The condo market continues to degenerate. Development deals are catering left and right. Many buyers are no longer qualified to close on their presales. Consequently, creative buyers and sellers are looking to the courts to read into their presale agreements what they argue are implied covenants. So far Western Washington courts are not agreeing with creative interpretation of those presale agreements.

Some time has passed since the limo driver’s case against Bellevue Towers was filed and discussed in the press and this BLOG. Recall that the plaintiffs sued Bellevue Tower’s developers and lender for fraud in the inducement, breach of contract, mistake, conspiracy, and violations of the Washington Consumer Protection Act with respect to the presale agreement for their condos. Prior to filing their answer to the complaint, defendants filed a motion to compel mediation and arbitration. In their opposition, the plaintiffs argued that the arbitration clause was unconscionable and should be rejected; that the purchase contract was an unconscionable adhesion (“take it or leave it”) contract; and that the “loser pays” attorney fee clause was unconscionable. In their reply the defendants pointed out that none of the terms were hidden and significantly, that plaintiff’s counsel was told on more than one occasion that ADR is required under the terms of the agreement. King County Superior Court agreed with Bellevue Towers and stayed the proceedings and granted the motion to compel mediation and arbitration. The defendants were also awarded attorney fees. No big surprises there. The court simply upheld the real estate purchase agreement as written, including the alternative dispute resolution and attorney free clauses.

The understandably hard part to swallow for many is losing one’s earnest money when one can’t close a purchase because the developer’s preferred lender that promised you that sweetheart loan, well, maybe just short of promised, advises that you’re no longer qualified to borrow, the promised rate and terms have vaporized, and that you’ll need more down payment money you don’t have because the condo you prequalified for is worth less then when you put down your $50,000 or more that you’re now going to kiss off along with attorney fees. (Run on sentences are allowed in blogs.)

In a similar but different case, on June 25, 2009 the Supremes filed an En Blac Opinion in the matter of Torgerson v. One Lincoln Tower LLC, another Bellevue high rise condo purchase dispute. In this case the development stalled and the developer rescinded its purchase agreements offering to return deposits. The Buyers sued for specific performance and damages. King County Superior Court and Division I upheld the purchase agreement and found for the defendant developer.

Supreme Court Justice Sanders framed the issue as to whether or not a real estate contract can limit a buyer’s remedies for breach to return of deposits and certain monies spent improving the property. The plaintiffs argued that the limitation is unconscionable. The contract contained a standard clause, in all caps, stating that if the buyer fails to close without excuse, the seller can keep the deposit and terminate the agreement.

The Court found that: (1) the contract provisions limiting remedies enforceable (“It is black letter law of contracts that the partes to a contract shall be bound by its terms” Alder v. Fred Lind Manner (2004)); (2) the remedy limitations do not fail their essential purpose; (3) that limitation on remedies is not void for public policy reasons; and (4) that the sellers are entitled to attorney fees by contract as the prevailing party.

In this case, the Court concluded that the buyers, real estate agents, were “sophisticated buyers.” The Court found the buyers were given the opportunity to provide input into their agreements. I’m not convinced of that. Few high rise developers, even in this market, are going to renegotiate seller default provisions under any circumstance. But I suppose knowing that is in itself an opportunity to better understand your position in a transaction.

For now I think it’s safe to conclude that Washington Courts, at least in Western Washington, are going to continue to firmly uphold the limitation of remedy clauses in standard real estate purchase and sale agreements. As Justice Sanders’ stated, “… remedies limitations can cause … Buyers or Sellers to bear the risk of the other party’s breach, depending on changes in the housing market.”

HUD dropped the following news release last Friday. Headlined “Donovan Announces Recovery Act’s Homebuyer Tax Credit Can Immediately Help Thousands of First-Time Homebuyers To Buy a Home.”

WASHINGTON - Speaking to the National Association of Home Builders Spring Board of Directors Meeting, U.S. Housing and Urban Development Secretary Shaun Donovan today announced that the Federal Housing Administration (FHA) will allow homebuyers to apply the Obama Administration’s new $8,000 first-time homebuyer tax credit toward the purchase costs of a FHA-insured home. Donovan said that today’s action will help stabilize the nation’s housing market by stimulating home sales across the country.

