By Saul J. Feldman and Angel K. Mozina
In this article, we will discuss ways in which the
condominium form of ownership can be used as a financing tool.
BACKGROUND
A construction lender will want broad rights to protect
its security. For example, once the
Master
Deed is recorded, the construction mortgage must be amended to show
clearly that the security is no longer the land and improvements but rather the
condominium units and the phasing rights.
There must be a broad definition of “Declarant” in the Master Deed to
include not only a foreclosing mortgagee, its successors and assigns, but also
any purchaser of the note and mortgage.
Lenders
ought to be aware of potential liability and address it whenever possible in
the financing or related documents. For
example, Section 22 of Chapter 183A imposes liability on a construction lender.
The SJC, in Moloney v. Boston Five Cents Savings Bank FSB, 422 Mass. 431
(1996), has said that Section 22 is a consumer protection statute. It covers deeds in lieu as well as
foreclosures. Proper indemnification and
waiver language in the financing documents can ensure the lender is protected
in such cases.
In Wyman v. Ayer Properties, 469 Mass. 64 (2014), the Court held that
the economic loss doctrine is no bar to construction defects claims asserted by
condominium associations. In addition to
indemnification and waiver language, a lender may require a higher liability coverage
limit when lending to a condominium developer.
The phasing/development rights are customarily covered
not only by specific and detailed references in the Master Deed but also by a
separate assignment of phasing/development rights.
Pursuant to Chapter 183A, the Massachusetts Condominium
Law, Chapter 183A applies when the sole owner or owners of land submits such
owners’ interest in the land by executing and recording a Master Deed. As Massachusetts is a “title” state, an
“owner” includes the mortgagee of record, and therefore each mortgagee must
execute a subordination of the lien of its mortgage to:
(1)
The
Master Deed;
(2)
The
entity for the organization of unit owners which may be a trust, a corporation
or an unincorporated association; and
(3)
More
generally, the condominium regime.
EXAMPLES
In each of the following examples, title insurance
companies provided (both owners and lenders) title insurance thereby making
these examples available to developers and their lenders.
The following are three (3) examples of using the
condominium form of ownership as a financing tool.
Take the case, for example, of a rental apartment complex
for low income people over fifty-five years of age. There are two high rise buildings. A condominium could be created with each
building as a separate unit. There will
be three budgets, one for Building A which becomes Unit A, one for Building B
which becomes Unit B, and one for the common areas. This form of ownership allows each building
to obtain separate mortgage financing.
Another way the condominium form of ownership can assist
in financing is phasing. Phasing can be
vertical or horizontal. Vertical phasing
is several phases in a medium or high rise building. Horizontal phasing is several phases on a
single lot. Lenders will not be willing
to finance the entire development at one time, but lenders may be willing to
finance a development on a phase by phase basis. There may be a market today for twenty (20)
units but not for 200 units. The condominium
documents and plans must be drafted carefully to allow the financing of phases.
Sometimes a development may be built with multiple
condominiums. The various condominiums
may want to get a single loan from a lender.
One way to do this is to create an umbrella trust which will include all
of the condominiums. The umbrella trust
can be the borrower as a lender will be willing to accept the umbrella entity
as the borrower. The security is not a
mortgage. The loan is collateralized by
a security agreement, a conditional assignment of revenue stream and a UCC
financing statement. The security is the
income stream the umbrella trust receives from its unit owners in the form of
the monthly payment of condominium fees.
We routinely put a paragraph in Master Deeds to address
the financing of construction. The
following is the language we use:
“The Declarant reserves the right to mortgage all or any
portion of the Condominium which is not encumbered by a mortgage for the purpose
of financing the construction phases and, until discharged, any such mortgage
shall have priority over the interests of all other Unit Owners and their
mortgages as to the phase which is encumbered by such mortgage.”
Lenders
ought to be aware of potential liability and address it whenever possible in
the financing or related documents. For
example, Section 22 of Chapter 183A imposes liability on a construction lender.
The SJC, in Moloney v. Boston Five Cents Savings Bank FSB, 422 Mass. 431
(1996), has said that Section 22 is a consumer protection statute. It covers deeds in lieu as well as
foreclosures. Proper indemnification and
waiver language in the financing documents can ensure the lender is protected
in such cases.
In Wyman v. Ayer Properties, 469 Mass. 64 (2014), the Court held that
the economic loss doctrine is no bar to construction defects claims asserted by
condominium associations. In addition to
indemnification and waiver language, a lender may require a higher liability coverage
limit when lending to a condominium developer.
Also,
a construction lender may be bound by unrecorded purchase and sale agreements
(“P&S”s) where the bank had actual notice of the P&Ss and the buyers by
virtue of the P&Ss had priority equitable interests in the condominium units. Queeno
v. Colonial Co-operative Bank, 63 Mass. App. Ct. 392, review denied 444
Mass. 1108 (2005). A lender should ensure
that a P&S for future construction contains a specific reference to the right and
intent of the developer to obtain construction financing, and the buyer should be asked to
subordinate to such financing within the text of the P&S.
Sometimes,
being a construction lender can be hazardous!
CONCLUSION
Little has been written until now about the concerns of
lenders in lending to a condominium development. We hope that this article might encourage
more thought on this important topic.
Saul Feldman and Angel
Mozina practice with the Feldman Law Office in Boston The firm's primary
specialties are commercial real estate transactions and condominium law and
development, in addition to residential conveyancing. Angel can be contacted at angel@feldmanrelaw.com. Saul can be contacted at saul@feldmanrelaw.com.
