Avoiding Land Mines on Busted Residential Developments

Avoiding Land Mines on Busted Residential Developments

This is directed to a lender or holder of a mortgage loan (“Lender”) on the unsold and/or unbuilt portions of a failed condominium or planned unit development.

The market for busted developments is thin. It's limited primarily to national homebuilders looking to build up an inexpensive inventory of land. Preferably, these homebuilders seek out finished lots in “infill” locations, investors who intend to hold the land until the market returns. Or, in the case of busted condominiums, investors who intend to rent completed units, either indefinitely or until the market returns and they can sell the units to owner/occupants. These buyers are typically sophisticated and understand that busted projects often have flaws and shortcomings.

The Lender has several options in dealing with a busted development:

  1. Sell the note and mortgage;
  2. Negotiate a workout or restructuring with the borrower;
  3. Negotiate a deed in lieu deal; or
  4. Foreclose. 

Regardless of which course of action is taken, the Lender is best advised to step back and take an overall view of the development and its legal structure. This ensures that it will get, or can get, all the rights and powers that it needs to obtain in order to be able to maximize its return when it finally disposes of the paper or the land.  Often omissions or mistakes made at loan origination can be corrected during the workout, foreclosure or deed in lieu process.

Following is a list of some of the issues that the Lender needs to evaluate in order to develop an effective strategy for dealing with a troubled or busted development:

  1. Who holds the developer rights and does the Lender need to obtain them?
  2. Is there real estate that has not yet been added to the declaration or declarations and if so, who has the right to add it in and should it be added?
  3. Are there architectural controls and who has them?
  4. Who has the right to maintain sales and construction facilities and model units and conduct a sales or leasing program at the development?
  5. Has the homeowner or condo association been properly organized and is it being properly administered?
  6. Has the association been turned over, and if not, should it be turned over and when?
  7. Are there assessments or subsidies owed to the association?
  8. Is the association solvent and are there sufficient reserves built up?
  9. Can vacant units be leased?
  10. What obligations are there under development or annexation agreements that apply to the development and do they run with the land?
  11. Is there development work that needs to be completed and if so, who is responsible and is there a bond or letter of credit to secure performance?

The attorneys at Meltzer, Purtill & Stelle have been formulating plans and drafting documents for condos and PUDs for over 40 years.  We have had extensive experience in recent years dealing with troubled projects for developers, lenders and investors.  Let us show you how we can help you increase the value and/or marketability of your troubled developments.  We would be happy to do a legal audit of a troubled development, at no charge, and advise you of the issues that you need to consider and make suggestions as to how they can best be dealt with. 

We know where the land mines are buried and we can find and disarm them for you.  We will charge you our reasonable rates to disarm the land mines and add significant value to the development.  Ask us to look at your troubled deal before you decide what to do with it.

Visit our website at www.mpslaw.com or call Brian Meltzer at 847-330-2402.

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