agreed upon time, or approval

requirements in the Operating Agreement, Limited Liability Company Law §701(a), (b) and (c).

45. Limited Liability Company Law §701(b).

246


9

of winding up an LLC, or at any other time there are no members.46

8. LLC Variations. a. Foreign Limited Liability Company.47 b. Professional Service Limited Liability Company.48 c. Foreign Professional Service Limited Liability Company.49

OPINION 2 – POWER AND AUTHORITY

Corporation

1. Review Department of State certified copies of Certificate of Incorporation, with amendment and filing receipts.

2. Review certified copy of By-Laws. 3. Review any shareholder agreements and buy-sell agreements. 4. Review applicable state laws.

a. Laws of general application to corporations.50 b. Laws applicable to special purpose corporations (e.g., regulated

industry, religious, not-for-profit, bank, railroad, educations). 5. Purpose of the foregoing reviews:

a. Identify limitations on corporate power to own, operate business.

b. Identify contractual limitations on power to execute, deliver and perform loan documents by directors and officers.

c. Identify contractual limitation on powers of shareholders; is shareholder approval required?

Individual

1. Refer to earlier discussion of individual capacity.51

46. Limited Liability Company Law §705. 47. Limited Liability Company Law §§801 et seq. 48. Limited Liability Company Law §1201 et seq. 49. Limited Liability Company Law §1301 et seq. 50. Generally requires authorization by majority vote of Board of Directors. 51. Generally no restrictions on authority.

247


10

General Partnership

1. Each partner is agent for the partnership and has apparent authority to bind the partnership unless a third party knows that the partner does not have the authority to do so.52

2. Dissolution of partnership terminates the authority of the partners.53

Limited Partnership

1. General Partner normally has power to act alone. a. Rights and powers of a general partner are the same as a

partner in a partnership without limited partners.54 b. Due diligence (e.g., power and authority is therefore of the

general partner). c. Rights and powers of a general partner are limited.55

2. Rights of Limited Partners a. Enumerated having to do with information and access to

information, accounting.56 b. Safe harbors of permitted activities of a limited partner.57

3. Same person may be both a general partner and a limited partner.58

Limited Liability Company

1. Member Managed LLC59 a. Review Articles of Organization and Operating Agreement.60

52. Partnership Law §20(1). 53. Partnership Law §64. 54. Partnership Law §98(1) and §121-403. 55. General Partner may not do any act which would make it impossible to carry on

the ordinary business of the partnership or confess a judgment (without the written consent of all partners). Partnership Law §98.

56. Partnership Law §99; §121-303(b). 57. RLPA: Very few; acting like a general partner resulted in limited partner taking on

liability of a general partner. RULPA: List of permitted activities greatly expanded (Partnership Law §121-303), but authority to act still not granted to a limited partner.

58. Partnership Law §101(1), ULPA §12; same provision is found in RULPA §404. 59. Member defined in Limited Liability Company Law §102(q). 60. Limited Liability Company Law.

248


11

b. Unless provided to the contrary, each member is a manager.61 c. Unless provided to the contrary, every member is an agent

of the LLC with apparent authority.62 d. Authority of a member may be limited in the Articles of

Organization.63 2. Manager Managed LLC

a. Review Articles of Organization and Operating Agreement. b. If provided in the Articles of Organization, management

may be vested in a manager or managers. Follow entity review for an entity which is the manager.64

c. Unless provided to the contrary, every manager is an agent of the LLC with apparent authority.65

d. Management is by an “authorized person”, a person whether or not a member, authorized by the Operating Agreement, or otherwise, to act on behalf of the LLC.66

e. Title of signatory.67

OPINION 3 – ALL ACTION NECESSARY

Corporation

1. Review Applicable Law. a. Corporate powers defined in Business Corporation Law §202. b. Applicable law may limit powers (e.g., power of a profession-

al corporation to invest in real property).68

61. Limited Liability Company Law §401(a) and (b). 62. Limited Liability Company Law §412(a). 63. Limited Liability Company Law §203(e)(7)(b). 64. Limited Liability Company Law §412(b). 65. Limited Liability Company Law §412(b). 66. Limited Liability Company Law §120(c). 67. The use of title (e.g., President) is neither authorized nor prohibited by the Limited

Liability Company Law. 68. Business Corporation Law §1506.

