Getting in the DC Development Game: Ideas for Out of Town Developers

A thoughtful multifamily real estate friend recently asked us to share our thoughts about the hurdles faced by out-of-town developers who want to get in the DC development game and whether there were tactics the developer could employ to be perceived as more “D.C. connected.”

Here is our response:

As is the case with most states, any entity “doing business” in D.C. must be qualified in D.C. To qualify, an entity formed in a different state must have a D.C. registered agent with a D.C. address.

If timing is an issue, an out-of-town developer can initially contract to buy the D.C. property with a foreign entity (i.e., one formed in a different state) and then later qualify that contracting entity in D.C. By the time that the developer acquires title to the property, it should do so with a D.C. formed or qualified entity.

If the developer will be going through any extensive entitlement or zoning process for the property and in connection with that effort, the developer will undertake substantial work with the D.C. Government, it should probably use a D.C.-qualified entity to do so because those activities constitute “doing business” in D.C. In this case, the contract purchaser for the property should probably be a D.C. entity, such as a single-member, disregarded LLC formed in D.C.

Every development/construction project in D.C. is subject to the D.C. Government’s requirements that the entities doing the work hire D.C. based small contractors and D.C. residents. These are documented in the “First Source Employment Agreement” and “Certified
Business Enterprise Utilization Agreement” that are forced on any significant real estate development. The developer can have its general contractor be responsible for most of the obligations under these Agreements, especially the monitoring and reporting requirements.
Developers with multiple projects and multiple Agreements will probably receive better treatment from the District than a developer with a single project.

If the developer plans on going through a rezoning or zoning amendment or planned unit development, it will have to deal with the Advisory Neighborhood Council and other local groups. In this circumstance, there may be a benefit to the developer to being
perceived as partially-local rather than out-of-town.

Are you an out-of town-developer? Please share your views about the obstacles you face for development projects in DC and the innovations you have developed for overcoming them.

Permalink: http://womblemultifamilyandmixeduse.blogspot.com/2012/03/getting-in-dc-development-game-ideas.html

New Fannie Mae Loan Documents Issues Checklist (Continued)

Continuing our discussion about the new Fannie Mae Loan Documents, below are items 5 and 6 from our checklist of key issues:

5. Evergreen Environmental Representations. As in the old security instrument, the environmental representations made by the borrower in the new Environmental Indemnity Agreement are evergreen – that is, they are continuing representations and are deemed made and in effect until the loan has been paid in full. However, unlike the previous security instrument, any breach of an environmental representation is an automatic “Event of Default” under the loan documents. Therefore, even though the Environmental Indemnity Agreement appears to permit the borrower to remedy a breached representation or otherwise remediate a prohibited condition that occurs subsequent to the origination of the loan, the automatic nature of the Event of Default relating to a breach of an environmental representation appears to prevent the borrower from exercising that remediation right.

6. Failure to Complete Life/Safety Repairs within Completion Period. Under the new Loan Agreement, it is now an automatic Event of Default if the borrower fails to make repairs associated with fire, life or safety issues within the completion period without apparent regard to force majeure delays other than weather. This is a policy change for Fannie Mae, so Fannie Mae is unlikely to change this provision. Further, Fannie Mae has refused our requests to grant any notice or cure period for a breach of its terms in the Loan Agreement. The completion periods specified in the loan documents are often short and, therefore, any delay can present a risk of default for a borrower. The borrower will have to put a greater emphasis on managing the completion timeline for the repairs and, in advance of signing the loan documents, raising with Fannie Mae any concerns that the borrower may have in completing the required repairs by the
specified deadline.

Permalink: http://womblemultifamilyandmixeduse.blogspot.com/2012/03/new-fannie-mae-loan-documents-issues.html

Fannie Mae New Loan Documents - Issues Checklist

After a meaningful hiatus (one that essentially paralleled the same time period in the multifamily marketplace where there was little to no transactional activity), we are back in the multifamily blogging business. Our first topic, one we are confident is near and dear to almost every multifamily real estate owner, is Fannie Mae, and more particularly the new set of form multifamily loan documents introduced by Fannie Mae in 2011. These new documents reflect a major overhaul of the previous Fannie Mae loan documents in both form and substance and they include several additional provisions that materially expand the risks of recourse exposure to borrowers and loan guarantors. We have developed a list of 10 key issues that borrowers should focus on as they evaluate the new Fannie Mae loan documents. Here are the first 2 items from our checklist:

1. Full Personal Liability for Failure to Comply with Single Asset Entity Requirements. Under the new Loan Agreement, the borrower and any guarantor are personally liable to the Lender for repayment of the entire indebtedness if the borrower fails to comply with the single asset requirements of the Loan. This is broader than the previous non-recourse carve out that was limited to loss or damage suffered by Fannie Mae, but is fairly customary for a non-recourse loan. What is unusual, however, is the lack of clarity about exactly what comprises these single asset entity requirements. The recourse provision does not reference a particular section of the Loan Agreement or any other loan document, so the borrower is left guessing about what failure might trigger this major liability. Also, there is no apparent notice or cure period before full personal liability is triggered, so the borrower is not even afforded the opportunity to fix a loan document violation it may not even clearly understand it has engaged in.

2. Full Personal Liability for Non-Willful Material Misrepresentation. Under the Loan Agreement, the borrower and any guarantor are personally liable to the Lender for repayment of the entire indebtedness if the borrower, any guarantor, any key principal, or any officer, director, or owner of those parties commits fraud or material misrepresentation in connection with the original underwriting of the loan or in complying with the loan’s on-going
reporting requirements. In the old Fannie Mae loan documents, the borrower and any guarantor were only liable for the loss or damage suffered by the lender due to fraud or material misrepresentation; these infractions did not trigger full personal liability for the indebtedness. Again, this new provision is broader than a traditional a non-recourse loan.

Stay tuned for the remaining items from our list and please weigh in if you have identified other areas of concern in the new Fannie Mae Loan Documents.

Permalink: http://womblemultifamilyandmixeduse.blogspot.com/2012/03/fannie-mae-new-loan-documents-issues.html