The Ohio Real Estate Blog

"Bad Boy" Guaranties Upended by Recent Court Decisions

noreply@blogger.com (Connie Carr) — Mon, 06 Feb 2012 13:00:00 +0000

Many commercial properties such as retail strips and apartment projects are financed with CMBS, or conduit, loans. These loans are structured so that the key asset mortgaged to the CMBS lender is owned by a single purpose entity (SPE) so that it's isolated from other liens and indebtedness other than typical trade payables related to the asset's operations. A key component of these loans is the lender's nonrecourse against the borrower and guarantors for deficiency balances absent an affirmative 'bad act' on the part of the borrower or a guarantor. These are commonly referred to as "bad boy" guaranties. And the assumption would be that some affirmative 'bad act' is required in order to trigger full recourse against the borrower and guarantors.

A couple of recent decisions in Michigan (one in state court and one in Federal district court) have turned this assumption in its head. One of the 'bad boy' acts is for the borrower to no longer be an SPE. CMBS lenders and rating agencies require SPEs to remain solvent and be able to pay its debts as they come due from its own assets. The courts in Michigan have interpreted this to mean that the insolvency does not have to result from an affirmative act or omission to act by the borrower or guarantor or anyone related to them in order to trigger the 'bad boy' guaranties. This expansive view allowed the lender to pursue the borrower and guarantors for the full deficiency balance on the loans after its foreclosure of the properties despite no bad act or failure to act on their part.

What does this mean?

For borrowers and guarantors on projects located in Michigan, it means:

if the mortgaged property is the victim of the bad economy, the resulting insolvency can be sufficient to trigger full recourse against the borrower and guarantors;
a nonrecourse loan subject to 'bad boy' triggers is meaningless, and borrowers and guarantors needs to be aware of their real exposure;
when faced with a property that is kicking off sufficient cash flow, a guarantor may want to inject additional equity to prevent a trigger of the guarantor for the full loan amount;
when faced with more recourse liability than bargained for, a guarantor may face restatement of its financials as full recourse guaranties are accounted for differently and may itself be thrown into insolvency as a result;
there is no incentive for a borrower or guarantor to cooperate with the lender in a foreclosure unless a release will be a part of the bargain, which a lender may or may not be willing to give; and
there is no incentive to work diligently to avoid triggering the "bad boy" provisions, as the borrower and guarantor are damned if they do and damned if they don't.

For the rest of us outside of Michigan, we need to be aware of the potential that courts in our jurisdiction will follow the Michigan courts' lead. These court decisions are the first to be decided on this issue. It is anybody's guess what will happen on appeal, but if the decisions stand, they will be included in lenders' briefs to other courts requesting full recourse on the guaranties.

The CMBS real estate loan market isn't doing so well right now and this will not help.
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FHA-Insured Loans for a Condo Unit? Maybe, Maybe Not

noreply@blogger.com (Connie Carr) — Mon, 30 Jan 2012 13:00:00 +0000

Back in the good old days (aka, pre-2008-09 financial collapse), a buyer with good credit could buy a condominium unit with less than 20% down by relying on private mortgage insurance. These days all we have are our memories.

As a seller, it is not enough to find a buyer willing to pay an acceptable purchase price. First, mortgage lenders have to be satisfied with the appraisal of the condo unit. I've written previously about the problems with appraisals today and it's negative impact on transactions.

Second, the buyer has to come up with an adequate down payment. Many buyers have the cash flow to handle the mortgage payment but coming up with a big enough down payment can be a challenge.

One way out of the wilderness is for the condominium development to seek approval with HUD for FHA-insured financing. As an FHA-approved condominium, buyers of units in the approved condominium development can obtain FHA-insured acquisition financing with its lower down payment requirements.

Recently, the FHA changed its rules for condominiums, who must now recertify 2 years as an FHA-approved development. The application to recertify must be made within 6 month of the condo's current expiration date. A failure to timely reapply will result in having to go through the full application process.

For more information, click here to search the FHA web site for condominium projects that have applied, including both approved and rejected applications. Click here to access HUD's Condominium Project Approval and Processing Guide.
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Senate Bill 117 Changes Ohio Title Law

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 23 Jan 2012 05:01:00 +0000

Reprinted with Permission from Guardian Title & Guaranty Agency, Inc. and Kim McNally, Esq.

Big changes are on the horizon for some Deeds that would previously have been
deemed a void conveyance.

Governor Kasich signed SB 117 into law in December, 2011 which will take effect on March 22, 2012. Among other things, the greatest impact for title agents and real estate practitioners is providing that a conveyance into a Trust, rather than to a Trustee of a Trust will not be deemed as a void conveyance on its face. In the past, a conveyance into a Trust was deemed to be void ab initio, as if the Deed had no legal effect at all. However, this is no longer the case under the new statute.

