FLORIDA DISTRESSED REAL ESTATE:
Practical Tips for Investors
Moderator:
Orlando, Florida
www.lowndes-law.com
Michael Ryan
Presenters: Gary M. Kaleita
Gary Soles
Robert F. Higgins
Alexander Dobrev
Zachary J. Bancroft
Jason W. Johnson
M. Rebecca Wilson
March 1, 2012
© 2011 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved
Orlando, Florida | www.lowndes-law.com
PART ONE
STRUCTURING THE
PURCHASE
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Eight Possible Methods
of Acquisition
Short Sale
Buy winning bid
Buy loan documents
Bid at foreclosure sale
Hybrid approach
Buy from Lender after foreclosure
Buy final judgment
Section 363 Bankruptcy Sale
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Short Sale
• Pros:
º
º
º
º
Potentially lowest purchase price
No legal fees/costs to foreclose
No defenses or counterclaims to overcome
Ability to include/exclude development
rights/entitlements/liabilities
º No phantom income issue for Buyer
º Reduced brokerage commissions possible
º Under contract at front end
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Short Sale
• Cons:
º Junior liens still exist
º Rights of tenants still exist
º Buyer liable for past-due HOA and Condo
assessments
º Doc stamp tax due on deed
º Owner’s title policy premium
º Deficiency claim by Lender
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy Loan Documents
• Pros:
º Traditionally lowest purchase price
º Development rights/entitlements/liabilities may be
acquired
º Deed-in-lieu or stipulation to foreclosure possible
º Statutory limit on liability for past-due HOA and Condo
assessments
º No doc stamp tax due on assignment of loan docs
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy Loan Documents
• Cons:
º Riskiest structure for Buyer
º Owner bankruptcy will stay foreclosure
proceedings
º Buyer may have phantom income
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy Loan Documents
• Notes:
º Ensure that Lender has authority to sell
º Get payment history and originals of Notes & Endorsements
º Adjust purchase price if Owner makes loan payments after
Contract signed
º Prohibit loan modifications pending closing
º Transfer escrow/impound accounts (taxes & insurance)
º Lender’s reps and warranties
º Assignment of Mortgage Endorsement
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Hybrid Approach
(combination of Short Sale and Purchase of Loan Docs)
• Pros:
º
º
º
º
Leverage over junior lienors
Ability to foreclose junior lienors and tenants
No Owner defenses or counterclaims
Include/exclude development rights/entitlements/
liabilities
º No significant Owner bankruptcy issues
º No phantom income issue.
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Hybrid Approach
(combination of Short Sale and Purchase of Loan Docs)
• Cons:
º Buyer liable for past-due HOA and Condo
assessments, but can still foreclose mortgage
to reduce liability to safe harbor amount
º Doc stamp tax due on deed-in-lieu
º Owner’s title policy premium
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy Final Judgment
• Pros:
º Foreclosure done - risks to purchaser substantially reduced
º Lender already paid bulk of attorneys’ fees/costs
º No doc stamp tax due on assignment
• Cons:
º Purchase price may be higher
º Owner bankruptcy will stay foreclosure
º Buyer may have phantom income issue
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy Final Judgment
• Notes:
º Contract should provide deadline to obtain
Final Judgment
º Final Judgment must be assignable
º Impact of 30-day appeal period
º Buyer will not qualify for statutory safe harbor
for past-due HOA or Condo assessments
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy Winning Bid
• Pros:
º Risks to purchaser further reduced
º Risk posed by Owner bankruptcy minimal
• Cons:
º
º
º
º
Purchase price may be higher
Double doc stamp tax
IRS may still claim phantom income
Buyer will not qualify for statutory safe harbor for past-due HOA
and Condo assessments
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy Winning Bid
• Notes:
º Contract should obligate Lender to make full
credit bid
º Final Judgment should allow assignment of
winning bid
º Impact of 10-day period for filing objections to
sale
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Bid at Foreclosure Sale
• Pros:
º No Contract needed with either Owner or Lender
• Cons:
º
º
º
º
Must complete all due diligence before bidding
Must be familiar with bidding process
Doc stamp tax payable on amount of bid
Buyer will not qualify for statutory safe harbor for pastdue HOA or Condo assessments
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy from Lender after Foreclosure
• Pros:
º
º
º
º
Traditional land purchase Contract
Due diligence period negotiable
Closing expenses negotiable
Since Lender is Seller, Lender is liable for
past-due HOA or Condo Association
assessments… Buyer only pays going
forward
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Buy from Lender after Foreclosure
• Cons:
º Probably highest purchase price
º Doc stamp tax payable on purchase price
º Owner’s title premium payable
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Section 363 Bankruptcy Sales
o Sale is approved by bankruptcy court.
