Real Estate Law: Usury Rules Plus a Free Teleseminar

Greetings from San Diego!

I have always liked San Diego. What is not to like right? Ocean views, great weather, Sea World, the zoo, etc. But what I like most is that you cannot help but relax here. So…as I sit here on the deck overlooking the ocean….I write….maybe someday I will write with this view everyday….?

I have taken time off from the blog but my buddy Michael Powlen from Global Law in San Francisco sent me another great piece on real estate law. Specifically on Usury Rules. What the heck are usury rules? Luckily, Micheal explains below. You can read more from Michael @ www.AllLawBlog.com.

Now, I have done a few creative deals using a lease option in commercial real estate. I actually bought my first mobile home park using a lease option (which is a great educational story in itself). I have also sold assets via lease options and real estate contracts. Michael sheds some light on the risk that I was not aware of…..

Also, please remember to subscribe, there is a free financial teleseminar coming up next week that will only be available to subscribers…..

Don’t Overlook the Usury Rules

By

Michael S. Powlen Global Law, LLP Michael@globallawllp.com © 2008 Michael Powlen. All rights reserved.

Do you intend to sell property and take back financing? Do you lend money secured by real estate? An Arkansas case, Van Carr Enterprises, Inc. v. Hamco, Inc., No. 05-954, 2006 WL 649985 ( Ark. Mar. 16, 2006), shows that you can take a big hit if you don’t pay attention to the usury laws applicable to your transaction. That case involved a two-year commercial lease of space in a multi-unit property that granted the tenant the option to purchase the entire property with the landlord financing the purchase over 20 years at an interest rate of 7% for five years and thereafter at 6% above the federal discount rate. The lessee exercised its option and paid for the property with a twenty year note. In litigation over the transaction, the court found that the financing violated Arkansas usury law, which limits the maximum legal interest rate to 5% above the federal discount rate. At the time the lease was made, that rate was 1.25%. The law makes usurious contracts “void as to the unpaid interest.” The court allowed the purchaser to pay the price over 20 years without interest.

To illustrate the financial impact of this decision, assume a purchase price of $500,000. With a 7% interest rate, the monthly payments would be $3,877 and the total payments would be $930,359. Under the court’s ruling, the purchaser would have to pay only $2,083 per month for total payments of $500,000. The violation of usury law cost the seller $430,359.

Checking on the usury laws can potentially save you a lot of money. In most jurisdictions, you will be able to find a way to structure the transaction to get the amount of interest you want and not have a usury problem. This will vary from state to state. For example, with respect to the transaction in Arkansas, it may have been possible to structure the note so that it was originated and made outside of Arkansas by, for example, from a New Mexico LLC with the note specifying that New Mexico law applies. Let’s say the seller had funded a New Mexico LLC owned by the seller with $500,000. Let’s say the loan was documented and approved in New Mexico and had a cap of 15%. Also, let’s say the money was funded from a New Mexico bank account to the seller in Arkansas and the New Mexico LLC held the note and received payments in New Mexico. Assuming that this transaction was otherwise structured properly, New Mexico law would apply and not Arkansas law, and the note would not have violated the usury laws.

Don’t try this on your own. Check with an attorney in the applicable jurisdiction and make sure that the usury laws have been addressed properly. It could save you a lot of money.

Check out www.Alllawblog.com

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