Terra Incogito

Pundits are writing on the Internet that Judge Michael McVey’s opinion filed nearly a month ago with the Maricopa County Superior Court sounds the death-knell for the medical marijuana industry in Arizona. No landlord will make a lease accepting the risk of not getting paid by its tenant on the basis that the federal government will wholesale begin to enforce its Controlled Substances Act. Before folks head for the exits of this vaudeville show, however, they may find the independence principle instructive.
Judge McVey ruled in the case of HAMMER v. TODAY’S HEALTH CARE II (CV 2011-051310, filed April 17, 2012) that a half million dollars of loans could not be recovered by the lenders from the medical marijuana business principals to whom the loan was extended. Court records show Michele Rene Hammer and Mark Haile in August 2010, each agreed to lend Today’s Health Care II $250,000 to finance a “retail medical-marijuana sales and growth center.” You can read a bit more of the facts on the Arizona Republic’s Website on the story at http://www.azcentral.com/news/politics/articles/2012/05/08/20120508arizona-medical-pot-ruling-may-reverberate.html#ixzz1urXWGCcj.
Judge McVey ruled that since, under federal law medical marijuana is illegal to possess or sell, the purpose of the loan, to open a dispensary and grow site, was illegal also. A contract for an illegal purpose is not enforceable; this is the common law general rule in most states. In addition, although the parties did not address this argument to the court, Judge McVey held that the lenders could not recover their loan funds through equitable theories like unjust enrichment or promissory estoppel. While the latter theory might make the promise enforceable, McVey ruled, it would be illegal for the promise to be enforced.

Several bloggers have read this opinion, which may be challenged before the Court of Appeals (there are exceptions to the general rule that a contract for illegal ends is unenforceable, especially when the result of “voidness” violates a fundamental public policy of the state), as meaning that a landlord cannot count on receiving its rent, and that a tenant cannot be ensured that the landlord will not evict the tenant summarily during the lease term on the grounds that continued occupancy by a medical marijuana business is illegal. (The latter event is especially weird since essentially every astute landlord now knows this fact.)

I can’t help tenants here, but one thought that occurs to me for landlords is that they can require a different route of payment than just depending on a mailed check. (Cash would be good, sure, if you’re a landlord, but that’s not what I mean.) Typically, however, accepting a year or two’s worth of rent (assuming a tenant could afford this “nut”) in advance is a violation of the landlord’s covenant not to do this found in the landlord’s security documents (when landlords have leveraged their property). But a landlord has additional options here. One I focus on here is the irrevocable standby letter of credit. A medical marijuana business operator can pay a willing bank, upon application, to post a letter of credit as enhancement for the tenant’s promise to pay rent. If the standby letter of credit is “clean and evergreen,” meaning that the bank will require little in the way of demonstrating the tenant’s default and the letter of credit will renew automatically for the duration of the lease term, then the landlord will be able to go to the bank, make a claim under the letter of credit, and get paid its delinquent rent upon doing nothing more than providing a letter on its letterhead confirming that the rent is delinquent.

Enter the independence principle. When the tenant-applicant pays the fee of the bank for the issuance of the letter of credit, their relationship is confined to the obligation of the bank to perform under the terms of the letter of credit. The letter of credit, when the terms of same have been agreed upon between the issuing bank and the landlord, becomes a contract between the two latter parties to which the tenant is not a party. The bank must, however, collect the premium for the letter of credit for its duration, in advance, to hedge against the chance it cannot get reimbursement from the applicant-tenant. This means that the tenant is going to have to produce some serious cash if it wants to induce the bank to issue the letter of credit in favor of the landlord as that instrument’s beneficiary.

So, while a lease may be illegal between a landlord and tenant and thus the rent obligation is not enforceable against the tenant, it is not illegal for the bank and the prospective landlord to sign a contract under which a landlord may get paid in the event of a third party’s default. Because that contract is independent of the lease, the independence principle protects the landlord from having to “eat” unpaid rent loss. This is the message of Article 4 of the Uniform Customs and Practices for Documentary Credits version 600 (2007), which landlords will want to govern the letter of credit’s interpretation and enforcement. The bank gets to generate fees for letter of credit issuance; and the landlord doesn’t have to collect any rent before the moment of a delinquency in an installment. This program allows the landlord to dodge the mortgage bullet from its lender who doesn’t want the landlord pocketing long green and concealing this fact from the lender. The lender can take a security interest in the letter of credit proceeds payable for its beneficiary’s benefit should a default occur.

