Colorado`s Mechanics` Lien Laws

Construction Lending
Colorado’s Mechanics’ Lien Laws
News
Volume 25, Fourth Quarter 2008
25th
EDITION
By Stephen B. Shapiro 1 and Matthew S. Rork 2
Introduction
The Colorado mechanics’ lien statutes codified at C.R.S.
§38-22-101 et seq. apply to private sector residential and
commercial construction. Public works projects are covered by
a separate statutory scheme. The substantive and procedural
requirements for perfecting, litigating, and foreclosing
mechanics’ liens are the same for both residential and
commercial projects with limited exceptions. The confines
of this article do not allow for a comprehensive dissertation
on Colorado mechanics’ lien law, and thus is focused on the
nuances between residential and commercial construction
projects.
Homeowner Payment Defense
In 1987, the Colorado General Assembly enacted a
defense specifically designed to prevent homeowners from
paying twice for a new home or for improvements to an
existing home. C.R.S. §38-22-102(3.5). When triggered,
the statute provides an automatic and complete affirmative
defense against any and all mechanics’ lien claims.3 This
statutory affirmative defense is available to owners of existing
homes who contract for improvements, to homeowners
who contract for the construction of a new home, and to
purchasers of newly constructed homes.4 All that is required is
that the homeowner’s contractual obligations are paid in full
before any liens are filed.5 Conversely, where the homeowner
does not pay in full, the affirmative defense is unavailable and
any mechanics’ liens will attach to the residence.6
Bona Fide Purchaser Defense
The bona fide purchaser defense provided in C.R.S. §3822-125 applies to single or double family residences. It is
unlike the homeowner payment defense discussed above, as
it does not provide a complete defense to mechanics’ liens
but rather imposes more stringent requirements to perfect
lien rights. Whereas mechanics’ liens generally may be timely
recorded within four months of the claimant’s last work on
a project, where a purchaser of a single- or double-family
dwelling is involved the lien must be recorded within two
months of completion of the residence or within two months
of the conveyance of the residence to a bona fide purchaser,
whichever is first. There are three exceptions to this twomonth time limit, which are:
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1.At the time of conveyance the purchaser had actual
knowledge of the amounts due and owing to the
claimant; or
2.The lien was filed before conveyance to the purchaser;
or
3.A notice of extension of time to file a lien statement
was recorded within one month after completion of
construction or conveyance to the purchaser, whichever
is later.7
If an exception applies, then the general timelines set
forth in the mechanics’ lien statutes are applicable.
Notice of Non-Liability
Tenant improvements and buildouts are typical in
commercial leases. In Colorado, a landlord/owner with
knowledge of construction, alterations, or repairs to leasehold
premises by a tenant is deemed to have requested such
construction, alterations or repairs. Consequently, the landlord/
owner’s fee interest is vulnerable to mechanics’ liens for unpaid
services or materials. A landlord/owner can protect itself if
within five calendar days after learning of such construction,
continued on page 2
1 Stephen B. Shapiro is a founding partner of Bieging Shapiro & Burrus LLP in Denver, Colorado. A graduate of Creighton University Law School, he entered private practice in 1984 after serving a one-year judicial
clerkship on the Colorado Court of Appeals. Mr. Shapiro has arbitrated and litigated construction claims at both the trial and appellate levels. His practice also entails recovery of insurance benefits for construction
and design defects, as well as bad faith litigation. He may be reached at 720.488.0220 or [email protected].
2 Matthew S. Rork is an associate at the law firm of Bieging Shapiro & Burrus LLP and is licensed to practice in both Colorado and California. For the past 10 years, Mr. Rork’s practice has focused on commercial and
construction litigation, representing clients in all facets of their construction and business practices. Mr. Rork has represented contractors, engineers, and owners in complex construction and business related disputes
including residential, commercial and heavy civil construction. He may be reached at 720.488.0220 or [email protected].
3 C.R.S. §38-22-113(4); Koch Plumbing & Heating, Inc. v. Brown, 835 P.2d 610, 612 (Colo. App. 1992).
4 Wholesale Specialties, Inc. v. Village Homes, Ltd., 820 P.2d 1170, 1174 (Colo. App. 1991).
5Id.
