SC Lawyer, Jan. 2005, #4. Observations on financing of real estate construction.

AuthorBy John L. Davidson

South Carolina Lawyer


SC Lawyer, Jan. 2005, #4.

Observations on financing of real estate construction

South Carolina Lawyer January. 2005

Observations on financing of real estate constructionBy John L. DavidsonJohn Freeman asks interesting questions. His Ethics Watch column, False Swearing: Lawyers Beware in the November 2003 issue of South Carolina Lawyer, considered the duties of lawyers advising business clients who purchase real estate with an eye toward resale or redevelopment and resale. However, the context supports conclusions vastly different than offered.

The questions arise because § 12-24-70# requires businesses to publicly disclose what may well be a trade secret and what is surely confidential and proprietary business information through the device of filing# of public record an affidavit "showing the value of the realty." Current information about costs has always been understood to be at least confidential and proprietary business information. #Some question whether the state can compel such, constitutionally. There is a substantial difference between confidential disclosure to the government and public disclosure by affidavit. Perhaps a later article may consider these questions. #Unless otherwise noted, all statutory references are to the South Carolina Code of Laws, of which § 12-24-70 reads:


(A) The clerk of court or register of deeds shall require an affidavit showing the value of the realty to be filed with a deed. For deeds exempt under the provisions of this chapter, the value is not required to be stated on the affidavit, but the affidavit must state the reason the deed is exempt from the fee. The affidavit required by this section must be signed by a responsible person connected with the transaction, and the affidavit must state that connection. The clerk of court or register of deeds, at his discretion, may waive the affidavit requirement.

(B) The clerk of court or register of deeds shall file these affidavits in his office.

(C) A person required to furnish the affidavit who wilfully furnishes a false or fraudulent affidavit is guilty of a misdemeanor and, upon conviction, must be fined not more than one thousand dollars or imprisoned not more than one year, or both.

Some (disciplinary counsel for the bar and the Department of Revenue) seemed to be troubled whether a bona fide discount# had to be reflected in the affidavit. #(There is no "discount" of any legal significance. The price is the price. Perhaps the word choice is an attempt to explain the problem through the lens of §§ 12-43-224, -225.) The discount was said to arise when a buyer purchased several lots, intending to redevelop and then resell the developed lots as single family homes. To better understand the problem, let's assume that Company A contracts to buy a large tract for redevelopment as a single family home subdivision. Company A specializes in ground acquisition and redevelopment but not home building. A's business model is to option a large tract and then enter into land sale contracts with several home builders, including Company B. These home builders are contractually obligated to take out multi-lot parcels when development has reached a certain point (say after re-zoning and when streets and utilities are in place). Let's assume Company B contracts for four lots for a total purchase price of $1,000,000.

Company B is a modest start-up with limited capital; B's business plan is to borrow as much as possible from a national bank. (A national bank has been chosen for simplicity. The same statutes and similar regulations apply to other federally regulated lenders.) Borrowing both minimizes required capital or owner's equity and maximizes the leverage and possible return on that capital.

Company B has raised $250,000 for its cash down payment for its purchase of the four lots and has obtained a loan from a national bank for $750,000 to complete the purchase. This loan conservatively meets the banks regulatory loan-to-value limits, which establishes a loan-to-value limit of 75 percent for land development loans#. # Section 34.62 of the Code of Federal Regulations defines such loans: "Land development loan means an extension of credit for the purpose of improving unimproved real property prior to the erection of structures. The improvement of unimproved real property may include the laying or placement of sewers, water pipes, utility cables, streets, and other infrastructure necessary for future development." 12 CFR § 34.62.

The national bank must have obtained an appraisal of the property from an appraiser, selected by the bank, with the minimum qualifications established by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)#, before extending the loan. Financial Institutions Reform, Recovery and Enforcement Act of 1989, Title XI (Real Estate Appraisal Reform Amendments), Pub. L. No. 101-73, 103 Stat. 183, Sec. 1101, et Seq. This appraiser, in turn, had and met her professional and legal duty to obtain and review the sales contract between Company A and B in making her appraisal. Uniform Standard of Appraisal Practice Standard 1-5 provides:

In developing a real property appraisal, when the value opinion to be developed is market value, an appraiser must, if such information is available to the appraiser in the normal course of business:

(a) analyze all agreements of sale, options or listings of the subject property current as of the...

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