Real Estate & Development

What To Watch For When Buying Distressed Developments in New Hampshire

September 2009

By Erik Newman*

Distressed or unfinished developments may have attractive prices but can come with a multitude of concerns. The circumstances that led to their abandonment frequently give rise to liabilities that may not be readily apparent. These hidden costs and conditions can detract from anticipated profits and impede completion of the development.

Where Can You Go From Here — Understanding the Status of Permits, Approvals and Zoning

Just because the original developer commenced construction doesn't mean you'll be able to pick up where he or she left off. Distressed projects that have sat idle may require reinstatement or extension of development permits and approvals. Dredge and Fill, a.k.a "wetlands" permits, Shoreland Protection Act approvals and Alteration of Terrain permits may specify a limited period of time during which the permitted activity must occur. Recent changes to the rules implementing these permits can make obtaining extensions challenging, time consuming and costly. For example, revised Shoreland Protection Act rules condition a project's vesting under the prior rules on the continued enforceability of the project's local permits and approvals. Therefore, expiration or revocation of a local planning board approval, building permit, variance or redevelopment waiver would require compliance with the new Shoreland Protection Act rules. The new rules contain certain more stringent requirements, such as limits on the creation of impervious surface area. Compliance with the requirements of revised rules could require modifications to the original plan of development and municipal approval of those changes.

An uninformed purchaser may face risks associated with site plan approvals. Unless active and substantial building began within 12 months of site plan approval, a project may not be vested against subsequent changes to zoning, subdivision regulations, site plan regulations and impact fee ordinances, under RSA 674:39. Without vesting, the original plan of development could become non-compliant and require costly modification. Even if the project is vested under the "active and substantial building" standard, vesting only lasts for four years after the date of site plan approval. Awareness of this four year deadline is particularly important in the case of an unfinished development.

Thorough knowledge of the zoning ordinance and relevant permitting statutes is also critical. Just because the original developer put a shovel in the ground doesn't mean that a development was properly or fully permitted in the first instance. Determination of whether a property has historic resources present and is subject to regulation by the New Hampshire Division of Historical Resources is one example of areas of state regulation that could have been overlooked during the original permitting. Impacts on wildlife and the presence of environmental liabilities such as hazardous waste are other areas of state and federal regulation that can present pitfalls for the uninformed purchaser. At the local level, any proposed deviation from the original plan of development will require a careful feasibility analysis under municipal ordinances. Even if the original plan of development fully complied with zoning requirements, subsequent amendments to the ordinance could affect one's ability to obtain an extension to permits and approvals that are nearing expiration.

Identify the Deep Water Before Jumping In To Purchase a Distressed Condominium or Subdivision Development

Condominiums and subdivisions present unique challenges and risks owing to the frequent involvement of an owner's association and complexity of shared ownership of common areas. A development's state of distress oftentimes arises from to a developer's inability to complete sales as anticipated, which may compromise his or her ability to obtain or maintain construction financing. This lack of access to capital may contribute to a developer's failure to maintain proper reserves for maintenance and repair. Also, if sales were inadequate, a developer may supplement common expenses out of his or her own pocket rather than saddle owners with higher than expected assessments. A distressed development purchaser may have to continue the practice of supplementing assessments and reserves out-of-pocket, or otherwise risk upsetting existing owners or chilling potential new purchasers by imposing higher assessments.

A condominium or subdivision in a distressed state of development may have an owner's association functioning in a similarly distressed state. Fixing an owner's association state of disrepair can be critical to the proper administration of and long-term success of a condominium or subdivision. But proceed with caution. Unless owners associations are carefully managed and educated, resources needed for the broader development and marketing plan could be diverted for non-essential amenities and to address a backlog of owner grievances.

A condominium or subdivision development may also be subject to a development agreement with the municipality to address improvements to roads and services and the timing of development. A development agreement can impose additional project costs and any deviation from its terms could require further negotiation and approval from the municipality.

If the development is of sufficient size or structured with phasing, consideration of whether any land is in "current use" is important. Land that is placed in current use pursuant to RSA 79-A is valued well below market rates, resulting in lower tax assessments. But there is a stiff penalty imposed in the form of a "land use change tax" of 10% of current market value of the land in current use that is triggered when construction and disturbance of the land commences. That tax is secured by a lien, notice of which is recorded in the registry of deeds when the land goes into current use.

