Real Estate

Understanding Real Estate Secured Note Purchase Transactions

Since its inception in 1978, SettlePou has represented every imaginable type of party in real estate, lending, and commercial transactions. In that time, there has arguably never been a better environment for the opportunistic acquisition of real estate assets than the one that exists now.  However, given the current status of the real estate and financial markets, parties seeking to take advantage of these circumstances must use non-traditional methods to acquire the real estate assets that they covet.  One such method is through the purchase of notes secured by the desired real estate – whether commercial mortgage-backed securities (CMBS), commercial bank, or private notes.  

SettlePou represents all manner of buyers in these transactions – from large private funds to individual investors.   In evaluating a real estate secured note purchase, buyers must determine whether (a) the borrower and/or guarantors of the note being purchased are capable of honoring the terms of the note, and (b) the value of the property securing the note justifies purchasing a non-performing note (in the event that the purchaser ultimately forecloses on the borrower’s interest and becomes the owner of the property).  Generally, for collateral to justify purchasing a non-performing note its value must exceed the amount paid for the note plus the expected incidental costs of acquiring the collateral under the terms of the loan documents.

A party investing in real estate secured notes must be prepared to wear two hats throughout the purchase process: that of (i) lender, and (ii) real estate investor.  The due diligence associated with evaluating a note purchase must first determine the lender’s obligations and rights under the loan documents (including whether any further advances are due to the borrower), whether the borrower has any notice or cure rights which need to be addressed, and whether the lender has its full anticipated scope of remedies upon a borrower default, among other concerns and any lien priority issues.  As a potential real estate investment, a proposed note purchaser must also address issues familiar to a more traditional real estate acquisition, such as title, environmental, and property management issues like leasing, among other issues.

The actual acquisitions process is fairly straightforward – at least in the initial stages – in that the purchaser will enter into a Note Purchase Agreement with a lender that has determined, for one of many reasons (including poor note performance, the note being under-secured, or pressure from regulators) that it must divest itself of the note. While the process has some similarities with a purchase and sale agreement that would be utilized in a traditional real estate transaction, there are also many differences. For example, a Note Purchase Agreement will often contain far fewer of the assurances to which purchasers of real estate are accustomed, for example, far fewer (if any) representations from the seller as to the status of the property.

In non-CMBS transactions, the loan files and documentation may be fairly bereft of records and historical data or have poor organization or retention of correspondence with the borrower, leading to lack of comfort as to the status of the property and, potentially, the note itself. In contrast, due to extensive regulation and oversight, CMBS transactions typically are more heavily detailed and complete in documentation, with up-to-date property records.  This reality is one with which the note purchaser must become comfortable.  However, the typical transaction generally involves a discount on the face value of the note, giving the purchaser an opportunity to offset the potential risk.

A carefully drafted Note Purchase Agreement is essential to ensuring a successful transaction.  The contract should provide for the seller’s unconditional agreement to sell the note and transfer its rights under all other loan documents relating to such note, including the loan agreement, deed of trust, assignment of leases and rents, all guaranties, and any other loan documents.  A purchaser must ensure that it can enforce the terms of the loan documents and exercise all remedies against the borrower, including foreclosure, deficiency collection, and actions against guarantors. 

The Note Purchase Agreement should contain certain provisions to specifically identify the interests assignable to purchaser.  First, the agreement must clearly identify all loan documents and require that seller deliver such original loan documents at closing, including the seller’s loan file with all correspondence.  The agreement must also provide for an assignment of the original lender’s title policy, for which purchaser will obtain a policy transfer endorsement from the title company. 

As with a standard real estate purchase contract, the Note Purchase Agreement must identify an adequate inspection period in which the purchaser can perform all due diligence on the loan and property, and allow the purchaser to terminate the contract.  The loan file must either be delivered to purchaser for review or made available for review at seller’s offices.  To aid purchaser’s due diligence review, in addition to access to the loan files referenced above, the agreement should require delivery of seller’s existing property due diligence materials including a survey, copies of all leases, environmental reports, and other collateral assessment records.

Finally, the Note Purchase Agreement must provide certain protections to purchaser regarding the status of the loan.  Ideally, the agreement will require the seller to deliver a certified payment history related to the note through the closing date and contain a provision whereby the seller represents and warrants: (a) that seller is the current owner of the note and there is no prior assignment to any third party, (b) that seller has no further financial obligations under the loan, such as further distributions or escrow requirements, and (c) that the note is free and clear of all claims and liabilities.

Understanding the key concerns and concepts involved in the purchase of a real estate secured note is only the first step.  A potential purchaser must also understand the key differences between various types of note products, and be prepared for the possible paths that note ownership can follow after closing a purchase and how purchaser’s ability to exercise its rights as the new lender may be affected.