For every FHA borrower who is assisted through the tax credit program, FHA will collect the name and employer identification number of the organization providing the service as well as associated fees and charges. FHA will use this information to track the business closely and will refer any questionable practices to the appropriate regulatory agencies, as necessary.

Good news for first-timers. Hay, how about the rest of us? If you want to stimulate the market through a tax credit program, why not open it up? There are a number of ways it could be done such as percentage of sale price or income limits to name just two. It’s good news, but more needs to be done to move the home market into positive territory.

Today’s Seattle Times’ Retail Report featured a story on dwindling occupancy in the downtown retail core. Vacancies are up 3.4% and so are rents - from $31.50 to $31.80. Who would increase rents – even thirty cents a square foot - when vacancies are increasing at the same time with no end in sight? Owners and managers who want to offset the negative impact of rising cap rates (a income multiplier used to value commercial real estate) on pro forma operating statements for valuing real estate investments for one. There are other reasons too. But that is an incentive. At $31.80 PSF, a independent retailer needs to generate sales of $636.00 PSF to “make it” according to conventional wisdom and published statistics (ICSC) as a 5% rent load factor is optimal for most retailers. I said most. Food operators - double that. So, a typical 1,000 square foot boutique needs to generate $636,000 annual sales. In this business environment, that’s a tall order. Get out to your suburban strip center and mini-strip center, the numbers are a little less harsh as rent is quite a bit lower, however, same math applies. And foot traffic is lower, or non-existent, with sales much lower as well. In my client mix, I represent small retailers, the “moms and pops.” I’ve put them in business, and helped them shut ‘em down. It’s painful to watch years of savings and hard work, go down the drain in an economy like this. I’ve also helped many save themselves from themselves, by pointing out the flaws in their business plans, and advising to hold off for another day. I only digress to save my reader from thought that I may have been dishing on small business last week. I wasn’t. As to the recession benefitting “big retailers,” from the onslaught of bankruptcies this past year, I think the jury is still out on that one. Please support your neighborhood mom and pop stores. They stepped out and took the risk. Independent retailers need and deserve our business. Have a great Memorial Day Weekend. Enjoy the sunny Seattle weather.

This morning NPR featured a piece on the National Association of Realtors’ annual convention in Washington DC. The upshot is that the ever-optimistic Realtor group sees a ray of sunshine in the otherwise gloomy real estate market. Thanks to government programs, first time home buyers may qualify for products that may help the battered market. Not so lucky are the commercial real estate brokers, or investors for that matter, as the lending market continues its deep freeze. That with today’s report of lower than expected retail sales, I thought I’d revisit commercial real estate investment grade cap rates and sales.

Ouch… Deals that were going out a few years ago at 5% cap rates are now in the mid-sevens. What does this mean? If you had purchased a commercial property, say a Walgreens Drug Store with $300,000 net operating income (“NOI”) at a 5% cap rate, back around 2004, 2005, you would have paid around $6MM. A conventional take out loan at 75% loan-to-value would require $1.2MM equity investment. That same credit tenant lease and NOI today at a 7.5% cap rate is worth a mere $4MM. In other words, that brilliant 2005 addition to the portfolio is now upside down to the tune of two million bucks, rounded. You’ve not only lost all your equity, but your loan is upside down too. Worse for the rest of us, your lender is south in security in the neighborhood of $1.5MM (the difference between the $4.5MM he or she could have underwritten then, versus the $3MM that could otherwise be underwritten today). If you bought a little strip center to go along with your mini-anchor, filled or partially filled with zero-credit tenants (mom and pop coffee shops, dry cleaners, hair, nail and tanning salons, struggling franchised five buck sandwich shops, etc.), then that part of the portfolio is in even worse shape, if that’s possible. It certainly is on paper if you’re being honest. There are tons of those deals out there too. And I don’t think their impact has really hit public consciousness or pocketbooks yet. No question, however, that cap rate increases have hit the valuation of REITS, and private retirement portfolios; and increased illiquidity in capital markets, hence the freeze.

