To continue our series to recap the Real Estate Investment Society’s “Challenges and Strategies for Property Development Today” workshop, and to follow Cody Vaughan-Birch‘s post on Development Incentives and Local Pro-Growth Policies, the second panel of professionals provided an overview of the current trends, challenges and strategies in property development from a legal and practical perspective.
Southwest Florida Real Estate: Problem or Opportunity?
Steve Hartsell, a zoning and land use attorney with the Pavese Law Firm, summarized two circumstances where legal and practical strategies are needed:
- an owner trying to retain challenging properties and determining what to do with the property to increase its value; and,
- a buyer or bank determining whether to purchase or foreclose on a challenging property.
What is challenging property? Mr. Hartsell listed several criteria centered on property values being far less than the loan amount, as well as potential owner bankruptcy, accumulated fees and assessments, lack of income, incorrectly performed foreclosures, uninsurable title and incomplete construction.
Owners, investors, or lenders must consider whether these challenges are problems or opportunities. Mr. Hartsell suggests taking inventory on existing permits to know when they expire and, if necessary, apply for extensions. Recent legislation allows DRI’s or various deadlines within a DRI to be extended for up to four years. In the present climate, governments are more receptive to creative ideas. Take advantage of the regulatory climate and be creative to make your project work by thinking about alternative uses that may be permitted, may provide opportunities to the community, and may provide tax benefits to the owners.
Home Owner Challenges
Tom Gunderson, a Florida Board Certified real estate attorney at Henderson, Franklin, Starnes & Holt, P.A. addressed common questions he is asked by clients, as well the types of transactions he has been handling. There are some homeowners asking whether they can convey their “upside down” property back to the bank, even if they can afford to make the payments. Unless the owner can prove hardship, it is not likely. The lender will look at tax returns, income and other financial information. The owner must consider potential tax liability if a deficiency exists between the value of the property given back to the bank and the balance of the mortgage. Documentary stamp taxes are also triggered with a deed in lieu of foreclosure, which is probably based on the outstanding principle of the mortgage.
Challenges Creating Opportunity
Mr. Gunderson indicated there are a lot of investors looking at buying mortgages in default from a bank, with the intent of ultimately obtaining title to the property by foreclosure or deed in lieu of foreclosure. The process usually involves a short due diligence period, during which the buyer should review whether the loan documents were done properly, and whether the proper foreclosure procedures have been followed. Standard due diligence of the property itself is also performed, which may involve engineers, land use attorneys, surveyors and environmental consultants. Once the buyer owns the mortgage, they will have to determine whether to foreclose or negotiate a deed in lieu of foreclosure. Completing the foreclosure may result in documentary stamp tax savings if the borrower does not put up a fight. Some of the main risks in buying these mortgages is that the owner or guarantor may file bankruptcy or may aggressively defend the foreclosure, increasing the costs to the investor and delaying time until the property is obtained.
Mr. Gunderson listed other considerations to review when buying challenging properties, including:
- successor developer rights and obligations
- status of completion of the infrastructure
- outstanding association assessments
- if the property is in receivership, is the receiver authorized to sign a sales contract and deed?
Taking Advantage of the Opportunity
Timothy Byal, Vice President of Finance for Miromar Development Corporation, discussed the practical approach to dealing with challenging properties. Mr. Byal stated he encourages buyers and investors to set aside long timeframes and sufficient dollars to make sure due diligence and property acquisition is done properly. He believes the market prices are stable, but a lack of demand exists due to the economy. The benefit of the uncertainty in demand is that everything is severely discounted. Mr. Byal believes if buyers are willing to accept risk and get entitlements extended, the investment may start to pay off in 18-24 months. He agreed that it is important for a buyer to work through the project’s issues with the development professionals of local government in the meantime.
The panel members agreed that opportunities exist in the present market for buyers who have the resources to acquire and hold onto the property, assume the risk, and work through the practical and legal issues involved.