REAL ESTATE OUTLINE

Questions Ch 1.

2. It is very rarely ever the case that all the costs will match up correctly. The old and new mortgage influence the price of sale, as does closing costs and many other factors

3. (a)The purchase and sale contract sets price & the exact form of contingencies. The deed says from the seller to Buyer: “Here is my house (& land).” It is recorded in courthouse or land records office, so we know who owns that. The note says from the buyer to bank: “I will repay your loan.” The mortgage or deed of trust says from the buyer to bank: “If I don’t repay, you may take my house.”(b) Why maybe a promissory note but no mortgage? May do it if the borrower is super trustworthy, or has other security, or is paying a very high interest rate, or is family, or the seller has been bamboozled (Belleville). Why may you have a mortgage but not the accompanying note? May do it to secure some other debt or obligation or someone else’s debt.

4. (a) Pros - Appease bar associations, and help clients out who want to go ahead and get the deal done, but don’t want to make a mistake. Cons - Signed contract used to lure a better offer (Shopping the deal). There is no requirement you have to say why you turned it down but if you say you turned it down because of a bad reason then you can be held liable (better to not say anything).(b) It is not illegal to do so in your jurisdiction but it may be very immoral, and unethical so I would probably say no; however, you are also duty bound to do what is in the best interests of your client.(c) Not required to specify in reasons in most jurisdictions. You do not want to list price solely ever. It would only be a good idea to list other reasons than price if you believe those to be valid reasons that benefit your client.

5. (a) Attorney’s probably earned the reputation as being deal breakers because they get paid no matter what so they don’t have anything to lose by disapproving the deal if it is in their clients’ best interest. (b) The attorney should be faulted if it acts unethically by holding out for a larger sale solely based on price or failing to go ahead when the sale is advantageous to his client, but not necessarily the most advantageous to the attorney. The attorney should be praised when he tells the buyer not to go through with the sale because of defects in the property, an unreasonable price on the property, also if the attorney is engaging in dual representation and so recuses himself.

6. (a) The attorney probably should not represent both parties. The ABA is against it, and it also increases the demand for more lawyers. (b) If he really desires to he should get the consent of both parties in writing explaining that they agree to this.

7. (a) The attorney shouldn’t disclose because he will be violating attorney client privilege and could be disbarred. (b) He should withdraw immediately because if he does not he will be helping the fraud and be liable himself. There is a fraud exception to disclosing confidences but it is best not to try and navigate around it. Just get out and keep quiet.

8. (a) The attorney should get the seller to sign a piece of paper acknowledging that he only represents the buyer. (b) The buyer’s attorney has 3 levels of notice that are possible and one is to tell the other party that the note is unsecured. It’s questionable whether or not he has a legal obligation but he definitely has a moral obligation and he should tell the party. (c) Probably not, you can only go so far without being totally detrimental to your client. There is one level of notice though that says he should say the deal is unfair. So if the deal is grossly unfair he may have a duty to tell the seller. Also the attorney could refuse to participate in an unfair deal.

Questions Ch. 2

1. (a) They might already be a real estate agent and can do it themselves, real estate brokers are expensive and the cut may be more than the home owner is wishing to allow. Also the hassle may be very small, and not worth a broker’s time.(b) Most use a broker because you get your home on MLS or realtor.com and more prospective buyers get to see it. The cost of a broker is minimal compared to the hassle of an inexperienced person doing it themselves.

2. (a) The purpose of these laws is to weed out the untrustworthy and to test all perspective brokers for a general knowledge of agency and real estate law.(b) The law is there to prevent amateurs from posing as qualified professionals and owners are not trying to do that when they market their own homes. They are acting solely for their own benefit.(c) As long as she limits her activities to just matchmaking (introducing buyer and seller) she should be fine. The principal may however, change his mind and revoke the offer at will so she probably doesn’t have much of a shot at enforcing the oral promise. Also oral promises are not valid with respect to a contract for land.(d) I believe it’s justifiable. You are facilitating commerce and this exception helps that.(e) Yes as long as they are not wearing two hats and acting in a dual role. If they make it clear that they are acting merely as a finder and not as an attorney for the deal then they should be able to legitimately claim brokerage commissions.

3. (a) Open Listing, Exclusive Agency, Exclusive Right to Sell(b)The broker might not work as hard. There might be resistance from the guild, like not showing your house very much or to the right type of buyers. The broker also might not try as hard to bridge the gap between the asking price and the offer.

(c) She should talk to her friend before making the listing agreement, she should insist on an exclusive agency so that no other brokers can be allowed in. She could also write a spot exception. Lastly, she needs to warn the friend not to talk to a broker.(d) California says they must pay the commission. However, it limits the broker’s recovery to half the sum the innocent seller manages to recoup from the breaching buyer. They would not be liable if they had language in the contract that conditioned the broker’s commission on the deal actually closing.(e) Property is not listed in their name. Real estate agent messed up. The contract is null and void because they have listed a piece of property that they don’t own. The real estate agent should have a copy of the deed with the book and page number. They should notify the listing agent immediately that the property has never been recorded, they want to rescind the contract. There should be no commission for the real estate agent.

4. (a) Exclusive Buyer’s Broker because this way no other broker can come in and take part of the percentage or mess with the deal. Also since she is a potential new home owner she is going to need help or advice.(b)Many hire their own broker because the seller’s broker is not working for them as well as the seller. They want someone to represent their own interest and hopefully be able to bargain better than they can. Other’s may rely solely on the seller’s buyer because they may know the broker and trust him. The buyer may have lots of experience buying property and not need a buyer. He may himself be a real estate broker.

5. (a) The broker has a duty not to break the confidence given him by the seller. However, he also has a duty not to unfairly deceive or mislead counter parties. In this situation I would advise the broker to recuse himself. He may lose the commission but if it is discovered that he helped this fraud on the buyer he could lose the commission anyway, as well as have to pay damages to the buyer.(b) I would tell him that I am not an expert on the subject and to ask the school himself if ultimately concerned. Another route would be to say that in the past the school has had a very good reputation.

6. (a) Yes because the buyer’s broker is really working for the seller. Also the buyers may not be able to pay so that’s part of whether the buyers are “ready and able” to pay. He has to disclose it.(b) It doesn’t matter at all.(c) It ultimately depends on the buyer’s credit history. If it’s great then it would most likely increase the sale. If it’s bad then it would obviously hurt the sale.

7. Brokers should advise the seller to verify the reasonableness of the broker’s offer

through an independent appraisal made by someone with no connection to the broker. Brokers should refrain from bidding against buyers.

Chapter 3 Questions

1. For Home ownership: Social status, self-esteem, wealth accumulation, housing options, equity build up, housing-cost predictability, tenure (LL can make TT move out without TT having breached any of the provisions, mortgagors can’t make homeowners move out as long as they keep paying their mortgage loans), provides jobs, tax benefits, and move less frequently than renters. Against Home ownership: time and effort is much more than renting, uncontrollable costs, and loss of mobility.

2. (a) Yes. Home sellers aren’t taxed on the first $250K of gain or $500K for a couple filing a joint return. Stepped-up basis reduces the capital gains tax the devisee has to pay upon the death of the devisor. Homeowner can deduct property taxes. Homeowner can deduct from adjusted gross income all qualified residence interest.(b) Socially justified; by allowing these tax breaks it is allowing more and more taxpayers to move up into home ownership and thus you create a way for middle and lower income families to move up in the economic spectrum.

3. (a) People place different priorities on certain things in a sale and price is not always the only motivating factor. Schools in the area may prompt someone to buy or not buy; job location; location of family close by, and many other things. (b) Brokers fear that buyers and sellers could antagonize each other and kill the deal if they get to haggling over emotion-charged details. Also they want their commission and the buyer and seller may make a deal to cheat the broker out of his commission. Using a broker has a lot of advantages. He has been there before and isn’t going to get upset or embarrassed or discouraged during negotiations. Also it allows both parties time to react and think instead of making a hasty decision. (c) A buyer could risk losing the entire deal, because once you reject a counteroffer there is no duty to go through with the sale. The seller may find someone willing to pay that price.Chapter 4 Questions

1. We use contracts because they can help guard against the fogginess of memory. It confirms and provides evidence of the parties’ agreement. Written contracts are universal in custom and practice for realty sales. Brokers insist upon written purchase-and-sale contracts as essential to the paper trails that will demonstrate their having earned their commissions by procuring “ready, willing, and able buyers.”

2. Letters of intent are not enforceable contracts, a formal agreement is meant to follow within a specified period of time, and if it doesn’t the obligation to negotiate in good faith and the letter itself is automatically deemed terminated. LOI embody the main deal points expected eventually to form the basis of the contract. The parties hope not to squander time or legal fees trying to work out all the fine points of a comprehensive contract until they attain consensus on matters of primary importance. A written contract may be modified by later oral agreement even if the agreement specified all modifications were to be made in writing. Any provision in a contract may be waived by

subsequent consent, express or implied. One may be estopped from disputing an oral modification whose conduct induces another’s reliance on it.

5. Email contracts are generally held valid because of the email is easily retrievable and copyable. However, consideration and meeting of the minds (standard contract law provisions) apply. Contracts on email are just like written contracts because we have record of them. There is one limit on e-signature though. An electronic record satisfies legal requirement for a writing only if “capable of being retained and accurately reproduced for later reference.”

6. (a) Buyer might prefer purchasing the entity to preserve valuable franchise or service contracts, personal property or goodwill owned by the entity. The entity serves as a protective shield against unlimited liability for tort or environmental mishaps. Buyers valuing the property might prefer the entity because their identity won’t be revealed in the real estate records. The transfer may escape notice by mortgage lenders whose loans have “due on sale” clauses, by tax assessors in the habit of reassessing property when the record title changes hands, or by neighboring property owners with whom the purchaser may also be quietly negotiating.(b) Make sure the agent is authorized to sell on behalf of the partnership. They should ask to see the operating agreement of the LLC. They should ask to see certification of authority, akin to title insurance.

7. Generally both spouses must sign the deed for the transfer of jointly owned property to be valid. Even if one spouse claims ownership of the property, the buyer’s title insurer will almost certainly insist the other spouse sign a deed quitclaiming any possible interest in the property. By signing the quitclaim deed the grantor transfers whatever interest she may actually have, not warranting a good title.

8. (a) It depends how much D has in the LLC. It generally takes 80% vote for X and Y to overrule D. However, A & B can sue for treble damages or 3 times the FMV. (b) It depends what the agreement in the LLC says, they can buy him out or force him out.

9. (a) Undisclosed principle might hurt the seller’s reputation (A Republican doesn’t realize he’s selling property in Crawford, TX to Cindy Sheehan). Also the undisclosed principal might have poor credit. The undisclosed principal may have a lot more money and be willing to pay a lot more than the marker price. (b) Can require purchaser to certify that they are not acting as an agent for someone else. They can also require seller’s approval for any assignment of the contract. But, there’s always a big loophole: the buyer can perform himself; then sell the property. The only way around this loophole is to put in a covenant and that’s hard to do. You can prohibit resale within a certain time, but buyer might be willing to wait.

10. (a) Buyer isn’t performing a personal service, rather he’s just paying money.(b) Because the seller has to be assured that the assignee can qualify to make the mortgage payments based on the loan to debt ratio.

(c) Because his property has been in limbo and off the market for a considerable amount of time and may have gone down in value.(d) These provisions prohibit quick resale, and require occupancy. It depends why you’re buying. You would want the provisions if you want to live there for a while and don’t want pesky renters. You would not want the provisions if you want to sell soon or rent it out.

Chapter 5 Questions

1. Factors she needs to consider are: ongoing costs of ownership- add up projected mortgage payments, casualty

insurance premiums, property taxes, maintenance costs, and homeowner coop/condo association dues

buyer should also consider local custom and practice (what percentage is covered by liquidated damages)

for buyers the smaller the better; for sellers the larger the better

2. When the property turns out to be smaller than the buyer believed or larger than the seller thought it was, a buyer’s refund or seller’s rebate claim depends on whether the parties intended the sale price to be set “in gross” or “per acre.”

No refund on “in gross”o in order to collect must prove agreed purchase price was substantially,

unconscionably higher than fair market value refund on “per acre”

o usually farms are sold per acre may contain the language “more or less” then court decides if 20 acres really

matters

3. Seller is responsible for 2 months and 1 day. So the seller is responsible for $2,000 plus one day and the buyer is responsible for 4 months minus one day ($4,000 minus one day).

4. (a) She won’t be entitled to rescission because the default rule says there is no financing contingency. If she wants to have a contingency she should have written it into the contract-

“Subject to financing” provision. The default rule is that the buyer is completely responsible for arranging

financing.(b) She has a lot of cash and knows she can cover with an established credit line.

She is super-confident in obtaining financing. perhaps she doesn’t want to scare the seller by insisting on a provision

5. (a) Loan funding would be the best, that way the buyer will be able to rescind the contract if something goes wrong after receiving a loan commitment (such as job loss or bad appraisal) (b) would be better off with satisfactory financing although it must still be in good faith, available financing could be construed to mean any financing no matter what the interest or term(c) depends on the situation- ex. buyers didn’t lose down payment when lost job and had no source of income; perhaps the seller waived the time period; if buyer does receive loan commitment before scheduled closing time, then can still close(d) depends on the situation presented and the good faith of the buyer

Chapter 6 Questions

1. (a) Houses are built at a faster pace, and a lot of builders will cut corners to make more money. Many general contractors who have entered the field are entrepreneurs, not artisans or experts in the building trade, and they frequently employ unskilled or overworked subcontractors.(b) Home inspections need to occur several times during the executory period. Buyer should walk through the property before contracting to buy but will need to reserve the right to make a more thorough, formal inspection within a week or two of signing the contract. Buyer needs to inspect the day of closing, preferably after the seller has vacated to check on the status of punch list items and make sure the seller has left behind all the promised personal property and fixtures. Informal inspection during Act 1, Formal inspections within time specified in K, Check to see any fixes made, about a week before closing, Check on day of closing to make sure house is OK (c) If you put in clause that says that the house will be acceptable to the buyer only on the buyer’s consent after inspection.(d) The reason buyers shouldn’t rely entirely on seller-provided disclosures has nothing to do with the buyer’s right to hold the seller’s inspector accountable for errors and omissions. The buyer won’t have participated in reviewing the terms of the seller-inspector agreement, including provisions limiting the inspector’s liability and the buyer’s time for filing a claim. Buyers won’t know what the seller paid for the inspection, how long it took and how careful the inspector was. Since the seller’s inspections will have taken place before the buyer entered the picture, the buyer won’t have been present during the inspection. A lot of experts believe that the buyer being there encourages the inspector to make a more thorough investigation.(e) The seller should bear the loss for concealing or failing to reveal the defect. The inspector’s defenses to liability are that the defect wasn’t there when the inspection took place, which in this case it was no longer there so the seller should bear the risk. Also the inspector is not liable if the defect wasn’t the sort the inspection was designed to cover. Here we don’t know.

2.(a) Seller is not liable because of no implied warranty of habitability.

(b) The seller would be liable if he knew of defect and did not disclose roof defect, but would not be liable if he didn’t know of roof defect.(c) In this case it depends on the adverbs in the contract. If it said “as far as I know” or “to the seller’s knowledge and belief” then the seller is ok. The seller is not allowed to make up stuff, even if they don’t know its false – not knowing either way is bad enough. (d) The seller would be liable if he said it’ll be good for one year, that’s what a warranty is.(e) No. The “as is” clause only exonerates from affirmative representations, it does not exonerate the seller from a duty to disclose.

3. The advantages of an “as is” clause is that it can insulate the seller from some liability and can induce the buyer not to rely, because some picky buyers won’t be able to raise frivolous claims. People challenging “as is” clauses rarely win. The disadvantage of an “as is” clause is that it might scare away buyers. It also might give a false sense of security regarding the duty to disclose. Some brokers say that sellers should never sell a house “as is” unless it’s a fixer upper, because buyers may think it has hidden defects.

