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Distressed Real Estate

Distressed Real Estate

Contact: David G. Martin
Contact: Diana R. Palecek

During the recent economic downturn, lenders saw their REO departments become inundated with properties acquired through foreclosure of developments in some stage short of completions. In order to preserve their collateral’s value and to position their REO properties for resumption of development and ultimately resale to another develop or investor it became necessary to evaluate a host of issues for each project. Smith Moore Leatherwood’s Distressed Real Estate Team stands ready to help lenders navigate the issues and potential hurdles associated with putting a partially-complete project back on sound footing.

Planned developments typically will be subject to various agreements that govern the operation of the development such as declarations of covenants, conditions and restrictions, reciprocal easement agreements, cost-sharing agreements, and operation and maintenance agreements. Owners associations are often established to administer the development. Lenders must evaluate these agreements and the associations to determine if any action is necessary to allow development to proceed and/or to make the developments marketable to third parties.

Restoring a functioning owners association may be key to resumption of development activities and sale of the remaining property within the project. An audit may be necessary to establish the financial condition of the association. Members of the governing body may need to be removed and replaced if the developer’s representatives remain on the governing board. The status of title to and condition of common elements must be evaluated to determine whether immediate action is necessary to preserve the value of the common elements.

Development documents often will reserve special rights to the developer, called “declarant rights” or “development rights,” that allow the developer to take certain actions in connection with the continuing development of the project. Transfer of these development rights to the lender may be essential to the continued development and marketability of the project. However, lenders must carefully evaluate whether obligations and liabilities will tag along with the declarant rights.

Our attorneys can help lenders navigate laws and regulations applicable to the development process in order to preserve and enhance the collateral’s value. Site plan and subdivision approvals and building permits sometimes expire or "sunset" if the applicant fails to take action on the approvals or ceases development activities for a period of time. We can assist lenders with obtaining extensions of these deadlines. In some cases, the project will have failed because it is no longer feasible from a market perspective, in which case we can help obtain changes in zoning and other land use laws governing the project in order to facilitate a revised development plan.


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