Key New Developments in Real Estate Finance

Key New Developments in Real Estate Finance

In this article, Brook Boyd chronicles important new developments in U.S. real estate finance, during the period from April through late October of 2018.

Brook Boyd
Key New Development in Real Estate

Key New Development in Real Estate

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The following is a summary of the most important new developments in U.S. real estate finance, during the period from April-October of 2018.  These developments are described in more detail in the 43rd update to Boyd, Real Estate Financing (Law Journal Press 2018).

Easing of Federal Regulatory Restrictions on Commercial Real Estate Finance

A federal regulatory penalty applies to commercial loans that primarily finance or refinance the acquisition, development, or construction of real property (for the purpose of converting such property into income-producing property), and that are dependent on future income or sales proceeds from, or refinancing of, such property, for the repayment of such loans (“HVCRE ADC loans”).  Regulated lenders must generally hold 50% more capital for such HVCRE ADC loans than for regular commercial real estate loans.[2]  However, pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), HVCRE ADC loans do not include (A) an acquisition mortgage loan, or refinancing, of existing income-producing real property, if the cash flow from the property is sufficient to support the debt service and expenses of the property, (B) a mortgage loan for improvements  to existing income-producing improved real property, if the cash flow is sufficient to support the debt service and expenses of the property; or (C) commercial real property projects in which (i) the loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio; (ii) the borrower has contributed capital of at least 15% of the property's appraised, "as completed" value to the project in the form of (I) cash; (II) unencumbered readily marketable assets; (III) paid development expenses out-of-pocket; or (IV) contributed real property or improvements; and (iii) the borrower contributes the minimum amount of capital described under clause (ii) before the lender advances the loan, and such minimum amount of capital contributed by the borrower is contractually required to remain in the project until the loan has been reclassified by the lender as a non-HVCRE ADC loan.  In addition, a loan is no longer deemed to be a HVCRE ADC loan upon: (1) the substantial completion of the development or construction of the real property being financed by the loan; and (2) cash flow from the property being sufficient to support the debt service and expenses of the property.  Further, the following are not deemed to be HVCRE ADC loans: (1) any loan made prior to January 1, 2015, or 2) any loan for the acquisition, development, or construction of properties that are (i) 1-4 family residential properties; (ii) real property that would qualify as an investment in community development; or

(iii) agricultural land.[3]

EGRRCPA also provides that a “Community Bank Leverage Ratio” (the required minimum ratio [between 8-10%] of a bank's equity capital to its consolidated assets) will be issued by federal regulators for banks with assets of less than $10 billion; and all such banks that exceed this ratio shall be deemed to be in compliance with all other capital and leverage requirements.[4]  Such banks are now also entitled to certain other regulatory exemptions.[5]

New Laws for “Small” Lenders May Impair the Secondary Market for Their Loans

While new federal laws are intended to ease regulatory restrictions on certain lenders (such as certain regulated lenders with less than $10 billion of assets, as discussed above), however, some of such laws deny the same benefits to assignees that have been assigned loans originated by such lenders.[6]  This could adversely affect the secondary market for such loans, and may even trigger future claims against syndication sponsors, unless the impact of such new laws is expressly disclosed.

A Lost Note May Impair the Secondary Market for the Underlying Loan

In SMS Financial XXV, LLC v. Corsetti,[7] the court held that a transferee of a lost note could not enforce it because Rhode Island had not adopted the 2002 amendment to Section 3-309 of the UCC, which explicitly permits the assignee of a lost note to enforce it.  Similarly, in Sabido v. Bank of N.Y. Mellon,[8] the court ruled that the assignee of a mortgage note was not entitled to enforce it, and rejected the assignee’s lost note affidavit since it “did not state that any of the putative transferees . . . were ever entitled to enforce the note, and did not state unequivocally that the note was not lost as the result of transfer or lawful seizure.  . . . The [note assignee] was required . . . to prove that it ‘acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred.’ [Fla. Stat.] § 673.3091(1)(a).  . . . [T]he [note assignee] ‘offered no proof of anyone's right to enforce the note when it was lost.’” 

