Brown McCarroll | Blogs | Real Estate Blawg

Should Your Lease Include an Arbitration Clause?

2012-05-21T20:06:17+00:00

Arbitration clauses in lease agreements have become commonplace and are often included as a matter of course. In theory, arbitration is supposed to be less expensive, provide faster results, and generally be more efficient than traditional litigation. In reality, many have found arbitration to be just as expensive as litigation, if not more so, and ultimately less efficient. Litigation and arbitration each have their advantages and disadvantages. View this article, originally published in the CCIM Central Texas May 2012 newsletter, here.

New Day for Groundwater Rights in Texas (Part 2)

2012-03-16T21:44:34+00:00

Here are some of the likely effects on landowners of the new Edwards Aquifer Authority v. Day decision by the Texas Supreme Court:

(1) Landowners within the jurisdiction of the Edwards Aquifer Authority, who prior to this thought that they had no hope of pumping more groundwater than allowed by permits based on their historic use, may now have the power to force the Authority to revise its rules to allow them the right to pump more groundwater or else pay them the value of the pumping rights denied.

(2) Correspondingly, the Edwards Aquifer Authority may have to either (i) revise its rules to reopen its permitting process to landowners previously ineligible for withdrawal rights, and thereby diminish the value of permits previously issued only to those who could demonstrate the requisite historic beneficial use (most likely by reducing the amount that each permittee is entitled to pump), or (ii) expend such large sums of money on compensation and costs of litigation that it will have to raise the fees charged to its existing permittees to painful, unanticipated levels.

(3) Groundwater Conservation Districts throughout the state may have to revise their rules for allocation of pumping rights in order to manage the groundwater determined to be available so as to attain the “desired future conditions” required by amendments to the Texas Water Code in 2005.

(4) Correspondingly, a landowner in a District who has been denied a withdrawal permit, or who under existing rules may not have applied, may have a constitutional “takings” claim like that recognized by the Court in the Day case that he or she can press for either just compensation or amendment of the District’s permitting rules.

(5) The value of previously granted groundwater rights that have been traded or held for future trading may have been diluted, to the extent that their value was based on privileged pumping rights denied to others within the District who could not demonstrate the requisite historic use.

The market for sales and leases of groundwater in the state has been placed on a more solid foundation by this recent court decision, but other factors and the possible effects listed above make this arena complex.

New Day for Groundwater Rights in Texas (Part 1)

2012-03-14T20:38:02+00:00

On February 17, 2012, the Texas Supreme Court held in Edwards Aquifer Authority v. Day that land ownership in Texas includes ownership of groundwater in place that cannot be taken without adequate compensation. In the specific context of the Day case, this meant that the EAA could not deny Mr. Day the right to pump groundwater from his property overlying the Edwards Aquifer for failure to show that he put groundwater “to beneficial use” during the 20-year historical period ending May 31, 1993, without being subject to a “just compensation” claim under the state constitution.

Although the effect of this decision is greatest on the Edwards Aquifer Authority and landowners within its jurisdiction – both those currently holding withdrawal permits and those previously not deemed eligible for permits – its implications extend to virtually any landowner in the state and to all of the 96 Groundwater Conservation Districts that currently regulate 90% of all groundwater produced in Texas. In the next post, I will explore some of the likely effects of this decision.

Mechanic’s Liens – An Easy Step to Start Your Project Off Right

2012-02-21T03:27:40+00:00

With development picking up, this seems like a good time to remind my developer and general contractor friends to take this simple step to help protect yourself if you get into a fuss over mechanic’s liens in Texas.

File an affidavit of commencement within 30 days of starting your project.

This is an easy step that you should have on your construction checklist as a developer or general contractor. This makes things easier for your attorneys if you have a dispute later on with subcontractors or suppliers.

In Texas, most subcontractor’s or supplier’s liens actually go back to when construction first started or materials were first delivered to the site. This applies to all the subs and suppliers on a project, even the ones who don’t do any work until later on.

As an aside, this is one of the reasons that your lender insists on filing the mortgage/deed of trust before anything is delivered to the site. So make sure that the work doesn’t start, materials are not delivered, and your affidavit of commencement doesn’t show a date before your lender files the mortgage/deed of trust.