6 Crissey Fowler Lumber Co. v. First Community Industrial Bank, 8 P.3d 536, 538-9 (Colo. App. 2000).
Granite, 10770 E. Briarwood Ave., Suite3280, Centennial, CO 80112 866.710.4087
The information and opinions expressed by contributing authors and advertisers within the Construction Lending News do not necessarily reflect those of Granite Loan Management, LLC
or its affiliates or their respective employees (“Granite”) and should not be considered as endorsed or recommended by Granite.
Colorado Mechanics’ Lien Laws
(cont’d)
alterations or repairs, it posts and keeps posted at the leasehold
premises a written notice to the effect that its interests shall not
be subject to any mechanics’ liens. If such notice is properly
posted and kept posted during the course of construction, then
any mechanics’ liens will attach only to the tenant’s leasehold
interest and not to the landlord/owner’s fee interest.8 No such
notice needs to be posted by a mortgage lender with a deed
of trust, as the statute excepts mortgage lenders from the class
of persons who are deemed to have requested construction,
alterations, or repairs by a tenant.
Recording of General
Contract
The project owner
always runs the risk that
labor and/or material
suppliers retained by the
contractor will not be paid
for the work performed and
l
l
will file mechanics’ liens
accordingly. In situations
where the contractor runs
into financial difficulty
or has woefully underbid
the job, the project owner
often times will receive
l
mechanics’ lien claims far
above the original contract
price. The consequences to
the project owner can be disastrous. Colorado law provides
for some degree of protection to a project owner who
records the construction contract in the county where the
work is being performed. C.R.S. §38-22-101(3) provides
that a project owner may, prior to the commencement
of the work, record with the county recorder’s office the
contract or a memorandum thereof setting forth the names
of all of the parties to the contract, a description of the
property, a statement of the general nature of the work, the
estimated total amount to be paid, and the timing or stages
for payments to be made. If the project owner does this,
the contract price will act as a ceiling on any mechanics’
lien claims.9 Consequently, the prudent project owner can
limit its exposure to mechanics’ liens claims in excess of the
contract price by complying with the recording statute.
Grand Aspen
Junction
Durango
structures within a single commercial project. Under these
circumstances, Colorado law permits the lien claimant to
apportion the labor and materials supplied to each project.
C.R.S §38-22-103(4) provides that “it is lawful” for the
lien claimant to “divide and apportion” the value of the
labor and/or materials among the works of improvement.
However, Colorado law also recognizes that it is often times
difficult for the lien claimant to divide and allocate its labor
and materials among the different project or structures. When
the labor and/or materials cannot be “readily and definitely
divided and apportioned among
the several buildings, structures,
or other improvements” one lien
l
claim can be made against all of the
improvements for the value of the
labor and/or materials provided.
This is commonly referred to
as a “blanket” lien. In 2005,
the Colorado Supreme Court
confirmed a lien claimant’s right
l
to file a blanket lien and further
held that such a lien is valid even if
the lien claimant does not include
some of the works of improvement
l
in its lien.10 Moreover, where a lien
claimant has
chosen in
good faith to
file a blanket
lien, the failure on the part of the
lien claimant to show that the claim
could not be apportioned is not fatal
to the claim but merely goes to the
availability of relief. Thus, as long as
there is support for the lien, the court
may equitably apportion the debt in its
Stephen B. Shapiro
foreclosure decree.11
Fort Collins
★ Denver
Colorado
Springs
Pueblo
Conclusion
While Colorado’s mechanics’
lien statutes apply to all manner of
private construction projects, there are
provisions that are unique to residential
construction and others that are
unique to commercial construction.
Compliance with the above statutes can
yield significant benefits to borrowers
and consequently to their mortgage
lenders.
Blanket Lien v. Apportioned Lien
Situations arise where a lien claimant has provided
labor and/or materials to an owner on separate works
of improvement within a specific county, or on several
8 C.R.S. §38‑22-105.
9 Armour & Co. v. McPhee & McGinnitty Co., 85 Colo. 262, 275 P. 12 (1929); Independent Trust Corporation v. Stan Miller, Inc., 796 P.2d 483, 493 (Colo. 1990).
10 Compass Bank v. Brickman Group, 107 P.3d 955 (Colo. 2005).
11 Id.
2
Matthew S. Rork
Pitfalls of Construction Loan Agreements
By Will DePuy 12
Lenders typically rely on protections contained in a
construction loan agreement (“CLA”) as part of a sound
construction lending program. While CLAs can take many
forms, most prudent lenders understand the need to have an
agreement in place that clearly sets forth borrower and lender
responsibilities related to a proposed construction project.