There is a title wave of commercial real estate foreclosures ready to hit. It is being held off in some measure, but who knows for how much longer. There is anecdotal evidence in the market that many developers and investors, particularly local and regional mom and pops, are still living in dreamland, grossly overvaluing their portfolios. Lender complicity in these dreams only postpones the pain. Will it turn around some day? Maybe. It always seems to, eventually, but that sunny day is not on the horizon just yet.

Last month the Department of Financial Institutions released an Interpretative Statement related to the Mortgage Broker Practices Act (“MBPA”) and the Consumer Loan Act (“CLA”). The statement was in response to inquiries as to whether or not loan modification service providers must be licensed in Washington State to offer services to Washington residents involving their Washington real property. Anyone exploring Craigslist, the Pennysaver or other compilations of classified ads knows that the sharks run thick in those waters trolling for the unwary looking for shelter from bad loans. Interestingly enough, companies from California and Florida seem to lead the pack. Some are looking for lawyers and former real estate agents to partner in the loan modification business.

The short answer is yes. In order to offer loan modification services in Washington State requires licensing under the Mortgage Broker Practices Act RCW 19.146, or Consumer Loan Act RCW31.04, unless a specific exemption applies. Significant excerpts from discussion section of the Interpretative Statement follows and makes for good reading for anyone seeking services from a loan modification specialist:

The Division has received many inquiries regarding the regulation of loan modification services. According to callers, individuals are communicating directly with borrowers and brokers offering to provide loan modifications services. Many callers inquire about what restrictions are applicable to loan modification services.

In addition to any applicable licensing requirements under either the MBPA or CLA, all individuals who offer or negotiate loan terms for borrowers are prohibited from directly or indirectly employing any scheme, device, or artifice to defraud or mislead borrowers or lenders or to defraud any person; engaging in any unfair or deceptive practice toward any person; obtaining property by fraud or misrepresentation; soliciting or entering into a contract with a borrower that provides in substance that the mortgage broker or loan originator may earn a fee or commission through “best efforts” to obtain a loan modification even though no loan modification is actually obtained for the borrower.

There seem to be new companies coming into, or forming in Washington State, on a weekly basis, offering loan modification services. Many are legitimate; however, many are simply out for a quick buck. And that buck quickly heads south and out of state. We’ve seen too much carnage in this area already. This interpretative has been circulated by the NWMLS and the WSBA Real Property Listserv to advise brokers and lawyers practicing in this area as to what the guidelines are for compliance. Consumers need the same information to make informed choices. As always, it makes sense to shop around before committing. Before you shop, make sure you know the rules of the road.

Washington Realtors issued their press release on new mortgage rates today:

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.78 percent with an average 0.7 point for the week ending April 2, 2009, down from last week when it averaged 4.85 percent. Last year at this time, the 30-year FRM averaged 5.88 percent. The 30-year FRM has not been lower in the life of Freddie Mac’s weekly survey, which dates back to 1971 for the 30-year FRM.

One-year Treasury-indexed ARMs averaged 4.75 percent this week with an average 0.6 point, down from last week when it averaged 4.85 percent. At this time last year, the 1-year ARM averaged 5.19 percent. The 1-year ARM has not been lower since the week ending September 29, 2005, when it averaged 4.68 percent.

Lower rates will help support housing prices at the bottom. However, consumers will still need to qualify for loans. With the job market in the tank I’m not sure we’ll see a flurry of new sales anytime soon. However, the loan closers I’ve been in touch with say things at their offices are extremely busy right now. Hopefully these rate targets will also help some folks in need of loan modifications as well.

Senate Bill 5221, passed by the Washington legislature earlier this year and signed by Governor Gregoire today, amends the Distressed Property Law. Excerpts from The Washington Realtors press release:

There is now a general exemption for all real estate agents and brokers who provide real estate services pursuant to the Agency Law. So long as agents and brokers do not participate in a distressed home conveyance (essentially a scam transaction), agents and brokers cannot become distressed home consultants.

