So on a beautiful quiet day in pastoral Sonoma County, after almost 3 years my 61 year old client Diane finally received the final order from the Court. It was ordered that Bayview Financial/M & T Bank was to return the excessive PREPAYMENT/lockout fee that they had woven into the loan documents, unbeknownst to Diane at the time of origination.

The money ordered to be returned was money the bank collected when Diane went to sell her home/ income property and discovered a Lockout/ Yield Maintenance clause in addition to another CLEARLY stated prepayment penalty.

At the time my only experience with Lockout Clauses was with Large Commercial Investment Loans that had an experienced high net-worth borrower. In the case of Diane she owned a Small Multi-Unit Property that she had inherited from a close friend when he died. Here’s what happened to Diane.

She was in contract to sell her home/ 9 unit property for APPROXIMATELY $995,000 and had a (year and a half old) First Mortgage in the range of $450,000. When reviewing the Seller’s Escrow Closing Statement we noticed that there was not only a 5% prepayment penalty, but another lender demand for approximately $220,000. I am not making this up! As astounding as this story sounds it turned out to be true. The Cover Page/Abstract of the loan’s terms and conditions did mention the 5% Prepay Penalty. However, not listed was a Lockout Clause in the body of the contract.

Diane had to perform on the Sale or face a prospect of a 1031 inspired lawsuit from the buyer. She paid under duress and was able to convince two very gutsy and talented attorneys to take on the case to sue to get the money returned that was collected from Lockout /Yield Maintenance Penalty.

This was a tricky proposition for the attorneys because the law approaches Residential and Commercial loans in much different ways when it comes to Predatory Lending Practices. While residential loans have strict criteria for these kinds of lender “shenanigans”, commercial lenders function in lending practices based on something to the effect of ” Not Shocking the Conscious of the Community”.

In the case of my client, fortunately she won!! It took approximately 2 years to get a judgment in her favor and another year (or so) to wade through the appeals. While I am not privy the Court Costs and/or the attorney fees that accumulated over the 35 month process, I believe the fees must be triple what my client collected. ONLY HER OWN money was returned. That’s what it took to pry the money back from the lender.

Moral of the story – Understand your Loan Documents and all penalties associated with paying off your loan, and know the meaning of the Lockout Clause.

The passage of the 2010 Patient Protection and Affordable Care Act (ACA) may result in some unique and interesting opportunities for the alert investor.

OVERVIEW

While the recession has been brutal to the commercial real estate industry forcing occupancy levels across most asset categories to painfully contract, the implementation of the ACA may afford savvy investors new opportunities to meet the needs of accelerated, “good old-fashioned” demand in health care sectors.

Expanded health insurance coverage will surely expand the need for medical office space, as well as the retail, manufacturing and industrial space for health-related businesses.

Remember that approximately 32 million of the 46 million uninsured Americans will receive insurance coverage under the new legislation in 2013.  Approximately 260 million people in the U.S. enjoy some kind of medical insurance coverage.

MEDICAL OFFICE BUILDING (MOB)

The need for new medical space for patient care appears not to be tied to any one asset type.

For instance, observe retail space morphing into medical use becoming a new part of the retail sector’s economic recovery.  The marriage of medical use and retail space is becoming an important and growing part of the U.S. primary care delivery system. This new strategy is providing increased visibility and easy accessibility to a potential patient.

“Owners of better-quality, performing medical office properties should enjoy stable returns over an extended period, as tenants tend to make significant investments in improvements and on-site equipment, discouraging relocations.”( Marcus and Millichap report)

Medical office building (MOB) investment opportunities should begin to outperform other real estate sectors as hospital and medical group executives move ahead with plans that have been on hold. Long-term stable leases, diversity of income sources (i.e. insurance companies, government reimbursements, and private sources) coupled with the matrix of expanding tenants (Assisted Living facilities, Pharmaceutical companies, Biotechnology companies, etc.) all contribute to these contemporary investment strategies evolving within the healthcare industry.

Consider the industry multiplier of 1.9 sq ft required per patient. This estimate should eventually increase the amount of requisite “patient space.” It can be estimated that 64 million additional square feet may be required to meet the increased demand.  The surge in demand for space is estimated to happen almost immediately.  Vacancy rates in retail and office make both sectors ideal candidates to absorb the increased medical demand.

TRENDS TO KNOW

16% of hospital executives indicate future projects for them are outpatient facilities in neighborhood settings. (ASHE2011 Construction Survey)

We will be watching this trend through in the upcoming year 2013.

The Health Care and Education Reconciliation Act of 2010 (HCERA) added Internal Revenue Code §1411, which imposes a new 3.8% tax on net investment income, effective January 1, 2013.

The new law imposes a 3.8% tax on the lesser of the taxpayer’s net investment income or the excess of the taxpayer’s adjusted gross income over the specified thresholds (i.e. $250,000 for married filing jointly; $125,000 for married filing separately; and $200,000 for other taxpayers).

In addition to the new 3.8% surtax on capital gain, the Bush tax cuts are set to expire beginning January 1, 2013, which will increase the top capital gains tax rate from 15% to 20%. With the new 3.8% surtax starting in January of 2013, the effective top capital gains tax rate will be 23.8%.

Since the issuance of HCERA, many taxpayers have expressed concern about whether an IRC §1031 exchange could be used to defer this additional 3.8% tax on capital gain. Now, under newly published “proposed regulations” — 26 CFR Part 1[REG-130507-11] — for those who were worried that an IRC §1031 exchange could not be used to defer this additional 3.8% tax on capital gain, §1.1411-5(C)(i)(2)(ii) alleviates that concern by providing as follows: “to the extent gain from a like-kind exchange is not recognized for income tax purposes under section 1031, it is not recognized for purposes of determining net investment income under section 1411.”

Although these regulations are not yet final, section 12 of the proposed regulations provides that taxpayers may rely on these proposed regulations for purposes of compliance with §1411, until the effective date of the final regulations.

Taxpayers should review the proposed regulations with their tax advisor to ensure proper compliance and interpretation thereof.

The proposed regulations may be viewed at the following link: https://s3.amazonaws.com/public-inspection.federalregister.gov/2012-29238.pdf. A hearing on these proposed regulations is scheduled for April 2, 2013.