In order for the new curative statute to apply and for a Deed into a Trust to be valid, the Trust must have been in existence at the time of the original conveyance into the Trust, and a Memorandum of Trust must be recorded. In addition, the statute will be retroactive in effect to cure previous conveyances that would have otherwise created a title defect. However, the statute will not set aside previous conveyances made subsequent to any defective deed that would otherwise be cured by this statute.

The curative nature of this statute will be codified into ORC 5301.071(E) and will read as follows:

“No instrument conveying real property, or any interest in real property, and of record in the office of the county recorder of the county within this state in which that real property is situated shall be considered defective nor shall the validity of that conveyance be affected because of any of the following:

(E)(1) The grantor or grantee of the instrument is a trust rather than the trustee or trustees of the trust if the trust named as grantor or grantee has been duly created under the laws of the state of its existence at the time of the conveyance and a memorandum of trust that complies with Section 5301.255 of the Revised Code and contains a description of the real property conveyed by that instrument is recorded in the office of the county recorder in which the instrument of conveyance is recorded. Upon compliance with division (E)(1) of this Section, a conveyance to a trust shall be considered to be a conveyance to the trustee or trustees of the trust in furtherance of the manifest intention of the parties.

(2) Except as otherwise provided in division (E)(2) of this Section, division (E)(1) of this
Section shall be given retroactive effect to the fullest extent permitted under Section 28 of Article II, Ohio Constitution. Division (E) of this Section shall not be given retroactive or curative effect if to do so would invalidate or supersede any instrument that conveys real property, or any interest in the real property, recorded in the office of the county recorder in which that real property is situated prior to the date of recording of a curative memorandum of trust or the effective date of this Section, whichever event occurs later.”

Guardian Title & Guaranty Agency, Inc.
Founded in 1962, Guardian Title is a locally owned and operated business offering residential and commercial title and escrow services through Guardian Title and Guaranty Agency Inc. Other separate entities of Guardian Title are Guardian Equity Services and Guardian Exchange Services. Guardian Equity Services provides fast and accurate service to lending institutions for their equity loans and offers limited lien searches, junior loan policies, flood certifications and evaluation products. Guardian Exchange Services, a qualified intermediary providing exchange services to real estate investors, offers 1031 exchanges, construction exchanges and reverse exchanges. Guardian title was recently honored in the “North Coast 99” - Honoring 99 of the Best Places to Work in Northeast Ohio. Contact Guardian Title at: 7550 Lucerne Drive, Suite 310 Middleburg Heights, Ohio 44130-Phone: (216) 898-4925-Fax: (216) 898-4959 -e-mail: contact@guardiantitle.com

How Engineered Cost Segregation Can Help Your Estate Plan

noreply@blogger.com (Connie Carr) — Tue, 17 Jan 2012 13:00:00 +0000

Ok. The info below isn't exactly real estate law, although it has a strong real estate component. However, how we own our real estate and account for it, taxes and estate planning are all intertwined. The information below can be quite useful for owners of commercial real estate; particularly those who are small family-owned businesses. Thanks to Duffy+Duffy Cost Segregation Services for supplying this information.

The two key benefits of using cost segregation in the estate plan are the acceleration of noncash depreciation and the ability to avoid potential depreciation recapture tax. Both dramatically reduce taxes(through deferrals), and have a significant and positive impact on cash flow.

For any income producing commercial property purchased, constructed, inherited, or passed through an estate post-1986, an engineered cost segregation study report can generate a significant Sec. 481(a) Depreciation Adjustment in the current year. IRS Rev. Proc. 2002-9 and 2002-19 provide authority to claim this Sec. 481(a) Adjustment in the current tax year, by automatic consent, without amending tax returns. Compared to straight-line depreciation without engineered cost segregation, cost segregation studies typically result in double the noncash depreciation deductions over the first 15 years of ownership.

Estate Example:

Let's assume that in 2004, a husband and wife purchased a $1M building, and capitalized the asset at the statutory 39 year life, straight-line depreciation method. They learned in 2010 about accelerated depreciation with cost segregation. They hired cost segregation professionals who identified 34% of the $1M asset as IRC Sec. 1245 Assets and Land Improvements that were 5 Yr, 7 Yr, or 15 Yr Assets, and claimed a $300,000 Sec. 481(a) Depreciation Adjustment in 2010 by Automatic Consent of the IRS.

In 2011, the husband died and the wife received a step up resulting in a new basis of $2 million. Updating and Applying engineered study results against the new basis might identify approximately $680,000 of additional shorter life components to be accelerated over the ensuing five years, deferring significant income taxes for the wife.

Upon the death of the wife, the property would receive a new basis of the current value at that time, which may be $3 million. The cumulative result of the application of cost segregation to this point yields approximately $980,000 that is never recaptured through gain on sale. The heirs or children would then be able to have the cost segregation study updated using the new basis and defer income taxes with the accelerated depreciation.

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CREOBA Webinar Training -- Commercial Short Sales and more

noreply@blogger.com (Connie Carr) — Wed, 11 Jan 2012 13:00:00 +0000

CREOBA is sponsoring 3 professional webinar training programs--Commercial Short Sales, Note Sales 101 and Advanced Note Sales 201.

