Classes 13 - 16: Post-Closing Terms of the Mortgage Loan Commitment - Feb. 26 - Mar. 6

Question 1

What is a joint venture? (Bender)

Answer 1

A joint venture is where the lender purchases an interest in the property and creates a general or limited partnership, or other ownership entity, between itself and the developer. (258)

Question 2

What is a convertible mortgage? (Bender)

Answer 2

A convertible mortgage is where the lender reserves the right to convert some or all of the mortgage indebtedness into a partnership or other equity interest, or, alternatively, obtains an option to purchase all or part of the mortgaged property during the term of the loan. (258)

Question 3

What is a participating mortgage? (Bender)

Answer 3

A participating mortgage is where the lender’s investment return is contingent on the income and/or appreciation in the value of the mortgaged property. (258)

Question 4

What is a kicker? (Bender)

Answer 4

A kicker is where a lender would receive, as contingent interest, a percentage of gross income (receipts) or net income (cash flow) from the property or a percentage of the gain based on appreciation in the value of the mortgaged property when it is sold or refinanced. (258)

Question 5

What does a usury law do? (Emanuel)

Answer 5

A usury law limits the amount of interest a lender may charge a borrower. (176)

Question 6

What does the term compounding in compounding interest mean? (Emanuel)

Answer 6

The term “compounding” refers to how often interest on the loan is calculated. Frequent compounding raises the effective interest rate. (176)

Question 7

What does simple interest mean? (Emanuel)

Answer 7

Means that interest on the loan is compounded annually. A usury law with a fixed annual maximum rate is usually calculated based on simple interest.

Question 8

When is simple interest usually applied? (Emanuel)

Answer 8

Simple interest is common for a loan with only a single payment, due at maturity.

Question 9

When is interest usually compounded? (Emanuel)

Answer 9

For installment loans, interest is usually compounded at the end of the period when an installment is due.

Question 10

What is a wrap-around mortgage? (Emanuel)

Answer 10

A wrap-around mortgage is a junior mortgage in which the junior debt includes the senior debt. Both of the debts are installment obligations. (240)

Question 11

What happens in a wrap-around mortgage? (Emanuel)

Answer 11

The borrower pays the holder of the junior debt (the wrap-around loan), who in turn pays the holder of the senior debt (the wrapped loan). (240)

Question 12

What is the purpose of wrap-around mortgages? (Emanuel)

Answer 12

The purpose of a wrap-around mortgage is to preserve the senior loan. (240)

Question 13

What is the risk to the wrap-around lender? (Emanuel)

Answer 13

Reduced because borrower pays all money to the junior and the junior forwards the amount to the senior lender. (240)

Question 14

What is the risk to the wrap-around borrower? (Emanuel)

Answer 14

Borrower has risk that junior will not properly forward funds to the senior lender. (240)

Question 15

What is post-default interest? (Emanuel)

Answer 15

Loans may require borrower to pay a higher rate after default. In some states, usury laws limit post-default rates. (177)

Question 16

What is a variable rate mortgage? (Bender)

Answer 16

A variable rate mortgage (VRM) is an alternative mortgage instrument which includes different varieties of variable interest rates that are geared to some objective reference point, either domestic or foreign or simply renegotiated at regular intervals. (275)

Question 17

What is a mini-perm loan? (Bender)

Answer 17

A mini-perm loan is a combined construction-permanent loan that is relatively short-term (ex: 7-10 years) and converts from an interest-only construction loan to a (prenegotiated) fixed rate permanent loan once construction is completed. (275)

Question 18

What is a bowtie loan? (Bender)

Answer 18

A bowtie loan features a floating rate and contains a cap on interest payments so that any interest above a stipulated ceiling amount is deferred as a balloon payment that is not payable until the loan matures. (276)

Question 19

What is amortization? (Bender)

Answer 19

Amortization is repayment of the principal during the life of the loan. (277)

Question 20

What is a nonrecourse loan? (Emanuel)

Answer 20

Under a nonrecourse loan, the lender is limited to proceeding against the collateral if the mortgagor defaults. Personal liability for waste is unclear in nonrecourse loans.

Question 21

What are some examples of carve-outs that may be subsumed under waste? (Bender)

Answer 21

Failure to discharge mechanics’ liens, failure to insure, failure to comply with laws, failure to maintain the property, removal of personal property and failure to pay real estate taxes and insurance premiums. (287)

Question 22

What are carveouts? (Bender)

Answer 22

Carveouts are when a nonrecourse loan becomes recourse when a specified event, such as waste, takes place (look for public policy arguments re: bankruptcy, alienation, right of redemption)

Question 23

What happened in CSFB 2001-CP-4 Princeton Park Corporate Center, LLC v. SB Rental I, LLC (2009)? (Q)

Answer 23

A nonrecourse carveout clause in a mortgage note is not an unenforceable liquidated-damages clause.

Question 24

What happened in GECCMC 2005-C1 Plummer Street Office Limited Partnership v. NRFC NNN Holdings, LLC (2012)? (Q/TB)

Answer 24

If a tenant stops paying rent and abandons leased property, the lease is not terminated if the lease states that these actions do not constitute a termination.

Question 25

What happened in River East Plaza, LLC v. Variable Annuity Life Insurance Co. (2007)? (Q)

Answer 25

A clause within a mortgage note that requires a fee to pay off the loan early is not an unenforceable penalty clause.

Question 26

What happened in Savarese v. Ohio Farmers Insurance Co. (1932)? (Q)

Answer 26

If insured property is damaged and the owner, without the consent of the insurance policy or the mortgagee, repairs the property, the mortgagee is entitled to use or apply the insurance-policy proceeds. The mortgagee cannot keep the money as profit.

Question 27

What is a coinsurance provision? (Bender)

Answer 27

A coinsurance provision relives the insurer of the obligation to pay a portion of the loss if the property is underinsured. (317)

Question 28

What are the two types of loss-payable clauses? (Bender)

Answer 28

The two types of loss-payable clauses are the old "open mortgage" clause and the more recent and widely prevalent "New York standard," "standard," or "union mortgage clause." (317)

Question 29

What is the old "open mortgage clause"? (Bender)

Answer 29

Under an open mortgage clause, the mortgagee is deemed to be a mere appointee of the mortgagor, who stands in the shoes of the latter and is therefore subject to any defenses the insurer might have against the mortgagor. (317)

Question 30

What happens under the standard loss-payable clause? (Bender)

Answer 30

Under the standard clause, the mortgagee may recover even if the loss is caused by the insured mortgagor (for example, by arson) and (as held in Savarese) even when the mortgagee's security interest was not impaired by the loss. But the mortgagee would not be protected if the mortgagor neglects to pay the the insurance premiums in a timely manner. (318)

Question 31

What happened in La Sala v. American Savings & Loan Association (1971)? (Q)

Answer 31

A loan provision that accelerates the loan upon any executed junior encumbrance is an invalid restraint on alienation.

Question 32

What does the Garn-St. Germain Depository Institutions Act do? (Bender)

Answer 32

Under the Garn-St. Germain Act, subject to certain exceptions, "due on sale" clauses are freely enforceable IAW their terms notwithstanding contrary state law, including any court decisions that would limit enforcement to transfers that jeopardize the lender's security. The Act expressly invalidates due-on-encumbrance clauses in residential real estate loans (with further than five dwelling units). (327)