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HomeMy Public PortalAbout2008.12.24 Ltr Lindley Kirkpatrick from White PetersonHITE PETERSON Wm. F. GIGRAY, III MARY F. GIGRAY-SHANAHAN MATTHEW A. JOHNSON WILLIAM F. NICHOLS * CHRISTOPHER S. NYE ATTORNEYS AT LAW WHITE, PETERSON, GIGRAY, ROSSMAN, NYE & NICHOLS, P.A. CANYON PARK AT THE IDAHO CENTER 5700 E. FRANKLIN RD., SUITE 200 NAMPA, IDAHO 83687-7901 TEL (208)466-9272 FAX (208) 466-4405 EMAIL: wfn@whitepeterson.com December 24, 2008 Lindley Kirkpatrick, City Manager City of McCall 216 E. Park Street McCall, Idaho 83638 PHILIP A. PETERSON TODD A. ROSSMAN DAVIS F. VANDERVELDE ** TERRENCE R. WHITE *** * Also admitted in OR ** Also admitted in NV *** Also admitted in WA Sent via email Re: Lender request for analysis of warranties and the Ground Leases for community housing units on McCall Avenue, McCall, Idaho Dear Lindley: As City Attorney, I have been asked to express my opinion on various warranties and assurances sought by commercial lenders that may extend credit and make loans to individuals purchasing community housing built on land owned by the City of McCall and leased initially to Neighborhood Housing Services. In preparation for rendering these opinions, I have reviewed the Ground Lease dated September 28, 2006 between the City of McCall, Idaho and Neighborhood Housing Services, Inc., and the First Amendment to Ground Lease dated November 6, 2008, and a third document complied by Flagstar, which contains a number of warranties related to the effect, or lack of effect, a Ground Lease will have upon loan documents that encumber a lessee's leasehold interest. This specific letter pertains to the lease of the following real property in McCall, Valley County, Idaho: All that certain lot, piece or parcel of land situate in Valley County, Idaho and shown as Lot 3, Block 3, Greystone Village No. 3, a plat which is recorded in the office of the recorder of Valley County, Idaho. I express no opinion with respect to the terms of any loan documents that any lender may use to collateralize a loan. We have not examined, or been asked to examine, any documents associated with any loans or potential loans secured by a leasehold interest in the McCall Avenue Community Housing. The law covered by this opinion is limited to the federal law of the United States and the law of the state of Idaho. We express no opinion with respect to the law of any other jurisdiction. We have assumed that the lessees and lenders will comply with all state and/or Lindley Kirkpatrick December 16, 2008 Page 2 federal laws and regulations applicable to them arising out of any loans regarding the McCall Avenue homes. For the purposes of this opinion, and the answers given to the questions raised by the various warranties, the term "Ground Lease" shall include the Ground Lease referred to above, and all amendments thereto that are in effect on the date of this opinion. All matters related to dates, or terms of years, assume a beginning date equal to the date of this opinion. The term "covenants, conditions, and restrictions" shall include, but not be limited to, the applicable Valley Adams Regional Housing Authority Community Housing Guidelines and Recorded Covenants, including any recorded amendments to said covenants. The Ground Lease has been reviewed and all warranties are met per Flagstar guidelines as detailed below. For ease of review, I have reproduced each separate warranty contained in the Flagstar document and have issued my comments specific to that warranty immediately after each one. WARRANTIES FNMA GUIDELINES 1. Mortgage must cover the property improvements as well as the mortgagor's leasehold interest in the land. It will be the responsibility of each lender to insure that this warranty is met. The Ground Lease does not address this warranty. 2. The leasehold estate and the improvements must constitute real property, be subject to the mortgage lien, and be insured by the lender's title policy. Idaho Code 55-101 defines real property as: 55-101. REAL PROPERTY DEFINED. Real property or real estate consists of: 1. Lands, possessory rights to land, ditch and water rights, and mining claims, both lode and placer. 2. That which is affixed to land. 3. That which is appurtenant to land. Whether the lender obtains a title insurance policy is a matter for which the lender is responsible, and the terms of which are governed by the title insurer's underwriting guidelines and contract. 3. The term of the estate should run for at least five years beyond the maturity date of the mortgage. This requirement does not apply if fee simple title will vest in the borrower, owners' association, or a cooperative corporation at an earlier date. Assuming that the term of the mortgage does not exceed thirty (30) years, the Lindley Kirkpatrick December 16, 2008 Page 3 Ground Lease will, in the absence of default, extend at least five (5) years beyond the maturity date of the mortgage. 