This article serves as the first in a series of three articles which will further address note purchase transactions.  While this article addressed the general implications and structure of a note purchase transaction, part two of the series will address the processes and structure of both CMBS and standard commercial note purchase transactions.  The third installment will address several common strategies used by note purchasers to realize a return on their investment, as well as potential pitfalls that can result.

By: Jeffrey J. Porter, Jeff Mosteller and Brian H. Baker

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Dallas Morning News names SettlePou as Top 100 Places to Work

For the second year in a row, SettlePou has been named by The Dallas Morning New’s as one of the Top 100 Places to Work in the metroplex. Companies recognized in the Top 100 must excel in six areas: direction, execution, career, managers, conditions, and pay and benefits. The selection process includes getting feedback from employees about each of these areas through a survey process, and over 1700 companies participated in 2010. The Dallas Morning News reports that after these surveys are completed, responses are compiled, weighted, and ranked by their research partner, Workplace Dynamics. SettlePou is among only a handful of law firms to be granted with this recognition.

Real Estate

Homeowners Associations’ Foreclosure of Assessment Liens An Ounce of Prevention…

The Homeowners Association –appreciated by many, reviled by some. When a homeowner makes the investment for the purchase of a house, generally the desire is that the house and neighborhood selected will not deteriorate, be it aesthetically or monetarily. The primary purpose of the Homeowners Association ("HOA") is for such upkeep, maintenance and preservation of a neighborhood. News reports about HOAs often do not reflect their beneficial attributes, par­ticularly when foreclosure of a person's home is involved.

This was certainly the case in the recent local articles on the fore­closure of the Dallas-area home of one Texas soldier while he was on active duty. While all of the specific facts of this case are unknown at this time, there can be no argument that the situa­tion is more than unfortunate. For both homeowners and HOAs, avoiding unpleasant sce­narios, like this one, starts with understanding the processes, pitfalls, and protections of assess­ments and HOA foreclosure of assessment liens, particularly on a service member's home.

Creation of Assessment Lien

The Texas Supreme Court has addressed HOA assessment liens in Inwood N. Homeowners' Assoc.v. Harris, 736 S.W.2d 632 (Tex. 1987). Generally, assessments, their corresponding liens, and foreclosure thereof, are an in­herent characteristic of the property right – the only method by which other owners won't be forced to pay more than their fair share or be forced to accept reduced ser­vices. In Inwood, the Texas Su­preme Court recited that the creation of a contractual HOA lien is accomplished when the developer records a declaration of covenants, conditions & re­strictions ("CC&Rs") in the county where the land is lo­cated.

The CC&Rs run with the land and are binding on all parties acquiring rights to any property in the subdivision. Typically included in the CC&Rs are covenants—i.e., promises—by the homeowners to pay the annual, special, or other stated assessments as specified in the CC&Rs. Additionally, the CC&Rs often state that these assessments are a charge on the land and shall be secured with a contractual lien upon the lot against which such assessments or charges are made which may be foreclosed. The /mood Court recognized the harshness of foreclosure, especially when a relatively small amount of money is owed compared to the value of a home. Texas law, however, requires enforcement of agreements entered into concerning the payment of as­sessments. Whether developing a neighborhood or governing an existing one, it is paramount to have CC&Rs drafted which provide for the necessary as­sessments to sustain a neighborhood that also explain the utilization and procedural aspects of such assessments for use and understanding by the residents.

Steps to Foreclosure

Texas Property Code §51.001, et seq. addresses the non-judicial foreclosure process in Texas. First, unless there is an agreement that states other­wise, an HOA must serve a homeowner in default with written notice by certified mail stating that the homeowner is in default under the CC&Rs assessment lien provisions and give the debtor at least 20 days to cure the default before no­tice of sale can be given. Service by certified mail is complete when notice is deposited in the U.S.mail, postage prepaid and addressed to the homeowner at his last known address.

Second, a notice of sale must be provided to the homeowner at least 21 days before the date of the sale, and it must include a statement of the earliest time at which the sale will begin. This notice includes: (I) posting at the courthouse door of each county in which the property is located a written notice desig­nating the county in which the property will be sold; (2) filing in the county clerk's office of each county in which the prop­erty is located a copy of the notice posted on the court­house door; and (3) serving written notice of the sale by certified mail on each debtor who, according the HOA's re­cords, is obligated to pay the debt.

Finally, the sale must occur on the first Tuesday of the month within any three-hour period between 10:00 a.m. and 4:00 p.m. at the county courthouse in any county where the house is located, unless otherwise stated by the county. One item to remember is Texas Property Code §209.009 mandates that an HOA cannot foreclose an assessment lien if the debt se­curing the lien consists solely of (1) fines assessed by the HOA, or (2) attorney's fees incurred by the HOA solely associated with fines assessed by the HOA.