The affidavit of commencement helps you prove when the work first started or materials were delivered. You only have 30 days from the time that construction started or materials were delivered to file this affidavit. There isn’t a specific form that you have to use; however, there is some basic information from Section 53.124(c) of the property code that you need.

It isn’t fatal to your project if you forgot to file this affidavit, but if you end up with any mechanic’s liens on a project, it can make it a little easier for you and your attorney if you file this affidavit.

And isn’t making life a little easier for your attorney what it’s all about!

Quick Tip – Want to Speed up your Sales? Use an Access Agreement

2011-07-22T21:31:44+00:00

Here’s a way to speed up your sales that I think more sellers should consider…

Use an access agreement.

Most sellers and buyers don’t start the buyer’s inspection period until they’ve negotiated a purchase and sale contract. Why wait?

An access agreement allows the buyer to start doing its due diligence while you’re negotiating the purchase and sale contract. An access agreement has 2 main components:

Inspections: First, it lets the buyer enter the property and do its physical inspections. It has the typical insurance, indemnity and other seller protection provisions from a purchase and sale contract.

Confi: Second, it has confidentiality provisions so a seller can give the buyer whatever reports and other due diligence items it has.

I’ve had several people tell me that it may take longer to negotiate the purchase agreement because the buyer may focus more on due diligence than negotiating the contract. I haven’t had this happen to me with my deals. But, even if this happens, so what?

Let’s say an LOI gives the buyer a 30-day inspection period and it would normally take 10 days to negotiate the contract. Who cares if it takes you 20 days to negotiate the contract because the buyer is more focused on due diligence? You still come out ahead because the inspection period has already started.

Incidentally, if you don’t have the inspection period running simultaneously, then I think access agreements aren’t worth it.

Save Money on Title Insurance on Your Florida Deals – Ask for the Butler Rebate

2011-07-01T19:06:02+00:00

Here’s a tip that can save you money on a significant portion on your title policies in Florida. Ask for the “Butler Rebate.”

This refers to a Florida Supreme Court case[1] dealing with an anti-rebate law. This case ultimately helped title insurance companies to offer discounts on the cost of title insurance in Florida.

According to one of my title insurance buddies, a lot of title companies won’t tell you about this rebate. You’ve got to ask for it. If your title insurance agent is telling you about stuff like this without you having to ask, that means you’ve got a keeper.

She says this rebate helps them compete with Florida attorneys with title offices who offer to do the legal work on a deal at a discount if they get to issue the title insurance. I’ve run across this in Florida before, although your experience may vary.

[1] Chicago Title Insurance Co. v. Butler, 2000 WL 1535354 (Fla.2000)

Do You Really Need Table A, Item 20 on Your ALTA Surveys?

2011-06-17T17:28:36+00:00

Here’s an idea that could save you some time and money on your ALTA surveys…

I read this blog post from Vincent Macauda at Millman Land LLC dealing with a new Table A option for ALTA surveys.

New Table A, Item 20 for ALTA surveys deals with offsite easements that benefit the property. I agree with Vince’s premise that in most cases, you don’t benefit much from requesting this new Table A item.

You can still have the surveyor show these types of easements on your survey. Asking for this new Table A item means the surveyor has to do additional field work instead of being able to simply do the work in his office. That will cost you additional time and money in most cases.

Also, I think he has a great point about how your survey could get out of control for a parcel located in a shopping center if you ask for this new Table A, Item 20.

On a broader note, I recommend having your attorney or whomever is going to review your survey look over the Table A items that you require in your ALTA survey proposal. She could help you save time and money by avoiding unnecessary requests or by making sure your survey addresses items that your lender and investors will insist on.

Are there any other survey requirements that are commonly requested that you don’t think are usually necessary?

Is the Multifamily Development Market Ready to Make Some Noise Again?

2011-06-10T15:44:17+00:00

I thought this article from multifamilyexecutive.com dealing with a potential up tick in hiring at multi-family developers was interesting…

According to the article, "… a number of multifamily owners are starting to at least look at adding development talent again."

In my own practice, I've seen an increase in activity in the multifamily development market nationwide over the last year.

The article notes that "despite the hiring by a number of firms… no one is ready to say that the world is back to normal for developers… Some say developers just seem to be doing more with their downsized teams."