4. (a) Yes the material basis for the sale was because they advertised it as a Julia Morgan house, so they should correct the misrepresentation. (b) Worst that can happen if the buyer finds out is that they can hit the seller with big damages for misrepresentation and perhaps paying more than house is really worth.(c) Saying it is commonly thought to be a Julia Morgan house, but we didn’t check is not enough of a disclaimer. It still leaves a wrong impression in the buyer’s minds. It would have been better for the seller to say “there are conflicting opinions on this issue of who designed the house: if you want it because it’s a Julia Morgan house, check for yourself.”

5. (a) They should have said there are conflicting opinions on this issue of who designed the house: if you want it because it’s a Julia Morgan house, check for yourself during the initial phase of negotiations when the buyer first enquires about the property. (b) “There are conflicting opinions on this issue of who designed the house: if you want it because it’s a Julia Morgan house, check for yourself”

6. (a) If they truly desire a green lawn at closing, then they should ask for a warranty to be put into the contract saying that the lawn will be green and remain green for a specified period of time.(b) If they want the play equipment to remain for their children, they should list on “Exhibit A” the stuff they want to remain after closing, and put the play equipment in that list.

7. (a) If it is not in the contract it depends on what a reasonable person would think as to whether or not the fixtures go with the house. Cabinets generally do go with the house. Stoves often depend on the attachment. (b) The problem with a detailed listing of the things you want to remain in the house is that you might overlook something and then the seller can say well if you wanted that to remain in the house you would have included it expressly in the list. Also this list might annoy the seller, or cause him to demand more money.

8.(a) Equitable conversion because the buyer is now the “true owner” of the property because they have the right to insist the seller specifically perform by deeding the property as agreed in the contract, which the seller wants to do in this case. The seller is said to have only “bare legal title” just enough interest to secure payment of the purchase price which is what the seller wants in this scenario. (b) If seller really needs to go forward with the sale, then need to have a good provision to assess damages: may be hard to tell in time for closing, best to assign insurance proceeds, distinguish repair cost from loss in value (repair cost will always be higher). Need to say which risks are covered & get insurance for them; you also need to say if it’s only “substantial” costs, or only “material” costs.

Chapter 7 Questions

1. (a) No, perfect title is not needed. The title need only to be marketable.(b) The default rule calls for seller to deliver marketable title, so the seller would be legally obligated to do that in any event absent a contract provision. Ultimate test of marketability is whether a buyer would have difficulty in the foreseeable future selling the land to a “reasonable purchaser, well informed as to the facts and their legal bearings, willing and anxious to perform his contract.(c) Sellers avoid getting stuck with bad titles by purchasing title insurance.

2.(a) If someone is in the house and you want them out, you can ask them to sign an estoppel certificate disclaiming any interest in the house. If he’s a tenant, you will want to get a copy of the lease to see what it says.(b) If the preliminary title report shows exception for mortgage and federal income tax lien then the buyer should condition closing on repayment and recording releases of the mortgage and lien.(c) Buyers avoid purchasing into projects with rules they can’t abide by checking out the rules in advance and talk to members of the board of realtors.

3. (a) The easement makes the seller’s title unmarketable if a reasonable homeowner would not accept. It ultimately depends on how important a pool (or other things that would interfere with underground lines) is for a reasonable buyer.(b) The seller still has to pay for the cost of the move, so there is still a lot of encumbrance on the title. This law makes it easier but it is not still automatic.(c) It depends on the reasonableness of the swimming pool plans. It is unlikely though that the utility company is going to move their lines for a swimming pool to be put in.(d) The swimming pools plans and her intent of the use of the property has to specific and clear so that the seller knows about the issue with the power lines.

4. (a) Someone would want record title if they are trying to acquire a piece of property by adverse possession because the title can be marketable as long as the seller gives buyer sufficient documents to prove adverse possession.

(b) Someone may want to put in a marketable title instead of an insurable title because some of the heirs may not want to sell and it gives you possession to the land.

5. The language in the contract that would be most beneficial to the buyer is to ask the seller to give them a letter that the house was accepted to code and occupancy permit was accepted. If the seller made the renovations and the steps passed the building code the first time then the steps are grandfathered in.

6.(a) The rescission is not applicable because the buyer is presumed to know the law. Rescission for mistake needs a mistake at the time of contracting, materially affecting the exchange where the contract does doesn’t allocate the risk of mistake.(b) The provision the buyer-developer wants is that the “buyer’s obligation is contingent on receiving a CUP satisfactory to the buyer. You can add adverbs like “reasonably” to weaken contingency.

7.(a) The seller might give the deposit and last month’s rent to the buyer, so that the buyer can deal with the renter at the end of the lease. Also the seller could deal with the renter to try and convince him to get out before closing, maybe reduce his last month’s rent or give him the security deposit back. Sellers might put some money in escrow fund to deal with a possible detainer action to get rid of the tenant if he doesn’t leave at the end of the lease term, with the money to be returned to the seller if the tenant leaves on schedule.(b) The buyer should check and see if the house conforms to covenants now, if it does then the title is marketable. To deal with the requirement, the buyer might talk to members of the homeowners’ board or look around the neighborhood to see if white and yellow count as earth tones. He also might rely on informal conversations, or get it in writing for the homeowners’ board.(c) Right of first refusal does make title unmarketable, and a mere letter from attorney is not enough, since that depends on fact questions, marketability depends only on pleadings. If the buyer didn’t know, and the ROFR were unrecorded, then the buyer would be free of it after recording her deed. Here the buyer did know so he is not free of it after recording of the deed. If the neighbor doesn’t exercise ROFR, good to have written evidence of this, & record a release if the ROFR is itself recorded. The neighbor here does exercise ROFR so that makes title unmarketable.

Chapter 8 Questions

1. (a) I am not ok with the “time is of the essence” clause. If it is really important, you should not rely on this sort of language but spell out exactly why time is of the essence. “I’ve got another house I need to pay for in a month, so I’ve got to have the money by October 1st.”(b) If the buyer is a little late the seller should not go ahead and try to sell to another buyer at a higher rate. He should first tender a deed a tell the original buyer about an absolute drop dead date. Late performance by the buyer doesn’t always preclude specific performance.

2. (a) Three calendar days would be Monday May 16, 2005. You do not count the starting day, but you do count the ending day. Saturday is sometimes a business day and sometimes it is not, but since it says a calendar day you do count Saturday. (b) Midnight is ambiguous. You never want to use the term midnight. It is better to say 11:59 PM or 12:01 AM because then its clear exactly what day you are talking about.

3. (a) Collateral obligations like termite repairs don’t merge and survive closing. If the intention is clear that obligations should survive, they do. (b) To make sure they survive the parties should just make the obligations specific. If inspection results don’t get back in time for a treatment before closing, then its pretty clear the obligation would survive, but if inspection itself wasn’t even ordered until after closing, then it probably wouldn’t.

Chapter 9 Questions

1. (a) Both mediation and arbitration have distinct advantages to other dispute resolutions. With mediation, you might as well agree to it. It is simply trying to help someone work out a settlement. There is little risk involved in mediation, but there is not a great deal of assurance in getting things resolved. The benefits of arbitration are that it is a cheaper and more flexible actual resolution of a dispute than litigating the matter. You can reduce recovery costs under arbitration and you need not use the FRCP or MRCP.(b) I would not specify a decision according to law because it doesn’t always allow review of decision in court. Whether or not you agree to all these factors of arbitration depends on your likelihood of success. If the facts of the situation favor your client, and it is a specialized area, then you may want to request an expert in that field. I would only require a written decision if the facts benefit my client and it looks like I am going to win.

2. Rescission is an order to go back to status quo ante, contract get the promised land. Specific performance is an order to convey the promised land for an agreed upon price. Actual damages are to be determined by the court. These types of damages are expectation damages, benefit of the bargain damages, and the monetary equivalent of the promised land. Liquidated damages are specified in the contract. The parties agree in advance the amount available by a particular contract breach. The parties seek to do this so that it prevents disputes.

3. (a) The mutual rescission is a private agreement between the two parties to go back to the status quo ante. A legal rescission is a court order to go back to the status quo ante. There are 2 kinds of legal rescission: rescission for breach of K, and rescission for a problem with a contract (equitable rescission).(b) Equitable rescission involves things like mistake, undue influence, fraud, failure of consideration, illegal contract, and the contract goes against public interest.

4. The seller made provisions in her contract that it was contingent upon financing and the buyer went all out by trying to get 4 different loans and failed each time. Since the buyer failed to get financing and a contingency clause was present in the contract the seller had to give the deposit back. She should be happy to do this because she is actually going to make $50,000 extra; therefore, she hasn’t lost any actual profit. She has actually gained profit and its better to give up the deposit and not ruin a god deal you know you can get.

5. (a) The first buyer is entitled to damages. He should get the value of the property minus his contract price at the time of the breach. Appreciation after breach of the contract belongs to the seller. So if the buyer offered $900K and the FMV was really $100,000,000 at the time of breach the buyer is entitled to $100K. It does not matter if the seller sells the house for $1.1 million or $50 million; the appreciation after breach of contract belongs to the seller (b) The buyer does get compensation for seller’s breach if he has to buy a house at a worst interest rate. However, it is hard to tell how much compensation is proper, since it will ultimately depend on how long the buyer is paying the higher interest rate. If the buyer sells, then he’d have to refinance, so the seller should only have to pay the cost of the increased interest rate until that time. Some options would be to just make the seller pay for increased interest rate on a full 30 year loan, make seller pay periodic payments covering the increased interest rate, or make the seller buy an annuity that will pay for it, returning the principal when the buyer sells.

6. The buyer is obviously liable for the difference in price ($60,000). They can also be liable for extra cost damages (mortgage, taxes, and utilities) of staying in the house, minus the value of living in it. Also if the new house were expected at the time of contract and costs more, and those costs are higher, the seller might be able to get costs of the new house instead, but you certainly can’t get costs of both houses.

7. (a) First of all the buyer is not likely to have the money. The seller also can’t sell to another buyer while suing the first buyer, and they want to try and cover their losses as soon as possible, so it’s better to sell to another buyer then sue the first buyer for damages. Also the seller might really want to move out of their house and into a new home.(b) If a seller breaches and a buyer is thinking about suing for specific performance, the buyer’s attorney has several questions to ask the buyer. Are you really attached to this house, or are you just trying to keep the price low? Are you willing to pay the expensive costs of litigation and wait for a long period of time before you get specific performance? Do you need the deposit back? Are you sure that you can finance the house if you win?Will the lender make a loan commitment contingent on winning specific performance?What was the K price? Do you have an independent appraisal for that price? Is there a B2 willing to pay a lot more? Does the K allow specific performance? Is S breaching because of bad title, a better B2, or a change in plans? Did S misinform you?

8. (a) Specific performance is available for commercial investors because appraising real estate is really hard and determining he monetary equivalent of the Promised Land might be harder than ordering the Promised Land itself, because who knows how much future profits the building is going to produce. Lost profits might be deemed too speculative, given the relative liquidity (hard-to-sellness) of real estate.(b) They do this because appraising real estate is very hard, and trying to figure out how much expectation damages are is near impossible.(c) It distinguishes the mutuality of the obligation, which a contract needs in order to not be illusory, from mutuality of remedy which this contract would not contain. Most states do not require mutuality of remedy but only mutuality of obligation.

9. (a) There advantages a buyer would have in filing a petition for specific performance and recording a lis pendens after the seller breaches because they think they can get a higher price. By seeking specific performance a buyer can record a LP in the land office, and then no new buyer will want to buy it, since the title is clouded. This will cause the seller to want to come to the table and talk about settling because the first buyer has leverage over the seller.(b) The buyer can’t get financing and didn’t have a financing contingency in the contract, so the seller allows the buyer to get out of the deal, but he sues the buyer for actual damages (the deposit). In most states the buyer can’t get the deposit back from the seller. He would need a vendee lien. This is a lien against the realty property by a vendee (another buyer). Merely wanting the deposit back is not enough for an interest in land, which is what is required for a lis pendens. 10. (a) The advantage for liquidated damages is that the risk of not having them is far worse than having them in the contract. However, sacrificing actual damages might give up a chance at very big damages. If a lot of money is at stake, then liquidate damages provisions might not hold up. If the buyer breaches, and ignores the specific performance decree, the seller can sell the property at a sheriff’s sale and make the buyer pay the difference, even though the seller couldn’t pick out his own new buyer and get actual damages. (b) If the seller breaches the buyer has the option of liquidate damages or specific performance or actual damages. Liquidated damages may be more beneficial to the buyer than AD or SP. However, if the buyer breaches and the seller has the option of SP or LD, the LD as a form of risk allocation is destroyed. The seller would just take the more lucrative alternative.

11. If she sues for SP basically the buyer will have to take the house and pay the $475,000. That amount is worth far more than the house will probably be worth now. So instead of getting $12,000, if she sued for LD, by suing for SP she gets the actual damages that she would have incurred. The seller has had their property off the market for a long period of time and the market is falling and it is going to be hard to find a willing and able buyer.

12. (a) B1 breaches & S sells to B2 for more, with a 10% deposit; can B1 get the deposit back? The CA rule says yes. CA has a 3% cap and no actual loss here, so should be able

to get full 10% back (if B2 sale is within 6 months). The NY rule says no. Uzan case (NY 2004): Donald Trump keeps his $8M deposit from the Turkish billionaires on their $32M condos. NY favors the freedom of contract.(b) On its face, might seem sellers are always better in NY, buyer better in CA, but prices might be lower in NY with higher LD provisions, since sellers have more security.A rule that helps out one party will, through the market mechanism, help out those he contracts with as well.

Chapter 10 Questions

1. (a) A purchase money loan is at the time of sale, so there’s a clear valuation of what the home is worth. A refinancing loan is very dangerous for banks. The value of a home will get to be less than the value of the debt on the home. If the value is not known, then neither is the extent of the danger and that is very risky. A purchase money loan is at the time of a sale, so there’s a clear valuation of what the home is worth. Refinancing people might be dangerous, because you have desperate-for-cash people.(b) A home equity loan is riskier for banks more so than refinancing because a home equity loan is a junior mortgage to the purchase money loan. The senior loan gets paid off before the junior loan, if there is a default, so the junior mortgagee bears all of his cost before the senior mortgagee bears any at all.

2. (a) Banks are better for a purchase money mortgage loan rather than a finance company because banks are insured by FDIC and finance companies are probably not. Since banks are insured by FDIC they are regulated, and if you get a loan from a bank they should have lower interest rates than a finance company. Finance companies are free to make riskier loans, and therefore have higher interest rates.(b) The pro of a first time home buyer relying on a mortgage broker to acquire a purchase money loan is that they know better how to pick the best loan. The con is that the mortgage brokers take a cut and might be dishonest. An example might be taking a cut from a lender to steer things the lender’s way. It’s ultimately hassle vs. cost tradeoff.

3. (a) Pros of pre-approval certificate is that it gives the seller certainty that you’ll be able to come through with a loan. It might give the seller information about your willingness to pay. Of course, if the house isn’t worth it, you should be able to demonstrate your lack of willingness to pay so much for that house, simply by walking away from higher counter-offers. Pre-approval only really stops buyer from saying untrue things about her ability to pay – buyer’s willingness is another question. A negative aspect of pre-approval certificate would be that it is just an estimate and it might not turn into a loan commitment. If the estimates are off (used in gross instead of after tax income) then actual loan amount is going to be smaller.(b) A pre-approval is just an estimate it is not a legally binding contract. A loan commitment is legally binding. (c) If a loan commitment is unilateral the borrower is free to shop around, but the lender is bound. If it is a bilateral commitment both the lender and the borrower are bound so the buyer can’t shop around.

