The Fundamentals of Real Estate Financing
Financing arrangements are the heart and soul of most residential and commercial real estate transactions. It is the rare case that a buyer will pay for the real estate property in cash.
Real estate financing takes many forms. Most homebuyers are familiar with the concept of getting a loan and then securing that loan with a mortgage. Here, the borrower makes a down payment and agrees to monthly payments of principal and interest to finance the remaining debt. If the borrower defaults on the loan, the lender can foreclose if the right formalities are followed. The lender, after a foreclosure is approved, can take possession of the property or sell it.
The key parts of real estate financing
Experienced Florida real estate lawyers help with many conditions and concerns so that buyers and lenders are protected. Skilled lawyers:
• Help connect buyers to qualified lenders
• Help evaluate the benefits and risks of the transactions
• Explain what alternatives are possible
• Negotiate the contracts with the lenders and buyers
• Review the title report for the purchase and address any open issues
Respected lawyers handle a broad array of sales and development issues including homes, duplexes, townhouses, multi-family dwellings, apartment complexes, motels, offices, hospitals, and other residential, commercial, industrial and agricultural purchases.
Real estate attorneys help negotiate lease terms including what happens if there is a default.
Types of real estate financing
There are many different ways to finance real estate purchases in addition to the standard loan and mortgage. Some financing methods allow the lender to take a more active control. Others wait for a default to happen. Financing includes:
• Construction loans
• Development loans
• Security interests
• Tax-exempt financing or financing that significantly reduces tax consequences
• Public market financing
• Letters of credit
One of the many examples possible is mezzanine financing. This type financing is actually a hybrid. Here, the lender loans the funds and gets the right to acquire an equity interest in the real estate (or the company the buys the real estate) if a default occurs. Normally, the lender pays off senior lenders or venture capital businesses first.
Mezzanine financing can help the investor’s rate of return. Lenders also get regular interest payments. Borrowers may get significant tax breaks. It may be possible to pay principal and defer interest if one full payment can’t be made. The risk for borrowers is that they may lose control if they default.
Issues Involved with Leasing Real Estate
In addition to helping individuals, businesses, and investors buy real estate; full-service real estate lawyers handle the full range of financial, business, and legal issues involved with leasing. This includes representing lessors, tenants, developers, and others.
Individuals normally sign a lease before they move into an apartment. Many commercial businesses sign leases as well. Investors may also be interested in using a lease to help with management, financial, tax, and other issues.
Sale and leasebacks
This type of real estate financing is a combination financial real estate transaction. Here, the seller sells the real property and then leases it back for a long period of time – sometimes more than an expected lifetime. That way, the seller can use the property but also capture certain financial benefits such as raising funds for other investments, improvements, or for operating a business. Real estate investment trusts (REITs) often use sale-leasebacks.
This type of real estate financing arrangement allows the tenant broad range to develop the land being leased – but with the requirement that when the lease ends, the owner gets the land with the development/improvements.
The benefits to the owner of the property is clear. During the lease, they get regular payments. When the lease ends, they get a piece of property with a much higher market value.
The benefit for the tenant is that the tenant probably gets a better piece of land than he/she could otherwise afford and gets to develop the land for as long as the lease is active. The longer the lease, the better it generally is for the tenant. Another benefit is that the tenant doesn’t have to put money down to acquire the right to use the land.
Many chain stores use ground leases.
Restructuring Real Estate
Many times, a financing transaction needs to be renegotiated or handled in a different way because a borrower is in default or is continually getting behind. There are different ways to restructure the original transaction:
• The borrower may seek to consolidate other loans along with the real estate loan
• A new loan may be “worked out” – called a workout agreement. The benefit to the borrower is that he/she gets to stay in the property and use it. The borrower also gets more time to pay the arrears. Lenders normally want some benefit in return. That benefit is often higher interest rate payments. The lender may also renegotiate other lease term provisions to its advantage.
The borrower may agree to turn over the property in lieu of bankruptcy. Borrowers may agree because it may not affect their credit as much. Lenders may agree because it saves a lot of court costs.
• The borrower may also file a Chapter 7, 11, or 13 bankruptcy
Experienced real estate lawyers are ready to help
All of these new arrangements required skilled real estate lawyers (sometimes with the aid of experienced bankruptcy lawyers). For example, your lawyer should explain that an agreement by the lender to reduce the amount that is due will likely be considered taxable income by the IRS.
Leasing attorneys should also be prepared to represent lenders if an owner or tenant files for bankruptcy