Posted By: Anne E. Wal & Donald A. Schoenfeld & David I. Cisar

- Practice Area: Restructuring and Insolvency & Banking and Commercial Finance & Real Estate

This Update talks about the analysis that a Wisconsin lender ought to undertake to identify if it must take an assignment of a developer's arrangement as part of a deed-in-lieu of foreclosure transaction.

Deeds-In-Lieu of Foreclosure Generally
Reclaiming a deed to a residential or commercial property is an alternative to the in some cases prolonged and costly judicial procedure of foreclosing on an overdue loan. In a "deed-in-lieu" transaction, the celebrations agree that the lending institution will take title to the real residential or commercial property protecting the customer's defaulted note in exchange for the loan provider releasing the customer (in full or partly) of its liability under the defaulted note.

Although the lending institution is both the residential or commercial property owner and lienholder after the deed-in-lieu deal is finished, the files (the deed, deed-in-lieu agreement and estoppel affidavit) usually supply that the parties mean not to merge the mortgage into the ownership of the residential or commercial property (the "cost" interest). A non-merger endorsement must be obtained from the title business to insure that the deed and mortgage remain different.

The financial obligation should be maintained if the loan provider requires to begin a foreclosure to erase junior liens and encumbrances after it becomes the cost owner. This can be done by making the financial obligation non-recourse as to the customer in the deed-in-lieu agreement. (Note that some courts beyond Wisconsin have held that merger of the mortgage and charge interest does happen if the lending institution takes title with understanding of one or more junior liens, meaning that the obligations evidenced by the junior liens can not be extinguished).

Due Diligence
Before accepting take a deed-in-lieu, a lender must carry out substantial due diligence due to the fact that it will be taking the real estate subject to all of its risks and possible liabilities - i.e., environmental concerns, overdue taxes, judgments, and other liens and encumbrances. The lending institution must make sure that it has examined all documents affecting the mortgaged residential or commercial property, including easements, plats, encumbrances on the title, the closing book from the borrower's acquisition of the residential or commercial property, all strategies prepared in connection with establishing the project, and documents evidencing a hallmark or brand name for the project.

The loan provider ought to likewise carry out an extensive analysis of any designer's agreement connecting to the residential or commercial property before it decides to take a task. A developer's arrangement is an agreement between a municipality and a property designer that specifies the municipality's requirements for an advancement. It might consist of, for instance, provisions needing that public enhancements and infrastructure (such as streets, water, hygienic drain, storm water drainage) be constructed, needing that just a particular kind of development can be built, determining the optimum variety of property or commercial units, needing that payments (such as connection fees) need to be made to the town, needing that a certain quantity of green area should be maintained, or needing that streets or land should be dedicated to the town. Among other things, the lender will wish to understand the commitments under the developer's contract that have been completed, those that remain to be done and the cost of satisfying the remaining obligations.

Lender's Options For Handling Developers' Agreements
The lender has various alternatives depending upon whether the designer's arrangement is subordinate to the lending institution's mortgage. If the designer's arrangement is secondary to the mortgage, the lender might treat it the very same as other junior liens on the residential or commercial property and foreclose out the developer's arrangement (if the mortgage and the cost interest do not merge and the financial obligation has actually been protected). On the other hand, this might not be the finest course of action if future dealings with the municipality are required.

If the loan provider is not going to foreclose out the developer's contract (or if the designer's arrangement is not secondary to the lending institution's mortgage), the lending institution should choose whether to take an assignment of the contract. The very first concern is whether it is assignable. The town might have required its previous consent to any project. When a developer's contract does not state whether it might be assigned, the basic law of assignability controls and, like other agreements that do not specifically permit or prohibit project, it would be assignable.

The more difficult question is not whether the loan provider can take task, but whether it should. There is nobody aspect that drives this decision - rather, the lending institution requires to weigh the impact of multiple elements to determine what option will best serve its interests. Principle aspects include:

Whether the loan provider has actually supplied the municipality with a letter of credit. As part of a designer's arrangement, a municipality might need the developer to post a letter of credit as assurance for satisfying the requirements in the arrangement. The lending institution might have supplied such a letter of credit. If the lender is "stuck" with the expense of completing the remaining requirements under the designer's contract anyhow, because it has provided the letter of credit, it might make more sense to take a task.
What stage of development the job remains in at the time. The lending institution must figure out the phase of the advancement. If the uncompleted work is substantial, the loan provider may not desire to take a project of the designer's agreement, as it might not want to dedicate to doing all that is still required.
Whether the town is ready to negotiate. Instead of taking a task, the loan provider might wish to consider approaching the town to renegotiate the designer's arrangement (for example, permitting a multi-family apartment rather of single-family lots). If an advancement has actually stagnated and the lender believes the existing plan in the designer's arrangement is not marketable under present conditions, the lending institution may want to renegotiate a developer's arrangement to fit current market conditions. The lender ought to think about the possibility that it may be tipping its hand to the municipality that a bank is involved, which the municipality might view as a "deep pocket" to finish the development. Most significantly, the lender needs to reach out to the town only if the borrower/developer concurs and is, together with its counsel, associated with the discussion, which should minimize or prevent any allegations that the lender interfered with the borrower/developer's company.

Benefits and drawbacks associated with taking a project of a designer's contract as part of a deed-in-lieu transaction also consist of:

Pros:

- The lender has utilize with the municipality by offering to take the assignment and may remain in a much better position to renegotiate the developer's contract in connection with the deed-in-lieu deal (topic, as discussed above, to the borrower/developer's consent and participation).
- By taking a task, the lender can even more appoint the designer's agreement as part of a sale to another developer, improving its ability to realize the value of the security.
- The lender may be able to lower or remove a letter of credit it has in place with the town by taking an assignment and thereby consenting to complete the remaining commitments under the developer's arrangement.

Cons:

- The lending institution will assume the liability of the borrower/developer for its previous acts or omissions under the developer's arrangement.
- The lender might undergo claims from third parties for work it finishes after taking the task.
- The lending institution might require to employ an expert management company to help the lending institution with managing the commitments under the designer's arrangement.
- If the borrower/developer remains in default of arrangements of the designer's arrangement, the loan provider might need to expend a considerable quantity of money to cure such default.
- The town might see the loan provider as a "deep pocket" to complete the remaining commitments under the designer's arrangement.

Understand the Fundamentals of Each Unique Situation
Ultimately, a lender's decision whether to take a project of a designer's agreement as part of a deed-in-lieu transaction will involve analysis of all of the factors explained in this Update. This analysis will allow the lending institution to develop a more complete image of the benefits and dangers of taking a project before making this crucial decision.

von Briesen Legal Update is a regular publication of von Briesen & Roper, s.c. It is meant for general details functions for the community and highlights current changes and advancements in the legal location. This publication does not constitute legal advice, and the reader should consult legal counsel to identify how this information applies to any specific situation.