So, what are y'all seeing in the market? Is multifamily development picking up? Are any other areas of development getting steam as well?

Reader Question (Part 3) – With a Few Extra Bucks, What Can I Get a Title Company to Do?

2011-05-13T15:37:38+00:00

In Part 1, I discussed a title company’s common roles in a real estate deal. In Part 2, I covered some of the normal risks that a title company assumes in the base title policy. Now, lets see what a title company will do for a little extra money…

In addition to the base policy, you can also get endorsements to the policy for an additional cost. Here are some of the risks that a title company can cover with endorsements:

that the land doesn’t have access to a public road
if there is some structure on the land that violates a restriction or encroaches on a setback, easement or off of the property, the title company can assume the risk of a loss in this scenario
damage to a structure from a mineral owner’s activities. This can be an existing structure or one that you build in the future. Usually the mineral owner’s rights trump the land owner’s rights, so this can be an important risk for the title company to assume in an area with mineral activity. (The title company still has to make the underwriting decision to accept this risk.)

Due to the heavily regulated nature of title insurance in Texas, there are only a limited number of endorsements that you can purchase. Here is a list of the endorsements and related forms that you can get in Texas.

In other states, a title company usually has more endorsement options when it wants to assume risks in a deal. Here is a resource you can use to see what’s available in states that use the ALTA forms.

On another note, normally when we think about title insurance, we think about it in the context of the owner of the land or its lender. You can also get title insurance for an easement, lease or life estate.

Reader Question (Part 2) – What Risks Does a Title Company Typically Assume?

2011-05-10T17:54:31+00:00

In Part 1, I responded to a reader question about the basic roles that a title company plays in a commercial real estate deal. Now, I’ll discuss the risks that it typically assumes for a land owner and its lender with a basic title policy.

With a general policy the title company typically assumes these risks:

someone else owns the land
someone has filed a mechanics’ lien
there’s a mortgage against the property that wasn’t paid off or released
someone else has the right to use a portion of the land, e.g. to install a pipeline or road

that there are restrictions that affect your use of the land, such as restrictions on building materials, height, density, that weren’t picked up with the title company’s title search
that a lender’s mortgage is valid, enforceable and not junior to another lien on the property
Additionally, the title company covers the cost to defend a lawsuit that is covered by the policy. We all know you can win the lawsuit, but still loose the war when you’ve got to pay the attorneys who fought for you in court.

Also, no matter the risk, it’s important to remember that the title company will only have to pay up to the policy amount. If you want to learn more about what risks are covered, check out the Texas Title Insurance Basic Manual forms.

Part 3 addresses additional risk the title company will assume for an extra charge.

Mother’s Day

2011-05-06T14:23:12+00:00

You've probably noticed that I haven't posted anything for a few weeks. Things have been a little hectic around here and I didn't break free long enough to share my ~~random ramblings~~ wisdom with you. (I know, with as little wisdom as I have it shouldn't take long to come up with a post.)

The good news - you haven't had to read my inane thoughts about commercial real estate. The bad news - you've started to have withdrawal systems. Not to worry, I'll be back up and running at full speed next week.

In the mean time have a happy Mother's Day!

"All that I am, or hope to be, I owe to my angel mother." ~ Abraham Lincoln

Reader Question (Part 1) - What’s the Role of a Title Company in a Real Estate Transaction?

2011-04-05T12:58:41+00:00

A reader recently asked me what role a title company plays in real estate deals, what liability they assume and what fees are negotiable.

Since this answer is a little lengthy, I’ve split it up into multiple posts.

In a commercial real estate deal, the title company usually has 3 roles:

Escrow Agent– It holds the buyer’s earnest money until the deal closes or someone terminates the contract. If there is a dispute as to who gets the earnest money, the title company won’t take sides. If the parties can’t agree, the title company will either (1) hold the earnest money until the parties agree or seek a court order directing it to whom it should give the earnest money or (2) more often, it will deposit the earnest money with a court and let the court decide.
Title Insurance– It will provide title insurance to the buyer and its lender. See these prior posts on the basics of title insurance: Part I, Part II and Part III. If the buyer decides to forego title insurance, then it would order a report from the title company showing the status of title, including any liens filed against the property.
Closing Agent– Finally, the title company acts as an intermediary for the parties in closing the deal, including handling various tax reporting requirements. Both sides send the title company their funds and closing documents and let the title company handle the closing. This avoids the problem of deciding who has to perform first – i.e. the seller doesn’t want to give the buyer a deed until the buyer wires its money and vice versa. Imagine you wanted to sell your 1909 Honus Wagner mint condition baseball card. Would you give someone the card and then wait for the cash? Hope not. That’s where your trusty title company would come in handy.