The first webinar, Commercial Short Sales is scheduled for tomorrow, January 12, 2012 from 9 am to noon PST. The webinar will cover how to package and negotiate the transaction.

The second webinar, Note Sales 101--Learn to Sell or Buy Non-Performing Loans, will be held on Thursday, January 19, 2012 from 9 am to noon PST. The webinar will cover how banks syndicate notes, important items to consider when purchasing a non-performing note and how the CMBS market securitizes notes.

The final webinar, Advanced Non-Performing Loan Sales, will be held on Thursday, January 26, 2012 from 9 am to noon PST. The webinar will cover how to negotiate the purchase of a commercial property non-performing loan and reviews the documentation necessary to complete the transaction. This webinar is more advanced and assumes the participant understands how banks syndicate commercial mortgages and a basic understanding of the CMBS market.

Cost of each webinar is $99 for members and $149 for nonmembers.

Click here for more information.
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The (Real Estate Finance) Year in Review and Forecast for 2012

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 09 Jan 2012 05:01:00 +0000

A Perspective from Mike Cantwell, a Principal of Johnson Capital
(re-printed with permission from Mr. Cantwell)

Banks continued their lethargic return to the market with more loans moving off the balance sheets than being added. The Mortgage Bankers Association estimates that there is $2.4 trillion of commercial debt outstanding as of Q3 in the United States. Banks hold 33% of that total, so they are by far the most significant source of capital for commercial real estate. Banks will have lost over $100 billion in their commercial loan portfolios through this year.

CMBS lenders started the year with great optimism and retooling for a return to higher volumes. After a slowdown in the spring and early summer due to legacy loans, this sector was brought to its knees in July. S & P literally stopped CMBS lending in its tracks by the untimely and questionable withdrawal of its rating on the day before a securitization was to settle. CMBS spreads ballooned out to levels that were 100 to 150 basis points wide of Life Company and bank lending. As of December, we are finally seeing spreads come in and some meager volume reemerge. CMBS looks like it will finish with approximately $32 billion of closed transactions, which is up from 2010, but well below the pace that was anticipated at the beginning of 2011.
Life Insurance lenders enjoyed a record year in terms of production. With a total volume for 2011 approaching $75 billion, they were the mainstay of our business. This record level of production was achieved while maintaining low LTV levels and cherry picking only the most stable of assets used for collateral. Part of this record volume can be traced to the lack of competition from banks and CMBS as well as borrower willingness to de-lever.

Agencies: Freddie Mac and Fannie Mae remain solid and are producing loans at near record volume levels. Their multifamily delinquency rates remain at less than .5% and this sector of their business is solid and profitable.

New Construction:Multifamily continues as a good news story with demand projected to continue increasing for years to come and supply lagging behind demand. Rents and values are up and we expect to see a large increase in the number of multifamily permits as well as investment sales activity. Lenders consider apartments to be the preferred asset class. With new starts projected at 188,000 units across the country, opportunity exists for construction lending with our FHA, 221 d4 program as well as the life companies who are now providing low leverage, construction/permanent financing. Other than build-to-suit projects, expect to see little or no new construction of office buildings, warehouses or retail facilities.

Refinancing:Interest rates remain at all-time low levels and we can expect to see relatively flat interest rates for 2012. Only $101 billion of commercial loans mature in 2012, so the real onslaught of refinancing is projected to occur in 2015-2017. Look for banks to continue to move loans off of their books which should be another good source of refinancing opportunities. Also, we expect CMBS to re-emerge as a factor. Freddie Mac, FHA and Fannie Mae continue to offer very attractive rates and terms that most life companies and banks cannot match.

Investment Sales:Commercial investment property sales are surprisingly slow and have not reacted as expected to the low interest rate/cap rate environment. CRE sales are up over 2010 but the total is something close to 30% of the peak years’ activity (’05-’07). However, the trend is up and we expect 2012 to produce a continued increase in sales volume. A great deal of this activity will be a function of the political environment toward the end of the year and the health of the European Union economies.

2012 promises to be just as volatile and unpredictable. However there is good news on the horizon. Interest rates will remain near record low levels. And the top 30 life insurance companies report a collective increase of 20% in their 2012 lending programs. Founded in 1987,

Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen locations nationwide. Mike Cantwell, who has built his 29-year career in mortgage banking and commercial real estate in Denver, is in charge of new business production in Johnson Capital’s Denver office. He is also responsible for the mortgage loan servicing department. To learn more, email: mikecantwell@johnsoncapital.com.

CLE Update: Upcoming Real Estate Seminars

noreply@blogger.com (Connie Carr) — Fri, 06 Jan 2012 13:00:00 +0000

1. Fundamentals of Construction Contracts: Understanding the Issues--sponsored by Lorman Education Services. The seminar will be held on February 16, 2012 at the Holiday Inn Worthington, 7007 North High Street, Worthington, Ohio 43085, from 8:30 am to 4:30 pm. Click here for more information.

