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transaction are the following: l.The Buyers, 2.The Seller, 3.The Landlord, 4.The First Mortgage Bank, and 5.The Second Mortgage Bank. Each of these parties is going to have their own concerns and will want to create as good of a deal for themselves so that this commercial transaction can go through. The Buyers in this transaction are Mr. and Mrs. Hannan. According to the facts, they
operating this restaurant as chef and hostess and have no idea about the financial status of this business. Ifl was their attorney, I would want to know a few things about this business. The very obvious concern would be if there is a lease for the restaurant and if so, does the seller of this leasehold have the authority (via Warranties and Representations) to assign this interest in the restaurant. I would ask that a copy of the lease be submitted for a thorough examination. What I would be looking for is anything that would contradict that leasehold can or cannot be assigned. If it is assignable, then I would move onto the next step. The next question that I would have as Buyers' lawyer would how much money would the business actually make if the "former professional athelete" no longer had a presence in the restaurant. The idea is simple. According to the facts, Seller thinks the restaurant is worth $500,00.00 "for the equipment, good will and the value of the leasehold." The Good Will portion of the value is what I would be concerned with. I want to make sure that the business will be able to operate and generate an income which is comparable to that of the current status and ownership. Ifit doesn't generate as much income, then Buyer will not be able to pay his rent
to the landlord, his mortgage payment for purchasing the leasehold, his insurance, and the mortgage he still has on the first home. Finally, I would want to negotiate for Buyers that they
one of the biggest concerns that the Seller will have is whether or not the business goes well. it is in his best interest that the restaurant runs well and generates a profit. Thus. Now one might ask why he is giving it to the people who run it and not sell it to someone outside of the business that can pay him the full value of the leasehold.00). This is also providing some assurance to the Buyers that the Seller is going to provide some type I This setup sounds like a plaza setup and the Seller is renting one of the spaces of the plaza and runs it as a restaurant. The reason for this is because it's a way to offset the risk that people will not be able to park their cars and go to the restaurant. the day-to-day operations) and an outsider would need to learn how to operate the restaurant. The answer would probably lie in 2 hypothetical facts.00 that he invested. Secondly.Modern Real Estate Transactions Professor Smith Fall 2004 Final Examination have use of the "parking lot". The Seller is a former professional athlete who has a lease from the landlord of the building. First. . (Hypothetical Sketch provided in appendix) 2 .' It is apparent that he . Knowing this. I would advice him to have the Buyers mortgage out the value of the leasehold and the inventory of the restaurant. The next player in this business transaction is the Seller. I would want Seller to record the mortgage as soon as possible so that it is apparent that Buyers have mortgaged out the leasehold to him. he might end up losing his $175. I would also advice him to have Buyers sign a Guarantee (which goes along with the mortgage) so that the Buyers can be held personally liable as well. it is logical for the Seller to lend the Buyers part of the money to buy him out of the leasehold (which is $175. However.000.-.000. However.J '\ wants to move on and leave the business to the people who run it. Finally. if I was Seller's lawyer. the Buyers are people who know how to run the restaurant (i. it is probably in a location where only the Buyers are people who would be remotely interested in buying the leasehold. The reason for this is because if Buyers cannot make the restaurant run and generate a profit.e.. Aside from the mortgage.
Grills. foods.Modem Real Estate Transactions Professor Smith Fall 2004 Final Examination of benefit to the restaurant such as making special appearances and sign autographs from time to time.000. As the Banks attorney. financial statement updates (what inventory has been sold because that is part of what is secured in Mortgage). The risk that this Bank is undertaking is the fact that if there is a default in payment. etc. \ l current owner of the lease and new owners of the lease. insurance.) The last thing that Second 3 . I want the bank to know exactly what the status is of the business if they are going to lend the $250. It is also in the Bank's best interest to figure out what the value of the inventory is in the restaurant because that will be a security going along with the mortgage. tables. In the event that the Buyers do not comply with this agreement.00 that the Bank is going to potentially lend out. I would want them to know how much of a difference it would make to have different owners. The reason for this is because I want to make sure that it is a valid lease (via Warranties Representations). whatever equity they have on the condominium (that is if anything is left over after a foreclosure by the First Mortgage Bank).000.000. The next player in this transaction is the Second Mortgage Bank which is going to lend the $250. they will be in default. it is freely assignable or sublettable. then as Security they only have the value of the leasehold.000.000. ifit was negotiated that the Buyers want to use the parking space. I would also ask to see a copy of the lease to evaluate certain things such as the length of time remaining on the lease.00. I would also draft documents for the Bank that they will be entitled to audited statements. tax returns.e.00 for the leasehold. and time on the and that the remaining lease is worth the $250. thus it is in their best interest to comply with this. I would try to shoot for a 5 year lease since I know that the value will be worth about $2. and the contents of the restaurant (i. I would want them to compare the --. chairs. Finally. etc.