Part 2 discusses the risks a title company typically assumes for a land owner and its lender with a basic title policy. Part 3 addresses some of the risks a title company can cover with endorsements.

Thoughts and Figures on Distressed Real Estate and REO Opportunities

2011-03-28T19:20:31+00:00

Here are some thoughts and numbers which you may find interesting from a panel discussion on REO opportunities that I recently attended:

Only about 40% of all of the commercial real estate that went into default between late 2008 and the end of 2010, has been worked-out so far.
Only 13% of the acquisitions in 2010 for commercial real estate were done by institutional buyers.
46% of the acquisition financing for multi-family assets acquired between 2009 and 2010 was from government agency sources.
Multi-family rents have started to improve; however, rents for most other commercial real estate are still soft.
In general, commercial real estate prices are down 42% from the peak in early 2007.
One of the panelists thinks that 2011 will be "the year of the loan sale."
Another panelist thinks that there are good deals out there in raw land (obviously, you need to have patient money).
According to the panel, special services are starting to turn loose of some of their distressed deals. Also, banks have had time to write down losses gradually, so they may start to dispose of more of their REO.

Email me if you would like a copy of the slides from the panel and I'll put you in contact with the right folks.

Panel Discussion on REO – Where are the Opportunities?

2011-03-18T15:12:39+00:00

On Tuesday, March 22, I plan on attending a panel discussion here in Dallas at the Tower Club (Thanksgiving Tower, 1601 Elm Street, Suite 4800). This is a part of the Blackacre 48 Commercial Real Estate Breakfast series sponsored in part by my friend Carl Pankratz with Capital Title of Texas.

The subject is REO – Where are the Opportunities?

The panel will consist of:

· John Lester, Commercial REO Asset Manager, Beal Bank

· Powell Thompson, President, American Bank of Commerce

· Bill Graham, Managing Partner, Sperry Van Ness Commercial Real Estate Advisors

· Dan Anderson (Moderator), Director of Business Development, ICI Construction

More information is available here.

Hope to see you there!

Title Insurance Basics – Part III

2011-03-11T13:00:27+00:00

We’ve been discussing title insurance in Texas in Parts I and II in this series. Here are some steps to take if the title commitment shows you a potential problem:

If you find that someone may have a right to the property, you may be able to ask the seller to get that right released before you buy the property. Or, you may decide that you do not want to buy the property after all. Be sure that you review the title documents while you still have a right to terminate the purchase contract and get your earnest money back Most commercial contracts provide for a separate title and survey review period, in addition to the option period. Either way, your main goal is to read the documents and object while you have leverage!
The title company should issue updated commitments whenever there are changes made in the commitment, such as a release of any items, pay-off of any liens, or change in the purchase price, for example. Review each update and see what changed from the prior commitment.
You can also obtain title insurance endorsements to address certain title problems in Texas. If you have a potential problem, or a matter that cannot be released or removed, an endorsement may give you insurance for that particular item. For example, if you are buying improved property, and the building is built 1 foot over the property line into the neighbor’s land, you would have several options. You could obtain an easement from the neighbor permitting the encroachment. Or, you could obtain a title endorsement which says that the title company would compensate if you had to tear down the building.
And finally, after closing, read the title policy, and make sure it matches with the final commitment, and doesn’t include any other matters except your lender’s lien, if you financed the purchase. If you find any discrepancies, contact the title company and ask for a new policy.

Title insurance is always recommended – even if you remember only that you should ask for copies of the title exception documents, and read them, you will be well ahead of others in your knowledge on title insurance!