2. Negotiating Real Estate Loan and Workout Options--sponsored by National Business Institute. The seminar will be held on March 7, 2012 at the Doubletree Hotel, 6200 Quarry Lane, Independence, Ohio 44131, from 8:30 am to 4:30 pm. Click here for more information.

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Health, Safety and Environmental Webinars

noreply@blogger.com (Connie Carr) — Thu, 05 Jan 2012 18:30:00 +0000

Bureau Veritas has a variety of webinars scheduled throughout the month of January on topics related to health, safety and environmental issues. Click here for more information.
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Mortgage Holders --Have a bankrupt borrower? Beware how you file your proof of claim

noreply@blogger.com (Connie Carr) — Tue, 03 Jan 2012 13:00:00 +0000

If you are a secured creditor, holding mortgage on real property as collateral, you will be ahead of the unsecured creditors if the borrower files for bankruptcy. Correct? Sort of, but not completely. Under the Bankruptcy Code, a secured creditor actually has 2 claims—a secured claim up to the value of the collateral securing the loan, and an unsecured claim for the amount of the obligation, if any, in excess of the collateral’s value. Each claim carries its own control and distribution rights.

Before the collapse in real estate values, mortgagees never had to consider filing two claims when the mortgagor filed bankruptcy. After all, the value of real property typically held steady if not increased in value, so a lender’s claim would be fully covered by the collateral. Today, everything has changed. It is not uncommon to see property, both residential and commercial, being sold by lenders at a fraction of its original value, leaving a deficiency balance to be collected that is unsecured.

A mortgage holder that wants to ensure it is fully protected when a borrower files for bankruptcy protection should file a proof of claim for both the secured claim and the unsecured portion of its secured claim.

In November 2011, the Eleventh Circuit Court of Appeals handed the IRS an unpleasant surprise when it held that the IRS waived its rights with respect to plan voting and distribution towards the unsecured portion of its secured claim due to its failure to affirmative file a proof of claim for the unsecured portion. (I confess that I enjoyed the IRS getting smacked down.) The IRS argued that its secured claims were automatically bifurcated into a secured and unsecured claim under Section 506(a)(1) of the Bankruptcy Code. The court disagreed holding that an undersecured creditor must signal its intent to pursue a deficiency claim as this serves an important notice function providing the trustee of the bankruptcy estate and other creditors an opportunity to contest the claim.

For now this decision only controls for those located in the Eleventh Circuit (i.e., Alabama, Florida and Georgia). Only time will tell whether any of the other Courts of Appeal will follow the Eleventh Circuit or not. In the meantime, it’s best to take care in how your proof of claim is filed to ensure you do not inadvertently waive your rights and end up like the IRS.
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LEED workshop in Cleveland area

noreply@blogger.com (Connie Carr) — Fri, 30 Dec 2011 13:00:00 +0000

"LEED, The Basics", a free workshop, will be presented by HSB Architects + Engineers on January 24, 2012 from 8:30 am to 11:00 am at Corporate College East, Room 205, 4400 Richmond Rd, Warrensville Heights, Ohio 44128. Continental breakfast will be provided.

Learning Objectives for the seminar:

Distinguish between the different ratings systems
Understand the structure of LEED and requirements
Identify critical items, which may prevent a LEED certification
Develop a time line for involving the LEED professional and other stakeholders
Understand the rating system development and what's to come in LEED 2012
Your steps to becoming a LEED AP

CE credits have been approved for AIA LU (1.5) and CPD BOMI (1). 1.5 real estate CE credits are pending approval.

Click here to register.

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Watch Your Language with Licenses and Easements

noreply@blogger.com (Stephen D. Richman, Esq.) — Tue, 27 Dec 2011 05:01:00 +0000

Typically, courts will uphold commercial document provisions unless they are contrary to public policy or statutory law. They traditionally presume that commercial parties are on more of an equal playing field and are more sophisticated concerning commercial real estate transactions, since both will usually have attorneys to review their documents. Because courts often defer to the specific language of a commercial document (or lack thereof), unintended results are often the norm for parties who do not seek professional advice, and for professionals who do not closely review their documents. Ms. Christiansen, in Christiansen v. Schuhart, 2011-Ohio-1199 (5th Dist. Ct. of App.) was one such professional.

Ms. Christiansen, an attorney (presumably, not a real estate attorney) purchased a part of her neighbor’s horse farm in 2003. At the time of the purchase, Ms. Christiansen prepared a document entitled “License, Easement, Right of Refusal and Non-Compete Agreement”. Presumably, Ms. Christiansen wanted to cover all bases, and have a personal right to use (a license) the other part of the Esteps (neighboring) property, a right, in perpetuity (an easement) for Christiansen and her successors to use the Esteps property, and a right to match any offer to purchase the Esteps property (right of refusal).