they will owe money to the Seller. if Seller sees that the restaurant is not running well. The Subordination is ahead of the Seller's mortgage. well for the Buyers. he will make it work out through his "good will". I would make sure that both Buyers sign the Mortgage (and Promissory Note) therefore binding the parties personally and severally liable and I would have everything (the Mortgage. Thus it is also in the best interest of this Commercial Bank that this business goes \ . Finally. then they will not be able to make their payments on time and they will be in default. to hedge the Banks losses. the 4 . Thus. Signed Guarantee binding the parties on a Personal Level. Another piece of advice I would give to the Bank is to have a higher interest rate (than going Market Rate) on the loan. being junior to the First Mortgage Bank is lose its security interest in the condominium. Their concern in this transaction is that if the restaurant does not go well for the Buyers. The next player in this transaction is the First Mortgage Bank. there will be a foreclosure and First Mortgage Bank will have the condo as the security behind the mortgage. Thus. I would have a Subordination drafted to lock in the Seller. They already have an idea of what the nature of the beast is when the Seller is running the restaurant. since there is no telling how much they wil1lose (chances are that the Bank will lose out on the foreclosure). I would have them lend the money at a higher interest rate. Agreement Agreement is so that it is agreed that the Bank This is going make the Bank feel better about this transaction. the Subordination Agreement) recorded at the registry of deeds as soon as possible.. Next. and they will have to pay rent to the Landlord. Now the relationship between the First Mortgage Bank and the Second Mortgage Bank is that in the event of default. However._. Modern Real Estate Transactions Professor Smith Fall 2004 Final Examination Mortgage Bank. This is the mortgage bank that Buyers have their condo on. Thus. The reason for this is because the Buyers will owe money to the First Mortgage Bank for the condo.
The Leasehold estate is only Subletable and not Assignable. Provided that the lease he signed with the Seller is freely assignable. then the Condo will be foreclosed. it would put the Seller in a somewhat stressful position and it would make sure that he and the Buyers will make this business work. The clause would provide for the following: 1. he runs the risk of an entity taking hold of the lease and ending up not being able to make the monthly payments for the use and occupancy of the restaurant. The Second Mortgage Bank is also concerned with the Restaurant Business going well because if there is a default. and the Landlord all have something to lose if this business venture does not go well (it is obvious that the Buyer has everything to lose if this venture does not go well). The final piece of concern and drafting thought for the parties is NOTICE. he is actually a very interested party at this point. The Seller. I would have had the Landlord (this is before Buyers come into picture) put a clause into the lease he originally signed. Since "First-In-Time First-In-Right" applies. As a drafting precaution.Modem Real Estate Transactions Professor Smith Fall 2004 Final Examination First Mortgage Bank is extremely interested and concerned as to how the business will tum out. Provided that the lease even remotely had this language. These parties will want notice before any type of foreclosure 5 . Although it appears that he is completely out of this transaction. the First Mortgage Bank.Since the lease is only to be Sublet. The last player in this transaction is the Landlord. 2.The Landlord reserves the right to interview the potential new tenant in the event the present tenant wishes to leave and 3. the proceeds of the potentially foreclosed Condo will be applied to satisfy the remaining loan amount for the condo and the Second Mortgager might not get anything off of the condo. the Second Mortgage Bank. the current tenant is responsible for non-payment of rent from the new tenant.
A piece of that parcel of vacant land has been taken under eminent domain and the cause of action was brought to the "Department of Public Utilities.) The reason for this is because I do not want the Seller of Black Acre to be left off the hook via the Merger Doctrine. One other very good way to give some comfort level to the Junior Mortgagees (Second Mortgage Bank and Seller) is to include a Promise To Pay the senior mortgagees because if should include a Proof of Payment Clause and require the borrower to submit monthly stubs that they have been making their payments to the senior mortgagee." To secure title and make sure that notice is given to a potential Bona Fide Purchaser.._. thus making sure that every party (which at this point is connected (in some way. the only way a Lis Pendens can be properly discharged is through "judicial clerk's certificate and since by definition the DPU does not have that ability. the Lis Pendens is still in full effect. The first would be to avoid the Merger Doctrine and make sure that the Seller of Black Acre signs a Warranty (with the Purchase and Sale Agreement) that the title is free and free and clear (aside from the piece of parcel taken by the Gas Company. shape or form). my client is interested in purchasing a parcel of land. the Gas Company recorded a Lis Pendens. The reason for this is because some party may want to cure the default. However. Question #2 According to the facts. There are two things that I would probably suggest to my client as one of their counsel. 6 . Modern Real Estate Transactions Professor Smith Fall 2004 Final Examination process moves forward.
