When a borrower defaults on his or her commercial real estate loan in Washington, the bank has a number of options for collecting the debt. Lenders usually secure their real estate loans with deeds of trust, which gives the lender the option to foreclose on the collateral either non-judicially through a Trustee’s Sale, or non-judicially through a judicial foreclosure and subsequent Sheriff’s Sale. In each of those situations the rules governing the borrower’s and guarantor’s continuing liability on the loan after the sale differ.
The House Judiciary Committee held a hearing earlier this month to review the performance of the EB-5 Immigrant Investor Program. Congress created the EB-5 visa program in 1990 as a tool to stimulate the U.S. economy by encouraging foreign capital investments and job creation. The EB-5 program makes immigrant visas and subsequent “green cards” available to foreign nationals who invest at least $1 million in a new commercial enterprise that will create or preserve at least 10 full-time jobs in the U. S. A foreign national may invest only $500,000 if the investment is in a targeted employment area (“TEA”), defined to include certain rural areas and areas of high unemployment. A considerable amount of foreign capital invested through the EB-5 program has been invested in domestic real estate development projects.
Most of us in the United States are philosophical descendants of a Middle Eastern pioneer who left his parents’ home and ventured to a new land. He was inspired by his firm belief in monotheism, and his descendants founded the Jewish, Christian and Moslem faiths. Aside from the stories about his destruction of idols in his father’s shop, Abraham was well known for his hospitality towards strangers. The bible describes how he washed the feet of travelers who came to his tent after crossing the desert. In the realm of human behavior, this progenitor of three great world religions is best known for welcoming the stranger.
During this time of tumult over refugees coming to our shores, you might think I’m writing about the influx of Syrian’s fleeing war in their homeland. No, I’m a real estate and business lawyer, not a politician. This message is about welcoming the participation of foreigners in our real estate markets, especially our Pacific neighbors – the Chinese.
The Supreme Court of the State of Washington recently decided a case in which the advancing forces of the sharing economy intersect with the real estate world, in Fillmore LLLP the Unit Owners Association of Centre Pointe Condominium, Washington Supreme Court No. 0879-6 (September 3, 2015). In this case, the court analyzed whether a homeowners’ association condominium declaration amendment required a 67% percent vote, or if the higher threshold of 90% percent of affirmative votes was required to pass a resolution restricting the right of a condominium owner to rent the condominium.
As a longtime fan of Motown music and former Washington Supreme Court law clerk and now practicing lawyer, it’s hard to resist a mischievous overlap in nomenclature between our highest legal panel and Diana Ross and the Supremes. Once in a while our Court also inspires litigants and court watchers to burst out in song. Perhaps this is such a moment.
The Washington Supreme Court is made up of nine justices with a wide range of legal experience, most of whom have been trial lawyers and judges before being elevated to the state's highest court. They are individually and collectively respected as smart and hardworking. However, it appears that notwithstanding their varied backgrounds, none of the justices has much experience with the Washington Deed of Trust Act.
I reach this conclusion after reading the recent 9-0 decision of the Court in Washington Federal v. Harvey, No. 90078-7(January 8, 2015). In that case, the Court sided with the unified legions of banks against commercial loan guarantors seeking to avoid liability for loan deficiency judgments after non-judicial foreclosures. In the wake of the "Great Recession," during which more real estate loans went into default than at any time since the Depression, it became tragically commonplace that foreclosure sales did not yield proceeds sufficient to pay what were once well-secured loans. That resulted in large loan deficiencies, and banks looked to whatever source was available to help them repay loan losses, including to loan guarantors.
In Washington, the Deed of Trust Act bars deficiency judgments except in certain narrow circumstances involving commercial loans. While deficiency actions after trustee’s sales are generally prohibited, RCW 61.24.100(10) provides that a,
"trustee's sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligations of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust." (emphasis added)
In the cases before the Court, the banks used loan documents which said that the foreclosed deeds of trust secured not only the borrowers’ original notes, but also the loan guaranties. It's not clear if the inclusion of the guaranties in the documents secured was intentional, or if the banks did not contemplate that the Washington Deed of Trust Act seemed to prevent actions against guarantors after a non-judicial foreclosure of the deed of trust, as the language quoted above suggests.