Title Insurance Basics – Part II

2011-03-08T20:28:08+00:00

In Part I in this series, I explained the basics of title insurance. Here are the first steps to getting title insurance in Texas:

Make sure your contract for purchase provides that the seller will give you a title policy at closing and that the seller will provide you with a title commitment and time to review it during your option period; title insurance premiums are set by law in Texas – they are based on your purchase price and cannot be negotiated.
You should review a survey of the property together with the commitment, in order to glean the most information from the commitment.
The title commitment has three parts: a) Schedule A is the part stating the legal description of the property, the purchase price, and your name as the buyer; b) Schedule B is the part stating whether there are any restrictive covenants, easements, mineral rights, leases, or other similar matters affecting the property – these are called title exceptions; c) Schedule C is the part listing any liens on the property such as mechanic’s liens and liens from your seller’s lender who should be paid off at closing. All liens should be paid at closing by the Seller. They should not appear on your title policy.
Most of the items listed as title exceptions (and the liens) will have filing numbers from the county’s records, and you should request copies of all those documents from the title company. You should read them and consider whether they show a claim to the property, a right to buy the property, a right to lease the property, a right to the minerals of the property, an easement right to the property, or other right that you object to.

Quick Tip: Insurance Pitfall

2011-03-07T21:23:57+00:00

I was reminded recently of an insurance pitfall that I see in many commercial agreements that could cause you to be in a technical default.

Many different commercial agreements such as leases, loan documents or acquisition contracts, will require you to carry specific insurance policies. Those agreements usually have a requirement similar to the following:

The insurance policies noted herein shall contain a provision that coverages afforded under the policies shall not be canceled or materially changed until thirty (30) days advance written notice has been provided to the [landlord/seller/owner/lender].

A while ago I was working with the insurance manager for one of my clients and I discovered that while most insurance companies will agree to this sort of provision, they won’t agree to give 30 days notice if you haven’t paid your premiums. In that specific instance, they’ll usually only agree to 10 days notice.

In the example above, I would simply insert “…or ten (10) days notice in the case of nonpayment of premiums…” into that clause.

This is one of those times when your agreement doesn’t quite match up with how things actually work in the real world.

Why should you care? This could cause a technical default under one of your agreements.

What other contract requirements have you noticed that don’t always quite stack up to reality?

Title Insurance Basics – Part I

2011-03-04T18:14:55+00:00

We’re going to have a series on the basics of title insurance from guest blogger Cacki Jewart. Take it away Cacki.

You may consider title insurance worse than boring – it’s confusing too, and what does it really do for you?! At its most basic, it insures that when you think you are buying real property, you are, in fact, the owner. It also tells you some history on the property and who has rights to use it, other than you. And, just like almost everything in real estate, it is negotiable if you know where to look.

Title insurance shows what claims may be out there affecting your property. For example, it shows claims by tenants or former tenants, claims by potential owners or former owners, or claims by neighboring land owners. It also can show you whether the property is subject to private restrictions on use and on types of tenants, and it will tell you whether others may have a right to obtain minerals from the property.

The more expensive your purchase, the more vital your title insurance, and the more time you should spend reading and understanding it. Stay tuned for specifics on how to get the most out of title insurance.

Commercial Real Estate Foreclosure Process in Texas

2011-02-21T21:42:21+00:00

A reader recently asked for a basic outline of the commercial real estate foreclosure process in Texas. Hope this helps. Also, in light of the President’s Day holiday, I would like to share some advice from President Lincoln that still rings true today.

In this post I will focus on non-judicial commercial real estate foreclosures in Texas, which is the typical foreclosure where someone auctions off the property outside the courthouse. A lender can also go through a court, which is more like a regular lawsuit. A non-judicial foreclosure is much faster and cheaper and can generally be completed within 45 to 60 days of a default.

