Ensuring Your MPC is Sale-Ready (part 2)June 3, 2019
By Rachel Wilson
Negotiate these provisions on the front end for ‘smooth sale-ing’ on the back end
Our previous blog post outlined five of our top ten recommendations for what to include – or avoid – in your contracts and other project documents to help ensure that your MPC is sale-ready. After all, every Master Planned Community is for sale, every day, if the price is right.
For developers and equity holders, this means that your exit strategy has to be incorporated from day one. In part two of our series, here are five more critical issues to consider when drafting and negotiating your foundational MPC documents.
Securing Your MPC Exit Strategy
6. Security for Released Earnest Money
Deeds of trust in favor of homebuilders to secure their released earnest money can be problematic for an MPC buyer that will step into your shoes as borrower under those deeds of trust. They’re even more problematic if the buyer has a lender who will need to review the homebuilder deeds of trust and negotiate new subordination/intercreditor agreements with each homebuilder.
This process can be time-consuming and will at best, distract the buyer and its lenders from focusing on the sale itself. At worst, it can delay closing while the subordinations are agreed to with homebuilders who aren’t necessarily incentivized to move quickly. If you can’t get builder earnest money released without giving a deed of trust in return, make sure your lot sales contract provides that you can have the deed of trust released by escrowing cash …and be prepared to do so.
7. HOA Turnover
An experienced MPC buyer will look carefully at the developer’s ability to appoint the HOA board of directors and the ARC for the project. Your CC&Rs, HOA Bylaws and Design Guidelines should be drafted so that the developer controls the HOA board and ARC for as long as possible, within the limits of any state or other applicable laws.
Once any statutes requiring homeowner representation kick in, the CC&Rs and Bylaws should maximize developer representation for as long as possible before homeowners gain control of these entities. (Note that CC&Rs can always provide that the developer can sooner terminate its role as declarant, and/or its ability to appoint members of the HOA board and ARC, if desired.)
Keep in mind that two other red flags for an MPC buyer in a set of CC&Rs are (a) a declarant’s obligation to pay assessments on declarant-owned lots, and (b) a declarant’s obligation to subsidize the HOA for any budget shortfalls. These types of provisions should be avoided, though a declarant option to subsidize the HOA for budget shortfalls is market and would not be a deterrent for most MPC buyers.
8. Suspension Periods
Even in the cleanest of closings of sales of ongoing MPCs with the best teams of business-people, lawyers and title companies, it can be complicated to nail down all of the final details like lien waivers and true-up numbers for your closing statement in the days leading up to funding. In our experience, the best way to nail down those final details is to have a “down period” in which your contractors stop work for a short period of time (say, 1-2 weeks, depending on the size and complexity of the project) so that the developer can bring all payments up to date and collect all of the related lien waivers.
Busy contractors generally don’t like stopping work for any period of time, so having a provision in your construction contracts allowing you to suspend the contract for a short period and resume work, in your discretion, without allowing the contractor to terminate their contract, is essential in the context of an MPC sale.
9. Termination Provisions
A savvy MPC buyer will negotiate a provision in the purchase and sale agreement to allow it to evaluate the contracts in place at the project and require the seller to terminate certain contracts that the buyer doesn’t want to assume at closing. To make these terminations as seamless and inexpensive as possible, it’s important to build in to underlying contracts short lead times for notices of termination and minimal monetary penalties for early terminations.
Alternatively, your purchase and sale agreement can require the MPC buyer to assume certain contracts (i.e., the buyer can’t require you to terminate a select list of contracts…and the listed contracts include those with long termination notice lead times and/or termination penalties), or require the buyer to pay any termination penalties associated with contracts that the buyer doesn’t assume.
10. Exceptions in Confidentiality Provisions
A potential buyer of your MPC will of course want access to the agreements – homebuilder contracts, construction contracts, etc. – that affect your project. If your homebuilder or other contracts have confidentiality provisions, make sure there are carveouts so that you can deliver these contracts to potential purchasers of your MPC. Otherwise, you would have to choose between violating confidentiality provisions and chasing down consents from the counter-parties to these contracts, the latter of which would slow down the due diligence process greatly.
Full disclosure: it is unlikely that you will be able to secure all ten of these provisions. But it’s good to know where potential landmines lie and, whenever possible, avoid them. Every sale has complications, and experienced lawyers are able to work through them. But including as many of these as possible on the front end can maximize the readiness of your MPC for the market when it comes time to sell.
At The Watson Firm, our lawyers have bought and sold MPCs at every stage of their life. Some of those projects include Connerton, Willowsford, The Groves, Belterra, Reston, Windward, and many others. Contact us if we can be of assistance in the creation, purchase, maintenance, or sale of your MPC.
About The Watson Firm
Founded in 2008, The Watson Firm provides legal services for master-planned, mixed-use and resort communities. Our industry experience, both on the business and the legal side, is what makes us uniquely capable of guiding clients through the myriad of legal issues involved with any new or ongoing development.
Monty Watson, the firm’s Founder and Managing Member, has been instrumental in the sale or purchase of more than 35 master-planned communities, and has created the legal infrastructure for some of the best-known communities in the country. Before founding The Watson Firm, he served as Chief Operating Officer of Rockpoint Finance, a real estate private equity fund; General Counsel of Terrabrook, one of the country's largest land developers; and as a lawyer in private, public and in-house practice. He can be reached at firstname.lastname@example.org.
About the Author:
Rachel Wilson represents developers in all phases of master-planned community development, from acquisition to disposition or turnover. Rachel's specialties include acquisitions, homebuilder contracts and construction loans, and she handles all other client needs, from CC&Rs and HOA formations, to construction and consulting agreements. She can be reached at email@example.com.