CLAs typically use capitalized terms, the enforcement
and interpretation of a CLA using undefined terms may
be impacted. For example, terms such as “Agreement,”
“Property,” “Contractor,” “Parties” and the like are
commonly used and understood with no definition
provided. To avoid confusion from the use of undefined
terms, lenders may want to consider including a definition
section that defines all key terms used in the CLA.
Most CLAs contain a number of provisions specifically
designed to protect the lender. While this article is not
intended to be a comprehensive review or discuss specific
provisions that should be contained in a CLA, it hopefully will
provide some insight and guidance on pitfalls a construction
lender should be aware of when drafting a CLA. These
pitfalls include: 5. Disbursements. The CLA should include a well drafted
section of the duties and responsibilities a borrower must
meet as a condition of the lender processing, accepting
and funding draw requests. The section can include
situations where the lender has no duty to fund a draw
request if the draw request exceeds the line item budget,
the lender reasonably believes the proceeds remaining in
the loan are insufficient to complete the project, or the
borrower is otherwise in default under the loan.
1. Parties. To be fully enforceable, the CLA should name all
borrowers as parties to the agreement. To ensure full legal
affect, it is essential that each borrower is named as party
and signs the CLA. 6. Contractor/Builders. Typical construction contracts
are two-party agreements between the borrower and
contractor/builder. Even though a lender is not a party
to the contract, borrowers may attempt to assert claims
against the lender for failing to inspect and/or negligently
funding draw requests for work that is later found to
be defective, shoddy or incomplete. In an effort to
mitigate risk, the lender may want to consider adding
affirmative statements in the CLA that the borrower: (i)
has conducted the necessary investigation and review
of the contractor; (ii) has entered into the construction
contract with the contractor under terms and conditions
satisfactory to the borrower; (iii) will not hold the lender,
and its agents, responsible for any loss or damage resulting
from the contractor’s failure to complete the work per the
plans and specifications or pursuant to a draw request; and
(iv) will not hold the lender, and its agents, responsible for
any default, error or omission in the construction work or
materials supplied by the contractor. 2. Recitals. The “Recitals” section typically precedes the
body of the agreement and is used to provide opening
statements and guide interpretation of the document.
In the case of a CLA, the “Recitals” may include a
brief description of the proposed construction project,
a detailed property description, a statement that the
borrower has selected a contractor to complete the
project and entered into a construction contract for that
purpose and a statement that the parties desire to enter
into the CLA upon the terms and conditions set forth
in the applicable loan documents and the CLA. Some
courts have held the “Recitals” section of an agreement
to be unenforceable unless specifically incorporated into
the agreement. As such, the lender should consider
adding language in the body of the agreement stating the
“Recitals” are incorporated into and made a part of the
CLA by reference. 3. Consideration. An essential element in any agreement
is the statement of consideration. Consideration is what
each party is giving in exchange for performance of the
other under the agreement. While money is the most
common form, consideration can be property, giving up
a right, making a promise or most anything of value. To
avoid the pitfall of lack of consideration, a statement of
consideration should be included in the CLA along with a
statement that receipt and sufficiency of the consideration
is acknowledged by the parties.
7. Borrower Acknowledgments. In addition to the
affirmative statements described in Paragraph 6 above
relating to contractors, a prudent lender should also
consider adding affirmative statements in the CLA dealing
with borrower duties and responsibilities. This includes
the borrower agreeing to: (i) perform all obligations set
forth in the CLA and loan documents; (ii) repaying the
loan as agreed; (iii) using loan proceeds solely for purposes
of completing construction; (iv) not allowing parties to
assert liens, claims or encumbrances against the property;
(v) completing the project in good and workmanlike
4. Definitions. Another common pitfall is the use of
capitalized terms with no definition provided. While
continued on page 4
12 Will DePuy is General Counsel for Granite Loan Management and its affiliated companies. He is a graduate of the Denver Sturm College of Law with more than 15 years of corporate legal experience including 10
years in the construction lending industry. You may contact Will at 303.925.2078 or [email protected]
3
been known to have a borrower sign a number of blank
draw requests which the contractor will later submit when
a particular stage of construction is completed. In an
effort to mitigate risk, the lender should consider adding
a provision in the CLA that the lender is not responsible
for ascertaining the genuineness or authenticity of the
signatures or documents submitted pursuant to a draw
request.
