Vada Lindsey - Real Estate Finance in a Nutshell

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Professor of Law Emeritus, University of California, Los Angeles

A. BENJAMIN SPENCER

Earle K. Shawe Professor of Law,
University of Virginia School of Law

JAMES J. WHITE

Robert A. Sullivan Professor of Law Emeritus,
University of Michigan

REAL ESTATE FINANCE

IN A NUTSHELL

SEVENTH EDITION

VADA WATERS LINDSEY

Associate Professor of Law
Marquette University Law School

The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.

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ISBN: 978-1-68328-263-1

To my wonderful daughter
Alexis Taylor Lindsey

PREFACE

The seventh edition of this book examines the law of real estate finance. It is intended to be used as an introductory guide for lawyers and a general reference for law students who are enrolled in law school classes that address real estate finance issues. It discusses the fundamental rules related to various types of mortgage instruments, priority of encumbrances, loans in default and foreclosure. This book summarizes the law and relies on case and statutory law from various states to provide context to the application of rules that are fundamental to real estate finance.

The seventh edition greatly expands the federal governments involvement in real estate finance resulting from the subprime loan crisis and the Great Recession that was in its early stages when the prior edition of this book was written. The seventh edition includes a discussion of the changes in the regulatory landscape, including the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The tax consequences of issues related to real estate finance are critical. Therefore, this edition discusses various tax issues related to mortgages and real estate finance. It discusses the tax consequences of loan modifications, deeds in lieu of foreclosure and short sales. In addition, this edition includes a new chapter on advanced tax issues. That chapter outlines the fundamental tax issues, including the tax issues related to the inclusion of debt in an owners adjusted basis, depreciation, disposition of real property encumbered by a mortgage, form of ownership, limitations on deductions and character of gain or loss. This chapter also addresses the tax treatment of like kind exchanges, installment sales and sale and leaseback transactions.

Several people played significant roles in helping me write the seventh edition of this book. First, Vanderbilt Law School Professor of Law Emeritus Jon W. Bruce, the author of the first six editions of this book, provided me with a great foundation. In addition, I am grateful to Professor Carol N. Brown, a professor of law at the University of Richmond School of Law, for recommending me to West Publishing Co. to become the new author of this book. I also owe a thank you to Elana Olson, director of the Eckstein Law Library at Marquette Law School for her research support. Finally, I want to thank my three talented and dedicated research assistants, Edona Ajvazi, Matthew Carlson and Emily Greene, for their excellent research.

Vada Waters Lindsey

September 2017

OUTLINE

. Introduction to Law of Real
Estate Finance

V. Ground Leases and Other Forms of
Leases

Fundamentals of Ground
Leases

B. Mortgaging Separate Interests in
Same Land

B. Methods of Securing Future
Advances

a. Graduated Payment
Mortgage

Relationship Between
Construction Lenders and Permanent Lenders

Construction Lenders Special
Risks

a. Nature of Construction
Lenders Risk

Community Housing
Authorities

Nonrefundable Commitment
Fees

Importance of Mortgagors
Equity

Second Mortgages vs.
Refinancing

A. Increase in Risky Loans and Loans
with Adjustable Rates

B. Increase in Mortgaged-Backed
Securities

C. Losses Sustained in Major
Institutions

. Federal Government
Involvement in Financing Process

B. Interstate Land Sales Full Disclosure
Act of 1968

C. Real Estate Settlement Procedures
Act of 1974

D. Home Mortgage Disclosure Act of
1975

E. Comprehensive Environmental Response, Compensation, and
Liability Act of 1980

H. The National Flood Insurance
Program

I. Emergency Economic Stabilization
Act of 2008

. Transfer of Mortgagors
Interest

C. Rights and Obligations of Parties
When Mortgage Survives
Conveyance

c. Successive Assumption Conveyances/Break in
Chain of Assumptions

d. Termination or Modification
of Assumption Contract

Automatic Enforcement
Approach

Window Period Loan
Exception

IV. Further Encumbrance of Mortgaged
Property

. Transfer of Mortgagees
Interest

VI. Fractional Assignments (Loan
Participation)

D. Priority Absent AgreementSeries
of Notes

c. Order-of-Maturity
Exception

Purchaser of Mortgaged
Property

A. Definition and Significance of
Default

Failure to Pay Principal and
Interest

Failure to Pay Taxes or
Insurance

b. Collecting Rent from
Mortgagor in Residence

c. Operating Mortgagors
Business

Tax Consequences of a Deed in
Lieu of Foreclosure

D. Recovery on the Note Alone/One
Action Rule

Subordination of Purchase
Money Mortgage to Construction Loan Mortgage

b. Subordination Agreement
in General

c. Describing Construction
Loan

d. Obtaining Construction
Loan Described

e. Diversion of Construction
Loan Funds

Subordination of Lease to
Mortgage and Vice Versa

Subordination of a Mortgage on
the Fee to Leasehold Mortgage

Construction Lenders
Dilemma

a. Relation Back to Commencement of
Construction

Constitutionality of Mechanics
Lien Statutes

Other Protection for Mechanics
and Materialmen

Sale in Inverse Order of
Alienation Rule

III. Federal Legislation Affecting