4. The leasehold must be assignable or transferable, In addition, the lease must contain no default provisions that could give rise to forfeiture or termination of the lease except for nonpayment of the lease rents, and should guarantee Flagstar Bank the right to receive notice of any default by the borrower and to cure the default. The lease must also include provisions to protect the mortgagee's interests in the event of a property condemnation. The Ground Lease is transferable so long as the Lessee complies with Section Eleven of the Ground Lease. The Ground Lease speaks for itself regarding what will constitute a default. Section Ten of the Ground Lease entitles a lender to: request notice from Lessor, to receive copies of Notices from Lessor to Lessee, and the right to cure any defaults so long as the actions, if done by the Lessee, would cure the defaults. Eminent domain issues are addressed in Section Twenty -Eight of the Ground Lease, which section speaks for itself. 5. A11 lease rents, other payments, or assessments that have become due must be paid, and the borrower must not be in default under any other provision of the lease - nor may such a default have been claimed by the lessor. In all respects the lease must be valid, in good standing, and in full force and effect. This warranty must be addressed by Lessor when requested by a lender. Whether a Lessee is in default, or the lease is current and the Lessee is in good standing, is a factual question to be addressed by the Lessor in each instance. 6. The lease must provide that the borrower will pay taxes, insurance, and owners' association dues related to the land in addition to those he or she is paying on the improvements. The lease must also provide for the borrower to retain voting rights in any owners' association. See Section Thirteen of the Ground Lease, which speaks for itself. 7. The lease may, but is not required to, include an option for the borrower to purchase the fee interest in the land. If the option is included, the purchase must be at the borrower's sole option and there can be no time limit within which the option must be exercised. Both the lease and the option to purchase must be assignable, The purchase price must be the lesser of: a. the current appraised value of the land; or b. the amount that results when the percentage of the total original appraised value that represented the land alone is applied to the current appraised value of the land and improvements The Ground Lease does not include an option to purchase the fee interest in the Lindley Kirkpatrick December 16, 2008 Page 4 land. 8. The lease must provide that the leasehold can be transferred, mortgaged, and sublet an unlimited number of times either without restriction or on payment of a reasonable fee and delivery of reasonable documentation to the lessor. The lessor may not require a credit review or impose other qualifying criteria on any transferee, mortgagee, or sublessee. The leasehold estate and the mortgage must not be impaired by any merger of title between the lessor and lessee or by any default of a sublessor. Section Eleven of the Ground Lease does not contain any limitation on the number of times the Ground Lease may be assigned or sublet, or the number of times the leasehold interest may be mortgaged. The Ground Lease does not contain a credit review criterion but does require that the premises be used in accord with recorded Covenants, Conditions and Restrictions, and in some cases, upon payment of additional rent. Notice to Lessor of transfer or sublet is required. Any transfer by a Lessee of its interest in the Ground Lease will be subject to the interests of the then existing lender(s). Whether the leasehold estate is impaired by the default of a sublessor is a factual matter to be determined at the time of default. Any such default would trigger the notice of default provisions set forth in Section Twenty - Five of the Ground Lease. FHLMC GUIDELINES. FHLMC will purchase a mortgage secured by a leasehold estate, including a mortgage secured by a leasehold estate in a ground lease community. A mortgage that is secured by a leasehold interest is considered to be a leasehold mortgage. All eligible property types, including 1-4 unit properties, manufactured homes, PUDs, and condominium units are eligible as leasehold mortgages. For each leasehold mortgage, the following guidelines apply: 1. The leasehold mortgage constitutes an interest in real estate. It will be the responsibility of each lender to insure that this warranty is met. The Ground Lease does not address this warranty. This is a warranty that applies to a mortgage document not a lease. 