But with the ease of a footnote, the Court dismissed the language quoted above, or added its own additional qualification on the exception, in footnote (2) of that opinion:
". . . Subsection (10) is clear; it provides clarity about when a deficiency judgment may be brought, but does not protect a guarantor of a commercial loan from deficiency judgments solely because the guarantor's guaranty is secured by a deed of trust regardless of who granted such deed of trust. Accordingly, here, even if the borrowers' deeds of trust secured the guarantors' guaranties, subsection (10) would not preclude deficiency judgments against the guarantors because the guarantors did not grant such deeds of trust."
Notwithstanding that footnote, there is no such limitation in the language of RCW 61.24.100(10). It refers to a guarantor whose guaranty "was not secured by the deed of trust (foreclosed)". The Court, in effect, re-writes RCW 61.24.100(10) to read that a,
"trustee's sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligations of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust granted by such borrower or guarantor against whom a deficiency action is sought." (the author’s additional language is in bold)
Without the additional language, the statute would apply to both deeds of trust granted by the borrowers, as in the cases decided by the Court, and deeds of trust granted by the guarantors. Without that language, there is no basis for making the critical distinction made by the unanimous Court!
The Court pointed to no evidence in other portions of RCW 61.24 or the legislative history to suggest that it is only when the guarantor is the “grantor” under the deed of trust foreclosed that the guarantor is then protected against a deficiency judgment. In effect, the Court decided the entire case on a limitation to the prohibition on deficiency actions which is not mentioned in the statute.
After reading the opinion, I'm sure bankers across Washington started singing that old Supremes hit, "I Hear a Symphony," while those unfortunate guarantors were shaking their heads and humming, "You Keep Me Hanging On".
Recent editions of the The Seattle Times (Sunday, November 16, 2014) and the Puget Sound Business Journal (November 13, 2014) discussed a new local "disruptive" company on the residential real estate brokerage scene, Surefield.com. The Pacific Northwest, home to Zillow.com as well as Redfin.com, is known as an innovation hub in this industry. Surefield is an online residential real estate brokerage, which plans on dramatically undercutting the traditional 6-5% real estate commission paid by sellers (usually divided 3 or 2.5% for the listing agent and 3 or 2.5% for buyer's agent), charging only 1.5% to sellers.
As quoted in the piece by Ben Miller, Contributing Editor of the PSBJ, David Eraker, Surefield CEO said: "The U.S. real estate industry has been operating as a quasi-cartel for far too many years, just look at the high commission rates as proof of tacit collusion." While commissions have been negotiable in theory, in practice, it has been challenging to find a good broker to vary greatly from the general price range and format.
Zillow primarily provides online property information rather than brokerage services, like Redfin, which allows property listings and has its own stable of agents to work on a seller's or buyer's behalf. Redfin charges 1.5% for a listing (as opposed to the traditional 3 to 2.5%) and provides full service brokerage services accompanied by its online tools. The commissions charged buyers are less than the traditional model, and based on the price of the property. Redfin, like some other new firms in the space, pays its agents a salary rather than a share of the broker commission.
Other entrants into the tech brokerage market include UpNest.com, which allows residential real estate brokers to bid for a listing, competing by marketing proposal and commission rates. There are also on line brokers like Shopprop.com, which have a set discounted listing fee, less than the traditional 2.5 to 3%, and a graduated buying commission based on the number of services provided and the price. Seattle-based Findwell.com is another entrant into the growing online brokerage field.
What's the future of these and other online services, and how do you compare them to the traditional brokers?
In the past, one of the most important roles of the real estate agent was as gatekeeper to information about the market. That is the most significant change. Instead of asking your agent to locate and screen properties in the your price range and which otherwise meet your requirements, online tools now allow a buyer to view listings, filtered by price, bedrooms, location and amenities, often with interactive virtual home tours available. The new portals, such as zillow.com, as well as sites from traditional brokerage firms, like windermere.com or johnlscott.com, have made the property search and identification process much more efficient.
Technology can also help foster competition and efficiency in selecting the agent who can assist you in the sale/purchase process. One aspect of technology that I appreciate when I go out to dinner, stay in hotels or hire a contractor is the customer feedback/rating process. Companies like Redfin and UpNest have internal ratings based on customer feedback. I understand Redfin financially compensates agents who get great customer feedback. I like that. This screening function is helpful, but is not entirely new. Brokers at good traditional agencies also screen agents working for them, a process I know takes place at Windermere and John L Scott. Those that don't perform well aren't retained. And as a real estate lawyer, I often get asked for and check with my colleagues about agent referrals. It may be that with the right tools, quality will rise to the top even faster than in the past.