“With this bill, we will have overcome an important hurdle on the path to reviving our housing market,” said Greg Wright, President of Washington REALTORS®. “Being able to help homeowners prevent foreclosure is a real key to stimulating the real estate market and critical to economic recovery.”

Long story short, real estate agents may dodge bullet when working the distressed market. Buyers may dodge said bullet if the seller is represented by an agent or lawyer. Seller must be in a position to hire a real estate agent (and pay a listing commission) or lawyer for buyer to avail itself of protections (namely avoiding the possibility of a CPA violation). The NWMLS distressed seller language was convoluted and not well received. Nothing will be missed there. Pressure remains on buyers (i.e., “investors”) trying to work the distressed sale market with direct seller solicitations and off balance sheet deals – the intended purpose of the law. Good job contributors and legislators.

An update on the federal loan modification program - according to a report filed by Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter, loan modifications and refinancings can begin immediately. The program is scheduled to end on Dec. 31, 2012. Loan servicers that intend to participate must enter into agreements with the Treasury by Dec. 31, 2009.

Eligibility Requirements

Eligibility requirements for homeowner participation include:

• the loan must have been originated on or before Jan. 1, 2009;
• the mortgage must be a first lien loan on owner-occupied property, and the borrower’s occupancy must be verified;
• a single-family residence may have an unpaid principal balance of no more than $729,750, with a higher limit for two- to four-family properties;
• the borrower’s income must be fully verified;
• a loan can be modified only once under the program.

Terms and Conditions

Participation requirements for lenders and mortgage servicers include:

• servicers must include all eligible loans in the program and must make reasonable efforts to obtain any necessary contract waivers;
• all loans that are at least 60 days delinquent or at risk of imminent default must be tested for eligibility under a net present value test, and all that pass the test must be offered a loan modification (unless a contract prohibits modification or there is evidence of fraud;
• payments on the loan are to be reduced to no more than 31 percent of the borrower’s gross monthly income under a specified sequence of modification options;
• the sequence of options is interest rate reduction, then loan term extension, followed by forbearing principal, with refinancing being an acceptable alternative.

Financial Incentives

Under the program, loan servicers, lenders and borrowers all will be eligible for financial incentives to modify loans and keep the modified loans current. These include:

• the government will share with loan holders the cost of reducing payments from 38 percent to 31 percent of the borrower’s monthly income;
• servicers will be paid $1,000 for each modification and continuing annual fees of $1,000 for each loan that remains current;
• a single-family residence may have an unpaid principal balance of no more than $729,750,
with a higher limit for two- to four-family properties;
• borrowers who stay current on their payments will be eligible for annual principal reductions of up to $1,000 for five years;
• additional one-time bonuses of $1,500 for loan owners and $500 for servicers will be paid for loans that remain current.

In addition, there will be incentives for second-lien holders to extinguish their liens in order to permit modifications. The Treasury noted that comparable incentives will be available to encourage loan refinancing. Loan servicers also will be given incentives to take actions other than foreclosure for nonperforming loans.

The plan won’t make getting hold your loan correspondent any easier. I have heard reports from borrowers who claim to have made literally dozens of calls only to be placed on hold, or have the call dropped when switching to the “person that can help.” And delinquent borrowers will continue to have their mail flooded with solicitations from out of state loan modification companies that promise up to a 50% principal cut through their diligent staff after your $4,000.00 check clears their bank. So, help may be out there for some, but getting to the life raft through the turbulent seas will take some serious skill and determination.

The Plan is the obvious big news of the day. To qualify for relief you must be able to demonstrate that:

* You live in your house, condo, or co-op;
* It’s your primary residence;
* Your loan is less than $729,750 for a single family house; for multifamily homes the cap rises to $1.4 million for a four-unit house; and
* You’re in default or about to face default. By the way, you’ll have to sign an affidavit saying you can’t afford your mortgage.