o Must be noticed to creditors.
o Might be contested, or draw competing bidders.
o Could be subject to appeal.
o In most instances, it will be free and clear of liens.
o The court may order that the liens attach to the proceeds.
o In most cases, faster than a state court foreclosure action.
Florida Distressed Real Estate:
Practical Tips for Investors
Approx. 11,000 CMBS loans in Florida
•
Approx. 1400 in the hands of special servicers
TREPP Demonstration
Office Properties at Special Servicers
(sample)
Orlando, Florida | www.lowndes-law.com
PART TWO
PURCHASER’S DUE
DILIGENCE
CONSIDERATIONS
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
•
•
•
•
•
•
•
•
•
•
•
Land use & entitlements
HOA and Condo Association Issues
Physical condition of property
Loan documents
Communication with Borrower & Guarantors
Physical condition of property
Rent roll, leases and tenants
Status of title
Insurance
Outstanding Security interests
Unpaid taxes & CDD assessments
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Land use & entitlements
º
º
º
º
º
º
What development entitlements exist?
Do they run with the land or must they be assigned?
Zoning investigations
DRI/ PD issues
Concurrency, road and utility capacity, school capacity
Moratoriums
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• HOA and Condo Association Issues
º Outstanding assessments & other charges
º Violations of Condo docs or Declaration
º Waivers of Condo Association or HOA approval rights or
rights to purchase
º Estoppel letters from Association(s)
º Form 9 Owner’s Policy Endorsement
º Successor Developer liabilities
º Association control issues
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Loan documents
º
º
º
º
Chain of ownership of loan documents
Pledges of monetary accounts
Documents to obtain from Lender
Smoking guns
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Communication with Borrower &
Guarantors
º Will Borrower contest foreclosure or
cooperate?
º Releasing Guarantors
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Physical condition of property
º
º
º
º
Inspect improvements
Consider deferred maintenance
Building/health code violations
Environmental report
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Rent roll, leases and tenants
º
º
º
º
º
º
Status and priority of leases
SNDA’s with Tenants
Automatic subordination clauses
Sweetheart leases
Extinguishing leases in foreclosure
Evicting tenants who are foreclosed
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Status of title
º
º
º
º
º
º
Title defects (Buyer financing)
Examination of foreclosure proceedings
Assignment of Mortgage Endorsement
Estoppel letters from third parties
Owner’s title policy
Form 9 Endorsement
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Insurance
º
º
º
º
Casualty insurance
Self-insurance
Deductible
Replacement value vs. depreciated value
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Outstanding Security Interests
º Lender’s reps
º UCC searches
º Federal tax lien searches
Florida Distressed Real Estate:
Practical Tips for Investors
Orlando, Florida | www.lowndes-law.com
Purchaser’s Due Diligence
Considerations
• Unpaid taxes & CDD assessments
º Real estate tax and CDD assessment liens survive
foreclosure
º City/County Code liens may also
º Lien searches
º Delinquencies in taxes and CDD assessments
Florida Distressed Real Estate:
Practical Tips for Investors