Is it good that there is a wider range of commissions offered? Yes, unless you're on the receiving side of the equation. There are times when a property will sell itself. In those situations, having the option of selling through a low cost brokerage with minimal agent involvement makes sense. More commonly, however, the process of properly pricing, staging and marketing/showing are as important as ever for a seller. From the buyer's perspective, a skilled agent’s advice about the nuances of value, building issues, neighborhoods, negotiation and the buying process is also critical. Working with smart, hard-working agents is as important as ever. But from an agent's perspective, commissions are coming down. The best agents will learn to use the technological tools to become more efficient, and will find platforms which cost less from which to deliver their services. In residential real estate, as in most of the economy, the ground rules are rapidly changing, and for the most part, consumers benefit. Here's to the future!
Does a Property's Sale Price Really Equal the Taxable Market Value?
By Cynthia M. Fraser, Esq., as published by National Real Estate Investor - nreionline.com/viewpoints, September 2014
Typically, the basic principles of a real estate appraisal for commercial and industrial properties are based on market value—the price the buyer and seller agreed upon at the point of sale. In the current economy, as we emerge from the recent recession, many real estate assessors are questioning whether the purchase prices for commercial and industrial properties reflect their true market value. In today’s competitive real estate market, many real estate investors are faced with the following question: Is the recent sale price of a property the best evidence of the property's taxable value?
Please see the complete article published in National Real Estate Investor September 9, 2014.
Cynthia M. Fraser is a partner at the law firm Garvey Schubert Barer where she specializes in property tax and condemnation litigation. Ms. Fraser is the Oregon representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Ms. Fraser can be reached at firstname.lastname@example.org.
Innocent Property Owners may no longer be protected by federal legislation meant to toll the statute of limitations on an action against a late discovery of contaminated property.
In CTS Corporation v Peter Waldburger et al., 573 U.S. ____ (2014), the United States Supreme Court ruled that state law may override federal legislation meant to protect a property owner when the discovery of environmental contamination is years after the release.
Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), including a provision that, by its terms, pre-empts statues of limitations applicable to state-law tort actions in certain circumstances with respect to an injury from a release of hazardous substances. Under these provisions, the statute of limitations begins to run on an action after the property owner or person discovers that the harm to their property or person was caused by contamination of a previous property owner or another person.
However, several states, including Oregon, Connecticut, Kansas, North Carolina, and Alabama, have statutes of repose that limit the time frame a property owner may bring a cause of action regardless of the date of discovery of the contamination or its source.
In North Carolina, homeowners challenged their state’s statute of repose that limited its ability to seek compensation for the release of hazardous substances 24 years before by an electronic manufacture that contaminated their property. The state’s statute of repose limited any cause of action to 10 years after the last culpable act, regardless of discovery of the contamination or its source. The question presented to the United States Supreme Court was whether a federal statute on the timeliness of suits for harm caused by environmental contamination, 42 U. S.C. §9658, preempts North Carolina’s 10 year statute of repose provision.
In the ordinary course, a statute of limitations creates a time limit for suing in a civil case, based on the date when the claim accrued, and is often based on the date of discovery of the harm. A statute of repose puts an outer limit on the right to bring a civil action, not from the date of discovery, but from the date of the last culpable act or omission of the defendant. In a 7 to 2 decision, the Supreme Court held that a statute of repose is not within the pre-emption mandate of the act, and that §9658 addressed statute of limitations by its express terms but that language did not include pre-emption of a state’s statute of repose. Thus, because the states are independent sovereigns, the police powers of the state are not superseded by the Federal Act, unless there is a clear manifest from Congress.
The Court reversed the Court of Appeals for the Fourth Circuit dismissing the homeowners’ state law claim for water contamination against the electronic manufacturer; 42 U.S.C. §9658 pre-empts only statutes of limitations and not statutes of repose. The question now remains, will additional state legislatures adopt statutes of repose in light of this decision.
Cynthia M. Fraser is an owner at Garvey Schubert Barer in the firm’s Portland Oregon office.
Floor area ratio – commonly referred to as FAR – is the ratio of a building’s floor area to the size of the parcel on which the building is situated. The higher the FAR the bigger the building. A maximum FAR limits the size of the building on a parcel and many jurisdictions, including the City of Portland, have maximum FAR standards that place limits on how large a FAR is allowed within different zones (see City Code 33.510.200).