In New Hampshire, subdivisions are regulated by the Consumer Protection and Antitrust Bureau of the Department of Justice under the Land Sales Full Disclosure Act, RSA 356-A and condominiums are regulated under the Condominium Act, RSA 356-B. If a purchaser of a distressed development comes to stand in the same relation to the development as the original developer or subdivider, it is a "successor" for the purpose of those two acts. As such, it may have certain responsibilities for registration with the Consumer Protection and Antitrust Bureau which can delay plans for immediate marketing and sales. A successor may also be responsible for completing any improvements promised by the original developer. Condominium and subdivisions purchasers must receive a public offering statement containing detailed representations about the project, of which a successor developer may have little knowledge. Careful planning and coordination with the seller of a distressed condominium or subdivision can alleviate some of these challenges and minimize costs.

Get The Deal You Anticipated — Avoiding Foreclosure Sale Pitfalls

Foreclosed properties may have experienced a period of vacancy and vacancy fosters decay. Therefore, foreclosed properties carry a higher risk of latent defects to structural elements, mechanical systems and plumbing which may not be readily apparent upon viewing. These repairs are among the most costly to undertake. It is common for foreclosed properties to be sold in an "as is" condition and since certain auction sales afford no opportunity for comprehensive inspection prior to bidding, purchasers should attempt to gather information on the condition of the development prior to the sale. This may involve consulting with the foreclosing lender or auctioneer and reviewing any files maintained by the town planning, zoning and code enforcement departments.

Purchasers at auction sales should police the foreclosure procedure to ensure that the foreclosing party fully complied with all statutory requirements. Non-judicial foreclosure in New Hampshire under RSA 479:25 requires strict compliance with the timing and substantive requirements for notifying interested parties and advertising the auction sale. Failure to abide by the statutory requirements can render the sale ineffective as to junior lien holders who didn't receive the required notice. Unlike certain other states, there is no redemption period in New Hampshire's following the foreclosure sale.

New Hampshire law does not require that a foreclosure deed contain warranty covenants as to the quality of title to the property. Title insurance can mitigate some of the risk, but most policies will take exception to matters of public record. Therefore, before entering into a purchase agreement, it is prudent to arrange an insurance commitment and conduct a thorough investigation of title.

In purchasing title insurance on a distressed property acquired directly from the original developer or via foreclosure sale, be aware of complications to coverage owing to creditor's rights. With a distressed property acquisition there is a greater risk of insolvency or bankruptcy by the prior owner. If the conveyance is challenged as fraudulent or preferential under federal bankruptcy law or state insolvency law by a creditor of the transferor, the absence of a creditor's rights exception in a title policy does not mean that the insured will necessarily have coverage. Endorsements specifically tailored to ensure coverage for claims resulting from fraudulent or preferential transfers may be offered by the title insurer, subject to satisfaction of the insurer's due diligence requirements.

Know What You Owe — Property Taxes, Special Assessments and Lienholder Claims

Distressed properties may have substantial property taxes due. These taxes must be paid in full with interest and penalties to remove the tax lien encumbrance from the title, which may be condition of financing. A city or town obtains a lien against property for non-payment of municipal property taxes under the so-called "alternate tax lien" procedure described in RSA 80:58 through 80:86 that is followed by most municipalities in New Hampshire. The alternate tax lien has priority over all other liens and is not discharged by foreclosure. If the back taxes are not paid after 2 years following execution of the alternate tax lien, a municipality may acquire title to the property by tax deed and subsequently sell the property to satisfy the taxes owed.

The municipal tax lien may include special assessments levied by a municipality against property for interconnection to public services and facilities such as water and sewer under RSA 80:19. Consequently, nonpayment of special assessment may similarly result in a municipality acquiring title by tax deed and subsequently selling the property to satisfy the assessment.

A developer who allowed a property to become distressed could have failed to pay its contractors. Anyone who performs labor or supplies materials to a property for construction purposes has a statutory lien on the premises under RSA 447:2. The lien continues for 120 days after the services were last provided or the materials were last supplied and has priority over all other liens except liens for taxes. Subcontractors acting as agents of contractors or the owner can also obtain a priority lien if they give the owner proper notice under RSA 447:5. Before entering into any contract to purchase a distressed property, purchasers should attempt to identify any labor that was performed or materials that were delivered within the previous 120 days that could be entitled to the statutory lien. Prior to signing the agreement or as a condition of any purchase agreement, the seller should be required to provide a buyer with evidence that contractors and subcontractors entitled to a lien were paid in full for their labor and materials.

Do Your Homework — Rigorous Due Diligence Minimizes Risk and Expense

Opportunities for purchasing distressed and unfinished developments at deep discounts are abundant, but so are the associated risks. Awareness of the risks and rigorous due diligence can minimize some of the otherwise unforeseen expenses and liabilities. The information yielded by one's research can also be used to negotiate a lower purchase price. An informed purchaser is less likely to be rejected for making a low ball offer and stands the best chance for capitalizing on a distressed development acquisition.

* Erik Newman is admitted in New Hampshire.

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Real Estate Development
Resort Law
Shoreland Development