Pitfalls of Construction Loan Agreements
(cont’d)
manner; (vi) bearing the risk of all loss related to
the project; (vii) complying with applicable laws in
performing the work; (vii) not moving in or otherwise
occupying the structure until the construction loan is
paid off; (viii) obtaining and maintaining applicable
insurance coverages; (ix) allowing the lender and its
agents access to the property for purposes of performing
inspections; (x) assuming responsibility for completion
of the work per the plans and specifications; and (xi)
assuming responsibility for the timely completion of the
project. 11.Signature Line. The lender should be aware that some
courts have held that for a contract to be legally binding
on the parties, there must be a statement of the parties’
intent to be legally bound by the terms and conditions
of the agreement. As such, the lender should consider
adding language of the parties’ intent to be legally bound
by the terms and conditions of the CLA. 8. Liens & Encumbrances. An inherent pitfall with any
construction project is the filing of liens and encumbrances.
A provision making the borrower responsible for paying,
discharging and satisfying all liens and encumbrances that
may be filed or made of record relating to the property
can be an effective risk mitigation tool. The above is not intended to be a comprehensive list of
all the pitfalls or safeguards a lender should consider when
drafting a CLA. Rather, it is intended to provide some
illustrative examples of how a properly drafted CLA can
be used as an effective risk mitigation tool. This comments
contained in this Article are not intended nor should they
be construed as providing legal advice on the drafting of
CLAs or the legal impact or enforceability they may have in
a particular state or jurisdiction. You should consult with an
attorney before drafting or making any changes to a CLA.
9. Lender Inspections. Performing visual site inspections of
the work in place and materials on site as a condition of
a draw request is one of the most important safeguards
available to a construction lender. It can also be one of
the greatest areas of potential exposure to legal claims
from the borrower. In an effort to mitigate this exposure,
the lender should consider including a carefully drafted
inspection provision that protects against a borrower
claims for failing to inspect or negligently performing
inspections. The inspection provision may contain a
borrower acknowledgement that inspections, if made by
the lender, are for the benefit of the lender only to protect
its security interest in the property and are not intended
nor should be relied upon by the borrower. An axiom
of this provision is that the borrower is in contract with
the contractor and the borrower has the responsibility
to inspect the work and ensure it is completed in
compliance with the construction contract. A statement
that inspections are intended to be visual inspections of
the project that do not certify or imply compliance of
the work relating to: (i) the plans and specifications; (ii)
governmental zoning regulations or building codes; (iii)
completion of a particular stage of the construction work;
(iv) the quality, condition of materials or other matters
outside the scope of the inspection; (v) the adequate or
proper use of loan proceeds; or (vi) a belief or guaranty
that sufficient funds remain in the loan to complete the
work has been found effective in minimizing a lenders
potential legal exposure. Be a Part of Narcl!
NARCL is a nonprofit national
trade association representing
financial service providers in the
residential construction industry.
The Mission is to provide
education, information, policy
development, development of standards & practices for the
benefit of consumers, lenders, investors and others in the
residential construction community.
An “ALL MEMBER” conference call is hosted each
quarter at 2:00PM Eastern Time (1:00PM Central Time,
noon Mountain Time, 11:00AM Pacific Time). The call is
also open to any interested parties. To participate, please email
Executive Director, Richard Nirk at [email protected].
2009 Call Schedule:
• January 28, 2009
For more information on NARCL contact:
10.Fraud. Typical types of fraud in construction projects
include the use of forged signatures on draw requests
and lien releases and the use of forged or altered invoices
that may be provided to the lender from the contractor
and/or borrower. Less than honest contractors have also
NARCL, Attn: Membership
5445 DTC Parkway, Suite P-4
Greenwood Village, CO 80111
email: [email protected]
www.narcl.org
4
Housing-Crisis Grants Force Cities to Make Tough Choices
By Michael M. Phillips and Bobby White, The Wall Street Journal 13
AVONDALE, Ariz.—In this Phoenix
suburb, two townhouses stand vacant, filled
with trash and abutting an empty neighborhood
swimming pool covered with graffiti. But to
Gina Ramos Montes and other city officials, the
dilapidated properties look promising.