4.(a) She should not pull the plug on the contract and she should also not waive the contingency. If she pulls the plug she’ll owe the liquidate damages, and if she waives the contingency because if the loan doesn’t go through then the she no longer has the contingency to save her. She may have to pay the whole thing. What she should do is ask for more time extending the financing period, if the seller says no, then pull plug if you really need the deposit. Pulling the plug in this case is better than waiving the contingency.(b) The broker is not liable in this case because it is just a statement of opinion. He did not say you will get the loan just based on my past experience the chances are excellent you’ll get the loan. (c) Had the broker lied, then that would be fraud and he would be liable.(d) The mortgage broker might suggest omitting information about a student loan because the mortgage broker only gets paid if the deal really happens. Also a lot of lenders do not check student loans.(e) If she does lie about a student loan it is a federal crime to lie on an application to a federally funded bank, so she could go to jail. There is no federal crime until the application actually makes it to the bank and the borrower signs it.

5. The problem is that they could be in danger of losing their home. If the cause of bad credit is addiction to credit, as it frequently is, then shuffling around loans won’t get to main problem. Reference of 1st loan might be better option than home equity loan. One advantage to home debt is deductibility, if friend itemizes, but this probably isn’t worth the risk. Your friend might want to do something even less responsible, so home equity loan might be lesser of two evils.

6.(a) If the borrower lacks sufficient income to cover a monthly debt service the reason to not make a loan is that its wrong to help people to be irresponsible. You are only going to put them further into debt. People are hurting themselves, and it’s the same argument with crack dealers, casinos, and subprime lenders. The reason to allow the loan is that just about anyone defaulting could say the loan was not suitable. (b) Even if it’s favorable to the borrower it seems unethical, just because you can give someone the best loan that you should be exonerated. Crack dealers are not exonerated because they provide the best deal to their clients. It may seem cruel to deny people the best priced loans they can obtain but many times you have to be cruel to be kind.(c) If the lender failed to say foreclosure was likely can you avoid foreclosure: Probably not. No fiduciary duty of lender to buyer, so no affirmative duty to speak about dangers; no federal duty to speak about dangers; there is also no fraud without an actual misrepresentation. Even if there were duty, the sorts of borrowers at issue here probably wouldn’t heed them. Are there Unfair & Deceptive Trade Practices? This is mostly applied to those who buck custom. In California, need to explain home-equity loan is based on home equity, not expected income, but not that foreclosure is likely. Does this violate the Federal HOEPA statute? The statute only applies to a tiny portion of loans: only for a fixed period, only for Non-purchase loans, and only with particularly high interest rates.

Chapter 11 Questions

1. (a) $1000 (1% of a 100K= 1K)(b) A buyer is better off paying more points in exchange for lower interest you are staying in the house for a long period of time.(c) The most favorable rate to the lender is 365/360. The ratio is what you multiply the interest rate by to get the real interest rate. So if you have 365/360 you get a higher interest rate than 360/360 or 365/365, and 360/365 would give you the lowest interest rate that would be most favorable to the borrower and worst for the lender.

2.(a) In determining a fixed rate or am adjustable rate a home buyer should know that a floating rate will have a lower interest rate, since the borrower is bearing the risk. Also with an adjusted mortgage rate there may be a cap on the payment, but that just means that if interest rates go way up, then the loan amount increases, since the borrower isn’t even paying the interest. (b) A 15 year mortgage is much less interest over life of loan, but you will have 20% higher payments (though only half as many to make).(c) If you are looking a fully amortizing or interest-only loan there’s a big balloon payment at the end of an interest-only loan. For all the reasons you may like a 30 instead of 15 year loan, you might like an interest only instead of an amortizing loan even more. Yet, most people don’t want a big balloon payment; they want to build up equity.

3.(a) People like this type of loan because it would pay off a bit of the principal at a rate that would pay off the loan were it continued for 30 years, but it comes due with a balloon payment in only 10 years.(b) Reasons why the lender’s credit risk is greater: the chance that the borrower might not be able to make that balloon payment in 10 years, or in 10 years the property may be worth less than the balloon payment, or the borrower may choose to default, or the property may be damaged.(c) Hyperamortization: arrangement where debtor assigns all of his income to pay off the principal; one of the options in lieu of foreclosure during a workout. Commercial borrowers like this because the income is on the actual commercial property rather than on the borrower’s income. Its based on what the business can actually produce.

4.(a) Swap is Someone with a fixed-rate loan has obligations that don’t vary with the interest rate. ARM obligation varies with the interest rate. Swap: I’ll take your adjustable rate mortgage in exchange for my fixed mortgage rate. Caps are limits on how high rates will be. Floors are limits on how low rates will be. Both are essentially insurance devices where one party pays more money in exchange for the other bearing the risk of high or low interest rates. Collars are where the ARM guy says to the fixed rate mortgage guy: “Hey, between us we owe a certain rate, how about I take the cap and you take the floor (or vice-versa).” (b) The lender should make the borrower buy a cap that makes sure that even with this interest rate the hotel’s net operating income would cover the borrower’s debt service.

5.(a) TILA means by he APR the annual percentage rate. This is the total yearly rate of projected cost of credit, and allows relatively simple comparison between loans. TILA means by the amount financed the principal on the loan. TILA means by finance charge the interest on the life of the loan, plus all the up-front charges.(b) The APR is more informative because you can’t just look at the interest rate of the loan, since other costs may vary widely. This includes original fees; points, prepaid mortgage interest, and mortgage insurance premiums. (c) TILA allows borrowers of any consumer credit to a disclosure of APR (TV, car loans as well as houses). TILA does not apply to commercial credit, so Donald Trump borrowing money is not affected by TILA. (d) The only borrowers entitled to a 3 day rescission are home equity borrowers, if the disclosure statement is inaccurate. (e) A rescission is seldom a good idea because you still have to repay the money that’s been borrowed (though no interest & fees between request for rescission & granting of it). If you want the house, you must find a way to pay off the loan either through refinancing or renegotiation with original lender.

Chapter 12 Questions

1. (a) Factors affecting the amount of prepayment: interest rates (they go down, more prepayment), housing values (they go up, more prepayment), local economic conditions may affect how many people are moving in and moving out.(b) He can earn too much income in one year. The more installments he makes before prepayments are made then the more interest he will have towards the end.

2. (a) They are worse off because the value of paying a point increases with time. The amount of time the borrower is paying a reduce rate, so early payment reduces the effective value of paying the point.(b) Prepayment fees far more important for fixed-rate than for adjustable-rate loans, since the ARM floats with the market. ARM lenders do have fixed costs for each loan, so they do want each one to last a while, but the risk isn’t nearly as much.(c) A lender with a 95% LTV non-recourse loan – i.e. loan with no obligation besides the value of the property – will be very worried about default risk, so he won’t worry about prepayment risk. “Please prepay, so I won’t have to worry about this high LTV any longer!” Lender with a 60% LTV can afford to worry about prepayment.(d) The reason FNMA encourages this is because they support the policy that it’s OK to use a no-prepayment provision in order to prevent refinancing just to get lower interest rate, but homeowners who want to “move on up” ought to be able to. This encourages people to own homes: “the ownership society.”

3. (a) A prepaid lender is likely to be undercompensated by a capped fee formula when interest rates go down a great deal.(b) They are likely to be overcompensated by a capped fee formula when interest go down only a little or when they go up.

4. (a) Yield Maintenance is prepayment, with a fee sufficient to allow the lender to reinvest and not suffer loss relative to what he would get under original loan term. Defeasance is substitution of collateral. Lender releases mortgage on the property, in exchange for Treasury bonds as substitute security. Defeasance is the norm in securitized debt. 90% prohibit prepayment & allow defeasance as the borrower’s only exit option. Generally handled by specialists, and there are some costs because of that.(b) If defeasance costs a tad more, then the yield maintenance loan is clearly better for the borrower. The yield-maintenance loan would be better if the cost of arranging defeasance is less than the usual 1% cost for repayment under a yield maintenance provision.

5. Common law default rule says no prepayment is allowed. The default rule has been changed by statute in 20 states. The Restatement 3rd of Mortgages would reverse the common law rule. CA and NM say there is an “absolute right to prepay” can’t even contract this right away (though you can negotiate fees in the contract).

6.(a) This provision is still enforceable because the prepayment is not considered a breach of contract, and so the fee isn’t a liquidated damages clause. A 6 months fee is a very well established custom. In bankruptcy, fees might be denied to a lender who hasn’t been harmed. Prepayment fees escape usury laws, since they’re a fee for not borrowing money, not a fee for borrowing it.(b) Courts say this is not an unreasonable restraint on alienation because you can still sell, there’s just a cost to doing so.

Chapter 13 Questions

1. (a) It ultimately depends on whether the seller’s mortgage allows the buyer to assume the seller’s old mortgage, and whether the buyer can get a better new loan. Other factors that will determine whether the buyer makes this decision, is the creditworthiness of the buyer, the slip in value of the home (because it may not support such a big loan), and if there is a steep prepayment penalty for the seller’s loan.(b) If the buyer wants the seller’s financing to remain in place the buyer should make sure: the purchase K has a contingency for lender’s approval, the seller’s mortgage allows transfer, who pays the lender’s assumption fee, whether there’s a one-assumption limit to life or loan, and whether there’s a due-on-encumbrance clause to loan.

2. (a) With assuming the seller’s debt with 190K C is getting everything paid off plus $20K. With the $150K he gets nothing plus still has to come up with the other $20K. (b) Yes. If C doesn’t pay then the seller B is the surety for C & B must pay. If B doesn’t pay A is a surety for B, and A must pay.(c) Most places would say C is personally liable. CA and NY say C is not liable, they argue it’s a pure windfall for the lender, so its probably a mistake by C to sign this.

4. (a) The lease of a house for a year on a due-on-sale clause is not enforceable if less than 3 years and fewer than 5 units.

(b) If the lease comes with an option to purchase it is enforceable.(c) If it is transferred to mom and not dad and mom after a divorce it is not enforceable.(d) Inheritance of a 1 unit apartment house is enforceable because it is more than 5 units.(e) Home equity loan is not enforceable as long as the new loan is a junior loan.(f) Owner of a 30 unit house taking out a junior loan is enforceable because the junior lien exemption only applies to less than 5 units.(g) An investor taking legal title in trust for benefit of the borrower and looking for a buyer is not enforceable but as soon as the buyer is found it is enforceable.

5.(a) A second loan might be considered a sale or transfer of an interest in property to which a due-on-sale contractual provision applies(b) Due-on-encumbrance clause is where a lender may accelerate if borrower takes another loan on same property without lender’s consent. Due-on-sale clause is lender may accelerate if borrower sells property without lender’s consent. This could be interpreted to apply to a junior lien, since foreclosure gives the junior lienor a right to sell.(c) The higher the total LTV goes the riskier the borrower (B) gets, since he’s playing with OPM (other people’s money). The junior lien might limit size of the second loan to keep LTV within limit. It also might require that a credit agency confirm the status of the senior debt. Junior lien might agree to forego payments if senior lien is in default. J’s bankruptcy could prevent foreclosure. Also it might put someone on J’s board of directors with bankruptcy veto. In B’s bankruptcy, J could vote to force reorganization on an unwilling S, this might do the same thing with B. In foreclosure, J might unwittingly discharge tenant. J might agree not to terminate any lease without S consent. If S adjusts loan terms, J might have its interests infringed & claim senior status. J might waive in advance modification of S loan terms. If B defaults & J pays taxes or insurance premiums, J could become senior. J might agree not to become senior in that event.(d) Negative pledge(e) Negative pledge isn’t any sort of remedy for default, but only another contractual obligation that the borrower might break. The mortgage is intended as a remedy for breach, and additional promises don’t substitute for that.

6. (a) The new lender might be nasty about foreclosure.(b) The attorney should ask whether the note is negotiable & whether the new lender is an HDC (holder in due course). If the note is non-negotiable, borrower has the right to make payments to the original lender.(c) It is required by law that they give them notice that they have sold it. (d) The purchaser does not have to notify the mortgagor only the mortgagee, so because its not required by law, they don’t necessarily have to notify them.

Chapter 14 Questions

1. Joe needs to record the deed if he wishes to do anything with the property like sell, borrow money against it. Joe might get a secured loan, or give it to someone else, or may

die and have someone else inherit it. Title insurance can be very useful to get for the sake of future transactions.

2.(a) Indices are so important because there are a great many number of deeds.(b) Title insurers spend a lot of money to make their own tract indices, both in L.A. and Oxford. Tract indices are a lot easier, since there are so many fewer transactions in each area. Lafayette County office has them separated into section, township, and range, and a separated index for subdivisions.(c) Grantor-grantee index still important if there’s a judgment lien against all of someone’s property in the county – that won’t show up in the tract indexes. For searching for all of someone’s assets, grantor-grantee index is also useful.

3. Did she record it properly?

4. Marketable title act shortens the length of title searches by treating as conclusively abandoned certain interests in land unless the owners of those interests have been in possession, recorded a statutorily prescribed notice, or otherwise activated their claims, usually within the past 20 to 50 years.

5.(a) For a lease to be valid the lessor and lessee both need to sign it. For a deed to be valid the seller has to sign it. For a deed of trust to be valid just the trustor needs to sign it. For a right-of-way easement to be valid the grantor of the right-of-way has to sign it. (b) If it is only signed by a tenant then it is not constructive notice, because it might be bogus. Might put people on inquiry that they should check out to see if the landlord also agreed to the lease, but by itself, a lease without proper signatures does not impart constructive notice

6.(a) Race statutes save courts time and discourage false claims by eliminating disputes based on facts off the public record, such as what a subsequent purchaser knew or should have realized, whether and when a deed was delivered, whether a document was pre-dated, or whether a subsequent taker paid valuable consideration. Race-notice and notice statutes penalize buyers for acquiring knowledge and this is wrong. You only have to worry about who wins the race to the courthouse.(b) Race statutes tacitly encourage collusion by making the good faith of a subsequent taker irrelevant to the legal status of his title. The problem is you reward scoundrels and punish people who are merely incompetent.

7. (a) Notice Statute(b) Race-Notice Statute(c) Race Statute

8.(a) B wins because he’s a BFP and recorded first.(b) If B is a donee, A wins because B is no longer a BFP. This might seem intuitively odd but that’s the rule; race-notice and notice statute only protect BFP not donees. If A is a donee it doesn’t matter. The BFP status only matters for subsequent purchaser.

9.(a) Race-notice state C wins because we ignore the stuff with C and D recording. C isn’t saying that the B-D conveyance is not valid but only that the O-B conveyance is not valid. A beats B under Race-notice because B doesn’t satisfy the criteria. B is a BFP but didn’t win the race to the courthouse. So C beats D.(b) D beats C under a Notice Statute because B beats A, since he is a BFP & that’s all a notice statute requires.

10.(a) T does not have to record the lease to be protected against Z terminating the lease because a lease is generally exempted up to 1 year from recording acts.(b) Z’s interest is subordinate on 10/11, 11/15, and 12/1.(c) If T had entered a contract to lease, rather than lease itself that would be only an equitable interest until possession on Dec. 10. The equitable interest would be superior to Z’s equitable interest on Oct. 11 and on Nov. 15, but when Z’s interest turns into a legal interest on Dec. 1, then it beats T’s merely-equitable interest.(d) He takes the property subject to the lease.

11.(a) B should have asked C what is his interest in the property. He also could have asked A to terminate the lease first.(b) C could have a got a notarized copy of right of 1st refusal signed by A, then recorded it: B would then have notice of it.(c) Recording an affidavit is not enough, he needs A’s notarized signature on something.(d) The closing attorney’s knowledge clearly imputed B. The title insurer had no imputation since they only sell a product. The broker’s knowledge might impute B but it depends on their relationship. If they were B’s fiduciary then yes. But if they were B’s subagent then no. Also if broker is acting disloyally because he wants the deal to go through there is no imputation. The escrow agent is imputed because there is an expectation to disclose material facts.

