Presentation for Japanese Business Persons: DOING BUSINESS IN CALIFORNIA Real Estate Transactions Part 3 – Basics of Deed of Trust Financing Transactions Presented by: Noriyuki Shimoda Admitted in Japan and California Squire Sanders (US) LLP Phone: 415-393-9894 Email: noriyuki.shimoda@squiresanders.com April 18, and May 16, 2012 Palo Alto Office 36 Offices in 17 Countries
Introduction •Three major areas of real estate transactions Office Lease – Seminar Part 1 Sale and Purchase – Seminar Part 2 Deed of Trust/Mortgage Financings – Seminar Part 3 2
Basic Vocabulary Real Property (Land, Building, and Fixtures)( 不動産、土 地、建物、定着物） Personal Property (Tangible or Intangible) （動産、有体動 産、無体動産） ( 不動産所 A Fee (A Fee Simple, A fee simple absolute) 有権） Preliminary Title Report （タイトルリポート） Security/Lien （担保権） Mechanic’s Lien( 工事請負人の法定担保権） 3
Basic Vocabulary Pledge （動産質権） Encumbrance （不動産上の負担、担保権もその一種） Deed of Trust (Trustor, Trustee, and Beneficiary) （信託 証書ー抵当権） Mortgage (Mortgagor and Mortgagee) （抵当権） Assignment of Leases and Rents （リースと家賃債権の譲 渡） Pledge （動産質権、担保権） 4
Basic Vocabulary Debt/indebtedness/obligation （債務・債権） Lender/Creditor/Obligee （債権者） Debtor/Borrower/Obligor （債務者） Secured Obligations （被担保債権） Collateral （担保物） Real Estate Security Interest First Principle （不動産担保 権実行優先の原則） 5
Basic Vocabulary One Action Rule （一回のアクションの原則） Wozab Letter （ウオザブ・レター） Foreclosures (judicial or non-judicial) （抵当権実行 - 裁判 上、裁判外） Redemption Right （買戻し請求権） Deficiency Judgment （残額請求判決） Non-recourse loan （ノンリコース・ローン） 6
Basic Vocabulary Recourse loan （リコースローン） Promissory Note (unsecured or secured) （約束手形 , 無担保または担保権付） Prime Rate （プライムレート） LIBOR (London Inter Bank Offered Rate) （ロンドン銀行間 取引金利） TIBOR (Tokyo Inter Bank Offered Rate) （東京銀行間取引 金利） 7
Basic Vocabulary LTV or LTVR （ Loan to Value Ratio) （不動産価値に対する ローン額の割合ー loan Amount ÷ real estate value ） DSCR （ Debt Service Coverage Ratio ）（不動産からの年 間純利益に対する年間ローン返済額の割合ー annual net revenue from real estate operation ÷ annual loan repayment amount) Recording （登記） Fixture Filing （定着物登記） UCC-1 Filing （ UCC －１登録） 8
Basic Vocabulary Purchase money deed of trust/mortgage （購入資金を被担保債権と する抵当権） Deposit Account Control Agreement （銀行口座管理契約） Loan Title Insurance （ローン用タイトル保険） Guaranty/Surety （保証） Secured loan （担保付ローン） Securitized loan （証券化されたローン） Limited Guaranty （限定的保証） 9
Typical Process • Loan Application • Loan Proposal • Opening Escrow/Request Title Report • Preliminary Due Diligence • Loan Approval / Commitment Letter • Negotiation of Loan Documents • Further Due Diligence • Execution of Documents • Closing / Funding Process 10
Loan Approval and Commitment • Typical Contents of Loan Approval/Commitment Identification of Loan Amount, Term, Costs and Collateral Major Covenants, such as LTVR, and DSCR Requirement of guaranties or other collateral Allocation of Costs Termination of Commitment 11
Due Diligence • Property Conditions • Review of Rent Roll, or, for further due diligence, review copies of Leases and tenant estoppel certificates, • Title Matters (Review of preliminary title report, recorded documents and ALTA survey) • Environmental Conditions Phase I Investigation and Report 12
Closing • Borrower’s Action • Lender’s Action • Escrow Agent’s Action 13
Closing – Borrower’s Action • Delivery of Documents to Escrow Holder Deed of Trust (signed and notarized) Other recordable documents (subordination nondisturbance agreements, assignment of leases) Fixture filing documents and UCC-1 Financing Statement Other documents needed for title insurance (resolutions of property owner to encumber property, statements of identity, indemnity against mechanics’ liens, if work on the property is ongoing) In loan transactions, other executed instruments usually delivered outside of escrow, directly to lender 14
Closing – Lender’s Action • Delivery of Money to Escrow Holder Funds (sometimes including closing costs; other times the borrower is required to fund closing costs into escrow) In some counties, such as Los Angeles, funds must be received by the escrow the day before the recording of the documents, since title companies are only permitted to record once, first thing in the morning 15