Portland, however, like many jurisdictions, allows FAR beyond the maximum otherwise allowed by transferring FAR from one parcel to another under certain circumstances. Generally, how this works is a parcel with a maximum FAR the owner doesn’t intend to use, can transfer the “excess FAR”, i.e., the difference between the amount of FAR the property owner intends to use, and the maximum that otherwise is allowed on the owner’s parcel, to another parcel. The receiving parcel would then be able to “add” this additional FAR to the otherwise maximum FAR allowed on the receiving parcel and develop a bigger building. A bigger building generally brings more value to the “receiving” parcel and the “donating” parcel will likely expect some consideration for the transfer of the excess FAR, as the “donating” parcel will enter into a covenant that runs with the land that restricts development on the donating parcel to a FAR less than the maximum otherwise allowed.
The West Park Avenue (“WPA”) Parcel, commonly known as the hole in the ground west of Nordstrom in downtown Portland, was the recipient of excess FAR. In 2010, Fox Tower, LLC (“Fox Tower”) the owner of property next to the WPA Parcel and including a parcel now known as Director Park, transferred FAR that would otherwise be available to the Director Park Parcel to the WPA Parcel. The transferred FAR was the difference between the maximum FAR the City Code would allow on the Director Park Parcel and the amount of FAR that was actually being used for the development of Director Park. The Park is basically hardscape with little building development, so there was a significant amount of excess FAR that was not used. By adding the amount of excess FAR from the Director Park Parcel to the base FAR for the WPA Parcel, the WPA Parcel was able to achieve 354,000 square feet of floor area, i.e., a building significantly larger then would otherwise have been allowed on the WPA Parcel.
But the City Code in addition to allowing transfer of FAR from one parcel to another also allows “bonus floor area options” (City Code 33.510.210 C.), i.e., a parcel can have “Bonus FAR” if it does certain things including providing a “water feature or public fountains.” Director Park has a water feature. The City Code also allows additional FAR when a parcel provides bicycle parking and locker rooms, i.e., a “locker room bonus option” (to encourage bicycling). The Director Park Parcel did not have any bicycle parking and locker rooms, however, Fox Tower, the previous owner of the Director Park Parcel had reserved an easement on the Director Park Parcel for underground parking. That easement would allow for the construction of bicycle parking and locker rooms – creating additional FAR opportunity for the Director Park Parcel.
Clearly, the Director Park Parcel did not need additional FAR, although the WPA Parcel could use more FAR and the Director Park Parcel had those “bonus floor area options”. By now the Director Park Parcel was owned by the City of Portland. In order for the WPA Parcel to obtain the benefit of the “bonus floor area options” in May of this year, the three parcel owners – WPA, City of Portland and Fox Tower – entered into an amendment (the “Bonus FAR Amendment”) to the 2010 Agreement that transferred the excess FAR from the Director Park Parcel to the WPA Parcel. The Bonus FAR Amendment resulted in the City transferring the Bonus FAR available to the Director Park Parcel because of the water fountain to the WPA Parcel. This “Water Feature Bonus FAR” qualified the WPA Parcel to get an additional 10,000 square feet of FAR. The Bicycle Parking and Locker Room Bonus FAR, Fox Tower, owner of the subsurface easement on the Director Park Parcel agreed to allow WPA to construct bicycle parking and locker rooms within the easement resulting in a Bonus FAR of an additional 50,000 square feet for the Director Park Parcel, which the City as the owner of the Director Park Parcel transferred to the WPA Parcel.
As mentioned above, additional FAR has value and consideration, which is typically paid by the receiving parcel for the additional FAR. The WPA Parcel was receiving a significant increase in FAR from the Director Park Parcel and in return, although Fox Tower did not get any of the Bonus FAR, Fox Tower agreed to pay the City $100,000 to be used in maintaining and improving Director Park (Fox Tower and WPA are related entities- with the President of each entity being the same person).
But that is not the only consideration that was provided under the parties “Bonus FAR Amendment” as this Amendment provides if WPA elected to contract for security and janitorial services at its building that it would only contract “with contractors whose employees that directly perform security and janitorial services …. are represented in collective bargaining by a labor union” and “if the WPA employs persons directly to perform such work, WPA shall remain neutral during any union organizing campaign directed at security and janitorial employees …. and shall recognize the union as the representative of such employees upon a showing of majority status by the union through cards signed by such employees authorizing union representation.”