12.(1) O sells to A, but A doesn’t record. A sells to B, and B records. O mortgages to C, who records. C sells to D, who records. D will win uncontroversially. The A-to-B deed is a “wild deed” without connection to O. Even if D found it, wouldn’t cause problem for his chain of title.(2) Z gives O an option to buy. O deeds title to A. O exercises option to buy. A records. O mortgages to C, it’s a tough call, because the issue is whether C is charged with notice of the O to A deed; because its earlier than O’s acquisition, it might be missed, depending on the scope of a search.(3) O mortgages to A, O sells to B, who doesn’t know of mortgage to A, B records, A records, B sells to C. Is C a BFP, or does have notice of the mortgage to A? It is a tough call, because C might or might not be expected to keep on searching for subsequent recorded deeds later than the O to B deed.

13. If deed isn’t acknowledged, it doesn’t put subsequent purchasers on constructive notice of it, so it doesn’t prevent later purchasers from being BFP. Curative acts: defective in instrument do impart constructive notice after statutory period

Chapter 15 Questions

1. (a) Title companies do work related to actual titles. Title insurers do work based on money and risk. (b) Title companies select based on: quality of title searches, punctuality, creativity in solving title problems, rates, and financial condition of the title insurer they represent. Title insurers select based on: solvency, and how well they handle claims. 2. An abstract of title is the copies of all the documents affecting title. If guaranteed by counsel you can only sue if he’s negligent. It’s just an opinion of the attorney so there is no guarantee. Title insurance just identifies current condition of title, but it’s a guarantee based on K, so it’s strict liability. Title insurers are also much more solvent.

3. (a) Read not only because it might be wrong, but because preliminary title report has lots of valuable information about condition of title.(b) Pro, people do, in fact, rely on them, and “unjustifiable” reliance should only exclude reliance that departs from custom. Con, on their face, statements are only offers of insurance. It is important for businesses to be able to rely on disclaimers, but sometimes you need to have a tough stomach. If people want, they can buy insurance. A similar Coasean-style argument could be made to dispense entirely with fraud liability: “If you really want to rely on anything anyone says, you should purchase a warranty, and otherwise, don’t trust people!” This would not produce a very trusting society.(c) False positive case is one. The report scares off buyers from a deal by reporting problems that aren’t really problems. False negative cases are another. Here the buyer doesn’t get insurance, but there’s a problem later.

4. (a) It would not be covered. That’s a problem for surveyors. “Scope of coverage” states the land you want to make sure you have title to; you’d have to add a policy to make sure you have title to the house.(b) In an off-records risk someone else has interest in your title. Documents not properly signed, sealed, acknowledged, or delivered. Problems with the documents are: forgery, fraud, duress, infancy, incompetency, and impersonation.

5. The insurer wants assessment of likelihood of enforcement. Questions to ask are things like: are there other establishments with similar covenants nearby that serve alcohol? Has this place served alcohol? Is there a church or a school nearby? Does a marketable title act bar enforcement?

6.(a) Bad things can happen during the gap period. Someone else could beat you to the courthouse. As a result make sure insurance is effective as of the date of recordation.(b) Make sure policy is good as of recordation. Leave the policy good as of closing, but buyer a special policy for the gap. Eliminate the gap, by making closing contingent on recording.

7.(a) Someone tells the buyer, “Hey, I have a covenant against you.” Not known to insured.

(b) The land record contains the covenant. Doesn’t fall under exception. Only covers off-record things the insured knows about. The land records stuff is what the title company’s supposed to know. (c) Insured signs a paper, “You may enforce this covenant against me.” That’s known to the insured.

8. Yes, the title insurance isn’t just for the risk that an earlier transferee might beat buyer’s claim, which is the place where BFP does better than donee. Even if transaction is a “gift” in ordinary parlance, deed can recite a bit of consideration (e.g. love and affection) so won’t be done legally.

9. (a) The title insurer is responsible for costs of defense, even if over limit; no credit against policy limit.(b) The insured want a settlement, but it’s the insurer’s decision whether to litigate or to pay $700K. (c) Insurer would like to be able to change its mind, and language to that effect would be nice to have in the K: “insurer has the option at any time of settling the claim or paying the amount of the policy in full.”(d) If reliance on negligent misrepresentation in preliminary policy were justifiable, then policyholder could get $800K damages, not just $700K.

Chapter 16 Questions

1. (a) The CA closing is less costly because everyone gives documents in advance to the escrow agent whereas in NY everyone comes together at the lawyer’s conference for closing.(b) NY is better for resolving last minute disputes, but also better at creating them. An example would be “I show up at closing and want new hinges.”(c) NY is better for catching miscalculations.(d) In CA you usually don’t wire money until just before anyways, so not a big difference. There is a slight advantage in stopping embezzlement for NY.(e) CA is better for narrowing time for recordation. In CA you can stipulate closing is at time of recordation. In NY you need to deliver to land-record office after closing.

2. (a) The agent should not give legal advice. (b) If someone wants to renegotiate the price, tell him to send something in writing to the other party; they may also need the broker’s consent, if he has taken proper precautions. Wait until the check clears before recording the deed.(c) Wait until the check clears before recording the deed!(d) The escrow agent should tell parties any information (like existence of lien) material to fulfilling their duties under the K.(e) If a buyer adds instructions about giving the deed to someone else, the escrow agent has a duty to tell the seller that.

(f) If the escrow agent screws up and gives too-small check to me, and too-big check to another he should pay the difference to Mr. Too-small-check and seek reimbursement from Mr. Too-big-check.

3. Seller can sue, if the promise is collateral to the deed, and so doesn’t merge with it. Courts will differ, but probably collateral. If the mistake was caused by a mistake in the instructions, then Seller probably stuck with the loss: only if it’s escrow agent’s mistake may Seller recover.

4. (a) Generally whoever OWNS the money, or whose FAULT CONTRIBUTES to the loss, bears the loss. If seller to bear loss, then he can’t get house back or get paid again. If buyer bears loss, then he has to pay again or else give house back. Here in this case the Seller bears loss because it’s his money at that point.(b) Seller bears the loss, it’s his fault.(c) Buyer bears the loss; it’s his money at this point.(d) Seller bears the loss because of no interest of the buyer in money.(e) Escrow agent should bear the loss because they stole it.

5. (a) RESPA prevents escrow people from paying real-estate brokers a cut of their share. You can only pay brokers for actual services, not just referral fees. The objective was to reduce fees for consumers who pay the fees one way or another.(b) Yes. It may be a little like banning drug ads because drugs cost too much. The companies who pay kickbacks think this is the most efficient way to market their services, so a laissez-faire sort of person would let them do it. However, there is a huge worry about the kickbacks causing brokers to lie about which escrow agents are best. A little like the rationale of campaign-finance restrictions: take the money out of it and there won’t be so much corruption.

Chapter 17 Questions

1. (a) Quitclaim deed is the simplest deed.(b) Warranty deed is a warrant of good title, and says “I warrant.” Grant deed is a saying I haven’t impaired this title, use the term “I grant.” A quitclaim deed says here’s what I have left, use the term “I quitclaim.”(c) The date is not necessary. Acknowledgment is not needed. Recitation of consideration is not necessary but it is useful for showing BFP status of purchaser.(d) The names of the grantor and grantee is needed. However, no signature is necessary from the grantee, but useful for showing acceptance. The grantor does need to sign it though.(e) Property subject needs to be described in a full legal description.

2. (a) She should say “Subject to a utility easement of record, found in book X, page Y…” or she could say “Excepting a utility easement of record, found in book X, page Y…”

(b) She should say “Reserving an easement for beach access in favor of parcel 2, as described:” There is a danger in simply repeating an old formulation with an earlier deed: that might’ve been proper when the easement was being created, but now it is not since the easement is pre-existing.

3. (a) Delivery occurs at the moment, after the grantor has signed the deed, that she takes some decisive action reflecting the thought, “there it’s done. The property no longer belongs to me.” At that precise moment in which the grantor evidences an intention to part with title, the deed becomes irrevocable. In most transfers, delivery is presumed to have occurred when the deed is actually passed from seller to seller’s agent to buyer. Evidence of delivery would be the grantor devising the property in a will undermines a claim of prior delivery while the grantor leaving the property out of the will suggests the grantor believed title had previously been delivered to the grantee. The grantor permitting the recordation of the deed is proof of delivery, conclusive in some states, since grantors don’t usually allow their titles to be clouded by recordation unless they mean to convey.(b) In NY closing, delivery happens when the deed is physically passed across the conference room table.

4. (a) Grantor acknowledges his signature to the notary saying “This is my signature.” He does this because it is useful for preventing fake signatures, though its not perfect at preventing it. It is also required for recording deed and imparting constructive notice from the land records.(b) The problem with the notary saying that the person was really there and acknowledge the signature is ultimately fraud. It also encourages fraud by purported signatories, to have the notary handle all of them at the end of the day.

5.(a) Covenant of right to convey. An 11 year old can own property but they can’t convey it.(b) In a warranty deed, Covenant of encumbrances. If the right of way is a fee simple (actual ownership of the path) it will also breach the convent of seisin.(c) In a grant deed it depends if it contains a special or general covenant against encumbrances. If special, then no breach. If general, then there is a breach of covenant against encumbrances, because it also applies to the grantor “suffering” encumbrances.(d)(1) Breaches covenant against encumbrances, either with a grant or warranty deed. Encumbrance equals the right that diminishes value of estate but doesn’t divest grantee of title. (2) It is after the recording, so covenants breached. (3) Breach of covenant of seisin because of a present possessory interest. Also you have a breach of covenant against encumbrances. Also breaches, for warranty deed, covenant of quiet enjoyment. (4) For warranty deed, breaches the covenants of seisin & right to convey. For grant deed, there is no breach.

6. Title insurers would like to recover from someone whose misbehavior caused a title problem: they want subrogation rights: right to sue for compensation from someone. Even if a covenant is breached, it’s hard for insurers to recover from

someone who isn’t directly responsible for the problem. So grant deed is almost as good – it says “I haven’t cause any problems” v. warranty deed “there are no problems.”

7. (a) Not against B, because she hasn’t derogated her own title, which is all a grant deed promises. Not against A, because grant deed covenants don’t run with the land – they are construed as only “present covenants.”(b) Then C has a good claim once he’s actually or constructively evicted. An example would be that once X demands that C leave, or a court order ejects C. Covenant of quiet enjoyment construed as “future covenant: that runs with the land.”

Chapter 18 Questions

1. Attorneys need to know how to read legal descriptions even if you they don’t have the skills needed to prepare them. They need to know how to estimate the approximate size of parcels, since this is a crucial skill for your clients. In order to supervise people with expertise, you need to have some of that expertise.

2.(a)The postal address is not good enough for a deed because it doesn’t give the boundaries of the properties. Also it is also very often the case the street names will change.

3.(a) Title insurance only covers ownership of the land as described, not for example whether the house is on the land. The survey is used because you still need to make sure the property matches the legal description. Also a standard exception in the title insurance for any facts an accurate survey would show.(b) You probably don’t need a survey for all home sales, but there are differing

opinions on how often they are needed. Factors in determining whether a survey is needed: How old was the last survey? Is it available for inspection? Looking at the site, are there any unexplained adverse uses? Looking at the land description & preliminary title report, are there things needing explanation? Is construction planned? If so, probably want a survey. How important is it that the fences are at the true boundaries? Less concern, less need for survey.

(c) Commercial developers often need accurate surveys because there’s a greater likelihood of building on the property. You want to make sure the property will be the appropriate size needed for your business. Lenders will probably want a survey as a precondition to a loan. There is also a feasibility of projection that may depend on the exact size of the boundaries. Also the developer might want a survey done before even signing a purchase contract.

4. The only one of the three that would be beneficial to deal with the swimming pool problem is the language that says “Buyer’s approval of survey is a condition of buyer’s obligation to buy.” Therefore if the buyer doesn’t approve of the survey that finds the swimming pool half way on the neighbor’s land she doesn’t have to buy and can cancel the contract.

5.(a) The appropriate questions to answer are: Identify the owner, if different from the client; Delivery date for survey; Form of the desired product (digital drawing? blueprint?), number of copies, size of drawing and scale; Define and allocate the surveyor’s “errors and omissions” insurance coverage; Surveyor’s fee and time for payment; Content and methodology of the survey(b) The lender will probably require an ALTA/ACSM survey. Boundary line survey would probably indicate the location of buildings, but not necessarily of utility lines, and certainly not whether the structure and its parking conform to local buildings and zoning codes, and the like. Won’t suffice to justify the title insurer removing the survey exception form the mortgagee’s title policy – insurer will want ALTA/ACSM.

6. If you are worried about error by original surveyor years ago, you can use a quitclaim or a grant deed. If the promise merges into a deed, then there is no problem. However, there might still be a problem if the land description in is the purchase K and it’s wrong – merger doctrine can be overcome. Another option is to use specific exculpatory language, which is far more reliable. An example is “grantor assumes no liability for the accuracy of the legal description in the deed or purchase and sale contract, or for errors an accurate survey would have revealed.”

7. (a) First of all try and reason with the neighbor. If that fails, let the neighbor file suit and bear the burden of proof. If impatient, he could file suit to quiet the title. If the neighbor gives permission to have a garage where it is, then adverse possession “hostility” element is defeated.

8. (a) If the neighbor says he wants a fence, you might lose land on his side of the fence. You could lose it by adverse possession. Also you could be giving acquiescence to the disputed boundary. Also depending on cost of uprooting, you might have relative hardship claim to keep land and pay damages.(b) You can avoid this by giving written permission for the fence. It is revocable at will or after some period of time. You can also say it’s meant to benefit and bind successors to the property. Also it would be beneficial to include formal and complete descriptions of the 2 properties, taken from deeds or title policies. Also notarize and record in county recorder’s office.

Chapter 19 Questions

1. As long as the people keep making their payments to the bank you probably can not make the bank evict them. There is no evidence of a precipitous value in decline and no breach. A nuisance suit by neighbors could lead to damages and a lien against the property, but that is all speculation. The neighbors may want to argue illegal-purpose restriction has been violated, but that’s not always enforceable.

2. The lender would want an injunction against the removal of the cabinets. If they can’t get an injunction, the lender wants a reduction in value: the impairment = any reduction

in value. They could also have specific language of the deed and trust: the government forms promise not to “destroy, damage, or impair the Property.”

3. (a) The lender will care because it’s costly to defend against an investigation. Also in some jurisdictions, you can’t foreclose while there is a forfeiture act pending. (b) The lender can enter the property and inspect it (paragraph 7). UCC 2-609 allows a request for adequate assurance if the lender has “reasonable grounds for insecurity” which they have here.

4. (a) Lenders care about polluted property because environmental liability affects the debtor’s ability to repay. Also the environmental liability could drive down the property value of the land, and the lender might become an owner through foreclosure.(b) Paragraph 21 requires that there be no hazardous chemicals on the property, that the lender be notified, and that there be a remedial action.

5. The contract would be enforceable because otherwise a loan for a house could become a loan for constructing a house, which far more risky. Rebuilding the property should put the lender in as good a situation as they were in before, so that is a good. However, it might be particularly hard for the owner to get financing.

6. (a) An impound account is where the lender takes money and pays for insurance and property tax.(b) Benefits the mortgagor because it makes sure the insurance premium is paid. It benefits the mortgage lender because the lender gets interest on the money.(c) Lenders justify not paying interest on funds accumulated in impound accounts because it is justified as a service fee, and if it weren’t allowed, the interest rate on the loan would just go up, so allowing it could really hurt the borrowers.(d) Lenders might pay bill late if the penalty is less than the interest it could make.

7. Force place insurance happens when the borrower doesn’t pay premium and lender has to get insurance instead. It is more expensive because there are a risky bunch of people who miss payment, there is a captive market, and insurers who provide also monitor lender’s portfolio for “free” – this is a fee for that.

