Archive for the ‘Real Estate’ Category
Texas voters will decide in November whether Article I, Section 17, of the Texas Constitution — the “takings clause” that sets forth government’s power of eminent domain – will be amended. Proposition 11 tightens the reins on government’s ability to acquire private property for public use upon payment of just compensation.
The origins of Proposition 11 date to 2005, when the U.S. Supreme Court ruled in Kelo v. City of New London, Conn., that condemning property for purely economic development purposes was constitutional. More surprisingly, the court ruled government could rightly delegate its eminent domain power to private entities. Justice Sandra Day O’Connor’s succinctly summed up public opinion, stating, “Under the banner of economic development, all private property is now vulnerable to being taken and transferred to another private owner, so long as it might be upgraded.”
Texas legislators countered the ruling by adding the Limitations on Use of Eminent Domain statute to the Texas Government Code. The statute holds, in part, that a governmental or private entity may not take private property through the use of eminent domain if the taking: (i) confers a private benefit on a particular private party; (ii) is for a public use that is merely a pretext to confer a private benefit on a particular private party; or (iii) is for economic development purposes, unless the economic development is a secondary purpose resulting from municipal community development or municipal urban renewal activities to eliminate an existing affirmative harm on society. Voter approval of Proposition 11 would put these concepts in the Texas Constitution.
While most takings legitimately benefit the public — widening congested roadways, developing mass-transit rail facilities, building schools for expanding populations, improving detention to reduce flooding — a sporadic wrangling over what constitutes a public use may still remain if Proposition 11 is approved. For example, government will continue to have eminent domain power over blighted areas, but the definition of blighted remains ambiguous. Also not addressed by Proposition 11 are important elements of eminent domain actions, including the manner in which government acquires property and the debate concerning those elements of market value loss that constitute just compensation.
Senate Bill 18, which was not voted on by the House of Representatives, sets forth numerous landowner-leaning provisions dealing with the manner in which government acquires private property. Among other provisions are more strict guidelines concerning good faith negotiations criteria; the creation of a “Truth in Condemnation Procedures Act” that stiffens procedures relating to bona fide offers; and a tightly defined buyback provision. No doubt these issues will be the subject of spirited future debates.
A mortgage involves the transfer of an interest in land as security for a loan. The mortgagor and the mortgagee generally have the right to transfer or assign their respective interest in the mortgage. Standard contract and property law provisions govern the transfer or assignment of any interest. There are several different types of mortgages available.
Fixed Rate Mortgage
A fixed rate mortgage carries an interest rate that will be set at the inception of the loan and remain constant for the length of the mortgage. A 30-year mortgage will have a rate that is fixed for all 30 years. At the end of the 30th year, if payments have been made on time, the loan is fully paid off. To a borrower the advantage is that the rate will remain constant and the monthly payment will remain the same throughout the life of the loan. The lender is taking the risk that interest rates will rise and it will carry a loan at below market interest rates for some or part of the 30 years. Because of this there is usually a higher interest rate on a fixed rate loan than the initial rate and payments on adjustable rate or balloon mortgages. If the rates fall, homeowners can pay off the loan by refinancing the house at the then lower interest rate.
Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) provides a fixed initial interest rate and a fixed initial monthly payment for a short period of time. With an ARM, after the initial fixed period, which can be anywhere from six months to six years, both the interest rate and the monthly payments adjust on a regular basis to reflect the then current market interest. Some ARMs may be subject to adjustment every three months while others may be adjusted once a year. Also, some ARMs limit the amount that the rates can change. While an ARM usually carries a lower initial interest rate and lower initial monthly payment, the purchaser is taking the risk that rates may rise in the future.
Owner Carryback and Financing
An alternative form of financing, usually a last resort for those who cannot qualify for other mortgages, is owner financing or owner carryback. The owner finances or “carries” all or part of the mortgage. Owner financing often involves balloon mortgage payments, since the monthly payments are frequently interest only. A balloon mortgage has a fixed interest rate and fixed monthly payment, but after a fixed period of time, such as five or ten years, the whole balance of the loan becomes due at once. This means that the buyer must either pay the balloon loan off in cash or refinance the loan at current market rates.