While the “one from column a, b and c approach” works well when dining in a Chinese restaurant, the same cannot be said when transferring property interests. In 2008, Christiansen declined to exercise her right of refusal to match an offer then received on the Esteps property, because she did not have the available cash, and she thought she had a perpetual easement to continue to use the Esteps property for equestrian purposes.

Unfortunately for Ms. Christiansen, the 5th district Court of Appeals held that the 2003 License, Easement, Right of Refusal and Non-Compete Agreement did not transfer a perpetual easement, but instead, merely transferred a personal, revocable, license to use property which was revoked upon its sale. While the above-described transfer document used the word “Easement”, it also used the word “license”. This ambiguity was easily rectified by the Court as “there was no language that states there is a covenant running with the land” (required “magic words” for an easement). Further, the Court noted that there were no maintenance provisions that are typically found in an easement agreement. Finally, the Court reasoned that the parties could not have intended there to be a continuing easement, because there would then be no need for a right of refusal. Clearly, Ms. Christiansen begged to differ.

The morals of this story: 1) Say what you mean (and don’t forget the “magic words”), precisely, or a judge will decide what you meant; 2) An attorney who represents himself/herself will also have a fool for a client.

RESPA: Confusion Still Reigns Over What Fees Are Prohibited

noreply@blogger.com (Connie Carr) — Mon, 19 Dec 2011 13:00:00 +0000

"RESPA" stands for the Real Estate Settlement and Procedures Act. Title companies and real estate brokerages are keenly aware of RESPA as it affects them in their day to day business. One area of confusion has been exactly what types of fees are prohibited under RESPA. You'd think it would be simple but that's asking too much. (Yes, there's some cynicism in that statement.)

There's not much argument that RESPA (section 8(b)) prohibits what is commonly referred to as "kickbacks". An example of that would be if I were to refer a customer to a title company and the title company gave a cut back to me of the fees it earned on that customer's transaction. I didn't perform any services on the transaction but was paid a fee out of it. That would be considered a kickback and is prohibited.

However, the courts and HUD (the federal department in charge of enforcing RESPA) are not in agreement on whether other fees are prohibited or not. HUD has interpreted RESPA to outlaw unearned fees, overcharges and mark-ups. This is problematic as determining what amount is an overcharge, for example, can be quite subjective.

Some courts have disagreed with HUD and have taken a stricter reading of RESPA section 8(b). For example, some brokerages charge a flat commission fee on top of the percentage commission. The reason is to keep the commission fee from being split with the agent. However, some courts consider this flat commission fee to be "unearned," finding that it is not directly tied to a service performed and therefore prohibited. Other courts have taken a different position, holding that section 8(b) doesn't apply unless the unearned fee is being shared between two parties. This is the position held by the 5th Circuit Court of Appeals in Freeman v. Quicken Loans.

The bottom line is that confusion currently reigns when it comes to understanding what fees are permitted under RESPA. The US Supreme Court recently agreed to hear an appeal of the Freeman case. We can only hope that some of these questions can be answered. It's hard to comply with the rules, when no one can agree on what the rules are.
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The (Cyber) Sky’s the Limit- Preliminary Due Diligence You Can Do On Your Own.

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 12 Dec 2011 05:01:00 +0000

The buyer in a real estate transaction is always at a disadvantage. The seller possesses the property, and usually, all of the requisite information concerning same. More often than not, the buyer has little or no knowledge concerning the property, but must diligently investigate and inspect it or risk understanding, all too well, the still surviving doctrine) of “caveat emptor” (let the buyer beware).

Confirming what property is being received, what condition it is in, what can or cannot be done with the property, and what risks are inherent in its ownership are of critical importance, and warrant due diligence inspection rights in every contract to buy real estate.

Typically, title commitments/policies, surveys, environmental audits, zoning reviews, engineering and building condition reports, and financial and legal reviews are the required tools in any “diligence tool box”.

While certainly not a substitute for professional reports/reviews…there are a number of websites and places one can and should visit to get an early idea of the viability of a particular property and to identify any early warning signs:

Locating the Property- Thanks to “Mr. Google”, you don’t have to hire a pilot to get a decent aerial of a property any more. Just go to www.google.com/earth/index.html, download the program for free and get aerials, street views, 3D imagery and more. More detailed maps with parcel number overlays and other local information can be found on County GIS (Geographical Information System) Maps. Just log on to: www.caao.org/GIS/index.html for an index of all Ohio County Auditor/GIS websites (Note: not available in the following counties: Clinton, Erie, Morrow, Muskingum, Ottawa, Pickaway and Ross). A more direct access to Cuyahoga County’s GIS site is: www.gis.cuyahogacounty.us. Note that some sites will require specific browsers. For example, Cuyahoga’s GIS site requires Mozilla Firefox 3.5.2.

