Thursday, February 23, 2017

Property Maintenance Laws and Lending


The fight against property blight is a battle that has been waged for many decades. Some areas of the nation, have struggled with abandoned properties and even abandoned neighborhoods since the shrinking of the nation’s industrial sector beginning in the 1970’s. Other areas became intimately acquainted with blight as a result of the wave of foreclosures that took place at the end of the first decade of the century. However it may have arrived, the real estate finance market is certainly now affected by the palpable concern of property blight and has had to adjust to attempts to mitigate its damaging effects. 

Why Worry About Blight?

To be clear, blight is a real issue that can lead to a number of undesirable effects. Abandoned properties that are poorly maintained cause safety issues. Poorly maintained building systems and structure will eventually fail at some point, causing unsafe buildings. Overgrown landscaping leads to health concerns. These health and safety concerns become a problem for neighboring properties, as neighbors must then focus on how to curb the spread of these issues onto their properties. More generally, well-maintained properties inspire a pride of ownership that carries over to neighboring property owners. The opposite is also true—abandoned and poorly maintained properties drain the neighborhood of pride of ownership and lead to less diligent maintenance throughout the neighborhood.


The Carrot or The Stick?

To combat the issue of blight, state and local municipalities have attempted numerous methods ranging in nature from incentives to penalties. One end of the spectrum are the promulgation of expedited methods of purchasing abandoned property and programs that subsidize the purchase of blighted properties. On the other end are abandoned property maintenance statutes. 

The legal approach to maintenance of abandoned property varies based on the locality. Most states impose on property owners a duty to maintain their property. Some state and local municipalities like New York, California and the City of Chicago extend the duty of maintenance to a foreclosing lender. These municipalities typically maintain a registry of defaulting mortgage loans and require that lenders register each defaulting loan and pay a registration fee prior to proceeding with a foreclosure action. 


The Stick

The enforcement of property maintenance statutes varies. The most common method of enforcement is through property violations and local liens on the property. Another common method of enforcement is through the imposition of fines for noncompliance, which, if unpaid, ultimately show up as liens against the property. The municipalities that extend the duty of maintenance to foreclosing lenders typically impose larger and more frequent penalties for noncompliance than those localities that only impose the duty on property owners. Daily fines of hundreds of dollars are not uncommon in localities where the duty extends to foreclosing lenders. 

Forced maintenance is yet another method of enforcement of abandoned property maintenance laws. Many municipalities will repair exterior cosmetic issues and mitigate or remedy hazardous conditions. The costs of these repairs will then be charged to the property owner and will eventually become a lien on the property, if unpaid. In this instance, the property owner or foreclosing lender loses the ability to choose who is going to do the work, how it will be done and at what cost, but instead, will be forced to pay the cost of mitigation and be stuck with the consequences of any subsequent issues that result from the repair. 

Finally, in most states that maintain a registry of delinquent loans, failure to comply with the delinquent loan registry statutes can be a reason for courts to either delay or dismiss a case attempting to foreclose a mortgage loan. 

Real Estate Finance In a World of Property Duty

Property maintenance statutes are an area of consideration for investors of residential mortgage-backed securities, whole loan purchasers, note purchasers, lenders as well as purchasers and owners of abandoned property. The duty to maintain abandoned property typically covers residential properties under most abandoned property maintenance statutes, however, many of the local laws are drafted in such a way that they can also apply to commercial properties, as well. Such laws are increasing in popularity and should be considered

a risk factor or potential cost in the underwriting or investment determination of any affected real estate asset.

That is my take on property maintenance laws, please feel free to provide your prospective on the matter below.