2. The lease and any sublease (including all amendments) are recorded in the appropriate land records. A memorandum of lease or sublease may be recorded in lieu of the complete lease or sublease. The Ground Lease is recorded. Whether future transfers or subleases are recorded is beyond the scope of this opinion. I cannot opine on future acts. 3. The lease is in full force and effect and is binding and enforceable against the lessor. Lindley Kirkpatrick December 16, 2008 Page 5 To the best of my knowledge, the Ground Lease is in full force and effect and is binding and enforceable against the Lessor. 4. If the lessor's fee simple interest in the land is subject to any encumbrances or liens, the fee simple lienholder has executed and recorded a nondisturbance and attornment agreement that contains the following provisions. a. The lease or any of the rights of the lessee under the lease will not be terminated or otherwise affected by enforcement of any lien or other rights granted to the fee simple lienholder b. The rights of the leasehold mortgagee will not be terminated or otherwise affected by enforcement of any lien or rights granted to the fee simple lienholder c. The fee simple lienholder will not name the lessee or the leasehold mortgagee as a party defendant in any action to enforce its lien d. If the fee simple lienholder forecloses on its lien, the lease will continue in full force and effect as a direct lease between the fee simple lienholder and the lessee or, if applicable, the leasehold mortgagee e. The fee simple leinholder will accept the attornment to the lease f. The lien of the fee simple lienholder on the real property does not extend to the improvements and fixtures, real or personal property owned by the lessee g. The lessee and the leasehold mortgagee have no liability or obligation to the fee simple lienholder in connection with its lien on the fee simple interest h. Condemnation and insurance proceeds awarded to the lessor will be used for restoration, repair, or replacement of the property damaged or taken by condemnation if economically feasible. To the best of my knowledge, there are no encumbrances or liens against the Lessor's fee simple interest in the land. The nondisturbance provisions listed above may be contingent on the lease being in full force and effect and the lessee (or the leasehold mortgagee if it has exercised its rights under the lease and the leasehold mortgage) not being in default in the payment of rent, taxes, or property insurance. If the lease contains any provisions requiring the lessee to agree to the subordination of the lease to liens or encumbrances on the fee simple interest, these provisions must be conditioned on the lessee and the leasehold mortgagee receiving a recorded nondisturbance and attornment agreement that contains the provisions stated above and is executed by the fee simple lienholder. 5. The lease is a lease of the fee or a sublease executed by both the fee owner and the sublessor. If the lease is a sublease, it must contain a non -disturbance and attornment agreement Lindley Kirkpatrick December 16, 2008 Page 6 The Ground Lease describes what is leased to the Lessee in Section One, which section speaks for itself. 6. The use of the leasehold estates for the residential properties and an accepted practice in the area where the mortgage premises are located and such properties are readily marketable. To the best of my knowledge, there are a number of residential properties in Valley County, Idaho where the residential improvements are constructed upon land leased from the holder of the fee simple interest. To the best of my knowledge, such properties are regularly bought and sold, but whether such properties are "readily marketable" is a matter to which I cannot opine as it is beyond the scope of my training, expertise, or knowledge. 7. The instrument creating the lease, sublease, or conveyance reserving ground rents in a form commonly acceptable to private institutional investors in the area where the mortgage premises are located. I have no knowledge whether the form of the Ground Lease is "commonly acceptable to private institutional investors" in Valley County, Idaho. This opinion must come from someone familiar with private institutional investment practices in Valley County, Idaho. 8. The original term of the lease or any exercised option to renew the lease, or any renewal options that are enforceable by the leasehold mortgagee, whichever is applicable, does not terminate earlier than five years after the maturity date of the mortgage. Assuming that the term of the mortgage does not exceed thirty (30) years, the Ground Lease will, in the absence of default, extend at least five (5) years beyond the maturity date of the mortgage. 