Articles Posted in real estate loan

Commercial real estate lenders often require a guaranty signed by a financially responsible California guarantor. Included in the guaranty is a waiver of specific rights, often including a waiver of the antideficiency rights of California Codes of Civil Procedure sections 580 and 726. These are significant rights being given up; for this reason potential guarantors presented with waivers should consult with an experienced Sacramento and Yolo commercial real estate lawyer to fully understand what the consequences of the waivers may be.

Such waivers were included in the guaranty in Gramercy Investment Trust v. Lakemont Homes Nevada, Inc. which involved foreclosure of a $35 million dollar loan on a commercial development. The twist in this case was that the guaranty stated that New York law governed the document. California sections 580a and 726 (waived by the guarantor) limited deficiency judgments to the difference between fair market value and the entire amount of the loan balance due at time of foreclosure. New York law also has similar antideficiency protection, though with a different calculation. The court calculated the deficiency without applying California law, and the borrower appealed, arguing that New York law, and its antideficiency protections, should have been applied.

The court of appeal found first that, here New York law did not apply. First looking at the choice of law provision, it found that New York antideficiency rules do not apply when the real property is not located in New York. The courts of New York agree with this proposition. Additionally, as California has similar protection for debtors against certain deficiency judgments, it is of little consequence whether New York or California law applies.

Usury is the charging of interest for a loan in excess of the legal maximum. In California, the amount is set out in the state Constitution. Exemptions to the law are also described in the Constitution, as well as court decisions.

One the of court-established exceptions is for a joint venture. Where the relationship between the parties is a joint venture or partnership, the advance by the joint venturers is an investment and not a loan, and the profit or return earned by the investor is not subject to the statutory maximum limitations of the Usury Law.

In a recent decision, an experienced real estate investor and broker named Don found a commercial property in San Carlos that he wanted to buy. He contacted a hard money lender named Gary- one who specializes in providing money quickly and at high interest rates. He had worked with this lender many times before. They worked out a deal where they jointly took out a standard bank loan for $1.8 million, and the Gary contributed an additional $856,000 hard money, for which Don signed a promissory note at 12%, plus paying $14,000 in ‘points’. Don became a 90% owner of the property; Gary had 10%.

Chang guaranteed three construction loans, totaling 4 million dollars, for another party. In the guarantees Chang waived the right to require the Bank to proceed first against the borrower, or foreclose against the borrower’s property. The other party defaulted, and the bank went after Chang first, filing a lawsuit and seeking a writ of attachment against HER personal property, that was not security for the loans.

The trial judge said no to the writ, claiming that C.C.P. Section 483.010 does not allow attachment on a claim secured by real property. The court of appeals said no, the writ can attach to Chang’s property.

The appellate judges pointed out that the guarantee is a separate and independent obligation from the principal debt (the underlying construction loans) Though the construction loans were secured by real property, the guaranties were not. Thus, the 483.010 prohibition does not apply, so long as the guarantor waives their right to require the bank to go first after the security for the original loans.

Jim Wasserman’s comments in the Sacramento Bee this week about the sobering outlook for the Sacramento office market are a local example of a nationwide problem.

Comptroller of the Currency John Dugan noted last Monday that the Nation’s banks may be in for a “very rough ride” due to their commercial real estate portfolios. Speaking at the annual convention of the American Bankers Association, reported by Reuters, he noted that Government agencies have some help on the way for the lenders facing these challenges. This week, the federal bank regulators will publish new advice on loan modifications for commercial mortgages. That’s right, Loan Modification guidelines for commercial borrowers. The regulators will be giving the banks guidelines.

As reported in the Philadelphia Enquirer, Capmark Financial Group Inc.’s (a major commercial mortgage lender) bankruptcy filing was no surprise, but was still a harsh reminder of the hard times ahead in the commercial real estate industry. “It’s not a turning point. The problems are only starting,” Dennis Yeskey, a senior adviser at AlixPartners L.L.P., a business-advisory firm in New York, said yesterday.