Thursday, February 7, 2013

Odinet on The Rise of Super Priority and the Fall of the Recordation Doctrine in Real Estate

Odinet_ChristopherChris Odinet (Phelps Dunbar) has posted The Rise of Super Priority and the Fall of the Recordation Doctrine on SSRN.  Here's the abstract:

The recordation doctrine serves as a principal backbone of real property transactions. We rely upon it to ensure that there is stability in the market and that parties are diligent and careful to establish and protect their rights. The system rewards the conscientious and the cautious, and punishes the tardy or the unwary. We make exceptions, however, for those right-holders whose activities serve a special societal purpose. The most prevalent exception is in the collection of real property taxes. The failure to pay property taxes results in a lien against the property, and such a security right is superior and deemed to prime any other security interest in the property, even those which have been previously established and recorded. We do this because public policy dictates that timely payment and prompt collection of property taxes is essential to the efficient operation of government and the common good. However, the ever-growing political movement to create public-private partnership in the development of real estate has caused an expansion of this general exception. In order to help individuals finance infrastructure and other foundational improvements in the development of private real estate, cities and municipalities have created special taxing districts that give the developer the ability to charge assessments on the property over time in order to pay for the improvements. By legislation, these assessments are given the same lien priority as real property taxes, priming any pre-exiting security rights of the developer’s lenders. Over the past several years, special taxing districts have been created across the country to fund a variety of improvements, including utilities, green infrastructure, sustainability, and transportation projects. However, the additional assessments add to the holding cost of the property and diminish any pre-exiting security rights. As a result of the massive decline in the housing market, many developers have been unable to sell their properties and the special districts have gone into default. For instance, between 2003-2008 Florida has created 438 special community development taxing districts, which have issued a total of $6.5 billion in municipal bonds to finance their improvement projects. Of these, over 168 districts have defaulted on nearly $5.1 billion worth of bonds. The continued rise of these special taxing districts, despite their significant failures, necessitates a reevaluation of our understanding of the core purposes of the public recordation doctrine, as well as the fairness to the position of secured lenders who invest in these real estate developments on the front end. This Article argues that we should reconsider the widespread delegation of super priority to these special taxing districts and calls for a closer examination as to if and when the government should allow private projects to be clothed with public powers, and, if and when they are allowed, how to better screen, evaluate, and monitor them.

Steve Clowney

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