S.E.C. Real Estate Observer

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When purchasing land that can be subdivided, ask the Seller to carry back a Note and Trust Deed, each of which contains a provision that will require the Note holder to create multiple substitute Notes and Trust Deeds after the land has been subdivided. This will permit landowner to sell off parcels and allow each buyer to assume a portion of the original financing.

One of the most advantageous provisions available to buyers of unimproved land is the Trust Deed Split provision. It is sometimes called a Substitute Note and Trust Deed provision and allows the new owner to create multiple new Notes and Deeds of Trust (or mortgages) for the individual lots he creates upon the completion of certain agreed upon conditions. The provision is more advantageous to the developer than the more traditional partial release clause.

For example, a developer buys a twenty-acre parcel of land that can be subdivided into ten two-acre lots. The price of the parcel is $300,000. The developer makes a down payment of $60,000 and asks the seller to carry back a Note for the balance of $240,000. The Note is to be secured by a First Trust Deed on the twenty acres. The developer negotiates the purchase so that the Note will not contain a Due On Sale clause. Developer and Seller agree that after a final subdivision map has been recorded, Note holder will allow the $240,000 Note to be reconveyed and, in its place, Note holder will accept ten (10) substitute Notes of $24,000 each. The ten Notes of $24,000 each will be secured by ten separate First Trust Deeds, one Note and one Trust Deed on each of the ten (10) lots created by the map. Developer agrees to provide Title insurance to insure that Note holder is still in first position on each of the new Notes. After the paperwork is complete, each lot will have its own independent financing in place with no due on sale provision. In the aggregate, the total monthly payments and the due date will remain unchanged. Note holder’s security will not be impaired because Note holder will still be in a fully insured first position and, more importantly, the ten lots are now worth considerably more than the twenty-acre parcel before the new Developer completed the subdivision process.

EXAMPLES OF THE BENEFITS:

1. Developer sells one of the lots for $50,000 and accepts cash down payment of $10,000 and agrees to a $16,000 carry-back Second Note behind the original seller’s $24,000 First Note. In the above scenario, the $24,000 in financing is already provided by the original seller. Compare this result with a more traditional partial release clause, which would have required Developer pay off at least $24,000 in order to release that lot from the blanket debt of $240,000. In most cases, a partial release clause requires more than a simple pro rata share of the total debt. Using a partial release provision, with only a $10,000 down payment and with at least a $24,000 cash payment due the Note holder, the Developer would have had to go into pocket at least $14,000 to sell the lot.
2. Another lot buyer wants to pay $50,000 all cash and have Developer deliver the lot free and clear. Developer can use $24,000 of the cash purchase price to pay off the Note on that lot. The $24,000 Note is paid in full and the lien is reconveyed permitting the property to be delivered to the lot buyer free and clear. No release provision is required because the only debt on the property is the $24,000 Note. Obviously, therefore, no premium, such as 115% to 125% of par would be required.

The above example assumes that all ten lots of equal value. Other arrangements can be drafted in the Trust Deed Split Provision to account for lots with a range of values.

The exact terms and conditions of the Trust Deed split must be clearly defined in both the Note and the Deed of Trust. Be sure to negotiate the terms of the Trust Deed Split during the offer process, as it is too late to bargain for these benefits after the sale has closed.

SAMPLE ONLY: ALWAYS SEEK COMPETENT LEGAL ADVICE FOR ANY CONTRACT PROVISION

TRUST DEED SPLIT PROVISION

This Deed of Trust (“Original Deed of Trust”) and the Promissory Note secured thereby (“Original Note”) have been entered into with the understanding by all parties that the Land encumbered by the Original Deed of Trust (“Subject Property”) may be subdivided by Trustors, and/or their heirs, successors, and assigns. It is hereby agreed that the time, money, and effort spent in subdividing Subject Property shall improve its value and, thereby, increase the security for the Original Note. In consideration thereof, it is the intent of the parties that this Trust Deed Split provision be incorporated to accommodate the future sale of subdivided lots by providing for the creation of smaller Substitute Notes that shall be individually secured by Substitute Deeds of Trust on each of the to-be-created lots.

Now therefore, it is agreed that upon the acceptance of a Final Subdivision Map or Final Parcel Map by the governmental body having the authority to approve subdivisions on subject property, the Beneficiaries hereby agree for themselves, their heirs, successors, and assigns that, provided no default exists under the terms of this Deed of Trust or of the Note secured thereby, at Trustor’s request and at Trustor’s expense, Beneficiary shall split this Original Deed Of Trust into smaller Substitute Notes with each smaller Substitute Note to be secured by a separate Substitute Deed of Trust on one of the lots created by the subdivision.

In the aggregate, the total principal balance of all such Substitute Notes and Substitute Deeds of Trust shall be equal to the total remaining principal balance at the time of the split of the Original Note into smaller Substitute Notes. The total of all payments shall be equal to the single monthly payment in effect at the time of the split into Substitute Notes. There shall be no change in the due date on the obligation, nor shall there be any change in the interest rate.

Within ten (10) calendar days of Beneficiary’s receipt of a written request from Trustor accompanied by a copy of the Final Subdivision Map or Final Parcel Map, Beneficiary shall, at Beneficiary’s sole discretion, allocate portions of the total remaining principal balance to each of the lots designated on the Final Map. Each of the lots may be assigned any portion of the total principal balance, provided that, in the aggregate, the total value of all Substitute Notes shall be equal to the then remaining balance of the Original Note. The periodic payment allocated to each Substitute Note shall be in the same proportion that the principal balance on each new Substitute Note bears to the total remaining principal balance at the time of said split.

Beneficiaries shall execute any and all documents as may be required to fully cancel the Original Note and to fully reconvey the Original Deed of Trust, and, in exchange, Trustor shall execute each Substitute Note and its corresponding Substitute Deed of Trust. Trustor shall bear the expense of recording the reconveyance of the Original Deed of Trust and each of the new Substitute Deeds of Trust. Trustor shall provide, at Trustor’s expense, a title insurance policy on each of the Substitute Deeds of Trust to insure that each Substitute Deed of Trust holds the same seniority position as did the Original Deed of Trust.

It is further agreed that, within ten (10) calendar days from receipt of Trustor’s written request and at Trustor’s sole expense, the Beneficiaries, their heirs, successors, and assigns shall execute any and all documents which may be required by the governmental body having the authority to approve subdivisions on subject property granting approval by the Beneficiaries for a legal division of land, as well as any other documents that may be required to fully comply with the intent of this Trust Deed Split provision.