Also in this Issue:
-Estate Planning Don'ts
-Tax Traps
-How Not to Run Your Business
REAL ESTATE NO-NO'S
by Jonathan Rivin rivin@ddrs.com
Almost every business and individual in California deals in real estate at one time or another. Of course, for real estate investors, developers, lenders and brokers, such transactions are the heart of their operations, but other businesses frequently lease property, or acquire it, and even residential transactions are increasing in complexity and value. There are a number of common practices which I would always advise against.
Don’t sign standard form pre-printed real estate documents without reading, understanding and, if appropriate, modifying and supplementing them. The real estate industry uses a variety of pre-printed forms for leases, construction and design contracts, sales agreements, brokerage agreements and loans. These forms are sometimes useful and efficient, but frequently they are incomplete and prejudicial. The forms are usually biased in favor of the drafter or its industry and are often presented as "standard." Just because a broker or contractor tells you that "everyone uses these forms" doesn’t mean they are fair or accurate for your transaction. They seem long and boring, but read them carefully, for there is frequently lurking a provision which alters your expected rights. For example, most forms of architectural agreement provide that the plans belong to the architect, even though the owner has paid for their creation.
Don’t accept real property security for a loan without considering the negative implications of the one-action and anti-deficiency laws. Lenders often seek "security" for a loan in the form of a pledge of an asset. Under California law, a lender who accepts real property security not only gets a security interest in the property, but also gives up significant rights to pursue the borrower for payment, due to the effects of the "one action rule" and various "anti-deficiency" laws. The operation of these arcane rules often restrict the ability of the lender to pursue remedies other than foreclosure on the security and can result in a loss of security or loss of debt if the lender makes a mistake in exercising its remedies. The detailed operation of the one-action and anti-deficiency rules is beyond the scope of this item, but suffice it to say that loans to certain borrowers may provide more certainty of repayment if they are not secured by real estate.
Don’t forget about a survey as part of due diligence when acquiring real property. Unless a civil engineer or surveyor conducts a property survey, a buyer of real estate typically has no information or assurance that boundary, encroachment and easement disputes with neighbors don’t exist. Title insurance doesn’t address these matters unless an extended coverage policy is obtained, and the insurer will likely require a survey to issue the policy. Surveys can be expensive ($3,000 or more), but — even in a residential deal — the cost can be justified by the information gained about the acquired property.
Don’t neglect an environmental site assessment when acquiring real property. Because of the expense of an environmental site assessment ($2,000 and up), many people forego this element of investigation when acquiring property. This leaves them exposed to strict environmental liability, without regard to knowledge or fault, potentially outstripping the value of the property. This issue is not just relevant for commercial properties — older residences often have long forgotten underground storage tanks and former agricultural properties often have been contaminated by fertilizers and leaking equipment, if not worse. No sizeable property should be acquired without a Phase I environmental site assessment.
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