Documenting a Financing Based on SOFR (the Proposed Replacement for LIBOR)

The Alternative Reference Rates Committee of the New York Federal Reserve has issued guidelines for USD LIBOR “draft fallback contract language”, including “trigger events” (that start the transition from LIBOR to a new reference rate), a “successor rate waterfall” (listing various unadjusted rates that would replace LIBOR), and a “spread adjustment waterfall” (that would be applied to the successor rate on account of differences between LIBOR and SOFR).[9]  The “secured overnight financing rate” (“SOFR”), which is sponsored by the U.S. Federal Reserve, is generally expected to replace LIBOR.  Also, Fannie Mae recently issued $6 billion of bonds with a floating interest rate pegged to SOFR.  The documents for this offering are publicly available,[10] and provide a market standard for future financings based on SOFR.  Since SOFR is viewed as a risk-free rate, while LIBOR is not, therefore SOFR is expected to be lower generally than LIBOR at any given point in time.  Accordingly, it is expected that an interest rate spread adjustment will be added to SOFR.  Also, since SOFR may become a negative rate, therefore lenders should consider an interest rate floor for any SOFR-based financings.

Impact on Interstate Lending of U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc.

Generally, in order for a U.S. state or local government to tax a U.S. or non-U.S. lender which is not physically present in such state or locality, there must be a “nexus,” between such lender and such state or locality, in accordance with U.S. federal law.  However, in South Dakota v. Wayfair, Inc.,[11] the U.S. Supreme Court upheld the right of South Dakota to require large Internet retailers to collect sales taxes relating to sales to South Dakota residents, even though such retailers had no physical presence in South Dakota.  In the light of this decision, lenders need to evaluate whether they are also subject to taxes in jurisdictions where such lenders have no physical presence, but have nonetheless transacted business.

How Lenders Can Be Protected Against Divisions of LLCs

New laws have been enacted in Delaware and other states that permit “division” of LLCs[12] and their assets and obligations in a manner that may in certain cases leave a secured lender with a lien against a new entity that is no longer creditworthy.  These laws require new protections for lenders against such risks.  Accordingly, the loan documents should require (1) the lender’s prior written approval for divisions by LLCs and other entities, (2) new and acquired entities, resulting from any such division, to assume the original borrower’s obligations under the loan documents, and to consent to liens and security interests, in favor of the lender, against the assets acquired by such entities, and, (3) prior to any division, the filing of UCC financing statements (and, to the extent necessary, the recording of new mortgages and related instruments, and/or assumptions of existing mortgages and other existing instruments) in order to perfect the lender’s interest in the assets that are acquired by such entities.[13]  A lender should also consider requiring that the above restrictions be added to the borrower’s limited liability company agreement, and that such provision cannot be amended without the lender’s consent, although this may be subject to the rights of creditors pursuant to the bankruptcy laws.

Pledge to Mortgage Lender of Equity Interest in Borrower Has Been Held Enforceable and Not a “Clog” of the Borrower’s Right of Redemption

In one case, two lenders were secured by both (1) mortgages on two different properties, and (2) pledges of certain equity interests in the partnerships that owned such properties.  When the lenders gave notice of their intention to sell such equity interests at a UCC sale, the owners of the properties sued for a preliminary injunction against such UCC sale, and claimed that such UCC sale would “clog” the equitable right of the property owners to pay the mortgages before a mortgage foreclosure.  The court refused to grant such preliminary injunction, stating that (1) any losses of the owners of the properties would be compensable as damages, so they would suffer no irreparable harm, (2) the property owners had a right of redemption pursuant to UCC § 9-623 (which generally provides that redemption may occur any time before the secured party disposes of the collateral at the UCC sale), and (3) the property owners could bid at the UCC sale.[14]