Home Equity Loan
A home equity loan is usually used by homeowners to borrow some of the equity in the home. Doing so may raise the monthly housing payment considerably. More and more lenders are offering home equity lines of credit. The interest may be tax DEDUCTIBLE because the debt is secured by a home. A home equity LINE OF CREDIT is a form of revolving credit secured by a home. Many lenders set the credit limit on a home equity line by taking a percentage of the home’s appraised value and subtracting from that the balance owed on the existing mortgage. In determining the credit limit, the lender will also consider other factors to determine the homeowner’s ability to repay the loan. Many home equity plans set a fixed period during which money can be borrowed. Some lenders require payment in full of any outstanding balance at the end of the period.
Home equity lines of credit usually have variable rather than fixed interest rates. The variable rate must be based on a publicly available index such as the prime rate published in major daily newspapers or a U. S. Treasury bill rate. The interest rate for borrowing under the home equity line will change in accordance with the index. Most lenders set the interest rate at the value of the index at a particular time plus a margin, such as 3 percentage points. The cost of borrowing is tied directly to the value of the index. Lenders sometimes offer a temporarily discounted interest rate for home equity lines. This is a rate that is unusually low and may last for a short introductory period of merely a few months.
The cost of setting up a home equity line of credit typically includes a fee for a property APPRAISAL, an application fee, fees for attorneys, TITLE SEARCH, mortgage preparation and filing fees, property and TITLE INSURANCE fees, and taxes. There may also be recurring maintenance fees for the account or a transaction fee every time there is a draw on the credit line. It might cost a significant amount of money to establish the home equity line of credit, although interest savings can justify the cost of establishing and maintaining the line.
The federal Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. If the home involved is a principal dwelling, the Truth in Lending Act allows 3 days from the day the account was opened to cancel the credit line. This right allows the borrower to cancel for any reason by informing the lender in writing within the 3-day period. The lender must then cancel its security interest in the property and return all fees.
Second Mortgage
A second mortgage provides a fixed amount of money repayable over a fixed period. In most cases the payment schedule calls for equal payments that will pay off the entire loan within the loan period. A second mortgage differs from a home equity loan in that it is not a line of credit, but rather a more traditional type of loan. The traditional second mortgage loan takes into account the interest rate charged plus points and other finance charges. The ANNUAL PERCENTAGE RATE for a home equity line of credit is based on the periodic interest rate alone. It does not include points or other charges.
Reverse Mortgage
A reverse mortgage works much like traditional mortgages, only in reverse. It allows homeowners to convert the equity in a home into cash. A reverse mortgage permits retired homeowners who own their home and have paid all of their mortgage to borrow against the value of their home. The lender pays the equity to the homeowner in either payments or a lump sum. Unlike a standard home equity loan, no repayment is due until the home is no longer used as a principal residence, a sale of the home, or death of the homeowner.
Texas voters approved three constitutional amendments that will help reform the property appraisal process, making the system fairer for property owners. Voters also passed a proposition that will strengthen protections against a government entity unfairly taking private land or homesteads through eminent domain.
Proposition 2 will ensure that property-tax appraisals value a residence homestead as a home, not at its “highest and best use.”
Proposition 3 creates uniform standards across the state for appraisal methods.
Proposition 5 enables appraisal districts in two adjoining counties to combine resources for a single review board.
Proposition 11 strengthens eminent domain protections, barring government entities from taking private property for private development or for purely economic reasons.
The WSJ reported that Homeowners claimed a victory in New Jersey where a nationwide grassroots effort to stop government abuse of eminent domain power since the misguided decision in Kelo v. City of New London.
“Under that standard, as Sandra Day O’Connor wrote in her dissent in Kelo v. City of New London, any Motel 6 can be knocked down for a Ritz-Carlton. In the Long Branch case, the contracts even ceded the city’s power of eminent domain to the developers, giving private businesses the ability to tell the city when it should confiscate private property. Such flagrant abuse of public power for private purposes troubles most voters. In the wake of Kelo, some 43 states have reformed eminent domain laws to ensure they couldn’t become a tool used casually against local homeowners on behalf of private interests. New Jersey is one of seven states that did nothing. The Garden State’s courts have been more active, however. In 2007, the New Jersey Supreme Court ruled that to qualify for blight, an area must be a detriment to the health, safety and welfare of its residents. Subsequent rulings have adopted this more robust protection of private property, including for the homeowners of Long Branch.”