249


12

2. Review Organic Documents. a. Certificate of Incorporation need not recite the statutory

powers.69 b. Certificate of Incorporation may limit general statutory powers

(e.g., require unanimous consent to borrow money in excess of a certain amount).70

3. Review Minutes of Board of Directors and of Shareholders meet-ings, if applicable.

4. Review Consents obtained in lieu of meetings. 5. Review Resolutions for:

a. Compliance with applicable statutes and organic documents. b. Adequate notice, quorum (at inception and when vote when

was taken). 6. Review Shareholder Approvals.

a. Lists of shareholders. b. Classes of shareholders. c. Voting Powers of shareholders.

7. Ensure physical presence of signatories when documents are executed and delivered.71

Individual

1. See earlier discussion; no specific items for “all action necessary” opinion.

General Partnership

1. Review Partnership Agreement.72 2. Review applicable state law.73

69. Business Corporation Law §402(c). 70. Business Corporation Law §202(a). 71. Match signatures against those contained in resolutions and/or incumbency

certificates. 72. Check for limitations. 73. Check for limitations.

250


13

3. Authorization/Certification of Partners to Act. a. Each partner has apparent authority to bind the partnership.74 b. Check organic documents for limitations. c. Certified by general partner, managing partner, or as otherwise

called for in organic documents. d. Executed consent of partners or certified minutes of partner-

ship meeting. e. Compliance with notice, quorum, and required vote. f. Physical presence for execution and delivery. g. Signatures properly authorized.

Limited Partnership75

1. Review Partnership Agreement.76 2. Review applicable state law.77 3. Authorization/Certification of Partners to Act.

a. General partner has apparent authority to bind the partnership.78 b. Check organic documents for limitations. c. Certified by general partner, or as otherwise called for in

organic documents. d. Executed consent of partners or certified minutes of partner-

ship meeting. e. Compliance with notice, quorum, and required vote. f. Physical presence for execution and delivery. g. Signatures properly authorized.

Limited Partnership

1. See discussion pertaining to “power and authority” of limited liability company above.

74. Partnership Law §20. 75. Capacity – Same as General Partnership. Partnership Law §98 and §121-403. 76. Check for limitations. 77. Check for limitations. 78. Partnership Law §20.

251


14

2. Member Managed LLC. a. Review Articles of Organization and Operating Agreement. b. Members vote in proportion to each member’s share of the

current profits of the LLC.79 c. Voting on “special matters” requires an affirmative vote of

the “majority in interest” of the members entitled to vote thereon.80

d. Voting on “really special matters” requires an affirmative vote of two-thirds in interest of the members entitled to vote thereon.81

3. Manager Managed LLC a. Review Articles of Organization and Operating Agreement b. If provided by the Articles of Organization, management

is vested in a manager of managers or class of classes of managers.82

c. Vote is by majority of managers.83 d. If there is not a meeting, then vote must be of all managers

and a writing must be filed with the records of the LLC.84

79. Limited Liability Company Law §402(a). Determination of profits made pursuant

to Limited Liability Company Law §503. 80. Special matters include such things as admission to membership; incurrence of

indebtedness other than in the ordinary course of business; and changing the Articles of Organization or Operating Agreement (subject to certain restriction). Limited Liability Company Law §402(c). The Term “majority in interest” means, unless oth-erwise provided in the Operating Agreement, the members whose aggregate share of the current profits of the LLC constitutes more than one-half of the aggregate of such shares of all members.

81. Two-thirds vote required for things such as dissolution, sale, exchange, lease, mort-gage, pledge or other transfer of all or substantially all of the assets of the LLC; and merger or consolidation. Limited Liability Company Law §402(d).

82. Limited Liability Company Law §408(a). 83. Limited Liability Company Law §408(b). 84. Limited Liability Company Law §408(c).

252


15

OPINION 4 – MORTGAGE IS VALID AND BINDING AND ENFORCEABLE

1. Valid and Binding.85 a. Transaction involves competent parties who have acted with

requisite authority. b. The agreement is a product of mutual intend based on adequate

consideration. c. The transaction does not involve an illegal purpose of activity.86 d. The loan documents have been duly executed and delivered and

all conditions precedent have been satisfied or waived. 2. Assumptions as to Valid and Binding.87 3. Enforceability.88

a. An opinion as to enforceability implies that each of the bor-rower’s undertaking in the agreement will be given legal effect.

b. Unless properly qualified, an opinion as to enforceability implies that the loan is not usurious.

