DOING BUSINESS IN CALIFORNIA Real Estate Transactions

36 Offices in 17 Countries

DOING BUSINESS IN CALIFORNIAReal Estate Transactions

Part 3 – Basics of Deed of Trust Financing Transactions

Presented by:Noriyuki ShimodaAdmitted in Japan and CaliforniaSquire Sanders (US) LLPPhone: 415-393-9894Email: [email protected]

April 18, and May 9, 2012Palo Alto Office

Presentation for Japanese Business Persons:

2

Introduction

•Three major areas of real estate

transactions

Office Lease – Seminar Part 1

Sale and Purchase – Seminar Part 2

Deed of Trust/Mortgage Financings – Seminar

Part 3

3

Basic Vocabulary

Real Property (Land, Building, and Fixtures)(不動産、土地、建物、定着物）

Personal Property (Tangible or Intangible)（動産、有体動産、無体動産）

A Fee (A Fee Simple, A fee simple absolute) (不動産所

有権）

Preliminary Title Report （タイトルリポート）

Security/Lien（担保権）

Mechanic’s Lien(工事請負人の法定担保権）

4

Basic Vocabulary

Pledge（動産質権）

Encumbrance（不動産上の負担、担保権もその一種）

Deed of Trust (Trustor, Trustee, and Beneficiary) （信託

証書ー抵当権）

Mortgage (Mortgagor and Mortgagee) （抵当権、抵当権

設定者、抵当権者）

Assignment of Leases and Rents （リースと家賃債権の譲

渡）

5

Basic Vocabulary

Debt/Indebtedness/Obligation （債務・債権）

Lender/Creditor/Obligee （債権者）

Debtor/Borrower/Obligor （債務者）

Secured Obligations （被担保債権）

Collateral （担保物）

Real Estate Security Interest First Principle （不動産担保

権実行優先の原則）

6

Basic Vocabulary

One Action Rule （一回のアクションの原則）

Wozab Letter （ウオザブ・レター）

Foreclosures (judicial or non-judicial) （抵当権実行-裁判

上、裁判外）

Redemption Right（買戻し請求権）

Deficiency Judgment （残額請求判決）

Non-recourse loan （ノンリコース・ローン）

7

Basic Vocabulary

Recourse loan （リコースローン）

Promissory Note (unsecured or secured) （約束手形,

無担保または担保権付）

Prime Rate （プライムレート）

LIBOR (London Inter Bank Offered Rate) （ロンドン銀行間

取引金利）

TIBOR (Tokyo Inter Bank Offered Rate) （東京銀行間取引

金利）

8

Basic Vocabulary

LTV or LTVR （Loan to Value Ratio)（不動産価値に対する

ローン額の割合ーloan Amount ÷ real estate value）

DSCR （Debt Service Coverage Ratio）（不動産からの年

間純利益に対する年間ローン返済額の割合ーannual net

revenue from real estate operation ÷ annual loan

repayment amount)

Recording （登記）

Fixture Filing （定着物登記）

UCC-1 Filing （UCC－１登録）

Basic Vocabulary

Purchase money deed of trust/mortgage （購入資金を被担保債権と

する抵当権）

Deposit Account Control Agreement （銀行口座管理契約）

Loan Title Insurance （ローン用タイトル保険）

Guaranty/Surety （保証）

Secured loan （担保付ローン）

Securitized loan （証券化されたローン）

9

10

Typical Process

• Loan Application

• Loan Proposal

• Opening Escrow/Request Title Report

• Preliminary Due Diligence

• Loan Approval / Commitment Letter

• Negotiation of Loan Documents

• Further Due Diligence

• Execution of Documents

• Closing / Funding Process

11

Loan Approval and Commitment

• Typical Contents of Loan

Approval/Commitment

Identification of Loan Amount, Term, Costs

and Collateral

Major Covenants, such as LTVR, and

DSCR

Requirement of guaranties or other

collateral

Allocation of Costs

Termination of Commitment

12

Due Diligence

• Property Conditions

• Review of Rent Roll, or, for further due

diligence, review copies of Leases and tenant

estoppel certificates,

• Title Matters (Review of preliminary title report,

recorded documents and ALTA survey)

• Environmental Conditions

Phase I Investigation and Report

13

Closing

• Borrower’s Action

• Lender’s Action

• Escrow Agent’s Action

14

Closing – Borrower’s Action

• Delivery of Documents to Escrow Holder

Deed of Trust (signed and notarized)

Other recordable documents (subordination

nondisturbance agreements, assignment of leases)

Fixture filing documents and UCC-1 Financing

Statement

Other documents needed for title insurance

(resolutions of property owner to encumber property,

statements of identity, indemnity against mechanics’

liens, if work on the property is ongoing)

In loan transactions, other executed instruments

usually delivered outside of escrow, directly to

lender

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Closing – Lender’s Action

• Delivery of Money to Escrow Holder

Funds (sometimes including closing costs; other

times the borrower is required to fund closing costs

into escrow)

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Closing – Escrow Agent’s Action

• Required Actions

Recording of Deed of Trust and other instruments(UCC-1 Financing Statement and/or Fixture Filing)(as to recordation of the releases of prior liens beingpaid off in the refinancing or acquisition, titlecompanies often do not require actual reconveyancedocuments from institutional lenders, instead makingpayoffs in reliance on the payoff demands fromthem; sometimes this means that old, paid-off liensremain on the property, complicating latertransactions)

Disbursement of Funds

Issuance of Loan Title Insurance Policy to Lender

Disbursement of Documents to Lender

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Typical Alternatives for Foreclosures

• Strict foreclosure (forfeiture of the security without sale)

is prohibited in California.

