has historically been attractive to real estate investors, due in large part to
the protection provided by Arizona’s anti-deficiency statutes. Codified in
-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;
property is limited to and utilized for a one-family or two-family dwelling;
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.)
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
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
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.
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
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
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.