As part of the $4 billion Neighborhood
Stabilization Program authorized by Congress
in July, Avondale is set to receive $2.5 million to
redevelop neighborhoods blighted by abandoned
and repossessed homes.
The money, figured Ms. Montes, director of
neighborhood and family services, could be used
to refurbish the townhouses, fill in the pool and
build two additional rental units for low-income
families. The hitch: Such a project would eat up
a quarter of the city’s $2.5 million grant, leaving
roughly 2,600 other Avondale homes in bank
hands or about to enter foreclosure.
“It was going to be difficult—regardless of
how we split up the money—to turn around
neighborhoods with the limited funds that we
have,” said Ms. Montes while touring Avondale last month.
“It’s the nature of this problem. It’s overwhelming.”
foreclosure rate is one of the highest in the country. The
county even sent a delegation to California’s state house to
lobby for the cash. In the end, Merced will receive no federal
money directly and will instead get $7 million of the state’s
allotment.
The federal stabilization program is barely up and
running. But already, many states and localities are frustrated
by the small sums involved and how the Department of
Housing and Urban Development is allocating the grants.
The problems are an indication of how federal efforts to halt
the foreclosure crisis have proven inadequate to the task.
“I have a big problem with this entire thing,” said
Ellie Wooten, mayor of the city of Merced. “I just don’t
understand.”
In contrast, San Bernardino County, in southern
California, has a lower foreclosure rate of 9.6%. But because
San Bernardino has four times the population of Merced
County, it will receive $8 million directly and another $15
million from the state.
Nationwide, some 5.2 million homeowners are expected
to lose their houses between 2008 and 2010, according to
Economy.com, a research firm.
HUD recently announced allotments for 308 cities,
counties and states. Using a formula based on population,
foreclosures and the concentration of subprime mortgages,
HUD divvied up the money in grants ranging from $2
million for Pittsburgh to $32 million for Los Angeles. The
formula has led to some disparities. California, with 560,000
foreclosures, will receive $529 million, including grants to
state and local governments. Meanwhile, Florida, which has
half as many foreclosures, gets $541 million.
Brian Sullivan, a HUD spokesman, says the agency acted
fairly by directing money to certain cities and counties and
allowing states to pass on grants to localities that HUD has
overlooked.
Rep. Barney Frank, a Massachusetts Democrat and one
of the program’s main advocates on Capitol Hill, said in an
interview that it “would have made a bigger difference if
there were more money.” He initially pushed for $15 billion.
Officials in Merced County, Calif., with a population of
245,000, thought they would get a share because its 12.5%
continued on page 9
13 Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved. Used by Permission. Write to Michael M. Phillips at [email protected] and Bobby White at [email protected]
5
10th Anniversary SSCL Dishes
in the Big Easy!
The seminar commenced with a Keynote presentation
by “Category 5 General,” U.S. Army Lieutenant General
Russel L. Honoré, former Commander of Joint Task
Force Katrina. His pointed, no-nonsense sensibility and
unprecedented experiences spoke to the importance of the
events that occurred following Hurricane Katrina.
Construction lenders, attorneys, and other industry
experts assembled in New Orleans’ French Quarter for the
distinctive 10th Anniversary Strategies seminar December
2–4, 2008 at The Ritz-Carlton, New Orleans.
A session on the Economic Forecast followed presented
by Doug Duncan, VP and Chief Economist, Fannie Mae.
Rick Nirk, Executive Director of the National Association
of Residential Construction Lenders, then presented timely
information on the “Current Impact & Future Outlook for
Secondary Marketing of Construction Loans.”
For the first time, the SSCL event featured a preconference service day, themed “Big Hearts in the Big Easy,”
comprised of a guided tour and a Habitat for Humanity
build in the Hurricane Katrina–
devastated Lower 9th Ward.
After a day of service to New
Orleans, the evening Welcome
Reception greeted attendees
with unmistakable southern
charm. Attendees networked
while enjoying tunes by the Bill
Horaist Jazz Trio and specialty hors
d’oeuvres including New Orleans’
famous king cakes.
