Serving The Needs Of Washington Bankers Since 1889
The Importance of Ancillary Collateral
in Real Estate Financing:
When the Dirt Alone
Will Not Suffice
By Gregory R. Fox Lane Powell PC
a lawsuit to have a court decide the ownership of a particular preliminary plat. The
developer’s position was problematic because
many of its projects were then bank-owned
following the foreclosure of deeds of trust
that were less than clear on the scope of each
lender’s security interest in personal property
assets. The value of each lender’s real estate
owned property (“REO”) with preliminary
plat approval was substantially higher than
without. The court ultimately ruled that preliminary plats run with the land and belong
to the foreclosure sale purchaser, but not
before the lender incurred attorneys’ fees and
the expense of carrying REO for an extended
period of time while the ownership of the
related preliminary plat was litigated. While
the court’s ruling was sound, it does not bind
other Washington courts or developers.
Competing claims to ancillary collateral
are not unique to the case described above.
Borrowers and junior lienholders have recently asserted conflicting claims to timber,
transferrable development rights (“TDRs”),
plans and specifications, set-asides, permits,
building materials and other assets closely
tied to a real estate development project.
Comprehensive documentation, that unquestionably encumbered all key ancillary
collateral, would have strengthened the
lender’s legal position and likely avoided the
claims altogether.
The implosion of the real estate market and failure of
development projects throughout Washington have tested the
strength of every lender’s real estate loan documentation.
challenge often arises with respect to ancillary collateral that
is often essential to the value of
a lender’s real estate collateral.
Permits, plans, plat approvals, construction
contracts, water rights, development rights,
fixtures and related assets can make or break
a development project. Yet, many real estate
loans fail to encumber these types of assets
unambiguously, thereby subjecting collateral
and the lender’s right to repayment to attack
by borrowers, guarantors, junior lienholders
and trustees in bankruptcy.
In one recent case, a local developer took the
position with a Western Washington county
that all of the developer’s preliminary plat
approvals constituted personal property that
belonged to the developer and did not run
with the land encumbered by the lender’s
deed of trust. The county failed to reject the
developer’s position outright and instead filed
A lender can protect itself from unforeseen
collateral risks by placing the same emphasis on encumbering key intangible assets
as it does on analyzing those assets during
the underwriting process. While generic
deed of trust language arguably encumbers
many types of ancillary collateral, failure to
specifically reference all categories of assets
that comprise a development or vertical
construction project can open the door to the
creative arguments of borrowers and junior
lienholders. As a general rule, deeds of trust
securing development or construction loans
should specifically reference all categories of
assets that comprise a development or vertical
construction project, including, without limi COUNSELOR’S CORNER
— continued on page 24
March/April 2012 
Serving The Needs Of Washington Bankers Since 1889
tation: permits, entitlements, set-asides, rebates, building materials,
general intangibles, trademarks, plans and specifications, construction
contracts, fixtures and all other typical “additional collateral” items.
Alternatively, a lender may elect to obtain a separate security agreement that grants the key additional collateral. A lender should also
file a UCC-1 with the Washington Department of Licensing (in the
case of Washington debtors) in order to perfect its security interest
in tangible and intangible personal property collateral and protect
such collateral from attack by junior lienholders and trustees in bankruptcy. Finally, lenders must closely analyze key intangible collateral
to determine whether other steps are necessary to encumber, perfect
or ultimately enforce that collateral, including, without limitation,
third-party consents, collateral assignments, possession of the collateral or registration in other filing offices. While there is no way to
make a deed of trust bullet-proof, careful consideration of the scope
of the encumbrance language at the outset or during a restructuring
can save a lot of time, headaches and attorneys’ fees.
Gregory R. Fox is a shareholder at Lane Powell PC, where he
focuses his practice in the commercial finance and financial institutions industries, with an emphasis on loan documentation, loan
restructuring and enforcement, and commercial litigation matters.
He can be reached at or 206.223.7129.