I remember when the lawn mower was a Dangerous Machine. When I was growing up, I got paid to mow the lawn if I had been doing well in school. Bad grades, I still had to mow but I didn’t get paid. The Lawn Mower was … fun. It was a self-propelled monster with a huge engine on top, and I got to pour gasoline in it and start it up by myself. It was exciting to mow. Really.

As I got older, the thrill wore off, but I still own a lawn mower. But my mower just isn’t the Lawn Mower I remember. See, the engines are not as powerful due to EPA regulations. They don’t move as fast because they might get away from you. And they don’t suck up leaves and grass and put it in the basket as well, because the skirt has to come down almost to the ground to keep you from lopping off your toes.

I do have a lawn mower injury story. I was mowing the lawn, wearing tennis shoes. I shut off the mower and was taking the grass catcher off, and turned to carry it to the trash. My heel caught under the lip of the mower skirt and I cut my heel, pretty badly. The mower wasn’t even running. This, on a government approved mower.

So we can blame the likes of the nanny state for why our mowers are no good. What else can we attribute to nanny politics? Light bulbs that contain mercury, cost more, and take several minutes to reach full brightness; shower heads that don’t put out enough water to take a decent shower; water savers ON THE SPOUT FOR THE BATHTUB so that you have to wait so long for the tub to fill that the water is cold by the time it is full. REALLY????

How about spas that limit the temperature so you don’t cook yourself; cars that beep at you until you comply with all state and federal regulations… the list is endless!

I am at heart an engineer, and I am bothered by how things get regulated. I am similarly, and for the same reasons, bothered when my wife comes home with another trinket, be it a plastic plant that dances in the sunshine or a new piece of furniture. Alright, I am not really bothered. Much. I know I have worse habits.

See, in queueing theory we learn that if the rate at which things arrive in a queue is the same as the rate that things depart from the queue, then the ultimate length of the queue is infinite. What does that mean? It means that if you buy stuff and bring it in the house without throwing an equal amount away, the house will ultimately explode from having too much stuff in it.
Similarly, if our elected officials in Washington and our local states continue to write legislation without voiding other existing legislation, then ultimately every single aspect of our lives will be regulated in some way.

I travel through a local intersection on a regular basis. I remember when, in that intersection, you could turn left on green. At some point they changed it so you had to wait for the green arrow. It is a long light, so this change was annoying — after all, in the name of safety, my commute was extended by at least a minute or two. (It adds up when you consider how many cars sit and idle in that intersection waiting for the arrow)

So I called the City and talked to the traffic engineer.

“So I noticed that you changed the protocol at this intersection so you can’t turn left on green anymore”.
– “Yes, there was an accident, so we changed it.”
“Do you change the protocol in every intersection when there is an accident where someone is turning left on green?”
– “Yes, because we don’t want to get sued.”
“So that means that eventually there will not be any intersection in the entire city where anyone can turn left on green.”
– “Huh? How do you figure that?”

See, it is the queueing theory thing. There is no mechanism to undo the thing, but there is a mechanism to do the thing, so eventually everything will be in the “do” state. All the lights will require turn arrows. And over the past 5-8 years, that is exactly what has happened. Left on green intersections are all but a memory.

Congress is now passing laws without even reading them. They pass laws about things they know nothing about. They pass laws with severe unintended consequences. Just stop it!

We need a new law! We need a law that says, that for every new piece of legislation that is passed, the same number of pages, plus 10%, of old legislation must be voided. That way, we beat out the queueing theory problem. And maybe we would get to keep light bulbs and lawn mowers that work. Heck, we might even be able to do away with entire government agencies. Now there’s an idea that has merit!

–PLH

By now we all know that a short sale is a transaction in which a property is sold for less than the amount owed to the lien holders. In Arizona, the usual course of business is to write a promissory note, which is evidence of the debt (some states still use mortgages, which are different). Then, a Deed of Trust is recorded (the note is sometimes, but not always recorded; there is no recording requirement for any of this) which established rights of the holder of the promissory note to cause a foreclose if the terms of the note are not followed.

When someone does not pay, the holder of the note tells the trustee (the holder of the trust deed) to initiate foreclosure proceedings to get the property back. The first thing the trustee does, in the course of proceeding to foreclosure, is to notify anyone who has an interest in the property. How do they figure this out? They look in the records at the county recorder’s office.