There are no limits on the ratio of the size of your loan to the current market value of your home, and homeowners who are way “underwater” can apply. However, here’s a little catch – mortgage servicers will get to apply a standardized test (details still pending) to see if lenders would lose more money by refinancing or foreclosing. Even with a standardized test there is a plenty of room for interpretation available. So it’s still really the lenders’ game folks. Not everyone who’s been punished by layoffs and the economy, and really needing assistance, are upside down on their home loans just yet. So they’re out. I polled a few people in the lending business this afternoon and have been told that it’s going to be incredibly difficult and time consuming to move these deals forward. And again, a great many people that should get some help are barred by the rules. If you do quality, you may want to also check out other avenues for relief like the Neighborhood Assistance Corporation of America (”NACA”); a non-profit, community advocacy and homeownership organization (visit at https://www.naca.com). A client brought this organization to my attention today. No endorsement - I haven’t done any due diligence yet. I simply pass along the reference. There will probably be some kind of indemnity provision as part of the loan modification to prevent filing or force settlement of predatory lending actions by borrowers. That would logically follow and will be a great risk mitigation factor for lenders. In the meantime, the notices of default and notices of foreclosure continue to flood the gates. Troubled borrowers will need to be diligent and continue to push back as hard as they can. Good times – we’ll survive somehow.

The strange case of Hot Dog vendor and Bellevue Tower purchaser Danil Kasimov seems to be this week’s closely watched poster child for condo presale-gone-bad. Covered by the Seattle Times, Seattle Bubble Blog and KIRO, causes of action in the case include Fraud in the Inducement, Breach of Contract, Mistake, Conspiracy, Consumer Protection Act (CPA) violation, and violation of the Washington State Constitution.

The brief factual allegation leading off the complaint states that “this [case] involves an alleged conspiracy between a condominium developer and its bank, where below average income immigrants, with limited language skills, are shown extremely expensive “dream home” condominiums, who then make offers contingent on the bank approving them for financing. Then, the bank, in conspiracy with the developer, either mistakenly or fraudulently, allegedly massively inflates the income of the prospective borrowers using “Stated Income” loans, gives them non-binding “Prequalification” letters, and allegedly removes the contingency from the contract. At that point, the developer is allegedly free to grab the victim’s earnest money as liquidated damages under RCW 64.04.005(1), which states:

A provision in a written agreement for the purchase and sale of real estate which provides for liquidated damages or the forfeiture of an earnest money deposit to the seller as the seller’s sole and exclusive remedy if a party fails, without legal excuse, to complete the purchase, is valid and enforceable, regardless of whether the other party incurs any actual damages. However, the amount of liquidated damages or amount of earnest money to be forfeited under this subsection may not exceed five percent of the purchase price. (emphasis added). RCW 64.04.005(1)”

Interestingly enough, Tim Ellis at the Seattle Bubble Blog (http://seattlebubble.com/blog/) conducted a quick search of public records to uncover a number of inconsistencies in the Seattle Times’ interpretation of the complaint and background of the plaintiff. Deft reporter of the tanking local real estate market, no one can mistake Tim as a shill for the condo development industry.

Some of the inconsistencies uncovered by Ellis include the claim that Kasimov is a “a limousine driver, earning little more than minimum wage,” when in actuality, he owns Action Towncar Limousine Service (although that doesn’t mean he is making more than minimum wage); that he was unwittingly duped by a real estate agent and a flashy sales presentation into signing paperwork he had no way of understanding, when public records show three different purchases of real estate in the Redmond/Bellevue area totaling nearly $1.6 million over the last five years; and that …they (the plaintiffs) were never given a copy of the contract - which was written in English, where – based on employment and education - it seems unlikely that any of these plaintiffs are truly ignorant of the English language.

There’s probably enough blame to go around in this case. The majority of buyer’s I’ve interviewed over the past months with presale problems have the same jobs, same income, and same marital status they did two years ago when their project were in presale. Only the rules on lending, availability of funds, and condo valuations have changed locking them out of loans that need to close now to avoid forfeiture of deposits. No small matters these; but clearly issues not within the control of the condo buying community. The thing is many of these projects would have never be built but for strong presales bolstered by marketing and finance teams and an aggressively appreciating market. It will be interesting to see where this case goes. Probably to early settlement to avoid discovery is my guess.