SB 800 Construction Defects Liability: Why Should Construction Lenders Care?

As a receiver completing new condominium and tract housing projects, the subject of California SB 800 long term construction defects liability comes up a lot.  So I asked noted subdivision and DRE lawyer Robert Smylie of Robert Smylie & Associates to recap the issues for me.  His explanation follows (with some paraphrasing on my part with his permission). Of course, I’m not a lawyer, so those of you with further questions should contact him directly at rsmylie@smylieandassociates.com, or read his article at  http://www.waldrealtyadvisors.com/downloads/download.html:

Hey Buddy, Wanna Buy A Note?

Hey buddy, wanna buy a watch?   It’s the refrain that immediately conjures up the image of a shadowy figure in a back alley opening his trench coat to reveal a selection of watches hanging from the inside of his coat.  Not exactly the most progressive way to sell watches (or anything else for that matter), but it’s not that far off from the way that most lenders have been marketing their non-performing commercial real estate loans this year (commonly referred to as notes, as in note and first trust deed).  To be more accurate, lenders have been quietly offering their non-performing loans primarily to a small circle of good customers and business relationships.

Bid/Ask Pricing Gap Widened By Scarcity of Debt and High Cost of Capital

My friend and veteran land broker, Larry Lynch of Korek Land, emailed me recently to remind me that the scarcity of debt (the Wall Street folks call it deleveraging) and very high investor return expectations are also helping to drive prices of commercial real estate and land lower.

Long Term Construction Defects Liability Awaits Lenders Who Foreclose New Condominium and Tract Housing Projects

California Senate Bill 800 is complex legislation that requires those who develop and construct for-sale housing to be responsible for construction defects in those housing projects for ten years from the completion of any construction preceding the retail sale of that housing. In the case of condominium projects, it is actually ten years from the date that the developer turns over control of the homeowners association to homeowners. There is no special post-foreclosure protection for lenders who take title to new housing projects.

Low Sales Rates Produce Overvalued Appraisals

Lenders beware!  Your current mark-to-market housing appraisals may contain really low sales absorption rates, resulting in significantly overpriced housing units and overvalued housing projects. This means that your mark-to-market loan write downs on housing projects won’t yet be written down low enough to successfully reserve for, work out and/or sell housing units at current open market pricing.  At the very least, this means your appraisals may not be accurate tools for good decision making.

Where’s The Bottom of the Housing Market?

By most estimates, Wall Street’s easy credit allowed home builders to produce about 2 million new homes for which there was never a creditworthy buyer.  The resulting slow-motion economic train wreck has now produced over 5 million vacant homes currently listed for sale, with several million more for listed for sale but still occupied by owners or their tenants. Housing prices continue to fall, and everyone wants to know: Where’s the bottom?