In Some States, Opinion Giver Must Acknowledge That It Represents the Lender

UC Funding I, LP v. Berkowitz, Trager & Trager[15] held that, under Connecticut law, a lender group had no claim against a borrower’s law firm, for giving a false legal opinion relating to a Ponzi scheme, because the law firm did not agree that it was issuing its opinion as counsel to the lenders.  The court stated “a lawyer cannot have ‘undivided loyalty’ to her client and also have a legal obligation to the party adverse to her client in the transaction without express language indicating otherwise. . . .  . . . [Lenders] have not sufficiently alleged that it was reasonable for them to rely on the advice of [the borrower’s attorney], counsel of an adverse party in a financial transaction.” 

This may trigger difficult ethical issues.  For example, in some states, it is generally unethical for a lawyer to represent both the lender and the borrower in the same loan transaction, unless such parties consent, and the lawyer is engaged to act only in a ministerial role in order to carry out an agreement that has been previously agreed to by the parties without the assistance of the lawyer.[16]

“Franchise Services” Decision Clarifies When Bankruptcy Remote Provisions Are Enforceable

A new case upheld a Delaware corporate borrower’s “bankruptcy remote” organizational structure, since its certificate of incorporation provided that no bankruptcy petition could be filed by the corporation unless it was authorized by a majority of the holders of each class of stock.  Therefore, the sole preferred shareholder had the right to an order dismissing the corporation’s bankruptcy petition (filed without the preferred shareholder’s approval), even though the parent company of the preferred shareholder was also an unsecured creditor of the Delaware corporation.[17]

Risks Relating to Loan Acceleration and De-acceleration

A potential land mine for a lender is created when the lender accelerates its loan, but then sends to the borrower a proposed loan modification agreement, pursuant to which the lender agrees to dismiss its existing foreclosure action, and to give the borrower additional time to pay the loan.  In one case, a lender commenced a foreclosure action against a borrower on October 6, 2009, and accelerated the loan.  This foreclosure action was dismissed in August 2013.  The borrower then signed a loan modification agreement dated August 19, 2013, but the borrower alleged that he was later informed by the lender that there was no record of a loan modification agreement and that any payment for less than the unpaid balance would be rejected.  The borrower continued to receive statements from the lender demanding payment of the entire unpaid balance.  The borrower eventually sued to cancel the lender’s mortgage on the ground that it was time-barred on October 6, 2015 (i.e., 6 years after the lender’s acceleration of the loan).  The court ruled that the plaintiff had acknowledged the mortgage loan by signing the loan modification agreement, and there was no condition in such agreement that it be signed and returned to the borrower.  Therefore, the court ruled that the loan was not time-barred, and granted the lender’s motion to dismiss the borrower’s action.[18]

If a lender is concerned that the statute of limitations to enforce a loan is about to expire, and the lender’s loan has been accelerated, then the lender can take unilateral action to de-accelerate its loan.  In one case, a lender commenced a foreclosure action on January 13, 2009.  On October 21, 2014, US Bank, as the lender, sent a letter to the borrower stating that the lender “hereby deaccelerates the maturity of the Loan, withdraws its prior demand for immediate payment of all sums secured by the Security Instrument and re-institutes the loan as an installment loan.”  The court ruled that the January 13, 2009 foreclosure complaint accelerated the loan, and that the October 21, 2014 letter de-accelerated it.  The court noted, in dictum, that “a ‘bare’ and conclusory de-acceleration letter, without a demand for monthly payments toward the note, or copies of invoices, or other evidence, may raise legitimate questions about whether or not the letter was sent as a mere pretext to avoid the statute of limitations.”  However, the court refused to dismiss the borrower’s action to declare the lender’s mortgage unenforceable on statute of limitations grounds, on the basis that fact questions were unresolved regarding standing.  The court stated, “the de-acceleration notice dated October 21, 2014, does not establish that US Bank had standing to de-accelerate the earlier demand that the . . . mortgage debt be paid in its entirety.”[19]

Obviously, it is preferable for a lender to obtain the express acknowledgment of the borrower and other loan obligors to any de-acceleration of the loan, rather than to rely on the lender’s unilateral de-acceleration.

