1. Chapter 22 Liability, Agency Problems, Fraud, Ethics in Real Estate Finance

2. Chapter 22 Learning Objectives n Understand how parties to real estate finance transactions can be held liable for their actions n Understand the structure of agency relationships within real estate finance n Understand that there are agency costs associated with preventing parties from acting solely in their own interest and against the interests of others n Understand how insufficient agency costs allow wealth transfers

3. LENDERS’ LEGAL LIABILITY n Subject to liability in two areas: –Violation of state or federal laws regulating certain activities –Violation of contractual obligations involving loan arrangements

4. HAZARDOUS WASTE DISPOSAL n Federal laws regulating hazardous waste: –Comprehensive Environmental Response, Compensation, and Liability Act of 1980 –Superfund Amendments and Reauthorization Act of 1986 –Strict liability even if no laws were violated –Joint and several liability

5. HAZARDOUS WASTE n Potentially responsible parties (PRPs) for contaminated properties: n Current owners / operators n Owners / operators at time of discharge n Generators of the hazardous substance or parties arranging for disposal n Transporters of the hazardous waste

6. LENDER’S DEFENSES n Lender claims to not be a PRP n Contamination resulted solely from an act of God, act of war, or omission by a third party n Claims to be an innocent landowner with no knowledge of contamination

7. APRIL 1992 EPA REGULATION n Rules allowing lenders to foreclose and not be liable: –Actions prior to security interest –Periodic monitoring and/or inspection –Involvement from inspection results –Requiring borrower compliance –Restructuring the loan arrangement

8. APRIL 1992 EPA REGULATION n Rules allowing lenders to foreclose and not be liable: –Requiring additional rent or interest –Exercising any rights the lender may have under the law or any warranties, covenants, conditions, or promises –Providing financial or administrative advice

9. OTHER LENDER REGULATIONS n Comprehensive Drug Abuse Prevention and Control Act of 1970 allows confiscation of property used in illegal drug activity n Uniform Commercial Code which specifies rights and obligations of contracting parties

10. OTHER THEORIES OF LENDER LIABILITY n Prima facie tort n Promissory fraud n Nondisclosure fraud n Breach of contract n Duress and lender control

11. BANKRUPTCY AND AGENCY COSTS n Bankruptcy and the cram down process n Agency Costs