Closing – Escrow Agent’s Action • Required Actions Recording of Deed of Trust and other instruments (UCC-1 Financing Statement and/or Fixture Filing) (as to recordation of the releases of prior liens being paid off in the refinancing or acquisition, title companies often do not require actual reconveyance documents from institutional lenders, instead making payoffs in reliance on the payoff demands from them; sometimes this means that old, paid-off liens remain on the property, complicating later transactions) Disbursement of Funds Issuance of Loan Title Insurance Policy to Lender Disbursement of Documents to Lender 16
Typical Alternatives for Foreclosures • Strict foreclosure (forfeiture of the security without sale) is prohibited in California. • Private Sales/Non-Judicial Foreclosures Advantages: Quicker (usually about 4 months) and no need for lawsuit so less expensive. Disadvantages: Recourse is limited to proceeds of the sale – no deficiency judgment is allowed (though might be able to recover more from guarantors). 17
Typical Alternatives for Foreclosures • Judicial Foreclosures Advantages: Only way to get a deficiency judgment against the borrower, in the absence of fraud, waste of the property and other unusual circumstances. Disadvantages: Need to file (and incur the expenses of) a lawsuit, which is more complicated than most: prove your case, wait for the marshal to sell the property, hold a fair value hearing, then get the deficiency judgment; subject to one year redemption right for the borrower applies to judicial foreclosures, tending to depress resale prices. 18
Common Documents for Deed of Trust Transactions • Loan Agreement • Promissory Note • Deed of Trust. • Fixture Filing Document • Assignment of Rents and Leases • Subordination Nondisturbance Agreements • Environmental Indemnity Agreement • Legal Opinion 19
Other Documents • Security Agreement • UCC-1 Financing Statement • Deposit Account Control Agreement • Guaranty Agreement • Construction Loan Assignments 20
Common Documents for Deed of Trust Transactions • Loan Agreement – not always needed if the loan is a single disbursement, but it is needed if there are multiple or construction disbursements and if there are complex covenants and conditions. 21
Common Documents for Deed of Trust Transactions • Promissory Note – common to virtually all real estate loans • Basic Terms of Promissory Note Payment Reference to security in deed of trust Cross default with deed of trust Covenant to maintain collateral 22
Common Documents for Deed of Trust Transactions • Deed of Trust – standard form used in California to create a security interest on real property. Borrower grants the property to a trustee to hold for the benefit of the lender (the trustee does not have to accept the trust; usually a title company is named without prior consent or consultation). Typical covenants include maintenance obligation, obligation to insure, obligation to pay taxes and keep the property free and clear of liens. 23
Common Documents for Deed of Trust Transactions • Assignment of Rents and Leases – commonly used although there is no compelling legal need for a separate assignment of rents and leases; those clauses can also be in the deed of trust. Assignment of rents is especially important in judicial foreclosures, to preclude borrower from skimming off rents after it has defaulted. 24
Common Documents for Deed of Trust Transactions • Subordination Nondisturbance Agreements – Tenant agrees to subordination while securing a tenant’s right to continue the use of the premises as long as there is no default. 25
Common Documents for Deed of Trust Transactions • Fixture Filing Document – Deed of trust can usually have a fixture filing; there is no compelling legal need for a separate fixture filing, which adds the further complication of expiring after 5 years unless continued, just as other UCC filings. 26
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