Miami, FL (Associated Press) – Like many home owners, hotels are starting to drown in debt.
They have been enticing travelers all year with sweet deals: credits for in-house spas and restaurants, up to 50 percent off five-star rooms, even free nights.
But all that discounting hasn’t stopped occupancy from dropping an average of 10 percent. The result? Hotel loans have begun falling into delinquency faster than any other kind of commercial real estate debt.
The rising defaults paint a grim picture for an industry with increasingly more rooms than guests, and more hotels still opening every day. It’s a problem that could get worse before it gets better, with demand expected to remain weak and ambitious new projects planned before the meltdown worsening the room glut.
The oversupply means room rates should stay low for at least another year, good news for consumers but not so great for hotel owners and the banks that lent them the cash to build or buy.
The rise in delinquencies is sharp. Five times more hotel loans are behind on payments this year than in 2008, according to mortgage data firm Trepp LLC, which tracks those traded by investors. In October, 8.7 percent were distressed, compared with 1.5 percent last year.
That’s almost double the 4.8 percent rate for commercial property and the 4.5 percent rate for stores.
“Right now is an absolutely horrible time to be in the hotel business,” said Ben Thypin, senior market analyst for market research firm Real Capital Analytics.
What happens when a hotel loan goes bad? Banks are much less willing to seize them than houses because running a hotel requires know-how. But some hotel owners are just handing back the keys where property values have plummeted.
In most cases, it is investment funds falling behind on payments, not major hotel companies. They generally don’t own much property, instead franchising brands and earning a percentage of sales.
Most of the 1,231 U.S. hotels and casinos with troubled financing are remaining open. So, in the short term at least, consumers can expect to see deals on room rates for at least another year. Executives at STR Global, the hotel research firm, expect demand to rise 1.6 percent in 2010, but average rates to drop 3.4 percent.
Not in the 20 years the firm has collected hotel data has supply and demand been so far apart — not even in the early 1990s recession or after Sept. 11, 2001.
In July, even the posh California resort where American International Group employees vacationed after the company got bailout funds — inciting a wave of populist rancor — was taken over by a lender. Franchisor Starwood Hotels & Resorts Worldwide Inc. is still operating the St. Regis Monarch Beach, but such upscale resorts are still struggling without Wall Street business.
Extended Stay Hotels LLC filed for Chapter 11 bankruptcy protection in June, with $7.6 billion in debt across 681 residence hotels that also depend on business travelers. And Red Roof Inn Inc. defaulted in June on $361.4 million in loans on 131 properties.
Most of the distressed debt is on new or newly renovated high-end resorts built from 2005 to 2007 on dreams of corporate meetings and cocktail hours. Luxury projects approved before the recession are still opening this year and in 2010 — including three Ritz-Carltons.
And even more new hotels are on the way. Because outside investors have to secure the loans and take the biggest risk, hotel chains intend to keep growing — even at the high end.
Starwood is adding 45 luxury and upscale hotels to its U.S. portfolio this year, and about 23 in 2010. InterContinental Hotels and Resorts is signing a contract every day to add to its more than 4,300 properties, the world’s largest by room count, said Jim Abrahamson, the British company’s leader in the Americas. This year, 335 of the company’s new hotels are in the U.S.
Starwood CEO Frits van Paasschen brushes off critics, saying “rumors of luxury’s demise are greatly exaggerated.”
“As you look back on the excesses of the 1980s, ‘The Bonfire of the Vanities,’ the run-up in prosperity around the Internet boom — even going to Pompeii and seeing the way people were being pampered 2,000 years ago,” he said. “I think luxury, taking care of yourself, taking care of your family and those around you is so fundamental to the human experience.”
By: Travis Reed