Sunday, July 26, 2009

EXPRESSLY, VIA HANDBASKET: Arizona's modified deficiency statute?

So the Governor sues the entire state legislature to turn over bills that passed the house and senate but were not “timely” presented for her signature or, as the case might be, veto. (Okay, there’s a third alternative where a bill becomes law if the Governor takes no action on a bill for 5 days if the legislature is in session, and 10 days if it is not.) Under the current state of monkey-business, it’s hard to know if anyone is at home in either branch of our government.

Nothing in the State Constitution requires bills passed through the legislature to be presented to the Governor for disposition within a certain number of days. A bill isn’t “stale” just because the session of the legislature is about to close, under the Arizona Constitution. Likewise, there isn’t anything in Title 41 of the Arizona Revised Statutes that requires presentation of endorsed bills within a fixed time of passage. Which is why the Petition for Special Action and the supporting memorandum from the Governor’s camp had no citation to relevant authority. The case brought by the Governor was a dead-bang loser from its inception. But then, Arizona’s citizens were the real losers in the special action litigation, its legal costs having been funded with tax dollars.

Fear not: State government has in mind a method to recoup those costs. It’s a moral tale, ironically reprising the “timing is everything” narrative. It seems Senate Bill 1271 has residential real estate investors in a twist. The law intends to “gotcha” speculators by taking away the deficiency judgment “safe harbor” found in A.R.S. §33-814. You’ll recall that the Arizona Supreme Court in Baker v. Gardner said that on a lot of 2.5 acres or less used as a single-family residence, no lender could obtain a “deficiency” judgment following a foreclosure. The Supreme Court’s policy reasoning was that a homeowner should not suffer the outrageous misfortune of having a lender bid too cheaply at a foreclosure sale, on the theory that the lender would just take the shortfall out of the hide of its former borrower. The misfortune would be too burdensome, coupled with the reality of the borrower having already lost his or her (or their) primary residence. Enough suffering, already, said the Baker v. Gardner court.

But wind the clock forward; now, it’s the borrower wanting to part with the property too cheaply, via the ubiquitous “short sale” process, leaving the lender holding the bag under §33-814. So, the wise legislature drafted the bill to knock the skids out from under the borrower – maybe. Now, Section 814(G) has added hurdles to the “safe harbor seeker.” First, the borrower must show that the residence has received a “certificate of occupancy,” meaning clearance for occupancy by the municipality or the county. (Whoops – hopefully someone in the legislature had its research service confirm that all Arizona cities, towns and counties issue such certificates for residential building; otherwise, certain of our citizens have been denied substantive due process, equal protection of the laws or some combination thereof! There’s a difference between a certificate of occupancy and the structure merely passing its final inspection.)

Next, the borrower (aka the “Trustor” under the Deed of Trust) seeking harborage has to show that he/she/they occupied the structure for “six consecutive months.” This hurdle were intended, I suspect, to avoid protection for the person who either (a) was buying houses (and will perhaps continue to buy houses) and hoped to resell them quickly or to rent them as a part of his investment portfolio, without intending to be the occupant, or (b) was having a house built by a contractor but defaulted on the construction loan before completion. Why the (b) instance party who lost his job (and therefore his ability to pay) is less deserving of harborage than someone whose house is finished is mysterious, but let me not digress.

The interesting point about SB 1271 is the text about 6 consecutive occupancy months, because nowhere in the bill is it mentioned “measured from when”. Suppose the owner of the house lived in the house for 185 days straight during 2001, then accepted a job transfer, moved from Show Low and has been renting the house ever since? Renter, of course, has lost his job, and now there’s no replacement tenant to feed the mortgage. Safe harbor-time? How about the devout member of the Latter Day Saints church, or any other religious denomination, who has been the mission coordinator in a foreign land since the beginning of this year? What about persons temporarily detailed abroad through a job that subsequently was cut via a reduction in force? And members of the armed services; or what about the civilian contractors who are providing military consultation or support in Afghanistan – what about them? What if the residence is owned in joint tenancy and one of the two joint tenants hasn’t occupied for 180 consecutive days? How about folks who are hospitalized or otherwise confined to an institution for a prolonged period? Are these folks eligible for the safe harbor, or not?

And one other thing: The borrower has to prove the six consecutive occupancy months. Now you have all the excuse you’ll ever need for not tossing those accumulated piles of season’s greetings cards from all your friends, from one year to the next.

Some court will have to figure all these mysteries out. And you’ll be fronting judicial salaries as the bench tries to untangle another mess, courtesy of the legislature, with an assist from the Governor.


Saturday, July 25, 2009

The Joy of Commercial Tenants in a Down Market

I have a commercial property in Arizona, outside the valley. I have owned it for several years, and except for occasional late rent payments, the original tenant was friendly and easy to work with. He took pretty good care of the place, and I really didn't worry too much about what went on day to day. He was an older guy, knew his business, and wouldn't accept any foolishness from anyone.

He finally retired, and I rented the place to someone who had been working for him, a younger man. This guy had credit that was not acceptable to me, and so he partnered with a couple of other people and formed a company, and then I rented it to the company because at least one of his partners had credit I could tolerate.

After a year and a half, they finally went broke, and the place was left a shambles. Totally unrentable, I almost want to just scrape it off and start with a new building. I haven't been so depressed about something like that in a long time -- I just can't imagine treating a place you make a living like these people did. Amazing.

So I have been thinking about what it really means to be a commercial landlord. I've been on both sides, having rented space from people and to people; and even participated as the agent on each side. Here is what I think:

When you lease space to a business interest, you are making an investment in their business. If you write a one or two year lease, then that, to some extent, quantifies your investment; if you are smart, you insist on the maximum security deposit, and the minute they are 5 days late on the rent you lock the doors until they come up with the rent.

What it doesn't limit is your risk that they will trash the place. The property I leased was two acres, and in the last few months, the tenants turned it into a junk yard. Old washer dryers, an abandoned car, a refrigerator. A broken mini bike, countless damaged household appliances, all sorts of trash like beer cans, bottles, paper garbage, guts of some recliners, pieces of projects started and never finished, aluminum siding... it is not that different from the city dump. I'm getting estimates to get it cleaned up now, I'm sure it will run to the thousands.

I'm really glad I have 4 people who signed on the lease and agreed that the place would be kept clean. At least one of them will get to help pay for the work, the one with the good credit. Of course, this one person decided that he made a mistake after they got the lease and begged me to release him from the lease obligation. Not a chance of that, of course.

To be sure, commercial tenants are better than residential ones -- they are easier to evict. And, when the water gets turned off the commercial tenants don't usually just continue to use the facilities even though they won't flush... I have many fun stories about residential tenants. But that is for another post.