Environmental “Quick Check”- “Envirofacts” at www.epa.gov/enviro provides access to several US EPA databases that provide information about permits and environmental activities. Searches can be initiated by address, facility name, geographic location, classification and pollutant. While Ohio EPA’s databases are not as widely available, www.epa.ohio.gov/dhwm/info_resorces.aspx will let you determine what facilities are in the “Cessation of Regulated Operations (CRO) Program”. Log on to www.comm.ohio.gov/fire/bustMain.aspx and you can check the Bureau of Underground Storage Tank Regulations lists of regulated facilities and active releases.

County Auditor and Recorder Information- www.caao.org will take you to a list of all Ohio’s Counties, with links to their auditor websites. Current valuation (according to the County’s appraisers), taxes, permanent parcel numbers, GIS maps and more are available online and right at your fingertips. Pick up the phone, and you may also (depending on the county) be able to get a copy of the appraiser’s valuation card or full appraisal (called ‘industry report’ for commercial buildings in Cuyahoga County). www.ohiorecorders.com will give you a list of all Ohio’s Counties, with links to their recorder websites. Many of these sites allow you to enter a parcel number or owner’s name, and you can retrieve, on-line, copies of deeds, mortgages and other recorded documents. Some counties (e.g., Hamilton) will only produce an index of recorded documents, requiring you to send a check for a copy of a particular document.

City/Village/Township Information- Most cities/villages/townships have their own websites containing important information from demographics to zoning to codified ordinances. Many of these municipalities publish their ordinances on one of two websites: www.conwaygreene.com and www.amlegal.com. A call to a building/zoning department can usually direct you to zoning information, zoning maps, and answers to simple, but important information such as: “is the property at ___address currently zoned for retail establishments, such as a restaurant. www.city-data.com is another site you may find helpful to locate demographics and other facts about a particular municipality.

Valuation- While more reliable for residential (vs. commercial) real estate, www.zillow.com, www.trulia.com and http://realestate.yahoo.com are often utilized to get a good idea of values and comparable sales. www.loopnet.com is a great commercial real estate site to check asking prices, and what else is “out there” on the market.

General “let your fingers do the walking” Searches- Get lost in cyberspace and do a multitude of search combinations with different browsers, entering the facility name, address, owner’s name, tenants’ name…and you may uncover newspaper articles about a previous or current problem, a prospective two-year construction project, an expected new interchange or other valuable information.

Preliminary due diligence may indeed produce information that discourages a prospective purchaser. “That’s a good thing”, as the time, money and stress inherent in the real estate purchase/sale process can be avoided early on. Alternatively, information can be a good bargaining tool for the buyer, and help to allocate the risk and perhaps negotiate a better deal.

Preliminary due diligence, however, should not be solely relied upon as encouragement to proceed with a real estate purchase, without an extensive, professional, “post-contract” investigation and inspection (diligence) process. While “cash is king” these days, information is, has been and will always be “key” to minimizing real estate risk.

Real Estate 101: SNDA Agreements

noreply@blogger.com (Connie Carr) — Tue, 06 Dec 2011 05:00:00 +0000

What is an SNDA agreement? “SNDA” stands for a Subordination, Non-Disturbance and Attornment” agreement. It is essentially 3 agreements in one that addresses the priority of rights between a tenant and a lender to the tenant’s landlord. It is an agreement that is often overlooked, to the detriment sometimes of the tenants and/or the lenders.

Subordination
The subordination portion of an SNDA addresses how and when a tenant’s rights under its lease with the landlord will be subordinated to the rights of the lender. This can be crucial to a new lender whose liens might otherwise be junior to those of a pre-existing tenant under its lease agreement.

Non-Disturbance
The non-disturbance portion of an SNDA is intended to protect the tenant in the event of a landlord default that results in the lender foreclosing on the leased property. It permits the lease to remain in place so long as the tenant is not in default under the lease.

Attornment
The attornment portion of an SNDA is essentially the flip side of the non-disturbance agreement. If a non-disturbance agreement requires the landlord to keep the lease in force so long as the tenant is not in default, under the attornment agreement the tenant is agreeing that it will recognize the lender/mortgagee as landlord.

It is not uncommon for some of these provisions to be incorporated by a landlord into its form lease agreement, particularly the subordination and attornment provisions. However, a tenant, particularly one who is investing significant money into new lease space, will want to see a non-disturbance agreement included as well. How much a tenant can obtain in negotiating any non-disturbance agreement will depend on the strength of a tenant’s bargaining power.

While these provisions, or some of them, can be incorporated into a lease, my personal preference (particularly when I represent a tenant) is to negotiate a separate SNDA agreement that is signed by all three parties, the tenant, the landlord and the landlord’s mortgage lender. I would not want to risk the provisions being extinguished as part of the lease in a foreclosure. It is also not a bad idea, particularly if you are the tenant, to require the right to record the SNDA agreement.

