Published September 2005

Law prevents large profit
on some land sales

By John Wolcott
SCBJ Editor

Few land developers, real estate people or lenders may know about it, but Washington state added a new law this year to prevent property owners from windfall profits on the sale of land that was cleansed through public funds.

A new “super lien” — approved by the state Legislature this year and effective July 24 — applies only to certain abandoned properties once contaminated by meth labs or industrial wastes, and only if state funds were involved in clean up efforts.

While qualifying properties may be extremely limited, property owners and developers need to be sure they won’t be affected by those remote instances, according to Shannon Skinner, an attorney with Preston Gates & Ellis in Seattle.

“The state is just interested in protecting taxpayers money. The law makes sure a property owner is properly compensated for a land sale but that he doesn’t make a windfall profit at the taxpayers’ expense by selling off previously contaminated land that had little worth for some large amount after the state cleaned it up with public funds,” she said in an interview.

But it was Skinner, representing the Washington Mortgage Lenders Association, and Dwight Bickel of LandAmerica Title Insurance Co., on behalf of the Washington Land Title Association, who became involved in limiting the Department of Ecology’s original broad-brush approach to legislating the “windfall” issue.

Because of their involvement, legislators added amendment to protect property owned by a local government or a special purpose district, as well as property used solely for residential purposes with four or fewer units, unless the property was used for illegal drug manufacturing or storage.

The legislation permits DOE to file a lien for remedial action costs. This lien has priority in rank over “all other privileges, liens, monetary encumbrances, or other security interests affecting the real property” except for local and special district property tax assessments and mortgage liens recorded before liens or notices of intent to conduct remedial action are recorded under this statute.

If a mortgage or deed of trust is recorded before the DOE lien is recorded, or before DOE records a notice that it is about to clean up a property, then it has priority. Inserting “monetary” before encumbrances was intended to avoid having DOE’s lien be prior to easements, covenants, restrictions and other nonmonetary encumbrances.

In some cases, however, the DOE can obtain a super priority lien on the real property for which DOE has incurred remedial action costs. If DOE chooses to limit the amount of its lien to the “increase in the fair market value of the real property that is attributable to a remedial action” conducted by DOE, then the lien has super priority.

This super lien is prior to all “other privileges, liens, monetary encumbrances, or other security interests affecting the real property, whenever incurred, filed, or recorded,” according to the new law. The lien only applies to the property for which DOE has incurred the cleanup costs.

In addition, the lien only applies to abandoned property, land on which there has been no significant business activity for three years or on which property taxes are three years in arrears before DOE incurs cleanup costs.

The increase in fair market value is determined by subtracting the assessor’s value for the most recent year before the cleaning from the value after the work is done.

While the law is complicated, with exemptions and specific requirements for such “lien” and “super lien” situations, it is meant to protect property owners as well as mortgage lenders from exceptional circumstances that could affect mortgages, property tax payments and other debts.

Mortgage lenders can and do monitor payment of property taxes. In addition, after three years of delinquency in property tax payments, counties may foreclose their tax liens, which usually causes lenders to be aware of this problem. Lenders are unlikely to loan against property on which there has been no significant business activity, but the bigger issue for mortgage lenders, according to Skinner, is likely to be loans on property with business activity that later ceased, perhaps due to contamination issues.

Thus, it’s important for lenders to get appropriate Phase I and II reports to investigate the condition of property before making a mortgage loan as well as periodic monitoring of the borrower’s activities on the property. In addition, the lender will receive the DOE notices and have a chance to address issues with DOE before the lien is filed.

Intervention by Skinner and Bickel helped to make major changes in the original legislation, which provided for a super lien on the “facility,” which meant that the super lien might include properties in a “plume of contamination,” nearby land whose owners might have no knowledge of any contamination problems or clean up activities.

Also, before commencing remedial action on property on which a lien may be filed, DOE must provide notice to the property owner, mortgagees, lienholders of record and other persons conducting remedial actions at the property known to DOE, except for emergency remediation, in which case DOE has 30 days to provide notice.

Before filing a lien, DOE must give notice by certified mail to the property owner and mortgagees and lienholders of record, who then have a 30-day comment period.

If DOE receives comments, it must determine whether it has probable cause to file the lien. It may record the lien before the end of the comment period if it believes that “exigent” circumstances exist, such as imminent bankruptcy or sale.

In its original form, Skinner said, the legislation would have potentially affected a broad spectrum of properties and made real estate transactions in the state much more difficult. As passed, however, the law deals with the narrow category of abandoned property on which DOE has incurred remediation costs. This makes it similar to laws in other states, which have proved to be workable over time.

Real estate lenders, owners and others dealing with real property in the state should be aware of the legislation to be better able to manage full range of risks, including the new risk of super liens that are associated with contaminated property in Washington, she said.

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