Chapter 20 Questions

1.(a) DSCR is the ratio of income to debt payments: monthly net operating income over monthly mortgage obligation. It matters to a commercial mortgage because the net operating income will vary with how good the business is.(b) It might not want to go below 1.0 because if it’s less than 1.0, that is not enough income to pay the mortgage.

2.(a) There is a right to collect rents that goes with the ownership of the property because it would be hard to craft a simple contrary default rule, since the sorts of lockbox situations are somewhat complicated.(b) If it’s a title theory the lender owns the property and the borrower only gets it after paying off the loan. If it’s a lien theory the borrower owns the property and the lender only had particular remedies available because of the mortgage. If it is the intermediate theory the borrower owns the property until default, when it goes to the lender. (MS is an intermediate theory state).(c) In theory, title-theory states should routinely enforce such provisions, but intermediate & lien theory states should scrutinize them carefully. In practice, lock-box provisions are separate from the consequences of default, and they are uniformly upheld. Why is there no difference after foreclosure? The lender has possession & owns the property!(d) In real estate recession in the 1990s, lots of borrowers who saw ahead more quickly than lenders pocketed rent money rather than paying mortgage & tax obligations.(e) In a Lock box: rents go into account. Hard lock box, lender controls all disbursements. Soft lock box, mortgagor can use all funds until default. Waterfall account, debt service paid first, balance for mortgagor to use. In a Direct collection on borrower default, lender gets right to collect rents directly after default. In Conditionally absolute assignments, lenders reserves right to collect rents, grants borrower revocable license to collect until default. The borrower might negotiate for right to continue to collect, even after default.(f) Direct collection on borrower’s default and conditionally absolute assignments are preferred about equally by the borrower unless an additional contingency is negotiated on conditionally absolute assignment.(g) Activation is taking steps to get the money. This is incredibly important for getting the money. Perfection is recording the interest. This is important for notice to 3rd parties.

3. (a) Yes, you could initiate foreclosure proceedings and move for appointment of receiver. (b) You would then become a mortgagee in possession. You would get immediate access to funds but there is a fiduciary duty to borrower, court could 2nd guess any decision made later. It depends on how large a project it is to manage. Institutional lenders avoid becoming mortgagees in possession. Individual lenders are more receptive.(c) An equitable receivership may be better because that adds a middleman, which means more cost but less hassle. It depends on who this receiver would be – if it would be competent management company, that’s better than some pal of the judge.

4. There is a danger that the lease might not survive foreclosure of the landlord’s mortgage, to be sure the tenant will want a non-disturbance agreement with the landlord’s tenant. Without an agreement, if the mortgage pre-dated the lease, then the foreclosure would terminate it. Mortgagee, even if he’s later than the original lease, can challenge a 1/3 off change as commercially unreasonable.

5. (a) Who was there first, lessee or lender? If lease first, then the borrower couldn’t mortgage away the leaseholder’s interest. If a mortgage first, then the lease is subject to it, and disappear with the rest of the property at foreclosure.(b) Factors to determine is the flow of the market, is the person a good tenant, or is it good for other tenants located in the mall.(c) Get a subordinate non-disturbance attornment agreement (SNDAA) with the lender(d) He can change the term of the lease or change the amount of rent that is paid.

Chapter 21 Questions

1.(a) Equity courts were committed to protecting mortgagors from forfeitures. Petitions were granted routinely to force mortgagees to accept late payments, establishing an estate in land that came to be known as the “equity of redemption.” The originated word “equity” to describe the value of the owner’s interest in the security property above the sum of the secured debt.(b) A clog on it is an attempt to make an end run around procedures for redemption by making it easier to foreclosure. They are also called advance waivers, which are impediments to the borrower reclaiming the security property by paying off the debt. Chancery freely interfered with mortgage transactions with a complete indifference to the terms agreed by the parties; in no branch of the law was the sanctity of agreement less regarded.(c) An example vulnerable to re-characterization as a disguised mortgage: “Here’s some money – return, deed the property to me, and I won’t record it as long as you pay me back on time, and I’ll get rid of the deed if you pay all the money back.

2. (a) An acceleration clause means that as a result of the default, the lender declares the full debt due immediately and payable even though the loan would not otherwise have matured for some time.(b) The reason for having it is that you would have to sue for each missed payment if you did not have it, which would clog the court system with litigation.(c) Though it would seem bad, the good thing is that they don’t have to defend against a lot of individual law suits for missed payments, the extra costs just get added to the debt.(d) In a standard deed of trust, you can reinstate under paragraph 19 until 15 days before the foreclosure sale.

3.(a) A judicial foreclosure starts with a full lawsuit, and lawyers are required. A sale is then conducted by a public official (usually the sheriff). A nonjudicial foreclosure is much quicker and cheaper. It is conducted by the trustee. There is also a much smaller chance for the debtor to be de facto rent-free occupant. The notice regulated by statute: posting on property, newspaper, delivery in person.(b) Under a standard deed of trust, 3 notices to debtor: Notice prior to acceleration (informing of right to cure or protest), notice of default, and notice of trustee’s sale.(c) List the house with a broker as soon as possible, Try to refinance with the original mortgagor for lower payment, Could refinance with someone else, Could borrow money

from family or friends, Might rent the house, Bankruptcy (this is not very attractive but it is an option).

4. He should petition the court to set aside the sale, by asking for an injunction against transfer of property. He can argue this on 2 grounds: gross inadequacy or price, and lack of notice. He also needs to show that the purchaser isn’t a BFP because that will require showing that the in-house counsel is on notice of the procedural irregularity.

5. Do nothing, assume that the value of the property is less than the senior debt, so there’s no interest to protect; If a senior mortgagee forecloses, foreclosure junior lien at the same time, hope to get the money left over after paying off the senior debt; Before foreclosure, cure the default (i.e. reinstate) – stops foreclosure, indicates trust in the debtor; Redeem the senior debt – indicates great trust in debtor and value of property; Accelerate & foreclose on junior debt.

6. (a) Try to get a release from the omitted junior lienor. If the property isn’t worth the senior debt, then J’s lien is not worth anything anyway. If the property is worth more, then J will want more money for the release. O could also ask the senior lienor to petition the court to set aside sale and do it again with notice to J. O could petition court for a decree of strict foreclosure on ground that no value in the property beyond S’s debt anyway. (b) The grounds for setting aside a sale may differ a lot depending on whether it’s a judicial or nonjudicial sale: differences in notice required. It is however hard to set aside a sale to a BFP.

7. (a) The good thing about it would be that it prevents an end-run around a junior lien in which the debtor shirks obligation. However, junior lien had a perfectly good chance to bid at the foreclosure sale too. Allowing lingering, possibly-resurrectable junior liens make is less attractive to buy at foreclosure sales, since selling back to original debtor is less attractive to him. We need all the buyer we can at the sales!.(b) No. That would put junior lienor in a much better situation: revival would only give what he had before.

8. (a) The price of the reinstatement is $3150, but after sale to BFP, it is probably too late.(b) $100K, however it is also probably too late after a sale to a BFP.(c) $85K.

9. (a) What’s the redemption price? Who is entitled to redeem? Is the right of redemption assignable? How long is the statutory redemption period? Is the mortgagor entitled to remain in possession during this time? Is the foreclosure sale purchaser entitled to collect rents during this period or to hold the mortgagor accountable for the fair rental value of the security property? Will the redeeming party be entitled to these funds, if collected or collectible? (b) Might be better to buy statutory redemption rights from junior liens to prevent worries about resurrecting junior liens.

10. The IRS has the either 120 days or the state statutory redemption period to redeem from the BFP, the IRS is given the option of taking which ever of these 2 choices is longer so they have more time. They can redeem the whole estate, not just C’s 1/3 interest.

Chapter 22 Questions

1.(a) B should get the surplus because the wiped out junior lienor gets $150K surplus.(b) C will get the $85K surplus. A gets nothing, because the sale is subject to his mortgage because he didn’t foreclose. D gets nothing since his lease is at market price. W gets nothing since he didn’t perfect his lien.

2. (a) A non-recourse note says you can’t go after the debtor personally for deficiency. (b) X if free from personal liability (debt is free) since A paid in pull and B has no right after him.

8. A one-action rule means the lender doesn’t have the option of first going after a rich investor personally, rather than foreclosing. So a lender might use the option of going first after a rich investor personally, rather than foreclosing. Also you might trip up a bank who applies a checking account to pay a balance, unless the money is pledged as additional collateral.

10. (a) The deficiency is only $300K.(b) The deficiency is only $300K again: take the greater of the value of the sales price. It protects borrowers against too-cheap sale price, but doesn’t protect lender from too-expansive one.

Chapter 23 Questions

1. Borrowers are able to avoid the stress of credit impairment. The borrower also might get release of personal liability. He may also get some money. The lender can immediately begin marketing the property. This saves them the cost of foreclosing. It also avoids loss of interest income while the foreclosure is pending. One danger is that this process might be deemed a clog on the equity of redemption: end run around the procedure. But it has new consideration – it’s not like the original deal tried to limit the remedies, so it is probably OK.

2.(a) If the property is subject to junior liens, lenders can’t be expected to accept a deed in lieu until junior lienors have reached their security interest in the property to be deeded. A deed in lieu of foreclosure does nothing to bar the interest of junior liens. To get rid of the junior lien, the senior lienor would still have to foreclose. As long as junior liens cloud the mortgagor’s title, the mortgagee who accepts a deed in lieu will have to foreclose anyway to remove the cloud. The senior lienor as grantee of deed in lieu

becomes the owner of the encumbered fee and succeeds to all of the grantor’s interests and liabilities in the conveyed estate. To preserve the right to foreclose, senior lienors willing to accept a deed in lieu conveyed by the mortgagor to a senior lienor when junior lienors refuse to grant releases should insist that the deed recite an intention not to terminate the mortgage lien.(b) Debtor might convince junior lienor he has no value in the lien anyway, so he’ll give a release.(c) The senior lienor could threaten to foreclose, or give the junior lienor the chance to redeem the senior lienor’s lien.(d) He needs to set aside the deed-in-lieu transaction, so the junior lienor would have to show that there is value in property beyond the senior’s lien.

4. Admission of default and waiver of defenses possibly because if they foreclose they won’t be able to sell it either because there is a low demand right now with a huge market. Increased but deferred interest rate on a new debt (basically refinancing) this will give her a new chance to get tenants and pay more later. Increased but deferred interest rate on existing debt because she will not have to make any payments. Equity interest if she doesn’t have a lot of equity, if she does have a lot of equity then she needs to refinance because if she puts the equity up and she doesn’t have a lot of equity then what she is going to lose. She just acquired the property so she probably didn’t put a lot of money into it.

Chapter 24 Questions

1. The problem ultimately is its going to take a great deal of work to get this desert scrub property into shape for building. With the costs of streets, curbs, walks, driveways, storm drains, utilities, including services to each lot, street lights, installation of trees and required perimeter walls are going to be astronomical in the desert. Also, an irrigation system that will have to be installed in the desert is going to extremely high. To protect themselves I would say the seller should simply sell the land for a sum way below the $13,750 (possibly as close to the $2500 as possible) and say that once we sell the land you are responsible for all improvements you make on it, or simply they could just not sell it at all.

2. (a) Acquisition and developmental financing is for acquiring land, preparing engineer and design plans, as well as local governmental regulations and on site work. Sometimes called developmental loans. Construction loans pay the costs of building the project. Construction lenders can cut off their loss by only lending on the security of a finished lot rather than an undeveloped lot. Sometimes just 1 lender will give money for acquisition, development, and construction and ADC loan. Other times lenders just making a construction loan to the borrower will allow him to use part of the loan for land and acquisition costs. Permanent loans give the home buyer’s or developer’s long term mortgage financing. Funds from the permanent loan repay (take out) the construction loan. Until the construction lender is paid in full and releases the lien of record, the permanent lender won’t be entitled to a first lien on the project. So the permanent lender

makes the construction lender’s repayment a condition precedent to funding its take-out loan commitment.(b) A & D is more risky than Construction loans because governmental regulations may forbid the type of project you are trying to complete, and engineering and design plans may be extremely costly. Construction loans are more risky than permanent loans because permanent loans repay the construction loan. Until the construction lender is paid in full and releases the lien of record, the permanent lender won’t be entitled to a first lien on the project. So the permanent lender makes the construction lender’s repayment a condition precedent to funding its take-out loan commitment.

3. (a) Completion Risk which says the construction lender won’t be fully secured until the project is completed successfully. Cost Overrun Risk says project cost may exceed estimates due to initial miscalculation, or because of change orders, strikes, bad weather, or inflation in the costs of building materials. Value on Completion Risk. On completion the project could be worth less than anticipated because of falling demand or overbuilding. (b)For completion risk, lenders manage the risk through careful disbursement of loan proceeds and holding back some of the construction loan until completion. For cost overrun risk, lenders try to avoid giving money for unrealistic budgets and review estimates of prospective costs by the buyer. For value on completion risk, lenders reduce this risk by insisting upon the project being sold or rented before construction or by the borrower obtaining another lender’s commitment for financing with which to repay construction loan once the project is built.

4. The reason a lender would run out of the money is if the borrower did not borrow enough money to complete the project. The borrower borrowed 100K to complete project and it takes 150K to finish it. He can’t get a certificate of occupancy until he gets the other 50K. The lender is left holding the bag and the borrower can’t pay him back until he gets a certificate of occupancy.

5. (a) Letters of Credit, where the issuer of the letter promises to pay or perform the borrower’s obligation to the construction lender, if the borrower fails to do so, usually on presentation of a sight draft (a written demand for payment based solely on the construction lender’s one-sentence written declaration that the borrower has defaulted o is entitled to payment for some other reason. By becoming the letter of credit beneficiary the construction lender obtains excellent assurance of payment or performance. Borrower’s Personal Guaranty of Completion, where the guarantor promises a construction lender that the improvements the lender is financing will be completed by a specified completion date, lien-free and in accordance with the plans and specifications that the lender has pre-approved. Well-drafted completion guarantees define the improvements thoroughly so the lender doesn’t get stuck with a project different or less desirable than they agreed to. Lenders rarely place full confidence in personal guaranties since they often prove difficult to enforce and troublesome to collect. Permanent Loan Commitments, where the borrower pays off the construction loan immediately upon the completion of construction. The construction lender conditions the first disbursement of construction loan proceeds on the borrower’s having obtained a loan commitment from a

permanent lender to advance sufficient funds to repay the construction loan upon successful completion.(b)The letter of credit says that the lender will be paid if the borrower can’t pay, whereas the guaranty simply promises that the improvements the lender is financing will be completed by a specified date. It doesn’t promise to pay them the money if the borrower defaults.

6. (a) Performance bond offers the construction lender and the borrower an identifiable source of recovery for a default in the general contractor’s promised performance under its contract with the borrower. Performance bonds do not guarantee project construction lenders full loan repayment, but do purport to guaranty project completion according to the precise terms of the construction contract. Payment bonds often accompany performance bonds. They insure suppliers of labor and materials that the surety will pay sums due them from the general contractor. They encourage subcontractors to bid on the job and may even induce them to offer the work at a reduced price.(b) They stand in the shoes of a party whose performance they bonded.(c) It may not be perfect but it is still useful. Bonding companies usually verify the contractor’s reliability.

7. Place initial $450K in escrow until sale completed. Check out the plans for the $550K. Make Debbie enter a K with the general contractor with ceiling price. They can reserve right to assume Ks. Try to find buyer and lender in advance, but this might be hard to get the full expected $2M.

8. (a) He can’t get a lien superior to the construction lender because the construction lender was earlier in time. Even if the construction lender hadn’t recorded, the common-law priority rules would prefer legal interests to equitable interests, and earlier to later ones.(b) It’s not as good because in the San-a-Bel case, the lender knew about the pre-sale buyer and the buyer executed contracts before recordation of the construction loan.