Expansion of the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”) to review U.S. and foreign transactions involving foreign persons

Certain purchases, leases or licenses of land by a foreign person, and acquisitions, mergers or takeovers involving foreign persons, are now subject to expanded review by the CFIUS.[20]  If CFIUS approval is required for any transaction, then all parties will need to ensure that such approval has been properly obtained.  Since there are many issues relating to whether any particular investment must be precleared with CFIUS, therefore, some lawyers have recommended that, until these issues are resolved, law firms should include an exception, in their form opinion letters, for compliance with the CFIUS preclearance requirements.[21]

FNMA and FHLMC may refuse to buy residential mortgage loans unless they are based on approved credit scoring models

The Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”) are authorized to condition the purchase of residential mortgage loans (including loans secured by condominium units, interests in cooperative apartments, and multifamily properties), on the validation and approval by FNMA or FHLMC, as applicable, of the credit scoring models used to approve the borrowers.  Each credit scoring model that has been validated and approved must be periodically reviewed to determine if the continued use of such model is still appropriate.  Credit scoring models in use as of May 24, 2018 (that have not been so validated and approved) may continue to be used until the earlier of 1) the date a credit scoring model is approved as provided above, or 2) November 20, 2020.[22]

New Method of Verifying Personal Data

Lenders are now authorized, with the consent of an individual, to contact the U.S. Social Security Administration to confirm such individual’s name, social security number, and date of birth, in connection with a credit transaction and certain other cases described in 15 U.S.C. 1681b.[23]

Lenders May Be Required To Delete Any Copy of Individual Borrower’s ID

If an individual borrower makes an online application to an institutional lender for a loan, and the lender receives a copy or scan of the borrower’s driver’s license or personal ID, and uses such license or ID to verify the borrower’s identity, or as otherwise permitted by law, then the lender is required, in certain cases, to delete such copy or scan.[24]

Loans May Be Unconscionable Even If They Are Not Usurious

The California Supreme Court ruled that even if the interest rate on a consumer loan is not usurious, it may nonetheless be unconscionable if such interest rate is too high.[25]

The foregoing is merely summary general information, and is not specific legal advice for the benefit of any particular client or any other person.


[1]  Brook Boyd is Counsel at Meister Seelig & Fein LLP in its New York office, and practices in the area of real estate and corporate transactions.  His professional website is at  He is the author of Boyd, Real Estate Financing (Law Journal Press, 43rd ed. 2018) (hereinafter “REF”) (available at       

[2]  E.g., 12 C.F.R. § 3.32(f-j).

[3]  Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, § 214 (2018) (codified as 12 U.S.C. § 1831bb); “Regulatory Capital Treatment for High Volatility Commercial Real Estate (HVCRE) Exposures” 83 Fed. Reg. 48990 (Sept. 28, 2018).  See REF, supra note 1, § 2.09[9][c].

[4]  Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, § 201 (2018).

[5]   E.g., 15 U.S.C. § 1639c(b)(2)(F) (exemption from certain requirements for qualified mortgages), and 15 U.S.C. § 1639d(c)(2) (exemptions from certain escrow requirements).

[6]  See 15 U.S.C. § 1639c(b)(2)(F)(iii) (exemption from certain requirements relating to qualified mortgages for certain regulated lenders with less than $10 billion of assets); 12 U.S.C. § 3356(c) (limiting the right of a loan assignee to claim the benefit of a federal statutory exemption from certain appraisals of real estate located in rural areas); and 12 C.F.R. § 1026.35(b)(2)(v) (denying an exemption from the requirement for an escrow account for certain first-lien higher-priced mortgage loans that, at consummation, are subject to a commitment to be acquired by a person that does not satisfy the conditions in 12 C.F.R. § 1026.35(b)(2)(iii)).

[7]  186 A.3d 1060 (R.I. 2018).