9. The lease does not contain provisions for termination in the event of damage or to destruction of the mortgage premises so long as the leasehold mortgage exists. Section Twenty -Three of the Ground Lease obligates a Lessee to maintain full replacement cost insurance on all leasehold improvements. Section Fifteen of the Ground Lease obligates the Lessee to maintain the leasehold improvements and to restore or rehabilitate them if they are damaged or destroyed by any cause. If a Lessee fails to meet these obligations the same would trigger the notice of default provisions which could, if not cured, terminate the lease. A lender may protect its interests by verifying insurance coverage and notifying Lessor as provided in Section Ten of the Ground Lease. 10. For subleased mortgage, the amount of the sublease payments is at least equal to the amount of the lease payments. The sublease payments are due no less frequently than the lease payments. Lindley Kirkpatrick December 16, 2008 Page 7 I have not been requested to review and analyze a sublease and therefore offer no opinion on this warranty. In addition, each lease must: i. Permit mortgaging of the leasehold (or subleasehold) estate. See Section Ten of the Ground Lease, which speaks for itself. 2. Permit assignments of the leasehold (or subleasehold) estate, including any improvements on the leasehold estate, without the lessor's consent; however, if the leasehold is in a restricted community, including but not limited to communities restricted to residents of certain ages or income, the lease must require that the assignee/lessee satisfy those restrictions. The lease may permit the lessor to review and consent to or deny a proposed assignee/less based on whether the proposed assignee/lessee satisfies the creditworthiness requirements of FHLMC or other secondary market investors. The lessor will have five business days after receipt of the application to deny the assignee/lessee. Section Eleven of the Ground Lease governs assignment and subletting. Subject to the other provisions of the Ground Lease and the applicable Covenants, Conditions and Restrictions, the Ground Lease may be assigned or sub -let. 3. Provide for release of an assigning lessee (or sublessee). Pursuant to Section Eleven of the Ground Lease, consents to assignment (not sublease) will, unless otherwise noted in the consent, release an assignor of responsibility under the Ground Lease. 4. Permit the leasehold mortgage security to be insurance under a hazard insurance policy. Nothing in the Ground Lease prohibits a lender from seeking or receiving hazard insurance coverage for the lender's interest, provided, however, that such insurance does not relieve a Lessee from its duty to restore or rehabilitate any premises damaged or destroyed by any cause. 5. Provide for payment of hazard insurance proceeds to the leasehold mortgagee or insurance trustee. Hazard insurance proceeds may be paid to a lender subject to the Lessee's obligation to restore or rehabilitate the premises, and, also subject to the Lessor's right to consent to any loss adjustment. Lindley Kirkpatrick December 16, 2008 Page 8 6. Contain the following provisions governing increases in the basic rent and amounts due under the lease: BASIC RENT Permit an increase in the basic rent during the term of the mortgage and within five years after the maturity date of the mortgage only if the increase is a sum certain amount at a specified date or time interval. During this period, basic rent increased based on the cost of living index or other indices or reappraisal are acceptable if the amount of such increased is subject to an annual maximum limitation. Section Three of the Ground Lease sets base rent at $1.00 per year. Additional rent is payable upon assignment of the Ground Lease (sale of the leasehold interest) equal to ten percent (10%) of the Lessee's equity, or $5,000.00, whichever is less. Additional rent is also payable in the event the premises are not used for community/workforce housing. The amount of the latter additional rent is a fixed number equal to two times the fair market value lease rate for residential ground leases adjacent to Big Payette Lake, calculated on total square footage of the leased premises, and adjusted annually. TAXES, INSURANCE, and UTILITIES Increases in amounts due under the lease for taxes, insurance, and utilities on the leasehold estate, if collected and paid by the lessor, and taxes, insurance, and utilities related to the common areas and facilities in the ground lease community are permitted if: a. the increase is determined in the same manner as basic rent, including a maximum limitation, or b. the increase is based on the verifiable increase in such items imposed by third parties, and c. the lease provides for the lessee to obtain documentation of