Grant liens, should I buy the buildings??

Question

Greetings:  I’ve been presented with a 32 unit deal spread across 9 buildings. However, three of the buildings have grant liens that expire at different times up u til 2029. I am asking the sellers to give me something in writing from the town that specifies that the liens will transfer and they are being cryptic which is somewhat of a red flag. They are telling me that the town says that the “liens will transfer”. However, if I wanted to sell a building (let’s say for example sake) in two years, I would have to pay the liens or try and have them discharged. I was hoping for some thoughts here, mostly if I should be concerned or what I should be concerned about. The numbers are crazy good and I already have property in the area. Thoughts?

Peter Walther · Answer

Why do you believe the town's line will be junior to your new financing.  If the lien is of record, unless there is subordination language in the town's lien it should have priority over your new debt.  In reality, your deal won't close w/o the town lien being paid off or subordinated because the title commitment for the lender's policy will require it.

David Gotsill · Answer

@Marcus Robert - Sounds like the prudent move, given what you've described.  You might also be able to get additional information on the liens from a title company, if you have one that you work with.

Marcus Robert · Answer

Hi David:  Thank you for the reply. The numbers work, however the sellers are cryptic in their responses and have a situation where the (they say) the town is allowing them to transfer the liens when one of the main terms is that a sale will trigger payback of the liens working 15 years of obtaining the liens (which they are).  However, when I request the information in writing from the town that this is the case, they refuse to do it. BIG red flag. With regard to financing, I spoke with my loan officer and told her that I am trying to get a clear answer of this junior lien (if you will), and they won’t go forward ( I don’t blame them) without clarity. In addition, they initially documented that they would personally property manage for 1 year as a part of the deal and then reneged. So you can see what type of sellers these are. Hi be decided to not pursue. Thank you for the feedback and professional perspective David!

Marcus

David Gotsill · Answer

@Marcus Robert - I would always be hesitant to take property subject to any liens unless you know the full scope and potential cost of discharge for the liens.  What is the obligation underlying the liens?  I have not come a across anything referred to as a "grant lien" in my practice.

As you note, you may not be able to find a willing buyer when you're ready to sell, if the properties are still subject to liens.  That might be a big enough deterrent, unless you're confident in the numbers until 2029.

Another point to consider is that lenders might be squeamish about those liens, and either unwilling to lend to you (or to your theoretical future buyer) or require some additional protection, through some personal guarantee or addition to their title insurance policy.

You could try to keep seller on the hook for any costs related to those liens, but not sure she/he would be willing to do so.

Good luck!