The afternoon sessions began with the “Current State
of Construction: Where Are We Headed?” by Jack Haynes,
EVP, National Builder Division, Countrywide Home
Loans Inc. and Tim Sullivan, President, Sullivan Group
Real Estate Advisors. The group then participated in an
interactive discussion of the top issues facing residential
and commercial lenders, and ended with a discussion of
“Tying up Legal Loose Ends: The Do’s and Don’ts of Loan
Modification & Untangling Legal Provisions” led by Marc
Lifset, McGlinchey Stafford PLLC and Chip Sander of
Sander, Ingebretsen & Parish P.C.
After these informative discussions and lectures, guests
joined the 10th Anniversary “Joie de Vivre” SSCL Cocktail
Reception. The New Orleans–style party featured the big
sounds of The Regal Brass Band and entertainment by local
mystic Madame Engeren, and the presentation of a cake to
commemorate ten years of the SSCL.
Left: Keynote Speaker Lt. Gen.
Russel L. Honoré.
Below: Speaker Doug Duncan of
Fannie Mae.
The next morning began with the witty presentation
by Special Guest Speaker, Marty Clarke, Author and
6
Up Construction Lending Topics
“SSCL is a perfect and enjoyable networking opportunity. You walk away with greater knowledge and relationships while
taking advantage of The Ritz-Carlton. Doesn’t get any better.”
—SSCL Sponsor, Sonja Carlson, Permit Place
Leadership Coach. A complimentary copy
of his Communication Land Mines: 18
Communication Catastrophes and How to
Avoid Them was a gift to all attendees.
Following the personal booksigning session,
SSCL attendees had the opportunity
to break out into separate roundtables,
choosing between “Successful Solutions
in a Tumultuous Market: Project Review
for Residential Lenders” presented by Carl
Saxe, Team Saxe, and “The Anatomy of
Commercial Projects: Cost Analysis &
Review” led by Tom Hallock, Former SVP
of Construction Lending, Countrywide
Bank.
Next were breakout sessions
covering “Plots and Ploys of Residential
Appraisals: Outsourcing and Regulatory
Changes” by Wayne Pugh, President,
Appraisal Institute, and “Under the
Microscope: The Inexact Science of
Commercial Appraisals” presented by
Charles Elliott, President, Elliott &
Company Appraisers. As the day came
to a close, the group reconvened for
the “Regulatory Woes: Bruised Assets
and Egos” session led by Courtney
Guyton McBurney, Attorney, Alston
& Bird LLP.
continued on page 8
Above: Conference attendees in front of
the SSCL Habitat for Humanity house
Right: Special Guest Speaker
Marty Clarke
“Very well organized, valuable information from presentations and ability to visit and share with other people in the industry”
—Mary Jo Mews, US Bank Home Mortgage
Above: Granite’s President,
Bill Cobb, with the SSCL
10th Anniversary cake.
10th Anniversary SSCL Dishes Up
Construction Lending Topics in the Big Easy
(cont’d)
The SSCL Exhibit Gallery offered attendees a chance to
review the services of our Bronze, Silver, Gold, and Platinum
level sponsors. Sponsors included National Mortgage
News, NARCL, Louisiana Disaster Recovery Foundation,
McGlinchey Stafford PLLC, AccuDraw, Permit Place,
Secondary Marketing Executive, Commercial Mortgage
Insight and Sander, Ingebretsen & Parish, P.C.
“As with the past SSCL events I have attended, the
10th anniversary meeting held true; the SSCL is the
single source for construction lending information.”
—Mike Chappelle, Wells Fargo
This year’s SSCL seminar supported New Orleans
through The Ritz-Carlton’s “Meaningful Meetings” program,
donating 10% of room proceeds to Habitat for Humanity.
Granite Loan Management also contributed 10% of the
total event proceeds to
the Louisiana Disaster
Recovery Foundation.
The SSCL 2009 will take place in Colorado with the date to
be determined. Speaker presentations and follow-up photos of the
event are now available on our website at www.SSCLseminar.com.
For more information about the SSCL seminar and how you can
get involved, please contact a conference coordinator directly at
[email protected] or 866.710.4099.
Right: Marty Clarke signs copies of his book
for SSCL attendees.
Below: Granite’s Penny Roach with Lt. Gen.
Russel L. Honoré
“This is a
terrific source
of current
information I can
use to become a better lender.”
