Real estate development and financing attract legal issues that an investor should be aware of. The major issues in real estate development and funding arise from the fierce land competition, where developers offer landlords unfair deals they cannot afford. Therefore, the landlords should seek legal guidance and conduct proper due diligence.
Legal issues in Real Estate Development in Michigan
Form of ownership entity: Legal structures are essential when starting a business. The type of business can be a partnership, sole proprietorship, corporation or a limited liability company. However, the investor must understand the legal structure for their preferred investment option. Most small-scale investors opt for sole proprietorship or partnerships, depending on their financial power. The two options have a low personal liability factor because the investor is not likely to be sued for massive capital borrowing.
Conversely, the formation of a corporation is costly and has a high-risk level. Limited liability companies are a preferred venture because they limit the owner’s liability and court summons against the business. Consulting with an experienced lawyer offers the advantage of utilizing the most favorable tax rates. More so, the formation of the appropriate company entity may also guide how the organization will interact with various stakeholders. An investor should understand the level of the venture to focus on all risks involved.
The original form of ownership entity does not have to be permanent. You can start small with sole proprietorship and expand later to other forms such as partnerships. If your business grows and the risk level increases, it is advisable to convert the venture into a limited liability company.
You can consult our real estate development and finance attorney today for insight on whether your business is utilizing the best legal opportunities. You will be guided on the various investment entities based on the specific factors of your business.
Subordination: Real estate development and venture require the landowner and the developer to sign various agreements. The language used in the deal is critical in deciding the order of interaction, payments, and accomplishments of the parties that sign the contract. A subordination clause in Michigan applies when specific terms are placed within a more significant settlement, to make a claim senior to those that might be added later. Real estate development involves finance borrowing such as a mortgage, and thus a subordinate clause is vital in showing priority over any new loans. An example would be when there are claims of bankruptcy where the court disregards the subordinate loans, and a person is not subject to repayments.
On the contrary, a subordination contract can be added later when the number of parties in agreement expands. The parties wishing to join the original agreement create a separate subordinate agreement and then amend the original contract. However, the additional subordinate agreement must be signed by all parties from the original and the new deal. It is essential to ask for legal guidance before taking part in a subordinate clause or signing a new document to ensure that the document serves your bests interests.
Purchase and sale agreement: The purchase of a real estate property from a landowner involves a lengthy process which comprises of negotiations and development agreements. Timing for these types of transactions is crucial. A full purchase and sale agreement should not take place unless there is a guarantee that the ownership entity has a proper internal mechanism and is ready to take part in the negotiations.
Developers have two major avenues to tie up the land before engaging in a purchase agreement as indicated below:
- Term Sheets and Letters of Intent secure the exclusive rights for the developer to engage in property negotiations before a full purchase and sale agreement. The agreement includes the price of the property, inspection date and due diligence. It also comprises of conditions of sale and even the period during the negotiation when the seller should not actively negotiate with another interested party.
- Option Agreements
An agreement for improved land is different from that of raw land. The seller of an improved land may opt to make property representations besides the property’s historical details. However, the seller of the new land might be unwilling to offer more information before its purchase is confirmed. Therefore, the purchaser of new real estate is required to perform a high level of due diligence to make sure that property is viable for development.
Attorney services are vital in making sure the purchaser or the developer gets the most suitable terms in the agreement. Our law firms acknowledge that contingencies regarding the obligations of the purchase of the new property should be drafted broadly than that of developed property. Our team of attorneys will represent your best terms, including the evaluation of all possible scenarios before the purchase agreement is made.
Lien laws: Michigan has strict lien regulations that cover the right to hold another person’s property until the debt owed is repaid. Subcontractors, material suppliers, and laborers can file for a Mechanic’s Lien if they have evidence that they were not paid after improving a real estate property. However, if the property is residential, Michigan law only awards the lien rights if they are licensed, residential builders.
The Mechanic’s Lien claim has a deadline of ninety days after the last day of improving the property and the property participants must produce a Notice of Furnishing or a Sworn Statement. Finally, the Lien should also cover a description of the property.
Our law firm can represent your rights in a lien real estate property dispute. Our team of experts will prepare a Notice of Furnishing or a Sworn Statement on your behalf. We also provide you with additional legal guidelines on how to ensure that the person owing you compensation, does so within the shortest time possible.
Easement: At times, a property owner may want to seek rights over another person’s property. As a real estate developer, you might require an easement agreement to facilitate access to the landlocked property. With an easement, however, the ownership of the property does remain with the original owner.
On the other hand, if a landowner would like to keep a particular development from a specific area, he or she can file a conservation easement agreement, which details the duration that the land should remain untouched. A Conservation Easement Agreement pertains to donated land or when ecosystem protection is vital. Some easements, however, cannot be transferred to new owners, such as those that lack a formal written agreement.
Property Title Issues: When purchasing a property, a buyer must pay close attention to the property title or deed. The Title or Deed offers information on who the rightful owner is, as well as, other critical details of the history of the property. A buyer must have the skills to identify property title issues, so they know what they are getting into. Small mistakes in the Title, such as public record errors, can be detrimental. Such as if the original owner of the property owed another person money, that person can file a lien for payment and the property withheld.
Our law firm can help file a lien with the appropriate authorities. We will conduct due diligence on the property to be purchased and make sure it does not contain intended or unintended errors. We also offer advice on how to identify, mitigate and remedy the issues of property title.
Dealing with issues in financing and real estate development projects
Real estate is a venture that is guarded by commercial laws in Michigan. However, if an investor or a landowner fails to understand the application of the law, they could lose their investment. It is always advisable to exercise caution when entering into any real estate transaction. Consider the type of contract and make sure that you understand the terms included in the agreement. And if there is an issue, there are various legal options you can utilize.
Take advantage of our experience and consult us on all your real estate development and financing queries.