Here are the general steps for a typical non-judicial foreclosure in Texas:

Pre-Foreclosure Notices – Before a lender can foreclose, the borrower has to be in default and the loan balance should be accelerated. Thus, the lender will send various notices dealing with the default, the lender’s intention to accelerate the loan balance and then notice that the loan balance has been accelerated. Depending on the terms and waivers in the mortgage (or deed of trust), these may be in separate notices or in a single notice.
Mail IRS Notice – If the IRS has a tax lien against the property, you have to send the service a notice at least 25 days before the foreclosure. The IRS then has 120 days from the foreclosure to buy the property for the foreclosure purchase price, plus 6% interest and operating expenses (less any operating income). If you do not send this IRS notice, the tax lien continues even after the foreclosure.* So, caveat emptor. Another option is to have the IRS consent to the sale and release its lien. However, you will be shocked to learn that this can often take so long that it’s faster to just foreclose and wait out the 120-day redemption period.
Foreclosure Notice – Twenty-one days before the sale, the foreclosure notice must be (i) mailed to the borrower, (ii) physically posted at a designated bulletin board at the courthouse, and (iii) filed with the county clerk.
Conduct the Auction – Non-judicial foreclosures in Texas are always on the first Tuesday of the month, even if it’s a holiday. The commissioners court designates a specific area at the courthouse for foreclosures. The trustee named in the mortgage conducts the sale and sells the property to the highest bidder.
Payment – On commercial deals the lender is usually the high bidder because other bidders need cold hard cash or a cashier’s check, while the lender can bid up to the amount of the debt before needing to put up any cash.
Trustee’s Deed – Finally, the trustee gives the winning bidder a deed to the property to record in the real property records.

It is also important to review the mortgage carefully because it may include additional requirements and steps for the lender to foreclose.

On President’s Day 2011, I think the following advice from President Abraham Lincoln still rings true, especially in our current business and economic climate:

“Things may come to those who wait, but only the things left by those who hustle.”

“You cannot escape the responsibility of tomorrow by evading it today.”

I hope everyone has an enjoyable President’s Day.

* Nerd Note – See 26 U.S.C. § 7425 and 28 U.S.C. § 2410(d).

Can an Owner Use the Foreclosure Process to Extinguish Junior Loans and Retain the Property?

2011-01-19T19:52:36+00:00

I received this interesting foreclosure question from a reader:

Tyler, what are your thoughts on a 1st lien foreclosure wiping out subordinate liens with a subsequent sale of the property from the senior lender to the original owner? Would this be subject to challenge?

Example

Let's use the following hypothetical to help us think through this question:

Zack Realty owns a shopping center with a $25 million loan from RLJ Bank.
It also has a junior loan for $5 million from Westbrook Financial.
Zack Realty defaults on the RLJ Bank loan.
Zack Realty asks RLJ Bank to put the property up for foreclosure and to buy the property at the foreclosure sale. It then offers to purchase the property back from RLJ Bank and re-finance it with them after the foreclosure.

Zack Realty hopes this will eliminate the Westbrook Financial lien. Will it?

Analysis

Generally a senior lender’s foreclosure wipes out a junior lender’s lien. However, in Texas and several other states, if the owner of the property purchases the property at the foreclosure, then it doesn’t extinguish the junior lien.*

As an aside, many people are surprised to learn that Texas law doesn’t require RLJ Bank to notify Westbrook Financial of the foreclosure even though it will wipe out Westbrook Financial’s lien. This is one reason junior lenders usually insist on an intercreditor agreement with senior lenders to protect against these sorts of risks.

So Zack Realty couldn’t eliminate the Westbrook Financial lien by purchasing the property at the foreclosure itself. If RLJ Bank buys the property at the foreclosure and sells it to Zack Realty 30 seconds later, I don’t think a court would have much trouble keeping Westbrook Financial’s lien in place.

As you probably suspect, there isn’t an exact answer for how long Zack Realty would have to wait to buy the property back from RLJ Bank without having to worry about Westbrook Financial challenging the transaction. The longer it waits the better.

One option is for RLJ Bank to fully market the property before selling it back to Zack Realty, assuming it still has the highest offer.

Another option would be to change the ownership group. If Zack Realty were to bring in a partner, then I think it stands a much better chance of winning any court challenge because the “owner” isn’t the same.

Here are additional risks Zack Realty should consider:

Westbrook Financial may be able to sue Zack Realty and RLJ Bank for fraud.
This may create full recourse liability on any guaranties.
There could be tax consequences to discuss with its accountant.

Feel free to email me if you have any questions you would like me to address.

* Nerd Note – see Clearman v Graham, 4 S.W.2d 581, 583 (Tex. Civ. App. 1928). This is obviously an older case, but I think the holding on this point is still good.