Notice to Homeowner after Foreclosure Sale

Texas Property Code §§209.010 and 209.011 require certain post-foreclosure actions by the HOA of non-condominium property. No later than 30 days after the foreclosure sale, the HOA must send the home­owner and each lienholder of record written notice stating the date and time the sale oc­curred and informing the home­owner and lienholders of the right to redeem the property. Such notice must be sent by certified mail, return receipt requested, to the homeowner, each lienholder of record, and each transferee or assignee of a deed of trust that has notified the HOA of such assignment or transfer. No later than 30 days after sending the notice, the HOA must record an affidavit in the real property records of the county, stating the date the notice was sent and a legal de­scription of the lot.

If desired or necessary, the HOA or other person who buys occu­pied property at foreclosure sale must commence and prosecute a forcible entry and detainer action to recover possession of the property.

Homeowner's Right of Re­demption after Foreclosure

Texas Property Code §209.01 1 also provides redemption rights following an 1-10A foreclosure of non-condominium property. The affected homeowner or any lien-holder of record can redeem the property from the foreclosure-sale purchaser no later than the 180th day after the HOA mails written notice of the sale. A lien-holder cannot redeem the prop­erty before 90 days after the date notice was sent, and only if the owner has not previously redeemed.

Generally, redemption will re­quire payment to the HOA of all unpaid assessments as well as fees and costs incurred by the HOA for the foreclosure. If the property was purchased by a third party, redemption will also require the payment of the pur­chase price to the third party purchaser. If the property is re­deemed, the purchaser must immediately execute and deliver to the redeeming party a deed transferring the property to the lot owner.

The purchaser at the foreclosure sale, or any person to whom he transferred the property, can presume conclusively that the homeowner or lienholder did not redeem the property unless the homeowner or lienholder files in the real property records of the county (l) a deed from the purchaser of the property at the foreclosure sale; or (2) an affidavit that states the prop­erty that has been redeemed, contains a legal description of the property, and includes the name and mailing address of the person who redeemed the property. Should the redemp­tion period expire without re­demption being properly exe­cuted, the HOA or third-party foreclosure purchaser is re­quired to record an affidavit in the real property records of the county in which the property is located stating that the home­owner or a lienholder did not redeem the property during the redemption period.

Servicemembers Civil Re­lief Act

The Servicemembers Civil Re­lief Act ("SCRA"), 50 U.S.C.S. Appx. §50I, et seq., provides protection in scenarios like those described above for members of our armed forces. The purpose of the SCRA is to (I) provide for, strengthen, and expedite national defense through protection to service-members of the United States to enable such persons to de­vote their entire energy to the defense needs of the nation; and (2) to provide for the tempo­rary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of service-members during their military service.

Under §533 of the SCRA, fore­closure of property for breach of an obligation is not valid if made during, or within 9 months after, the period of the servicemember's military ser­vice. Exceptions are a sale, fore­closure, or seizure which is made upon a court order granted before such sale, fore­closure, or seizure with a re­turn made and approved by the court; or a sale, foreclosure, or seizure that is made pursuant to an agreement. This 9 month period only applies between July 30, 2008, and December 31, 2010. On January I, 2011, the statute returns to pre-amendment language, which still provides protection, but only 90 days instead of 9 months after the servicemember's mili­tary service.

Violation of the SCRA is a mis­demeanor punishable by fines and/or imprisonment for not more than I year if a person knowingly makes or causes to be made a sale, foreclosure, or seizure of prohibited property, or knowingly attempts to do so. Section 533 of the SCRA ap­plies to obligations on real or personal property owned by a servicemember that (I) origi­nated before the period of the servicemember's military ser­vice and for which the service-member is still obligated; and (2) is secured by a mortgage, deed of trust, or other security in the nature of a mortgage. Typically, foreclosing entities will make a determination on the military status, if any, of their debtor to ascertain the applicability of the SCRA. One website to locate such informa­tion is https:// 


Effective June 19, 2009, Texas passed H.B. 3857, which was codified as Texas Property Code § 51.015, titled Sale of Certain Property Owned by Mem­ber of the Military_ This section generally follows the SCRA and should be consulted during any HOA foreclosure occurring after the effective date ad­dressed above.

Foreclosure is typically an effort of last resort for HOAs to col­lect their assessments. There are risks and responsibilities for both sides involved in any fore­closure, and it is always advis­able to have the assistance of experienced counsel to navigate the detailed and nuanced proc­ess. Likewise, when preparing or revising the CC&Rs for your community, it is always advis­able to consult with an experi­enced attorney so efforts can be taken to minimize the perils involved with enforcing assess­ment liens.

By Scott Conrad and Jeffrey J. Porter