Florida’s recording statute gives priority to the real property lienholder who is first to record in the public records of the county where the property is located. There are certain limited exceptions to this general rule. One of the exceptions that most mortgage lenders doing business in the state of Florida are familiar with is the exception for the first lien priority created by Florida statutes for ad valorem or real estate taxes assessed by the property appraiser against real property.

Previously, mortgage lenders could accurately quantify the amount of the potential prior lien for unpaid real estate taxes that could prime their lien by examining county tax records. However, under the very recent case of Miami-Dade County vs. Landowne Mortgage, LLC, 2017 Fla. App. Lexis 14751 (3rd DCA), this analysis may no longer be accurate when refinancing an existing homeowner. In the case, Miami-Dade County filed a 2014 tax lien against the property on which Landowne had previously secured its first mortgage in 2007. The 2014 Miami-Dade tax lien imposed against the property was for up to 10 years worth of improper homestead exemptions previously received by the present owner of the property during his prior years of ownership. Florida Statutes, Section 196.161 allows property appraisers a look back period of 10 years to recoup the amount of any homestead exemptions improperly received, plus a 50% penalty and 15% interest. However, prior to this most recent ruling, it was not clear that a tax lien filed against a property for improperly received homestead exemptions would have a retroactive effect, which would prime the prior recorded lien of a mortgage granted by a lender who had no knowledge of the existing property owner’s improper claim of a homestead exemption.

This problem does not arise in connection with loans to homeowners who are buying a home and obtaining purchase money financing (as opposed to refinancing an existing loan) because the tax lien for improperly received homestead exemptions will only attach to the property owned by the non-exempt owner at the time the tax lien is filed. Prior to the filing of a tax lien of this nature, any purchaser for value of the property on which the improper homestead exemption was claimed will take free and clear of this retroactive tax lien.

Cash strapped local governments aided by ever improving data gathering techniques and the Miami-Dade County vs. Landowne Mortgage, LLC decision may  increasingly turn to real estate tax revenues presented by improperly claimed homestead exemptions. Accordingly, residential mortgage lenders who are refinancing loans for existing homeowners should seek advice from loan counsel who can effectively address this new landscape.

Loan Negotiation (00164323)

Commercial Loan Documents continue to get thicker and become a tedious read not only for borrowers and their attorneys, but for lenders and their attorneys as well. The “standardization” of loan documents (and the corresponding shrinking of font size) has made it easy for many borrowers to simply shrug off the pile of documents and sign whatever is put in front of them. Of course, no one should sign any document without carefully reading and considering its effect. And, despite lenders’ best efforts and hopes to standardize, many provisions are ripe for negotiation. Lenders understand expect certain comments to the standard boilerplate comment paragraphs. I’ll write about some of these provisions from time to time. Today’s installment: use and control of casualty proceeds.

Borrowers and lenders have opposite interests following a casualty. Lenders’ immediate focus is repayment of the loan. Upon the total or partial destruction of the security for a loan, the lender’s source of repayment is gone or at best, compromised. Therefore, the loan documents generally provide that lender has the right to settle insurance claims and insurance proceeds will be paid to lender and applied to repayment of the loan or restoration of the property at lender’s sole discretion. On the other hand, borrower’s concern is the continuation of its business, including its obligations to tenants and investors, not to mention protection of borrower’s own investment and income stream. Therefore, borrower will want access to insurance proceeds to rebuild/restore as quickly as possible.

If the borrower/lender relationship is good and long term, or if the project is strong (and that is not to say that lesser relationships or projects can’t  and don’t negotiate), it is easy for the parties to come to a mutual understanding as to the use of insurance proceeds. The lender will often agree to allow the borrower to participate in the settlement of the insurance claim if not lead negotiations (while lender retains approval over final settlement). In addition, the parties may agree that, although insurance proceeds will be paid to lender, lender will make the proceeds available for restoration if 1) borrower is not otherwise in default under the loan, 2) the loan is more than X months from maturity, 3) a certain percentage of tenants (or perhaps the anchor tenants) agree to continue their leases, and 4) borrower agrees to fund any costs of restoration, including deductibles, in excess of available insurance proceeds (in many cases borrower would be required to deposit all or a portion of such funds with lender). Sometimes, borrower and lender will negotiate a cost or percentage loss threshold where lender would be obligated to make the proceeds available to borrower for restoration of the property.

Where lender retains the insurance proceeds and allows borrower to use them for restoration, it is important for borrower to negotiate a construction draw provision. That is, the insurance proceeds (and any borrower funds required to complete restoration) should be held and disbursed by lender in the same manner as a construction loan. Lender should disburse such funds as work progresses and should not withhold funds until work is completed. Retainage provisions should be considered but should be flexible enough to allow borrower to negotiate with contractors in the future. In other words, retainage provisions should not be mandatory nor should retainage amounts be set in stone.

Other considerations for both parties should include wither leases require restoration and the effect of any prepayment provisions in the loan documents. Borrower should be certain that there should not be a prepayment penalty or yield maintenance premium due to the application of insurance proceeds to the outstanding balance.

Most lenders expect borrowers to make some variation of these comments to the use of insurance proceeds provisions of so-called standard documents. Lenders and their attorneys are generally prepared to respond to these requests and the back and forth should not be extensive meaning that in this case, standardized documents should be negotiable.

 

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