Finally. The lot that Acme Inc. 7 .. ". I would try to tum this clouded title into a marketable title by commencing an action by bringing in all "the adverse claimants into court as defendants. I would want to gather information such as ones stated in the facts. The idea is to show a great interest for Acme Inc. Cases. and the Car Dealerships. New York p."z What will ~ probably happen is that the Gas Company will be the defendant and since they have already taken the piece of parcel of land. Aspen Law and Business.. which definitely tbe most important and effective. it must be recorded as quickly as possible. compelling them [to] eitber establish tbeir rigbts or to relinquish tbem. this development [ J would be traffic 2 Robin Paul Malloy and James Charles Smith.. 277 (2002). Question #3 The very first thing that I would do as the developer is to use studies and marketing tools to be able to forecast how much money this project could potentially generate.000 and move on to bigger and better things.. This in tum would make the Town Planners very happy and would be willing to support the project. they will relinquish their rights to the title. It will be then the statute and state conveyancer's standards of a "judicial clerk's" certificate will be satisfied. wants to sell the property for $12. It also helps that I have been active in civic affairs and have personal knowledge about the Planning Board. Real Estate Transactions: Problems. According to the facts.Modem Real Estate Transactions Professor Smith Fall 2004 Final Examination The second thing. The town wants to avoid having "big box" stores and to have some of the traffic generated from the Dealerships downtown to be located elsewhere. if and when the certificate is received.000. wants to sell off is a fitting location for the dealerships to move out of the downtown area. is that I would try to have this defect cured. I already know that Acme Inc. the Town Planners. the Planning Staff would support this because. and Materials.
the car dealers will have more breathing room to have their cars on the lot and in tum have a higher inventory to show off to their customers.. . what better way is there to test drive a vehicle and test its abilities than a state highway. I can tum to the Lending Markets and gets the loan amount necessary to have this project take off. the location next to a state highway is a great way to advertise to passing vehicles and prospective customers would have easier access to the dealership location. at 933. In having all of this information. . I would seek an Acquisition and Development Loan to acquire the land ($12. at 936 8 . At this point.Modern Real Estate Transactions Professor Smith Fall 2004 Final Examination neutral. 4Id. First. Secondly. Having this equity. and Specifications. Finally.3 Just like in a - into this project provided that everyone in this deal has something residential setting. and [clear up the downtown area and use it in a more productive way]" . what I could do issell an interest to the investors (most likely be the Car Dealerships). Schematics.000 in the soft costs to move forward with the project) However.4 In return. (I would probably need $200.. I will give them an interest such as a.000. the car dealers would be crazy not to relocate to the location next to a state highway. at 934 5 Id. I would be able to create Plans.5 3 Id.5 :) I million because they want out of this parcel ofland) to be developed and the "funding to obtain the use approvals necessary for commencing and going forward to completion with the project. tax positive. I have to show all this so that prospective Investors will be willing to put money to win. "Limited Liability interests.000 which I will try to negotiate with Acme to bring it down to perhaps $10 or $10.000 for Acme in capital and the $500. Finally. I would have all the money to put up front to buy the parcel and start construction.
land use authorization and utilities. such as.Acquisition and Development Loan and 2.Construction Loan. and federal government [including] site lans. This is a very key element because I want to follow the Construction of the project every step of way. authorizations from wild-life and fish ans game agencies. My background in having worked in local civic affairs will come in handy when I try to convince investors and financiers that I can convince the Town Planners to give me the necessary permits and move the gas pipe and pave a road in its place (it makes it less risky from their standpoint that this in reality is great project to invest in. state. I have l. I will have the finance to enable construction of the 5 lots and the dealerships according to the specifications that I want. I have to make sure I have covered all of the - Land Use Aspects of this project. At this stage of the project. "use approvals that require the consent of local.) After I have acquired the Acquisition and Development Loan and covered all of my bases. I will proceed for a Construction Loan. With the Construction Loan.Modem Real Estate Transactions Professor Smith Fall 2004 Final Examination Aside from the cost of the land to be purchased. Thus. possible. The Permanent Financier will come in and payoff the two loans when 9 .. permits from environmental agencies. These two types of Loans are ones that should be paid off through I want to make sure that the construction is as attractive and fitting as Permanent Financing..6 This is extremely in my case because I want to move the Gas Pipe that goes around the dog-left left of the parcel. I would need not just financing but the authority from several agencies to commence the relocation of that gas pipe. The reason for this is because the entities I will be selling this project off to are the dealerships.
The loans are "rolled over" and a Mortgage takes the place of the two loans. 7 Idat943 10 . I also have a Mortgage (permanent Financing) on the property and it is at this point that I will proceed with Selling OfTthe Project." As security.000.~ Modern Real Estate Transactions Professor Smith Fall 2004 Final Examination the construction is completed.000. At this point of the project. I can go to the Dealerships and since I have already been shown a great interest in this project from the beginning. which in turn relinquishes me from any personal liability as I was probably in when I had the Acquisition loan and the Construction Loan (via signed Gurantee). In this way. I should have no trouble in selling the project to the 5 dealerships. I should hopefully also have an Online and In Service end product. Essentially. I will mortgage the buildings and land. I sell off the property in hopefully come up on top with by $5. the dealerships buy me out and I walk away with a profit. I will have hopefully had construction of the road where gas pipe used to be and the 5 dealership buildings.
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