4. Special issues may arise in the context of a charitable, religious, non- profit or other similar institution or unincorporated association.


General Considerations

1. Whether the issuance of a guaranty is ultra vires. 2. Whether the guaranty is supported by adequate consideration. 3. Whether the guaranty is void or voidable under applicable bank-

ruptcy, insolvency or fraudulent conveyance laws. 4. Special issues may arise in the context of a charitable, religious,

non-profit or other similar institution or unincorporated association.

85. See footnote 30 to Model Opinion. 86. For example, usury, gambling, etc. 87. Opinion giver is entitled to assume competency, authority, intend and actions of the

opinion recipient. If opinion giver is acting as local counsel, assumptions as to com-petency, authority and intend and actions of the Borrower may be appropriate.

88. See footnotes 31 and 32 of the Model Opinion.

253


16


1. No Violation of Borrower’s Organizations Documents.89 a. It is generally agreed that this opinion is duplicative of power

and enforceability opinions above. 2. No Breach or Default of any agreement or court order listed on

schedule.90 a. Borrower’s counsel and lender must agree upon schedule of

contracts.91 b. Borrower’s counsel and lender must agree upon schedule of

litigation.92 c. Where the borrower is a newly formed, special purpose entity

whose only asset is the collateral and whose only obligations are the loan documents, the “no breach or default” opinion may be unnecessary.

d. Company’s inside counsel may be in a better position to give this opinion than outside or local counsel.

OPINION 7 – NO VIOLATION OF LAW

1. No Violation of Law.93 a. This opinion is understood as a matter of customary practice to

cover only those laws and published rules and regulations that, given the nature of the transaction and the parties to it, the opin-ion preparers exercising customary diligence would reasonably recognize as applicable.

b. This opinion does not cover all laws and is generally deemed to exclude law relating to tax, insolvency, antitrust and

89. See footnotes 42 and 43 to the Model Opinion. 90. See footnotes 42, 43 and 44 to the Model Opinion. 91. This list is often made up of material contracts to the borrower’s business as agreed

upon between borrower and lender. This often includes ground leases, operating leases, existing financing, intercreditor agreements, reciprocal easement agreements, construction contracts, and development agreements.

92. List of litigation may be supplied by borrower, borrower’s counsel or pursuant to a litigation search in the more obvious jurisdictions.

93. See footnotes 45 and 46 to the Model Opinion.

254


17

securities matters, environmental laws as well as local laws, such as city ordinance, zoning regulations, building codes and other similar laws.94

c. An opinion that payment of the indebtedness evidenced by the note would not violate any applicable law implies an opinion that the loan is not usurious.

OPINION 8 – NO LITIGATION

1. Litigation.95 a. Opinion is typically given by inside counsel or outside coun-

sel (where acting as principal litigation counsel for Borrower). b. This opinion only addresses actions pending or threatened against

the Borrower, it does not cover actions which might affect the collateral.

c. Schedule of litigation must be agreed upon by borrower and lender.

d. Purpose is to disclose the litigation to the lender, but not to pass on the merits of particular actions or predict their likely outcome.

e. This opinion is frequently limited to the “actual knowledge” of the opinion giver.96

94. If an opinion regarding the Borrower’s “performance” is requested, the opinion giver

should be entitled to assume that the Borrower will perform its obligations in com-pliance with applicable law and will obtain, in the ordinary course, such license and permits as then be required. However, if there is any provisions of law that would pre-vent, rather than regulate, the borrower’s future conduct, and customary diligence would recognize it as being applicable to a given transaction, it should be identified as an exception in the opinion.

95. See footnotes 47 and 48 to the Model Opinion. 96. This phrase is used to alert the opinion recipient that the opinion giver does not

typically check the court records or review the Borrower’s files. However, the opin-ion giver may want to check his/her firm’s litigation docket (if one exists) or firm’s litigation department to determine the nature and extent of any litigation pending against the Borrower.

255


NOTES

256