9. If there is a big change in the project then it probably breaches the subordination agreement the seller. The bonding company is not responsible for completion when the project is changed so much. The take-out lender hasn’t agreed to underwrite the loan on a possibly-very-different sort of property.

10.(a) Construction lenders need a subordination agreement because the pre-sale buyer and land sellers may have superior liens otherwise.(b) You may see provisions that: limit the size and use of construction loan proceeds, approval of construction lender, review of the developer’s plans, a description of the disbursement method, and the right to timely notice of default on the construction loan.(c) Construction lender solidify their lien priority against subordinating vendors and purchasers by requiring waivers protecting the lender’s priority despite malfeasance by the developer or the lender’s failure to control disbursements. These waivers are generally enforceable. If such waivers were not enforceable, construction lenders could easily remove the developer’s main incentive to procure vendor subordination in the first

place which is to reduce the developer’s cash equity in the deal.

11. (a) A release clause says “you’ve repaid the money, so I’ll discharge my lien.” A partial release says “you’re repaid some of my money, so I’ll discharge part of my lien.”(b) They agree to partial release lenders so that the parcels can sell, the buyers and their lenders don’t want the construction lender’s lien to be senior to their interests. (c) They might want to make sure that the parcels remaining are valuable, perhaps make them contiguous chunks. They may also want to require a little bit more repayment of the loan than is released from the lien. This is called a “release premium.”

Chapter 25 Questions

1. (a) The owner and the general contractor provision will say the owner is protected against the subcontractor’s misbehavior. The owner and the architect contract will say the owner is protected against the engineer’s misbehavior.(b) If the owner is relying on outside funding to cover its payments to the architect, the agreement should define the payments arrangements clearly and fully. The architect and the general contract may both be relying on the construction loan proceeds for payment. The contractor and the architect often extract a promise from the owner to inform them about construction financing arrangements and not to vary the arrangement without notifying them.(c) Should the owner default, the construction lender may desire the architect and general contractor to complete the job but won’t want to assume liability for the owner’s past debts to the architect and contractor. The lender should require the owner to provide the protection for them in the owner’s contracts with the architect and the contractor.

2.(a) The public policy goals of building codes are ultimately to protect the health and safety of the public. If houses are built sloppily and not up to code, the public could suffer a large number of preventable injuries and deaths.(b) The building inspector views the plans then either approves or rejects them. He then inspects the construction. The building inspector will then issue a certificate of occupancy if he finds it is up to code. Then the building inspector may come back later to see if there are any problems.(c) The owner can’t rely on the building inspector to make sure the architect’s plans are followed exactly because there are a lot of things that are unrelated to the health and safety of the building. For example, having granite counter tops as opposed to hard top counter tops.(d) You generally can’t rely on what the government (building inspector) tells you about the law. Equitable estoppel against the government is impossible. Though this may seem strange, it’s not an incredibly awful doctrine because we don’t want officials to be able to change the law by getting it wrong and then telling people.(e) No, the city code compliance by the government can only be enforced against present owners, so the original owner is not liable. However, the current owners might then seek remedy against their sellers, which would be the original owner.

3. It seems far to close to bribery. The norm against bribery is an underappreciated cultural jewel. If he does decide to go ahead and give the gift, he might try to distinguish between giving gifts to get attention and have the inspector look at the property and giving gifts to get approval. This is going to be very difficult to do. You generally, don’t want to pay for something that the official is supposed to do for free anyways. Several other options I would advise are to be very courteous, and make the building inspector’s job as easy as possible. You can sometimes pay “rush job” fees. Also he should request inspections to occur as far as in advance as possible. He might also try public shaming, but that’s probably not going to work, because the inspector will just get mad at you.

4. It depends on who picked out the bathtub. Any of the 3 parties could have made a critical error. The design specifications might not meet code requirements, so the architect would be on the hook. If the type of tub is wrong then the architect or general contractor might be on the hook. If the problem is due to the method of installation the general contractor or the subcontractor could be on the hook. The subcontractor might have some liability for not alerting the architect to the problem. If the problem arises because of a change in code, would depend on what sort of continuing duty the architect has. He is probably still liable, but can get compensation for having to redo plans.

5.(a) What are the owner’s goals? What are the owner’s design preferences for how to meet goals? What is the owner’s schedule? What is the owner’s budget? (b) The owner is responsible for any information that isn’t readily observable from a casual inspection. (1) The responsibility is the architect’s to know since architects are expected to take into account readily apparent site conditions. (2) This is the owner’s responsibility. The owner is burdened with the obligation of furnishing a full legal description and a detailed survey of the site showing all easements, utilities, zoning, deed restrictions, existing structures, boundaries and contours. (3) The owner is responsible for describing unusual site conditions to the architect and general contractor, hiring experts as needed, such as soils engineers. If only after excavation does it become evident that the soil or water table pose previously undetected obstacles, the added expense of dealing with these unforeseen site conditions is the obligation of the owner unless the architect or general contractor assumed it by contract.

6. (a) The architect wants to keep these ownership rights to the plans because it’s his intellectual property. He might want to be able to sell the plans to other owners. He wants to prevent getting a bad reputation by a misdeployment of his ideas. Lastly, he wants to secure A’s payment.(b) Developers may object because they feel that since they paid for the designs and may have had a considerable role in shaping them, they, not the architect should own the plans, be free to copy them in another project, and be legally entitled to enjoin competing developers from copying them.

7. When his design is not architecturally structural or sound. Also when the architect’s plans do not meet the building code for that particular area, changes would have to be made to meet the code requirements. If the architect does not engineer the plans for the

building (he just drafts the plan) the client may have to take other measures to make the building safe.

8. I would advise the architect to use utmost care in designing the building plans, then supervise closely the construction of the building done by the contractor so that there is as little deviation from the architect’s original plans as possible. There is usually some deviation, but so long as the architect supervises closely he can minimize his liability for construction defects.

9. I would advise against signing the A101-1997 Dispute Resolution Agreement. Mediation and arbitration are both mandatory under this agreement. Arbitration can be extremely costly, because parties basically have to agree to allow or disallow discovery. Also arbitration often produces binding, non-appealable rulings that go against established legal principals. I would advise putting into the contract specific provisions for how to deal with any problems that may arise so that mediation and arbitration is not needed.

10. It would depend on what type of style house she wants. If she cares very much about having a unique style then I would advise a design-build. If she wants a very basic style that fits in with other homes in the area, and keeps costs down then I would advise a turnkey.

11. (a)Lump Sum, Cost Plus, and G-Max. (b)Probably a G-Max, as cost goes up so does the price, but only to a maximum, so this gives her a ceiling. There is some incentive to keep costs down, but not a great deal.

12. The plumbing contractor is the subcontractor not the contractor. If she is under contract she has to do everything under change order with her contractor, otherwise she’s in breach of contract. The best way to do it is to petition the architect to prepare a written change order, specify a price, and reach an agreement concerning the scope of the work to be done, how long it will take, and compensation. Then have the architect, owner, and contractor all sign off on the Change Order.

13. Whether the owner could have reasonable anticipated the crippling rainstorm is important to know. Liquidated damages are not a penalty to be inflicted on the contractor; they must bear an actual and reasonably estimable relationship to the Owner’s loss if construction is not completed on time. Also it would be good if there was a mention of excused delays listed in the contract to explain if heavy rainstorms would be an excused delay.

14. It might be unfairly penalized when he can’t get his work done because another subcontractor is delayed. Electrician can’t put in wiring because the painter has not finished painting the walls. Carpet contractor can’t go in until the electrician has put in all the wiring and fixtures. They may benefit for example when say everyone is being pushed back, it gives people at the end of the job more time to get their materials in and

allocate resources to other jobs and receive their payment, rather than having to wait for this job and thus payment.

Chapter 26 Questions

1. (a) A mechanic’s lien is a non-consensual, statutory lien upon real property improved by unpaid providers of labor and materials incorporated into the realty potentially resulting in a court-ordered foreclosure sale after court determination of amount and priority of lien.(b) Professionals more accustomed to dealing with complex contracts. Encouraging credit is more important for construction trades than for professionals. A product is tangibly incorporated into reality; unjust enrichment is more obvious. This avoids “frontier justice”: shooting people who don’t pay.

2.(a) The purpose is to afford owners, contractors and construction lenders an opportunity to identify and pay every potential mechanic’s lien claimant, many states require potential lienors to give notice that if unpaid, they could lien the property. The preliminary notice is given to the owner, contractor, and construction lender. If the notice is late, the workman might be limited to work done for a limited time before notice is given (20 days).(b) This gives everyone constructive notice that the lien exists.(c) The reason for strict time limits is that it is pretty easy to file a lien, but harder actually to sue; you do not want to allow lingering clouds.

3. (a) The reason is because of the parity of different work on the project. The people who use the backhoe are no more lien-worthy than the people who put in the kitchen-cabinets.(b) A has notice, so he is not a BFP. B/C/D’s lien relate back to the beginning of the work, so they are superior to A.

4. (a) The lien against the tenant’s interest is not worth much: all foreclosing on it would give the mechanic the right to be in the apartment, with the obligation to pay $1500 per month. Since that’s the fair market value, it is essentially a worthless market.(b) The owner never consented, so there is no right to lien against the landlord’s interest. There may be an unjust enrichment claim, but its disputable whether there really was enrichment, since the antique cabinets have been removed. If a manager had seen the work, notice might be imputed to owner.(c) In CA, the owner needs to post notice of non-responsibility for work within 10 days.

5. (a) To guard against liens recorded before closing she needs to check the records, and get title insurance. (b) To guard against liens recording after closing she needs to check the grounds to see if any work has begun. The reason for this is because under the relation-back rule, they will get priority from the time any work has begun. Remember Riverside Mission Inn fiasco. The moral was in states having a mechanic’s or construction lien laws as strict as CA,

property on which a construction mortgage is to be insured must be thoroughly inspected just prior to recording. If any evidence of commencement is found, consideration should be given to whether mechanic’s lien coverage will be available and if so, on what conditions.

6. To make sure she doesn’t pay twice she has to do several things:Select the contractor carefully Hasn’t been engaged in much litigation Is duly licensed Hasn’t had many serious complaints lodged against it with the

contractor’s licensing boardo Obtain from the general contractor a list of all subs and material supplierso Require general and prime contractors to promise to keep the property lien

freeo Record prime contract and payment bond for 50% or more of the contract

priceo Secure lien releases or waivers – don’t pay prime contractor until all

potential lien claimants have signed final unconditional releaseso Issue joint checks as construction progresseso Withhold “retainage” no final payment until lien period expired o Contract directly with subso Require payment and performance bondso Use construction-supervision firm to oversee disbursements

7. (a) The precautions the commercial lender should take are things like: Inspect site before closing, make sure no work has begun

Take photos and date them Record deed of trust before work has begun Get title policy insuring a first lien free of mechanics’ liens Have mortgage contain a provision securing future advances

necessary to complete project(b)The commercial lender should cite provisions for protection of security interest in order to justify lien priority, under Restatement (Third) or Property (Mortgages). (c) If optional/obligatory distinction is the law, and the advance is seen as optional, can get rid of later liens by foreclosing. You might also stop work and record notice of cessation, then wait for time period to run out on submitting lien claims. Either way, there will be a significant delay.(d) A statutory notice and judicial equitable lien would be very nice to have. A statutory stop notice is only eligible in a few states. In this situation the court tells the lender: Stop paying that money. Instead you should pay the workmen. Under an equitable lien you need to show fraud or some sort of detrimental reliance on assurance or assurance of creditworthiness or unjust enrichment.

Chapter 27 Questions

1.(a) To get the net present values: o Add up all the individual cash flows, discounted by interest rateo Be sure to add the reversion (present value of the estimated resale price of

the property)(b) Cash on cash return doesn’t include reversion and doesn’t account for the time value of money, but it does include all the individual amounts.(c) NPV is highly dependent on the interest rate, but takes account of everything

2.(a) Cash on cash return on equity = 10% = $100K / $1M(b) Of that, she borrowed $900K at constant (total debt service = interest + principal) of 9%:

Debt service cost = 0.9 x $900K = $81K Cash on cash return on equity = 19% = ($100K – 81K) / $100K Positive leverage

(c) In her constant is 12%: Debt service cost = .12 x $900K = $108K Cash on cash return on equity = -8% = ($100K - $108K) / $100K Negative leverage

(d) B projects positive leverage(e) The reason a real estate entrepreneur would knowingly indulge in borrowing that resulted in negative leverage:

o Might be no other way to do deal at all, and for some reason investor is bound to it

o Might want to limit cash involvement in any one deal for the sake of diversification

o Might hope NOI will go up and make leverage positive o Might have a really good deal elsewhere with a better rate of return than

the debt, so use debt to free up cash for that deal The relevant comparison is really between the rate on the

additional debt and the rate on the new project, even if the additional debt is attached to the old project

3. (a) 3 most commonly used approaches to real estate appraisal:o Compare cost to other similar propertieso Calculate the cost to build such a propertyo Calculate the present value of the future income stream of such a property:

income capitalization(b) For a house, use market comparison, since its hard to tell the cost & it doesn’t produce any income. For a shopping mall, use income capitalization, since it’s also hard to tell the cost, and there won’t likely be a lot of sales of shopping malls; people buy to produce income

4. (a) Direct capitalization assumes annual income is constant. Discounted cash flow changes in income.

(b) An investor should accept a direct capitalization analysis if they have a stable net operating income, or have no particular reason to think the net operating income will change one way or the other over time.(c) If there is more risk, then the income is higher.

5. (a) The insurer might have to pay more than the value of the land, if the property is also insured for replacement costs.(b) It could be a property tax benefit to use DCF method, not replacement cost, since it might result in a much lower value in property. The replacement cost method presumes that a building is worth at least what it cost to build, but that might not always be true.(c) He might be willing to pay more if he might be buying the business too, and it’s good to be able to keep it in the same place.

6.(a) Pro forma is a description of estimated income & expenses.(b) Assumptions from the book pro forma:

Assumes indirect or soft costs at 35% of project cost Assumes operating expenses will be $6 per foot per year Assumes cost of renovation is $70 per square foot Assumes certain loan terms: a state mortgage debt of $46.4M, a

stated interest rate of 8.75%, and full amortization in 30 years with annual debt service of $4.385M

Assumes purchaser assumes investor’s existing mortgages as part of investor’s exit strategy without mention of prepayment costs and limitations if investor does not

(c) Assignment of lease might bring in tenants with much more risk of default or more maintenance costs(d) If the cost of the property had been only $1M, instead of $11,125,00 (i.e. $4,735,000 + $6,750,000), then the return on equity would be astronomical at 201.5%. I.e. $2,015,000 / $1M(e) For the investor to have a good cause of action they need to show one of these:

Breach of fiduciary duty to disclose something Breach of some express promise Fraud Negligent misrepresentation of some specific statement of fact Misbehaving escrow agent

Chapter 28 Questions

1.(a) The Marginal rate calculates how much you pay on the last dollar earned. The average rate calculates how much you pay, divided by income. If the system is progressive, with increasing marginal rates, then some income subject to a lower rate, so average rate is less than marginal rate.(b) Basis is how much you pay for something. The higher the basis, the less tax when you sell. Adjusted basis is basis + improvements – depreciation deductions.

2.(a) 0: $1M income - $700K debt service - $300K maintenance

(b) Take the before-tax cash flow and add taxes. The IRS will see: A $250K loss!

o $1M incomeo $1.25 million deductions

$650K interest $300K depreciation $300K maintenance

What’s a $250K loss worth? At 30% tax rate, a reduction of $75K in taxes

o That’s worth up to $75K, depending on whether you have taxes to be reduced

o3. (a) She can deduct the $250K loss against the $10K rental “passive” income. She can’t deduct the $250L against the $12K dividends: “portfolio” income. She also can’t deduct the $250K against the $180K: “active” income. (b) Yes. If the active income is less than $100K she can deduct up to $25K if there’s a material participation in the management. The deduction disappears between $100K and $150K. There is also an exception for real-estate professionals.

