Chapter 2 (Real Estate Financing: Notes and Mortgages) Flashcards
What are the documents involved in a real estate deal when closing?
- Purchase and sale agreement (contract for purchase of real estate)
- deed (needs to be signed and gives you the right to the building)
- Promissory note (document that the lender needs letting him/her know how much you have to pay back and all the details)
- Mortgage or deed of trust (evidence of security for the loan; also for the lender)
has value (to secure debt) and is capital intensive
real estate
has cash flow (to service debt)
investment property
A ___ is evidence of Debt, an “IOU”
Note
Major Provisions:
- amount borrowed
- rate of interest
- dollar amount, due dates, # of payments
- interest only, amortizing or partial am (nature of payback)
- maturity date
- reference to security for a loan
- application of payments
- Default (when you do not follow the terms of the note)
- penalties for late payment and forbearance provisions
- provisions for unscheduled payments
- notification of default and acceleration clause
- non-recourse clause
Example of a major provisions:
if you do not pay within the days they tell you the lender has the right to accelerate declaring total due amount is due NOW instead of the payments. we don’t have to accept the payments. further action will be foreclosure where you loose the property and your 30 million that you paid in cash is lost
acceleration clause
your credit card is a recourse loan, affects your risks of owning the property, needs to be clearly stated in the promissory note, there are exceptions called BAD BOY provisions which can cause you to get recourse of the loan because of the damage you did to the building
non-recourse clause
- liability is limited to specified collateral
- even if there is non-recourse clause, loans are generally with “recourse” if the “bad boy” provisions (carve-outs) are violated. For example, if the borrower willfully damages the asset, the borrower may be held personally responsible for the damage
- declaration of bankruptcy can also be a “carve-out” event
non-recourse clause
- evidence of the security
- pledges property as security
mortgage
This is the borrower, He/she is mortgaging his/her property.
mortgagor
This is the lender that receives the benefit of the mortgage.
mortgagee
promises to the owner of the building that the building is going to be kept in good condition
covenants
- Funds for Taxes & Insurance (escrow), common on a residential loan
- charges & liens (promise to pay taxes, liens)
- hazard insurance
- preservation and maintenance of the property
- transfer of property (or a beneficial interest in borrower) may trigger a “Due on Sale Clause”
- borrower’s rights to reinstate
- right of entry: lender in possession
- future advances
- subordination clause (seller financing)
important clauses for Mortgage instruments
Example:
putting in lights in a building before the 70 million loan was done, contractor comes back says he needs his 4,000. The 4,000 has to be paid first because it was done before the loan was taken out.
subordination clause
What are 6 types of properties that are covered?
- land
- improvements
- easements
- fixtures (anything that is permanently in place, special case of trade fixtures)
- mineral rights
- after-acquired property (improvements): example would be adding a 20 million parking lot to the building enhances the building
type of lien that would be the one that lent the 70 million, he has the first rights when the property is sold, would make sure this loan would be recorded first on time
Senior (1st lien) Mortgage
