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Real Estate Law | June 2014 (Rev. January 2015)

The New State of Arizona's Anti-Deficiency Protections

Legislation effective January 1, 2015, weakens Arizona anti-deficiency protection for developers and for private parties who are building a home

Arizona has historically been attractive to real estate investors, due in large part to the protection provided by Arizona’s anti-deficiency statutes. Codified in A.R.S. §§ 33-729(A) and -814(G), Arizona’s anti-deficiency statutes do not permit a lender to pursue the borrower for a deficiency after a foreclosure or trustee’s sale – that is, the amount that remains owing on the loan after the sale – as long as the following criteria are satisfied:

  • the property is 2.5 acres or less;

  • the property is limited to and utilized for a one-family or two-family dwelling; and

  • in some cases, the loan was given to secure the payment of the purchase price of the property.

While that seems straightforward, over the last 25 years Arizona courts have wrestled with interpreting what exactly it means for the property to be "utilized for a ... dwelling." (An equally compelling question for the courts has been what qualifies as purchase money, but that is a topic for another time.)

Court Decisions

In 1991, the Arizona Supreme Court took the position, in Mid Kansas Federal Savings v. Dynamic Development Corp., that the property was not utilized as a dwelling if it was owned by a developer that was going to build it as a dwelling but had not yet built it to such a point that it could be occupied.

However, in 2011, the Arizona Court of Appeals changed the standard, in M&I Marshall & Ilsley Bank v. Mueller, and determined that the property will be deemed to have been “utilized as a dwelling” as long as the owner intended to occupy the home under construction in such a manner; in other words, the home does not need to be ready for such a use in order to qualify. The Arizona Supreme Court affirmed that decision in 2012.

Then, in 2014, the Arizona Court of Appeals limited the new standard, in BMO Harris Bank v. Wildwood Creek Ranch, by holding that the intent of the owner will not qualify the home as being “utilized as a dwelling” if construction has not commenced. Thus, as of 2014, Arizona case law established that a property will be deemed “utilized as a dwelling” for anti-deficiency purposes as long as the intent was to utilize it as such and construction had begun.

2014 Legislation

All of that has changed. During its 2014 session, the Arizona Legislature passed, and Governor Brewer signed into law, H.B. 2018, which revised the aforementioned A.R.S. §§ 33-729(A) and 33-814(G). Specifically, the new legislation aims to clarify what it means for a property to be “utilized as a dwelling” for anti-deficiency purposes. The new laws - A.R.S. §§ 33-729(C) and -814(H) - which went into effect January 1, 2015, provide as follows:

  • Property held by developers will not qualify, even if being developed as an otherwise qualifying property.

  • Property that is not substantially completed will not qualify, even if intended to be utilized as a dwelling.

  • Property that was never actually utilized as a dwelling will not qualify, even if completed and intended to be utilized as a dwelling.

In other words, in order for property to qualify as being “utilized as a dwelling” for purposes of anti-deficiency protections, it must be:

  • owned by a non-developer,

  • substantially completed,

  • intended to be utilized as a dwelling, and

  • actually utilized as a dwelling at some point.

For the everyday homeowner who is buying a pre-existing home, this change will have no impact. But for developers and for persons constructing a home rather than buying a pre-existing home, the anti-deficiency protection was weakened after December 31, 2014.

Of course, as with many new statutes, questions remain:

  • For a loan for which the application was made in 2014 but was not funded until 2015, under which standard will it be judged?

  • If a pre-existing loan is refinanced after December 31, 2014, will the borrower retain the pre-2015 anti-deficiency protections?

These are likely among the next wave of questions to be addressed by Arizona courts over the coming years.

Alex Baker represents clients throughout the Phoenix area, including north Scottsdale, Cave Creek and Carefree.