4. (a) She is better off with a bigger loan since the loan is part of her depreciation basis.(b) An interest-only loan is better because it will maximize deductibility since principal repayment is not deductible.(c) If O buys a $3M shopping center: can include these things in the depreciable basis?

$1M personal savings: yes! $1M commercial bank loan: yes!

Even if it’s non-recourse, it’s qualified non-recourse debt $900K non-recourse loan from vendor: no!

Non-recourse loans from seller not included in basiso Policy rationale: this number could be fictitious

$100K market-rate loan from family member: yes! It’s market – rate, i.e. commercially reasonable

Total, $2.1 M depreciable basis

5.(a) Land itself isn’t depreciable, only the building, so you want as much as possible of the price to be allocated to the building. 39 years of commercial activity or 27 ½ years of residential activity is presumed to destroy a building. Land is NEVER destroyed.(b) To authenticate the land/building ratio:

Sale K Independent assessment Tax assessor

6. All other things being equal they prefer:(a) Residential to retail property, since you have depreciation faster. Residential is 27 ½ years and retail is 39 years.(b) Continuous patching because it is immediately deductible, but a new roof must be added to the basis and depreciated.

(c) Renovation to demolition. Demolition is part of land cost due to sudden casualty.(d) Projects where land costs are low fraction of project is preferred because the land is not depreciable.

8.(a) Relinquished property is property you sell.(b) Replacement property is property you buy instead.(c) Simultaneous exchange is when two parties directly swap properties. This is pretty rate unless both parties are entities controlled by the same person.(d) Delayed exchange is when you sell before purchasing a replacement property. 45 days to identify the property, 180 to close on it. You give the proceeds to a qualified intermediary in the interim. It can’t be a relative, employee, or agent (lawyer, accountant, or broker).(e) Reverse exchange is when you buy 1st then sell.(f) Like kind property is a restriction on what you can buy. Its pretty broad, you can buy almost anything.(g) Qualified intermediary is almost anyone who is not unqualified.(h) Unqualified intermediary is a lawyer, broker, or accountant.(i) A boot is personalty, cash, or cancellation or indebtedness received in exchange. You pay tax on it immediately.

9. (a) Sellers of real estate stand to continue in interim to earn income on the portion of the gain that would be used to pay taxes. (b) Drawbacks: why only 40% try, & some try and fail

45 & 180 day time constraints Can’t get to funds in interim: qualified intermediary rule Must avoid taxable boot Carry old basis forwards, so lose chance to establish new

depreciable basis from acquisition price Can’t exchange merely partnership or LLC interest, but only the

realty itself If a partnership or LLC wants to do a § 1031 exchange, all

the partners have to agree, since they aren’t taxable entities – they get pass-through taxation

Chapter 29 Questions

1. Personal residence? Hold it individually in order to claim home mortgage interest deduction & capital-gain tax exclusion. Property used in trade or business? Want the same entity that has the gain to also be able to take the depreciation deductions.

2. (a) Avoiding liability of entity for investor’s liabilitieso Corporation is the best

Keeps entity assets away from investor’s creditorso Next best, LLC or general or limited partnership

Creditors might get charging order: foreclosure on a partnership interest

That gives the right to profits from a partnership share, but not right to management

o Worst, tenancy in common Any co-tenant’s creditor could get court decree forcing sale of

asset to pay debt(b) Avoiding liability of investors for entity’s liabilities

o S Corp. and LLC are the best Full shield for liability

o Next best, tenancy in common Might get lien against property for improvements, but no personal

liability for con-tenant’s misbehavioro LP, projects limited partner but not general partnero General partnership, worst

Each partner liable in full for each other’s liabilities related to business

(c) If the entity goes bankrupt, the creditors go first, before owners of equity, so later creditors will want the initial-money people to be characterized as owners of the equity. Why might that be? Generally if the business is significantly undercapitalized, or leaves the business without any invested equity.

3.(a) C Corps the only one who pay it. Example is Corporation makes $1M profit, then pays 30% in corporate income tax, then distributes the $700K to investor, who pays individual 30% tax once, yielding $700K after-tax income.(b) Even with C Corp, can avoid having big income: 61% of them have no income, 37% just $50K

Pay profit out in “salaries” Pay profit out in “rent” by having investors own property Treat investment like a loan and pay “interest” on it

(c) S Corps and REITS escape double taxation at the cost of lots of rules. Contractual limits on S Corp investors selling interest to non-resident aliens or chopping up into pieces to make over 75.

4. (a) Under a general or limited partnership, or LLC they each have a $500K basis. If no one is personally liable, everyone gets a chunk of basis. If everyone is personally liable, everyone gets a chunk of basis. If some are personally liable only they get a chunk of basis. Under an S Corp, no pass along of basis, so each has $100K.(b) S Corp investor could guarantee the loan, thereby assuming personal liability and getting the basis.

5.(a) Hold interest through a corporation or LLC to minimize liability.(b) Buy the property from the entity and rent it back for $200K/year (better if thought about it in advance).(c) Enter into a partnership (or LLC) with him with the S Corp itself as a partner.

(d) Get a put – a type of option conveying the right to get the REIT shares in the future, instead of getting the shares right now

Tax deferred until the put is actually exercised This will generally be with an UPREIT: umbrella

partnership between the REIT and another partnership(e) REIT wants to get income from casino, hotel, racetrack?

Don’t run it yourself – lease it to a separate entity that runs it

6. (a) In an LLC everyone is shielded from personal liability. In a general partnership no one is shielded. In a limited partnership only the limited partnerships are, and they have to worry about meddling too much, lest they be considered general partners. LLC’s allow simultaneous control and limit liability.(b) Some states tax LLC’s like corporation, or have franchise or transfer taxes, though the federal tax is the biggest concern.

7. In a general partnership, but not TIC, there’s personal liability for what the other party does in scope of business

o In TIC, but not GP, immediate right to reimburse for operating expenses For both, deferred right to compensation for improvements until

sale or end of partnershipo Co-tenant can sell interest in property, but not property itselfo Con-tenancy, but not interested in GP, can participate in § 1031 swap

8. Want to allow one partner to buy the other’s interest out down the roado Need to set a price, & choice of methods:

Independent appraisal Set a price in advance, plus interest Give a right of first refusal – right to match any offer someone else

makes Give a right of first offer – right to accept some price

9.(a) REIT restrictions:o Top 5 owners can’t have more than 50% of assetso Greater than or equal to 75% of assets must be in real estateo Greater than or equal to 75% of earnings from passive sources:

Rents, mortgage interest payments, appreciationo Greater than or equal to 90% of earnings distributed to shareholders

annually(b) Reason for these restrictions:

Limit to small investors in a mutual-fund-like setup Not for big guys just looking for tax shelter Prevent competition with real-estate firms taxed at entity level

(c) REITS have found ways to generate huge internal tax-free cash flows they do not distribute to their shareholders. Consolidation of small REITs into much larger ones increases the absolute size of undistributed cash flows. Using these funds aggressively to

achieve rapid growth, the best REIT managers should no longer be regarded as passive managers of realty portfolios.

10.(a) Benefits to a REIT: Easier to sell Diversified Transaction costs, cost of borrowing low Don’t have to manage property Don’t have to put up as much money Less hassle – don’t have to pick out the property oneself

o Benefits to buying directly Get to pick out the property oneself! Can accumulate paper losses through depreciation deductions

while having actual positive cash flow Don’t have to deal with other people, who may be crooks

“The more I see of men, the better I like my dog”(b) Depreciation deduction still allows the REIT to invest the money that would’ve paid taxes, and can distribute money that reduces investors’ basis, allowing tax deferral – so it’s still a big tax benefit, just not a freely mobile tax benefit.

Chapter 30 Questions

1. The pros of it are you can get a fixed term for life, with life term bank is essentially selling insurance and they will charge for bearing that risk. The cons are closing costs will be higher than the conventional mortgage loan. It is calculated as if the entire principal is to be paid at once.

2. Graduated payment mortgageo For someone who is pretty sure he’ll have a larger income in a few years,

but wants to live today like he has tomorrow’s salary The other way to go: buy a smaller residence now and move up a

few years later if you actually want to be a partner That has costs for selling, but is probably more responsible

3. (a) Use a SAM when expected appreciation is more than inflation!(b) Homeowners tend to think their properties will go up in value, and want to keep gains over inflation.

4. Participating Loan: Lender gets a fraction of NOI, or a share of equity Lender is involved at the start & needs to pay close attention to

management & details of businesso Convertible Loan:

Lender gets option to purchase during window period Lender not involved in equity until exercise of option

Might be clogging-the-equity-of-redemption issues, as there is any time the bank can get a property quickly

Some states have declined specific performance of options on this ground

Some states, statutory safe harbor for convertible mortgages

o With either of them, borrower gets lower interest rate & higher LTV (i.e. lower down payment)

5. Equity sharing v. second mortgage loano Scenario: Dad thinking about loan daughter & son-in-law money to make

down payment, or maybe sharing some of the equity in their homeo Some things the same with either method:

With either method, Dad can get share of appreciation, if mortgage is SAM

Claim to security property will be subordinate to original mortgage loans

o Differences: Equity-sharer has liability for property taxes, insurance premiums,

maintenance and tort exposure Equity-sharer has tax advantages of owner of rental property

Can deduct share of:o Operating expenseso Mortgage interest paymentso Depreciation deduction

Equity-sharing interest would be junior to later interest, like mechanic’s liens, but a loan would be superior

Mortgagee can foreclose, but equity-sharer limited remedies Example: If there’s a divorce

6. Second mortgage loan v. buying & selling on long-term installment K?o Same scenario with Dado Remedies may be swifter if state will enforce installment-sale K as written

Some states, he’d have to win a quiet title suit (which can take a long time), not jus evict under a detainer action (which is usually much quicker)

o If K recorded, might be difficult to sell land until there’s a releaseo For installment K, dad would need more money up front

7. (a) Remedy: right to evict as if a tenant.(b) No responsibility to reimburse for repairs, and no reimbursement for improvements unless authorized in advance.(c) At the time of sale or refinance, the return of invested capital first before payment to Mr. Occupant.(d) No right by Mr. Occupant to buy out Mr. Investor’s interest.

8.(a) Advantages to WA mortgagee: Avoids risk of borrower default & senior lender accelerating If rate on WA mortgage is higher than 1st mortgage, much higher

returns Borrower can’t prepay 1st mortgage without prepaying WA

(b) Advantages to WA mortgagor: Consolidates payment, one-stop shopping Lower rate than straight 2nd mortgage Can borrow against accumulated equity even if 1st mortgage bars

prepayment(c) How does the WA mortgagee do better than a conventional second mortgage while WA mortgagor pays less interest?

Marginal reduction in risk of default, skillful arbitrage(d) Who gets the surplus if WA mortgagor forecloses?

“True debt,” goes to debtor (Restatement 3rd of Property Mortgages)

“Outstanding balance,” goes to reduce 1st mortgage

9. (a) He might be looking to mezzanine loan because a second lien on the property may be prohibited by the contract with the 1st lender.(b) It will probably be the shares he owns in equity of the commercial real estate property.(c) Mezzanine lender will care about the management because they might become owner of the entity – you always care about the debtor’s ability to make payments in the future.(d) The lenders acknowledge receipt of a copy of terms of each other’s agreements with the borrower and pledge to honor each other’s agreements with the debtor. The mezzanine lender agrees to attorn to the first mortgagee if it acquires title to the realty and the senior lender agrees to accept the mezzanine borrower’s equity interest. The mezzanine lender subordinates any interest it may be deemed to have in the security property to the senior lender’s mortgage lien and receives in return the right to notice and the chance to cure defaults of the senior debt or purchase it following the Senior Lender’s acceleration.

Chapter 31 Questions

1. Basic differences among leases as financing devicesa. Ground lease:

Landowner leases land for long term to developer who usually constructs improvement

o Sale leaseback: Landowner sells facility it was occupying for operation of business

& leases it back for a long termo Islamic mortgage:

Lender takes title, turning the “interest” into “rent” with the borrower taking title at the end

Avoids prohibition on taking “interest”o Synthetic lease

For tax purposes, treated like a loan, not like a lease The beneficial owner is the entity that is, for accounting

purposes paying rent For accounting purposes, it is treated like a lease Motivation: to make balance sheet look better for accounting

purposes, by reducing the amount of equity, which for example improves return on equity ratio

This is a little dodgy

2.(a) In a ground lease you have at least 3 parties and up to 5. You have the owner of land (ground lessor), the owner might have a mortgage lender, the “fee mortgage,” developer (ground lessee), and you also might have tenants (sub lessees)(b) Effect on D’s acquisition & development cost & leverage:

Less land acquisition cost: Ground lease functions as 100% financing of the land cost

More leverage: D’s initial cash outlay usually minimal, leveraged rate of return increases dramatically

More tax shelter: D can deduct all rent as operating expenses and also depreciate building D constructs; with purchase money mortgage loan, only interest component deductible

Not as good for O: Lease payment taxed at ordinary income rates to the seller-lessor, but repayments of principal on vendor financing usually taxed at capital gains rates

If O puts higher value on the reversion interest in the loan than D does, rent may be lower

3. Scenario: ground lessor O defaults on mortgage: can the purchaser at the sale be free of the claims of the leasehold mortgagee (D’s lender)?

1. If O’s mortgage is earlier than the ground lease, Yes: purchaser gets title as good as time mortgage was made, and that’s ground-lease-less

2. If O’s mortgage is after ground lease and leasehold mortgage, No: at the time of the mortgage, title subject to the ground lease

3. If O’s mortgage is after ground lease, but before the leasehold mortgage, then No: if the title is subject to the ground lease, then D can mortgage that interest

i. D’s mortgagee stands in his shoes: like the shelter doctrine from the title-priority rules

4. (a) For the seller: i. Selling, cash now, but leasing, monthly payments

ii. Tax on gain: have to pay tax on that cash; ground lease defers tax as well as money

iii. Appreciation over course of lease: selling loses opportunity of reversion

iv. Getting money over time is riskier: getting it all now saferv. Sale is less complicated, easier to negotiate & close

(b) Why developers usually prefer to buy:vi. Ground leases are difficult to negotiate and complicated to

administervii. Most Ds don’t want another deal participant, O

viii. Tenants might not like the complexity and riskix. Most Os want cash now, and don’t want to be landlords to

a developerx. Lenders will charge premium, or not do that at all

xi. Down the road, easier to sell pure fee than leasehold, and might need to sell if project is obsolete before term ends

5. (a) Get a promise from the Owner not to disturb R’s occupancy if R complies with a sub-lease, even if D defaults on ground lease. You might also make contingency arrangement with O for a new lease. You at the very least should get a notification of breach by the developer(b) The retailer wants a promise from the owner to honor sub-lease even if the developer goes bankrupt

6. Scenario: A buyer facility from B and leases it back, why is that better than a traditional mortgage?

Advantages for Seller/Lessee (B): Off-balance sheet financing: Removing assets from

balance sheet improves stated return on assets, return on equity, and equity-to-debt ratios

o Lease won’t appear as liability on the tenant’s books if it’s operating lease

o Lease payments can fully amortize the debt by the end of the lease term

More cash: 100% LTV; B may be able to borrow a larger sum this way

o Price based on lease terms and B’s solvency, not FMV

o Low rent if asset’s value rises Flexible duration

Advantages for Buyer/Lessor (A): Reversion: A gets value of the site unencumbered at the

end of lease term Ease of termination: A can terminate B’s ground lease

interest summarilyo But possible clog issue, if characterizes as equitable

mortgage! Protections against declines in value: Set rent based on

present data (interest rates, rent levels, B’s credit, and value of realty)

It increases yield to compensate for high LTV, greater risks and costs.