Will Preservation Easements Make a Comeback?

noreply@blogger.com (Connie Carr) — Mon, 28 Nov 2011 13:00:00 +0000

The term “preservation easement” is commonly used to describe a type of conservation easement – a private legal right that an owner of a property would give to a qualified nonprofit organization or governmental entity for the purpose of protecting a property’s conservation and preservation values. The typical purpose of a preservation easement is to protect a property with historic, architectural, or archaeological significance. One example of a preservation easement is a façade easement.

A preservation easement is a “partial interest” in real property – the property owner continues to own the property but transfers the specific set of rights represented by the easement to the easement-holding organization. Typically, a preservation easement protects against changes to a property that would be inconsistent with the preservation of the property, such as demolition of historic buildings, inappropriate alterations, or subdivision of land. The easement may also protect against deterioration by imposing affirmative maintenance obligations. The restrictions of the easement are generally incorporated into a recordable preservation easement deed that is part of the property’s title and runs with the land, binding both the present property owner and future owners.

Conservation and preservation easements are created under state law. Ohio law for conservation easements is found at O.R.C. § 5301.67 et seq.

As explained at PreservationOhio, preservation easements address five basic issues: (1) What physical features of the property are covered by the easement; (2) What activities by a property owner that could damage or destroy significant historic or architectural features are absolutely prohibited; (3) What activities are allowed, subject to the approval of the easement-holding organization; (4) What activities are permitted by the owner as a matter of right; and (5) what type of affirmative maintenance obligations are required to be undertaken by the owner. The easement will also address other “boilerplate” issues, such as insurance, public access, amendment, and casualty damage.

The reason many property owners gave preservation easements to local preservation organizations was for the federal tax deduction. However, since to qualify for the federal tax deduction the easement had to be perpetual, if the easement wasn’t structured correctly, a property owner ran the risk of permanently transferring the preservation easement to a nonprofit preservation organization without qualifying for the deduction.

That risk has been significant in recent years; so significant that the practice of donating a preservation easement has been dormant. The reason is the IRS itself. In the name of alleged abusive practices by certain nonprofit organizations, it went after the taxpayers who claimed the deductions, auditing them to challenge the deduction.

In September 2011, in Simmons v. Commissioner, a three-judge federal appeals court in Washington, D.C., unanimously affirmed a tax court ruling in favor of a property owner that had donated certain preservation easements and had taken a deduction for it. While the decision is not binding on other courts, it is powerful guidance for other courts to consider in actions by the IRS against these deductions.

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Use of Property, not Use of Proceeds Dictates University Property's Tax-Exempt Status

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 21 Nov 2011 05:01:00 +0000

Earlier this month, the Ohio Supreme Court (in Columbus City School Dist. Bd. Of Education v.Testa, Slip Opinion No. 2011-5534) ruled that property owned by a university (The Ohio State University), but rented to a third party for purposes unrelated to the university’s purpose is not entitled to exemption from property tax.

The property at issue is located south of the Ohio State University [“OSU”] campus. It houses four residential rental units on the second floor, and at the time of the application for tax exemption, the first floor and basement was occupied by a McDonald's. OSU received title to the building through a bequest intended to provide scholarships to veterinary-medicine students at OSU.

The Board of Tax Appeals (“BTA”) that heard the case prior to the Ohio Supreme Court took the position that income-producing property like the parcel at issue qualifies for exemption under R.C. 3345.17 to the extent that the income generated by the property is devoted to university purposes. Since there was credible testimony that income from the property at issue would be applied first to paying down OSU's acquisition expense, and then to veterinary-medicine college operations (in other words, all such income would be used for tax-exempt purposes), the BTA held that the subject property was exempt from real estate taxation.

The Court in Columbus City School Dist. v.Testa, however, unanimously overruled the Board of Tax Appeals’ interpretation of the applicable statute (O.R.C. Sec. 3345.17).

The Ohio Supreme Court analyzed the statute and keyed in on language allowing a property tax exempt status for university property, only if that property is “used for the support of such university”. According to the Court, “the statute notably does not explicitly allow or tie the exemption to the use of income from the property, but rather to the use of the property itself”. Further, the Court erased any doubt as to the intent of the current statute by offering previous legislative history of the law that would have allowed the use of “rents, issues or profits” (vs. use of the property) to prove exempt status.

Notwithstanding the Court’s ruling in Columbus City School Dist. v.Testa, it is important to note the “wiggle room” that is still permitted in these cases. First, the use can be prospective vs. current (See Id. at Para. 34; “Because there is neither a current nor a prospective use of the property operationally related to university activities, OSU's exemption application should have been denied”). Second, non-university purposes that are secondary to a university’s primary use will not defeat the tax exempt status of the property (See State ex rel. Univ. of Cincinnati v. Limbach, 51Ohio St. 3d. 6 (1990) and Bd. of Trustees v. Kinney, 5 Ohio St. 3d. 173 (1983)).