This became of interest to me recently, because a client told me that, while there were two conventional lenders involved with his property (two banks), there was also a 3rd, private party, who had a note naming his home as security. I looked in the records at the county recorder and could find no evidence of this note. Further, my client told me that the 3rd lien holder was surprised to learn that the property was facing foreclosure, as he had not been notified in any official way.

So what happens when either a short sale is completed and closed, or a foreclosure occurs, and there is an outstanding, unrecorded lien? Of course I turned to my fellow blogger and attorney Mr. Widener, who writes:

The validity of a note is not determined by recording. A lien has to be recorded in order to give notice to title searchers. A lien is still valid as between the grantor and its grantee if not recorded, but non-recordation would divest the lienholder of its ability to upset a foreclosure. Non recording of the lien likely makes it possible to estop the lienholder from overturning the short sale, also. A bona fide purchaser at the short sale without notice of the recorded lien and no ACTUAL notice of the lien’s existence takes title free of the lien.

So this is good news… except…

As a Real Estate licensee, now I have reason to know that this 3rd lien exists, and I am bound to disclose this information to a prospective buyer. I suppose if the seller had not told me about it, things would be different, but I must disclose this information to the buyer, and to the title company; Title likely will not insure the transaction without a sign off from the 3rd, and they will go attempt to locate and talk to the lien holder as part of their title search process.

Ultimately the rules are there to protect buyers, and they work reasonably well.

–PLH

Maybe. At least that’s the stock answer. There are some circumstances that can work out quite well for some people.

Let’s suppose you are at least 62 years old, and for some reason had to declare bankruptcy, or you got foreclosed, or both. And let’s also suppose that somehow you have a little cash, say 30k-40k put away. Can you buy a house?

Probably! A maligned mortgage option called a reverse mortgage, might work for you. Usually a reverse is used when an older (62+) person has equity in their home, and they want cash. The reverse mortgage lets them get cash out, but not the entire value, and the house reverts to the mortgage company when the owner passes away.

I just sold a home to a friend of mine, and he put about a third of the value of the home down in cash, and got a reverse mortgage for the other two thirds. He doesn’t have to make any payments, although he can, if he wants to ultimately leave the house to someone, or, if real estate values rise dramatically, he can pay off the reverse and sell the house, and keep the profits. Not a bad deal.

The amount and rates are based on the actuarial tables. And it is a much better deal than renting! Just another option for buying a home.

The internet is full of people trying to teach others how to do bulk property deals. I thought it sounded interesting, so I have listened to a few of the webinars about these deals. Mostly the information is vaguely accurate, based on someone maybe doing one deal, and is deceptive, in my experience.

I have had several sellers who had multiple properties to sell (more than 20) in a single transaction, and I have talked with lots of buyers (working with one right now) who want to buy many properties.

Here is what I have learned: If you have someone call you because you mentioned that you have a seller of bulk properties, first make sure they are licensed, or are the end buyer. There are many “intermediaries” who think they can take a real estate commission without a real estate license and get really angry when you refuse to work with them. I have had lengthy conversations with some of these people, they insist that the rules do not apply in bulk deals. Really? Every state I have checked has a law similar to the Arizona statute that says that any individual receiving compensation in furtherance of a real estate transaction is acting as a real estate broker, and a license is required.

Second, if you ever give up the list of homes you have to sell, they will end up all over the internet and at some point, if you are on the right mailing list, someone will try to sell them to you as if they own them. I send the home information, but I encode some information in the list of homes so I know exactly who got the list. Then if it shows up on the internet, we have a conversation.

Most of the time, the “buyers” that approached me for my bulk homes were people trying to resell the properties, as this is what the webinars all teach. Get a funding source and flip the properties in escrow. Sure, this can be done. However if you are trying to buy my set of bulk properties, I need proof of funds from a BANK not some company, and you better submit a purchase contract naming an in-state title company, and there had better be substantial earnest money, and enough of it non-refundable to pay for the title work. (A title company will do free title work if a deal falls through for 1 property; they will not do it for a block of 200 homes. If the deal falls through, the title company wants money.)

Most people claiming to have a block of properties to sell, don’t. Most people claiming to be buyers of bulk properties, aren’t.

Unfortunately there are way too many scam artists out there and not enough bulk deals.