7. (a) Lease (ground lease)(b) Equitable mortgage(c) Equitable mortgage(d) Equitable mortgage(e) Joint venture(f) Joint venture(g) Lease or equitable mortgage(h) Lease or equitable mortgage(i) Lease(j) Joint venture(k) Equitable-mortgage

Chapter 32 Questions

1. Advantages to one drafting the leaseo Much better to be using your own form:

Know it much better Know how to modify it better Can run over 100 pages Complaining about provisions in someone else’ form lease can

spend time and negotiating leverage

2. (a) The reason to purchase title insurance for the tenants is that the landlord really owns the place, they have the authority to rent it, and also you want to make sure the landlord entitled to rent the property to you with no weird covenants(b) Personal guarantee from individual lawyers, issue a letter of credit that gradually “burns off” as rents come in, big security deposit could do the same thing, in bankruptcy landlord is usually limited to 1 year’s rent as damages

3.(a) Yes, you don’t want just anyone as a tenant because they might have bad credit. Legal points become business points once a contingency actually arises(b) Financial responsibility, what the tenant plans to do with the space, you can prevent assignment for poor ability to pay rent, or for uses(c) Landlord would want specific performances, and to raise damages. He would want it limited to taking the new tenant. Tenant would want to include consequential damages – lost profits, delay etc.(d) “Recapture” provision: allows landlord to reclaim premises rather than allow assignment and sublease, or else allows landlord to get some share of the increase rent

4. “Usable” square footage will exclude spaces not for tenant’s exclusive use, so it will be less than “leaseable” square footage. If you have a skyscraper you may have more square footage than leasable square footage.

5. (a) Landlord insists on overseeing the work, since it’s his building – obviously cares about what the building will be like when the tenant moves out, even if the tenant likes the improvement(b) Tenant can make sure improvements are good with lease provision and work letter(c) Lease will be unenforceable for vagueness if no agreement on how to share costs

Subsequent negotiation will depend on how good the other lease terms are, relative to the market:

Can tenants do just as well elsewhere? Can landlord find just as good as a tenant?

6. (a) Lease promises of parking generally don’t guarantee particular reserved spots, but they do require good faith efforts to allow enough space for tenant to have that many customers. Only if it is in the agreement(b) If the landlord promised it then he does have a duty. Maybe he could reduce rent in exchange for less spaces

7. Depends on what kind of lease it is. Want it to be long enough to capitalize improvements

Apartment lease, just move stuff in and out, so 1 year is enough

Office lease, might do more stuff, like carpeting and paint Department store, landlord wants to lock in to have anchor

for mall Ground lease, need to capitalize the whole building, so 60-

99 years

8. Expansion v. Renewal Rightsi. Giving a tenant the right to expand means leaving space available,

and that might mean either kicking out another tenant or leaving it empty

ii. Renewable rights just allows expansion in time, which is much more convenient – would have to find another tenant at the end of the term anyway

9.(a) The developer will want rent to start as soon as he has to start making payments on his loan, usually at time of “substantial completion.” Probably time tenant comes in and starts making his share of improvements. Tenant will want to start paying rent only when his own improvements are done and the store is open for business(b) Might compromise by having partial rent during the final stages of construction(c) Damages for delay?

Tenant would want lost profits & other consequential damages Landlord would want just reduction in rent, extension of lease

10. (a) Doesn’t show up much in office leases, since that’s not so dependent on foot traffic. People don’t decide to sue someone because they are near a law office(b) Natural breakpoint is how much gross income is needed until percentage-rent provision kicks in. (c) An example is if the minimum rent is $1K and percentage rent is 2% of gross, then natural breakpoint is $50K - $1K / 0.02(d) Because it’s easy to make net very low, an example would be by paying higher salaries(e) Things excluded from gross are things the store doesn’t make profit on like “loss leaders”

11. Allocating common-area-maintenance costso Might just divide 50-50 between the two tenants and negotiate rents to

accommodate one of them getting more from the common areao Might divide proportionately according to total rento Might divide according to respective use of common area

12. (a) Lease terms on scope of tenants’ operationso “Exclusive” clause: no other tenants doing the same thing

Law firm wouldn’t care about that, and retailer probably wouldn’t care much – there are other retailers nearby anyway

o “Co-tenancy” clause: would require that landlord keep the same other tenants

Law firm and retailer would only care a little bit – to the extent that space isn’t rented to someone who looks too low-class, someone making noise, or something like that

o “Use” clause: restrict other tenants’ uses Law firm and retailer probably only want limit on noxious or low-

status useso “Continuous use” clause: keep space occupied

Law firm would like not to have a vacant store on ground floor, but retailer won’t care much if the law firm is closed for a few weeks

o “Radius” clause: tenant can’t operate another place within certain distance Landlord might want if he’s got percentage-rent deal with retailer

Wouldn’t have one with law firm(b) You could have a provision saying no other shops primarily engaged in sale of coffee or tea(c) Provision for snack shop, dry cleaner, flower shop or first floor?

Continuous use, open 9-5 (or 7-3 for snack shop) when people in tower need services

Use clauses making sure they provide these services & not completing with others in building

Limit assignment to people willing to provide some services

Chapter 33 Questions

1. Land use due diligenceo New homebuilder wonders if his plan is politically feasible!o What to do:

Inspect the site, see if the other uses nearby are compatible Imaging what the neighbors might be upset about See what legal hurdles there might be:

Anything required besides building permit? Might need to hire planning lawyer or consultant: ask about

o General plan?o Zoning ordnanceso Subdivision map controls

See what history of past controversies has been Meet lawmakers and neighbors and solicit their views

2. (a) People with 5 acre lots to N Probably put low-density buffer zone on boundary – park,

landscaping, lower-density houseso Houses to W: Crowded schools, on-ramps, no libraries

Can offer to pay for improvements, or sell land for schools or libraries to town at a good price

Under Nollan & Dolan, they can’t be required to fix current difficulties in infrastructure, but can help make the deal look good to the town

o Government’s power to just say no can make assertion of Nollan and Dolan rights counterproductive

Need road improvements Might need gated communities if neighbors are concerned for

securityo Farmers to S & E: would like sewers and roads

Might pay for bigger infrastructure now, but provide for the farmers to contribute if there’s more development later

(b) Binding developer to concessionso Neighbors can enter a written K with developer, with recorded covenants,

conditions and restrictionso Put conditions on developer’s rezoning or other required land use

approvalso Have development agreement between the local government and

developero Persuade local regulators to impose conditions on the developer’s

subdivision tract mapo Neighbors might have tort claim for developer fraud, or a contract implied

in fact, but hard row to hoe

3. Mayor’s daughter gets law firm job!o Probably no need for mayor to rescue himself from decisions involving

law firm’s clientso Generally conflict-of-interest rules apply to situations where there’s

actually a financial interest at stake If she were a partner, that might be different, but for associate,

probably OK to participateo Courts more likely to intervene for adjudicatory-type decisions

(conditional use permit, subdivision map approval, variances) rather than legislative-type ones (rezoning, rezoning amendment, adoption of general plan)

4. Suing exaggerating neighbors for defamation?o After they’ve already stopped project, won’t accomplish anything

Might deter neighbors of future projects, thougho Is a mere exaggeration about traffic & c, defamatory?o Is there proximate causation of harm, given that influence on government

is only effect?o NYT v. Sullivan 1A limits on defamation: if public concern, higher

scienter requirement (knowing falsity or lack of concern for truth)o Is there an anti-SLAPP provision that would allow summary dismissal of

action?

5. (a) 4 ways to pay: General fund Special assessments of present homeowners Special taxing districts of development land Developer impact fees

(b) Developer will support bond issues, since he doesn’t want to pay for himself(c) Nollan-Dolan: exaction must be in rough proportion to the cost imposed by the project(d) Some states allow developer to pay fee under protest, reserving right to sue later, but elsewhere, must refuse to pay(e) Asserting Nollan-Dolan rights might cause government to just disapprove project

6. Why do people like zoning?o People generally like to live where there are only other houses aroundo People generally don’t like a lot of densityo Keeping housing prices up can keep wealthier people in, who care more

about education Might be an element of pernicious class-based hostility to the poor

o Keeping retail and industrial uses away is more pleasant: traffic, noise, odor, lights, crime

o Zoning can help preserve some landscaping

o Publicly-provided protection, unlike deed restrictions and nuisance suits

7. (a) Why? Lessens traffic congestion Space between buildings, less fire-spreading risk, more light and

air No overtaxing of shared aquifers Keeping pace with available infrastructure

Roads Schools Sewers Water supply

o How? Limit occupants per dwelling unit Limit units per space (minimum lot sizes) Maximum heights, minimum setbacks Floor area ratio (FAR): square feet of floor per square feet of land

(b) Floor area ratio (FAR): square feet of floor per square feet of land(c) Tradable development rights (TDRs)

o Allow developer to do a project one place because he can’t do one somewhere else

o Moves density from one part of area to anothero Doesn’t prevent a single high-density area, but can preserve historic

buildings & open spaces(d) Can still control the total density of an “entire” area, if that’s the concern

8. (a) Use allowed, but must have lots of process before specific plan approved Public hearings, exhibits, notice to neighbors

(b) What sorts of conditions for golf & racquet club on former landfill, now in single-family zone?

Clubhouse designed to look residential, decent distance from other homes, screened by landscaping

Curb cuts to minimize neighborhood traffic flow Limits on size and frequency of special events like weddings Limits on annoying signage

9. (a) CUP is a process added to approve specific plan, but variances is an exception to an existing prohibition

(b) Variance wouldn’t be constitutionality compelled if there were still some use for the property

Might make a case that it is, if can’t build houses because of flood plain

10. (a) Standard Euclidean zoning separates uses, but mixed-used zoning mixes them Can walk to get groceries, more interesting places to work and live

Like living in NYC, which some people do want to do

o Standard zoning fosters uniform lot sizeso Mixed-use can allow developers to transfer density around to different

parts of a site(b) PUD projects require review of all of the specifics, more hearings, more discretion in government

Can be unpredictableo PUD project next to residential area might lead to higher densities, smaller

lot sizes, shorter setbacks, taller buildings

11. Urban growth boundary: line separating developable form open space preservation areas

o Growth cap: limits the number of units that can be built within jurisdiction in a specific time frame

o Concurrency planning: infrastructure must be in place before projects can be approved dependent on that infrastructure

o Consistency: zoning and subdivision approvals must be based on adopted general plan; all elements of the general plan must be internally consistent with each other

12. (a) Scenario: homeowner plans to subdivide and produce 2 lots, but change in lot-size requirement prohibits, cutting value in half

o Typically no vested rights unless owner has done something specifically in reliance on old zoning classification (e.g. start to build 2 houses)

Some places allow compensation for lesser forms of reliance(b) To avoid problems, get old owner to agree to refund some of the purchase price,

or buy back parcel, if plans are made impossible

13. Federal environmental regulationso Clean Air Act: creates regional air management agencies for “non-

attainment” areaso Clean Water Act: must get permit from Army Corps of Engineers to do

almost anything involving water (e.g. digging a ditch)o Endangered Species Act: Department of Interior can stop projects that

threaten habitats Sometimes can proceed with a Habitat Conservation Plan (HCP) Sometimes produces incentive to destroy forest before finding out

if it had an endangered species on it Example

o ESA gives landowners a perverse incentive to destroy evidence and habitats, rather than participate in conservation. The threat of severe restrictions on land use prompts landowners to make their lands inhospitable to rare species

Chapter 34 Questions

1. Types of cities’ land development projectso Upgrading downtown, removing “blight” and bringing in higher-value

propertieso Producing more low-cost housing

Vouchers work way better than housing projects Governmental funding, with private choice of where to

spend it, works much better than governmental supply o Beautification: lighting, landscaping

Alone, doesn’t pay for itself, but might help to make better environment for more investing

o Economic development: bringing in outside investors to create jobs for people living there

2. (a) Takes the increases in tax yields and gives it to a redevelopment agency to cover its expenses

Previous recipients (school district, county) get either the same amount of money, or some percentage each year to keep up with inflation, or a fraction of the increase that the agency would get

After redevelopment agency’s bonds are repaid, the former recipients of tax yields get all the money again

(b) Seldom feasible for the poorest of the poor, because just removing old buildings doesn’t help the tax base at all

Must replace them with higher-valued properties, and the existence of a blighted area suggests there isn’t the demand for those properties in the first place

Example: can we “over-improve” an area, spend more building than property worth

(c) To be sure to get tax increment, agency can make a deal with the developer Must get done by next assessment If tax revenues don’t increase, will pay fine of same amount

o Incentive to choose projects that would’ve happened anyway(d) Can use government bonds to fund, since municipal bonds have tax advantages and governments get special lien properties

3. (a) The problem of TIF diversion of revenues: Redevelopment doesn’t create demand, it just draws demand from

other locations Enormous pressure on the redevelopment agency to select projects

that would have succeeded even without redevelopment Systematically drains the tax base from other taxing entities

Redevelopment agencies have a tendency to prolong their indebtedness by refinancing, delaying return of increment to other entities

(b) Responses to problems:

Other taxing entities continue receiving tax revenues just as they did before the project area boundaries were set, multiplied by the current tax rate

But for the intervention of redevelopment, property values in a blighted area might’ve continued to slide, to the detriment of the other taxing entities

Other taxing entities have little to lose Hope is that redevelopment will jump-start private renewal activity

immediately adjacent to the project boundaries, increasing the tax base of other entities too

o Would be good to have a system that will only approve projects that wouldn’t have gone through anyway or else projects that other entities

4. (a) Early federal rules said the agency must own the land first before talking to developer, but that requires agencies to bear a lot of risk that deal wouldn’t go through(b) RFP: very detailed request for proposals, lots of requirements

o IFP: less detailed invitation for proposal, only lists basic goalso RFQs: request for qualifications, just ask for resumes of developers

(c) OPA: owner participation agreement, when the redeveloper already owns the landDDA: disposition and development agreement, when the redeveloper doesn’t already own the land – “disposition” is the selling-to-developer phase

5. (a) Motivation is a lot like the motivation for letters of intent rather than full contracts: because the full contract needs a lot of details filled in, and we want to get things moving before then(b) Hazard of exclusive-negotiation deals: could have complaints about good faith, or suit for specific performance

Agreement should recite clearly that it’s not a binding final contract

Have a limited time for negotiation Define what exactly “good faith” requires and doesn’t require:

responding to calls and attending meetings, not cutting off all conversation with any other developer

6. (a) If a developer wants a particular return guaranteed on its investment, it’ll have to submit its books for inspection, to make sure money isn’t getting drained away on salaries & c.(b) To implement provision giving half on tax increment to Wal-Mart:

Structure it as a loan, where ½ of the increment in tax revenue can be treated as paying off the loan, that way there’s still an obligation if the tax revenues don’t go up

Need to count the increase in tax revenue, but also subtract losses in other tax revenue nearby

Then divide by 2 to get what Wal-Mart can treat as a loan repayment

7. (a) Most will be perfectly happy to have eminent-domain power in government Aren’t a lot of buyers out there for these properties, so the prices

will be above-market virtually all the time Tax advantages under § 1033, all the benefits of § 1031 but very

little of the procedural rigmarole(b) Some landowners can resist: they don’t want to move

Emotional ties to house, neighborhood, friends, institutions Business has goodwill tied up in particular location Might try to extract higher payment from government or another

developer(c) Standards under takings clause “public use” requirement are very loose under Kelo – economic development is enough, and even before that, blight-removal was enough Midkiff authored by Kelon dissenting SOC(d) State courts’ standards generally also very loose under state-constitution takings clauses

Some exceptions – Michigan, Oklahoma Not generally construed to be gifts of public money (barred in

some state constitutions, including Mississippi’s) as long as there’s some sort of economic development quid pro quo