—Brent Pitcher, Mountain
America Federal Credit Union
8
Housing-Crisis Grants Force Cities to Make
Tough Choices
The bust quickly spun in other directions. Construction
workers lost jobs and residents cut back on spending. City
sales-tax revenue plunged 19% over the first nine months of
this year, prompting the government to eliminate 29 of 500
positions, with more layoffs expected this month.
(cont’d)
At Los Arbolitos subdivision, the homeowners
association, which keeps the grass green and the playground
equipment operational, has seen its usual $18,000 monthly
revenue plummet 35% as residents stopped paying their
$57 monthly dues.
But, he added: “Four billion dollars is better than nothing. I
hope it will help cities by reducing the amount of foreclosed
houses that are attracting vandals and not paying taxes.”
Some 5.2 million U.S. homeowners are expected to lose
their houses between 2008 and 2010. In Avondale, Ariz.,
local officials are scrambling to keep the neighborhoods left
behind.
People are “losing interest in beautification of the
neighborhood,” says association board member Peter Carlone,
an energy engineer. The indifference makes neighborhoods less
appealing to new buyers, suppressing prices and exacerbating
the crisis, Mr. Carlone said.
Not long ago, Avondale was at the epicenter of the
housing boom. Between 2000 and 2005, its population
doubled to 70,000, driven by soaring home prices and jobs
in the construction industry.
The vastness of Avondale’s foreclosure problem puts
city officials in a bind. They could concentrate the $2.5
million they expect from the federal government in one or
two neighborhoods and hope to reverse their declines. Or
they could spread the money more widely, realizing that it’s
unlikely to achieve much in any one area. They’re choosing
the second path. “There just isn’t enough money to do
concentrated revitalization,” said Andrew Rael, who manages
the housing grant for the city.
A flat city within sight of Estrella Mountain, Avondale
issued construction permits for 2,200 new houses in middleclass enclaves tucked amidst cotton fields. When the 236
plots at a development called Donatela went on sale two
years ago, eager shoppers camped out overnight just to enter
a lottery for a chance to buy one. Then the crash came.
Today, one in nine homes at Donatela is in foreclosure or
close to default, according to city records.
City officials calculate federal money could put residents
into roughly 40 to 60 vacant houses across 16 different
neighborhoods—most of which have foreclosure rates above
the 8.4% city average.
The sign at another subdivision, Starlight Trail, reflected
buyers’ ravenous demand for new homes in Avondale:
During the construction boom, between 2004 and 2006, the
sales pitch changed from advertising homes starting in the
$150,000s to advertising homes from the $250,000s.
For new subdivisions, the city wants to entice buyers by
subsidizing down-payments, closing costs and renovation
expenses. The structures are solid, but the interiors are often
damaged. Officials suspect that buyers might need a financial
incentive before they’ll take the plunge. “They’re watching
the TV,” said Rogene Hill, the assistant city manager.
“Everybody is getting bailed out. ‘Why should I have to buy
a refrigerator?’ It’s emotional, not rational.”
Now the builder is advertising new homes in Starlight
Trail starting in the $150,000s again—even though more
than 22% of the existing houses there are in foreclosure or
close to it. City inspectors now find abandoned homes in
the development stripped of the wiring, plumbing, door
handles and appliances. In Waterford Square, the hardest-hit
development in the city, more than 30% of homes are either
in foreclosure or severely delinquent.
In Old Town Avondale, where 134 houses are in
foreclosure, city officials plan to convert four homes to lowcost rentals to meet the federal requirement that the program
aid the very poor. In addition, the city would like to buy
houses that are beyond salvation, tear them down and donate
the lots to charities willing to build low-income housing.
Oak Park’s developer cleared 52 lots, paved roads,
installed sewers and power lines, and built four luxury model
homes. Workers were cutting trenches for the in-ground
sprinkler systems when the bank repossessed the entire
property, according to the city and Cindy Bourassa, a former
employee of the developer.
Mr. Rael says the city will try to negotiate the best deal it
can with the banks that own the properties. But he worries
that investors might swoop in, buy the houses for $20,000 or
$30,000 apiece and rent them to families for $400 or $500
a month. “It does occur to me that we are in a race with the
slumlords,” he said.