the amount paid to third parties for taxes, insurance, and utilities Taxes, insurance and utilities are all payable by the Lessee. USE FEES and OPERATING EXPENSES Increases for use fees and operating expenses for the common area, facilities, and services in the ground lease community may not exceed the cost of living index. To the best of my knowledge, the leased premises are not part of a ground lease community for which there are common areas, facilities or services. Lindley Kirkpatrick December 16, 2008 Page 9 7 Provide that in order for a notice of lessee's default to be valid, the lessor must have sent written notice of the lessee's default to the leasehold mortgagee. Section Twenty -Five of the Ground Lease requires all notices of default to be in writing. A lender may request that it be given notice by making such request as set forth in Section Ten of the Ground Lease. 8. Provide for the right of the leasehold mortgagee, in it's sole discretion, to cure a default for the lessee's (or sublessee, if applicable) account within the time permitted to lessee plus reasonable additional time. The time period for curing defaults is set forth in Section Twenty -Five of the Ground Lease, which is thirty (30) days from the date of the notice unless the default is of such a nature that it cannot be cured in thirty (30) days, in which case, the Lessee may begin to cure the default in the period and must pursue the same with diligence. Section Ten of the Ground Lease permits a lender to f.ure defaults within the time period set out in Section Twenty -Five. 9.-10. Provide for no termination for non curable default as long as not default in rent exists, except for a court -ordered termination. In the event of a court -ordered termination, the lease must provide for title to the improvements to revert to the lessor. In addition, the lease must provide for a new lease of the same priority to be given to the leasehold mortgagee, or its designee, in the event the lease terminates because of a court -ordered termination. The lessor must provide a title endorsement insuring that the new lease is of the same priority and that the lien on the leasehold estate is a first lien. (VI. Residential Underwriting Guidelines) I cannot conceive of a non -curable default and therefore cannot opine on this warranty. The Ground Lease does not divest a defaulted Lessee of that Lessee's property interest in the improvements built on the leasehold interest. Pursuant to Section Thirty of the Ground Lease the Lessor retains a first right of refusal to purchase any improvements upon termination. 11. Provide that in the event of the bankruptcy of the lessor or the lessee, the lessee must notify the leasehold mortgagee and take, in a timely manner, all action necessary to assume the unexpired term and any renewal options of the lease. The Ground Lease does not contain any provisions regarding bankruptcy by the Lessor. The Ground Lease does not determine what terms, if any, the Lessee and its lender may determine in the mortgage or other loan documents regarding Lessee's duties in the event of a bankruptcy. It is the obligation of Lessee and its lender to set forth what a Lessee must do under such circumstances. Lindley Kirkpatrick December 16, 2008 Page 10 12. Provide that in case of partial taking, the lessee (or sublessee, if applicable) will rebuild and restore the improvements on the mortgage premises, unless the leasehold mortgagee consents to the distribution of the proceeds instead. The proceeds must be applied first towards reduction of the leasehold mortgage debt. The Ground Lease allows a lender, if it chooses, to include provisions in the loan documents to protect the lender's interests in the event of a partial taking. 13. Prove (sic) for protection of the mortgagee's interests in the event of a property condemnation. The Ground Lease allows a lender, if it chooses, to include provisions in the loan documents to protect the lender's interests in the event of a property condemnation. 14. Provide for the leasehold mortgagee's right to acquire the lease in its own name or in the name of a nominee upon foreclosure or assignment in lien of foreclosure. Section Ten C. of the Ground Lease permits a lender to acquire the interest of the Lessee upon foreclosure sale. 15. Provide for the leasehold mortgagee's right to exercise any renewal options that may exist. The Lessee holds the right to exercise an option to renew the Ground Lease as set forth in Section Twenty. The Ground Lease does not prohibit a lender from including provisions in its loan documents that determine the manner in which a Lessee exercises its option to renew the lease according to Section Twenty; provided, however, that any such provisions are consistent with, and do not violate Section Twenty or any other provision in the Ground Lease. If a lender has any doubt regarding specific provisions in its loan documents regarding this issue, the specific language should be referred to Lessor for approval and consent. 