As stated above FAR has value and it is common when FAR is conveyed from one parcel to another that consideration is paid. In this case the City as the owner of the donating parcel is receiving consideration in the form of $100,000 to maintain Director Park. The other consideration granted was the above obligation of the WPA owner to use union labor. An obvious question is “why” was this included in the Bonus FAR Amendment? Was this an effort to obtain some assurance that those affected employees might receive a livable wage? Another question is “how” did this consideration end up in the Bonus FAR Amendment? Was it proposed by the City? The answers to these questions are not known, but there is an answer to “who” is benefitted by this consideration. The “who” is organized labor.
It must have been an interesting negotiation
As a real estate finance lawyer, I often review bank loan documents and shake my head over the extreme measures taken to protect the rights, prerogatives and leverage of banks. Lenders are given every conceivable remedy as against the borrowers, and borrowers and loan guarantors are required to waive all statutory, equitable and common law defenses and rights. Once in a while this approach backfires.
Standard loan documents used by many commercial banks have included a provision which said the deed of trust not only secures the obligation to repay the indebtedness, but also secures performance of “any and all obligations under the note, the related documents and the deed of trust.” “Related documents” is defined as including any “guaranties”.
At the same time, there is a general rule in Washington State and in most states that prevents lenders from obtaining deficiency judgments against borrowers and guarantors after non-judicial foreclosure of a deed of trust securing a loan. RCW 61.24.100. There are exceptions to that rule, including the provision of RCW 61.24.100(10) which allows a lender to sue a commercial loan guarantor for a deficiency if the guaranty was not secured by the foreclosed deed of trust. It is the interaction of the “related documents” language common to bank loan documents and the limited exception to the general rule prohibiting deficiency judgments which was examined by Division II of the Washington Court of Appeals in First-Citizens Bank & Trust Company v. Cornerstone Homes & Development, LLC, No. 43619-1 (Wash. Ct. App. 2013).
In First-Citizens Bank, the lender non-judicially foreclosed on a number of borrower’s properties after a series of commercial construction loans went into default. Because the amounts bid at the trustee’s sales did not fully repay the amounts owed under the loans, the bank then brought a lawsuit seeking a deficiency judgment against the loan guarantors. However the guarantors argued that because the guaranties were “related documents” which were secured by the deed of trust foreclosed, the general anti-deficiency rule of RCW 61.24.100 barred the lawsuit against them.
The bank and the amici (Washington Bankers Association) argued that the bank did not intend to secure the specific Commercial Guaranty signed by the guarantors, not withstanding the language that the “related documents” secured included “guaranties”. They also argued that the guarantors waived their right to raise the “anti-deficiency” defense in their guaranty, among the laundry list of rights and remedies which a guarantor ostensibly waives in the bank’s form guaranties.
In the first decision by an appellate court which I could find in the United States, Division II of the Court of Appeals agreed with the guarantors, that the bank was barred from seeking a deficiency judgment against them in this context. The Court ruled that the deeds of trust in question secured performance of the guaranties. While the bank may not have intended the effect of its explicit language, it drafted the instruments and is bound by the express language. To the extent the language may not have been clear, ambiguities are construed against the drafter and in favor of the guarantors. Because the guaranties were secured by the deed of trust non-judicially foreclosed, RCW 61.24.100 barred a deficiency judgment against the guarantors thereafter. It also cited recent Supreme Court precedent strongly disfavoring waivers of statutory requirements governing non-judicial foreclosures in rejecting the bank argument that the guarantors waived the anti-deficiency defense.
In a fashion which is typical in bank loan documents, the lender tried to overreach in providing protection for its prerogatives and expansive rights and remedies. This case confirmed that in this context, banks’ over-zealous efforts to provide maximum security for loan documents can backfire. Usually us lawyers representing lenders are more effective in enlarging a lender’s hammer in a way which does not harm its position. The “related documents” dragnet went too far.
As the Court noted, the bank had other approaches which would have preserved its right to sue the guarantors. But the bank chose to first conduct a Trustee’s Sale. There are at least ten cases pending in the Superior Courts of Washington or on appeal with a similar fact pattern. For commercial loan guarantors swept up in the real estate downturn of the last five years, this drafting and procedural misstep by many banks makes Christmas a little cheerier!
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