“They just went to lunch and never came back,” said city
code-enforcement officer Dave Wood. The model homes
stand alone and empty in a desolate expanse of driveway curb
cuts and dead sod. A New York investor has purchased the
houses and land, hoping the market will turn around, said
Ms. Bourassa, who represents the new buyer.
continued on page 11
9
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10
Housing-Crisis Grants Force Cities to Make
Tough Choices
(cont’d)
Mr. Wood, the code inspector, has scoped out 37
potential candidates for demolition in Old Town. But the
grant is only enough for the city to tear down four. Given
the likely lead and asbestos hazards, city officials figure that
buying and razing four houses alone will cost $300,000.
Last month, Mr. Wood, Mr. Rael and Ms. Montes, the
head of neighborhood services, cruised Old Town trying to
decide which houses merited destruction. At one empty,
peach-colored, stucco rambler, Mr. Wood gently nudged
open the door with his foot and immediately spotted
drooping floorboards in the dining room. One bedroom was
trimmed with pictures of Disney princesses.
“Demolition, Dave?” Mr. Rael asked him.
But the neighborhood isn’t among those eligible for the
federal program; the foreclosure rate isn’t high enough. “It
would be nice to have more targeted neighborhoods if we
had more money,” says Mr. Rael. “Two-point-five million
goes pretty quick.”
“Oh, yeah,” Mr. Wood answered. “This wouldn’t even
be a question. This floor is probably being held together by
the tile.”
Across the street from the rear parking lot of Ed’s Fish
& Chips, the officials walked through another house where
a trampoline lay collapsed in the back yard and a stuffed
purple rabbit slumped on the bedroom floor near copies of
“Gente Latina” magazine. Next to a large pile of dirt on the
kitchen floor sat a box of pay stubs from Luty’s Landscape
Maintenance.
Corrections and Amplifications:
The foreclosed house that this article cited as having an
assessed value of $50,100 was assessed for $63,500 in 2007,
at the time a finance company gave the owner a $103,000
loan. The article incorrectly reported the assessed value as
$50,100, which is the property’s 2009 assessment.
“Eight dollars an hour, 40 hours a week,” Mr. Rael said,
looking through the detritus. “That’s how low-income people
live. The lives of people left in a shoebox.”
Place Your Ad Here!
One house the officials would love to tear down is located in
an area of the city that housed migrant farm hands. It’s a blue,
wooden, 576-square-foot shack on a bare dirt lot. The owner,
according to the city officials, was an unemployed woman with
a history of drug abuse. In February 2007, at a time when the
house was assessed at $50,100, a finance company gave her a
$103,000 second mortgage on the house.
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When the city officials arrived to take a look at the other
late last month, the gas man was shutting off the supply. “Are
you taking the meters?” Ms. Montes asked.
CLN is offering advertising space in its upcoming editions.
With a circulation of over 5,000 copies, your message
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“They’re stolen, gone,” the gas man replied.
Tacked to the house was a note from the building codeenforcement officer: “Condemnation Notice: Unfit for
Human Occupancy.”
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Next door was another boarded-up house. Further down
the street, a church was holding an estate sale. Men hauled
the pews out of the front door.
11
In This Issue:
Upcoming Events
- Colorado Mechanics’ Lien Laws
- Pitfalls of Construction Loan Agreements
Please Visit Us at These
Upcoming Events:
- 10th Anniversary SSCL Dishes Up Construction
Lending Topics in the Big Easy!
The Georgia Lenders Quality Circle
January 11–14, 2009
Westin Savannah Harbor Golf Resort and Spa
Savannah, Georgia
MBA’s Commercial Real Estate Finance (CREF)/
Multifamily Housing Convention & Expo 2009
February 8–11, 2009
Manchester Grand Hyatt
San Diego, California
Construction-at-a-Glance
Total Monthly Housing Starts*
Oct. 07
1,275
Oct. 08
884
531
Multifamily
YTD Permits-Single Family*
316
324
811
460
YTD Permits-Multifamily*
371
248
Monthly New Home Sales*
723
4.8%
433
6.5%
One Unit
2009 Strategies for Success in
Construction Lending (SSCL) seminar
in Colorado!
Details to be announced soon
at www.SSCLseminar.com.
-Housing-Crisis Grants Force Cities to Make
Tough Choices
Unemployment Rate
791
*Thousands of Units
Source: U.S. Bureau of the Census, Construction Reports, Series C-20, Housing Starts. U.S. Bureau of Labor Statistics.
10770 E. Briarwood Ave.
Suite 280
Centennial, CO 80112
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