[8]  238 So. 3d 867 (Fla. Dist. Ct. App. 2017).

[9]  “ARRC Releases Information on Recent Progress on Transition and on Consultation for Fallback Contract Language” (ARRC Oct. 30, 2018) available at

[10]  See, e.g., the “Universal Debt Facility 2017 - Debt Securities with maturities of one day or longer” (Fannie Mae Nov. 3, 2017), available at, and “Pricing Supplement Dated July 26, 2018 (Revised August 17, 2018)” (Fannie Mae) [CUSIP 3136G4TG8], available at  See generally, Joe Rennison & Alexandra Scaggs, “Fannie Mae issues first debt linked to Libor replacement,” Financial Times (July 26, 2018), available at

[11] 585 U.S. 1 (2018). See REF, supra note 1, § 2.05[10][b].

[12]  Del. Code. tit. 6, § 18-217 (2018).  Division is also permitted by other states, such as pursuant to Ariz. Rev. Stat. § 29-2601, 15 Pa. Cons. Stat. §§ 361-368 (2018), and Tex. Business Organizations Code § 1.002(55)(A) (2018).

[13]  See REF, supra note 1, § 5.02[2][b].  See also B. Goodstein & J. Kratochvil, “Dividing Delaware LLCs,” New York Law Journal, Oct. 4, 2018.

[14]  HH Cincinnati Textile L.P. v. Acres Capital Servicing LLC, Index No. 652871/2018 (N.Y. Sup. Ct., N.Y. Cty. June 20, 2018).  See REF, supra note 1, § 5.02[15][d].

[15]  2018 WL 2023485 (D. Conn. May 1, 2018).  See REF, supra note 1, § 9.01[6].

[16]  E.g., N.Y.S. Bar Assoc., Comm. on Prof’l Ethics, Op. 753 (2002).

[17]  In re Franchise Serv. Of N.A., Inc., 891 F.3d 198 (5th Cir. 2018).  See REF, supra note 1, § 17.02[3][a-b].

[18]  Zucker v. HSBC Bank USA, 2018 WL 2048880 (E.D.N.Y. May 2, 2018).

[19]  Milone v. US Bank Nat'l Ass'n, 2018 WL 3863269 (N.Y. App. Div. Aug. 15, 2018).

[20]  John S. McCain National Defense Authorization Act for Fiscal Year 2019, Pub. L. No. 115-232, § 1703 (2018) (codified in 50 U.S.C. 4565(a)) and § 1706 (2018) (codified in 50 U.S.C. 4565(b)(1)(C)(v)); “Provisions Pertaining to Certain Investments in the United States by Foreign Persons,” 83 Fed. Reg. 51316 (Oct. 11, 2018) (codifying changes to 31 C.F.R. Pt. 800); and “Determination and Temporary Provisions Pertaining to a Pilot Program to Review Certain Transactions Involving Foreign Persons and Critical Technologies,” 83 Fed. Reg. 51322 (Oct. 11, 2018) (codifying 31 C.F.R. Pt. 801).  See REF, supra note 1, § 6.03[41][d][i].

[21]  Email from Richard Frasch to members of the Legal Opinions Committee, ABA Business Law Section (Nov. 1, 2018, 10:49 AM PDT)(on file with author).

[22]  Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, § 310 (2018) (codified as 12 U.S.C. 1717(b)(7), 12 U.S.C. 1454(d), and 12 U.S.C. § 4548).  See REF, supra note 1, § 2.09[8][c].

[23]  Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, § 215 (2018).

[24]  Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, § 213 (2018).  See REF, supra note 1, § 3.04[6][c][i].

[25]  De La Torre v. CashCall, Inc., 5 Cal.5th 966, 422 P.3d 1004 (Sup. Ct. 2018).  The actual language of the court is poetic, not specific.  The court said that an interest rate on a consumer loan may be unconscionable if such interest rate is “so ‘unreasonably and unexpectedly harsh’ as to be ‘unduly oppressive’ or ‘shock the conscience.’”