• Private Sales/Non-Judicial Foreclosures

Advantages: Quicker (usually about 4 months) and

no need for lawsuit so less expensive.

Disadvantages: Recourse is limited to proceeds of

the sale – no deficiency judgment is allowed (though

might be able to recover more from guarantors).

18

Typical Alternatives for Foreclosures

• Judicial Foreclosures

Advantages: Only way to get a deficiency judgment

against the borrower, in the absence of fraud, waste

of the property and other unusual circumstances.

Disadvantages: Need to file (and incur the

expenses of) a lawsuit, which is more complicated

than most: prove your case, wait for the marshal to

sell the property, hold a fair value hearing, then get

the deficiency judgment; subject to one year

redemption right for the borrower applies to judicial

foreclosures, tending to depress resale prices.

19

Common Documents for Deed of TrustTransactions

• Loan Agreement

• Promissory Note

• Deed of Trust.

• Fixture Filing Document

• Assignment of Rents and Leases

• Subordination Nondisturbance Agreements

• Environmental Indemnity Agreement

• Legal Opinion

20

Other Documents

• Security Agreement

• UCC-1 Financing Statement

• Deposit Account Control Agreement

• Guaranty Agreement

• Construction Loan Assignments

21

• Loan Agreement – not always needed if the

loan is a single disbursement, but it is needed

if there are multiple or construction

disbursements and if there are complex

covenants and conditions.


22

• Promissory Note – common to virtually all real

estate loans

• Basic Terms of Promissory Note

Payment

Reference to security in deed of trust

Cross default with deed of trust

Covenant to maintain collateral


23

• Deed of Trust – standard form used in

California to create a security interest on real

property.

Borrower grants the property to a trustee to hold for

the benefit of the lender (the trustee does not have to

accept the trust; usually a title company is named

without prior consent or consultation). Typical

covenants include maintenance obligation, obligation

to insure, obligation to pay taxes and keep the

property free and clear of liens.


24

• Assignment of Rents and Leases – commonly

used although there is no compelling legal

need for a separate assignment of rents and

leases; those clauses can also be in the deed

of trust. Assignment of rents is especially

important in judicial foreclosures, to preclude

borrower from skimming off rents after it has

defaulted.


25

• Subordination Nondisturbance Agreements –

Tenant agrees to subordination while securing

a tenant’s right to continue the use of the

premises as long as there is no default.


26

• Fixture Filing Document – Deed of trust can

usually have a fixture filing; there is no

compelling legal need for a separate fixture

filing, which adds the further complication of

expiring after 5 years unless continued, just as

other UCC filings.


27

• Environmental Indemnity Agreement– two types

commonly exist.

• One continues to exist after the loan is paid off or

foreclosed, requiring borrower to indemnify lender for

any costs of environmental cleanup that lender or its

foreclosure purchaser must bear. This is often a

separate document and described as “unsecured” to try

to avoid application of the one action rule.

• Another follows sections of the Civil Code, as to

environmental liabilities during the course of the loan.

This is often in the text of the deed of trust itself.


28

• Legal Opinion – typically covers due authorization,

existence, due execution, all necessary acts taken to

make the loan documents binding, and enforceability.

Priority of the deed of trust is typically not covered, as

the lender should rely on title insurance. Out of state

lenders sometimes require more complex and far-

reaching legal opinions, some of which are not

appropriate, such as general compliance with all laws

and all permits (to be fair, how can the attorney know

that?).


29

• Security Agreement – Deed of trust usually has a limited

security agreement, as to matters closely connected

with the real property. Borrowers need to be wary of

signing broad, blanket security agreements for lenders

that are only financing the real estate – either the

borrower will probably be in breach of its other financing

obligations or will have difficulty obtaining other

financing.

Other Documents

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• UCC-1 Financing Statement – Necessary for

perfecting security interest in personal property

other than fixtures. If filed in the County, will

perfect the security interest as to fixtures, but

nothing else.

Other Documents

31

• Deposit Account Control Agreement – required

after the 2001 amendments to the UCC in

order to give the lender a security interest in

deposit accounts of the borrower. If the lender

is the depositary bank, no need for an

agreement. More depositary banks are

becoming difficult about agreeing to control

agreements, so do not assume that a loan

requirement of a deposit account control

agreement can be easily satisfied.

Other Documents

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• Guaranty Agreement – Guaranties are often required for

real estate loans. Usually, guarantors can be held liable

but there is some legal uncertainty over whether

guarantors can assert the defenses of a borrower (for

instance, avoiding liability if the lender chose to

foreclose by private sale).

• Limited guaranties are sometimes used, especially in

securitization loans – guarantees/indemnifies for losses

due to fraud, waste and other “bad boy” acts, not

guaranties for the entire principal and interest.

Other Documents

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Worldwide Locations

• Cincinnati

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• Columbus

• Houston

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• New York

• Northern Virginia

• Palo Alto

• Phoenix

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• Bogotá+

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• Bucharest+

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