16. Provide that the leasehold mortgagee must approve: a. any partition, subdivision, or modification of the ground lease community and the leasehold estate; b. any surrender, abandonment, or termination of the leasehold estate or the ground lease community; c. the termination or cancellation of the lease or any action that has any effect of terminating the lease These limitations are more appropriate for the loan documents. The Ground Lease provides adequate protection to the lender in advance of any termination or cancellation of the Ground Lease so that lender has an opportunity, if it so chooses, to protect its collateral. Lindley Kirkpatrick December 16, 2008 Page 11 17. Provide that there shall be no merger of the fee interest and leasehold interest in the event the same person or entity acquires both interests. Section Twenty -Nine of the Ground Lease provides that surrender of the lease or mutual cancellation of the same shall not work a merger. Any other transfer of the leasehold interest will be subject to whatever restrictions are imposed by the loan documents between the Lessee and its lender. 18. The Ground Lease Analysis, and a copy of the lease, with recordation information, must be submitted with each mortgage file. This warranty may be satisfied by the lender or the Lessee at closing of the loan. ASSUMPTIONS. In rendering the foregoing opinions, we have relied, without investigation, upon the assumptions set forth below, unless in a given case the particular assumption states, directly or impractical effect, a legal conclusion expressed in the opinion: a. A lessee who is a natural person has sufficient legal capacity to enter into and perform the Ground Lease, or to carry out their role in it; b. Upon closing of a loan transaction, the lessee holds the requisite title and rights to any property pledged as collateral for the loan; c. Each party to a mortgage or other loan of the leasehold interest has satisfied those legal requirements that are applicable to it to the extent necessary to make the loan documents enforceable against the party charged with performance; d. Each party to a loan secured by the lessee's leasehold interest has complied with all the legal requirements pertaining to its status, as such status relates to its rights to enforce the loan against the lessee; e. The conduct of the parties to any loan will comply with any requirement of good faith, fair dealing and conceivability; f. Any loan documents related to a pledge of the lessee's leasehold interest as collateral will be consistent with the terms of the Ground Lease and any amendments thereto. We have no actual knowledge that the foregoing assumptions are false. We have no actual knowledge of facts that, under the circumstances, would make our reliance on the foregoing assumptions unreasonable. The opinions expressed in this opinion letter are solely for your use in connection with Lindley Kirkpatrick December 16, 2008 Page 12 obtaining, or rendering, consent to the transfer or assignment of a lessee's leasehold interest in one of the McCall Avenue homes where the City of McCall is the lessor of the land upon which the home or homes is built. Without our prior written consent, this opinion letter may not be used or relied upon by a lender for any other purpose whatsoever, except for the use of this opinion letter (i) in connection with review of a loan by a regulatory agency having supervisory authority over a lender for the purpose of confirming the existence of this opinion letter, (ii) in connection with the assertion of a defense by the Lessor as to which this opinion letter is relevant and necessary, or (iii) in response to a court order. Some of the warranties upon which I have been asked to opine are premature until there are loan documents that can be examined. Some of the warranties are not directly addressed in the manner in which the warranty is phrased, but which are not prohibited directly by the terms of the Ground Lease or its amendments. In those instances, lenders can protect their interests in the collateral through the careful drafting of the loan documents. In the event that a lender is concerned regarding a particular loan to a particular lessee, that lender is urged to have borrower's counsel issue an opinion letter regarding specific questions the lender has regarding the borrower/lessees duties under the Ground Lease (including all amendments), and the applicable loan documents. Very truly yours, WHITE PETE William F. Nichols WFN/msg msgW:A Work \M\McCall, City of 21684\Community Housing\Ltr Lindley Kirkpatrick 2008 12 24.doc