CLE Update: OSBA Real Property Institute

noreply@blogger.com (Connie Carr) — Thu, 10 Nov 2011 13:00:00 +0000

The Ohio State Bar Association (OSBA) is sponsoring the 19th Annual Bradley J. Schaeffer Real Property Institute: Hot Topics in Real Estate Law on December 15, 2011. The seminar will be held live at OSBA's offices in Columbus, Ohio and as a webcast and will provide 6.0 total CLE hours (including 1.0 Ethics). 6.0 CE hours for real estate are pending. For more information visit http://www.ohiobar.org/.
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Attacking Blight from Vacant and Abandoned Buildings

noreply@blogger.com (Connie Carr) — Mon, 07 Nov 2011 13:00:00 +0000

As the foreclosure crisis continues and the real estate market goes into its triple dip, one issue that cities of all sizes face is a growing catalog of vacant buildings adding to the urban blight and crime that is plaguing many neighborhoods today. Google 'vacant building ordinances' and you will be overwhelmed with the search results listing all the cities that have passed such an ordinance. Typically, these ordinances require property owners to keep vacant properties (empty for a specified time period, such as 30, 60 or 90 days and meeting other characteristics that triggers the law's application) secure and in good repair. A failure to maintain the property as legally required leads to significant fines. Some cities such as Sacramento event posts a sign on the property publicly identifying the name, address and phone number of the property owner. Other cities such as Chicago and Boston, place similar burdens on the lenders holding the mortgages for the vacant properties.

The problem with the above attempts at solving the vacant blight are they only work when you have property owners who care enough and have the resources to take care deteriorating buildings so as to avoid the fines. When you have owners that are financially unable to comply, or simply don't care, and the lenders have yet to have legal title/control that would enable them to address the property issues, the vacant properties fall into limbo.

In Illinois, lenders are working with state and local officials to change the state's foreclosure laws to streamline the foreclosure process, enabling mortgage lenders to take control more quickly and secure the properties from further deterioration. However, this doesn't always help either when the lender has no interest in foreclosing and taking control of the abandoned property.

Here in Northern Ohio a movement has been building to establish land reutilization corporations, a.k.a. "land banks". One such organization that works with local governments to establish the land banks, is the Thriving Communities Institute, part of the Western Reserve Land Conservancy based in Cuyahoga County, Ohio. Land banking involves the accumulation of vacant and abandoned properties by various and versatile methods. Once accumulated, the properties can be held by the county land bank, tax free, until the land can be put back to productive use.

Local governments have to get creative to keep the blight from vacant and abandoned buildings under control. Here's to hoping some the above solutions are successful.
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CLE Update: Groundwater Contamination Litigation

noreply@blogger.com (Connie Carr) — Thu, 03 Nov 2011 12:00:00 +0000

Strafford Publications is sponsoring a webinar/teleconference titled "Groundwater Contamination Litigation: Proving And Defending Against Liability for Clean-Up Costs" on Tuesday, November 15, 2011 from 1:00 pm to 2:30 pm EST.

The panel on the seminar will review the following and other key questions:

What lessons can be learned from recent groundwater contamination litigation?
What pitfalls do counsel need to watch for when working to demonstrate or defend against liability?
What strategies can counsel employ to prove and defend against liability for groundwater contamination?

Click here for more information regarding the webinar/teleconference.
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Targeting Lenders to "Fix" a Vacant Housing Problem--the law of unintended consequences

noreply@blogger.com (Connie Carr) — Mon, 31 Oct 2011 12:00:00 +0000

No one disputes that many city and towns, including many in Ohio, have a problem with vacant homes and buildings in their communities. In some locations, the problem is overwhelming and the cost to the local government can be staggering.

In the City of Chicago, an ordinance took affect in September that requires a mortgagee or its assignee or agent to maintain vacant buildings, including posting signs with contact information and maintaining the exterior of the building. The ordinance also requires the lender to perform certain maintenance on the property, inside and out, even if the lender does not have legal possession. (click here for copy of the ordinance)

Some lenders take a long term view of property it controls and maintain them to ensure the potential resale value of each property is the best it can be. Other lenders are a bit more short term in their thinking. Furthermore, the foreclosure process is not a quick process and it can take a considerable amount of time. In Cook County, Illinois, the foreclosure process averages around 2 years. During this time, the lender or mortgage service does not have legal control of the property, which allows it to deteriorate while it stands empty.

There is a fine line between legislating 'responsibility' on the part of lenders and adding so many more open-ended costs and associated risks to an already risky situation that it creates adverse unintended consequences; particularly if the foreclosure process continues to drag out over a ridiculous period of time.

Lenders can be caught in the vise of ever increasing financial burdens and not even be able to meet those obligations without improperly entering properties before they have a legal right to do so. That's enough to make lenders think twice before writing additional mortgages in the city, and lenders in fact threatened to challenge the ordinance.

The good news is the city and lenders finally sat down at the table together to discuss a resolution to their respective concerns. The result is a new compromise ordinance that is pending to replace the one that took effect in September. They are also working together on a state legislative solution that would standardize requirements across the state of Illinois and require municipalities in the state to create a fast track for expediting the foreclosure process. This will help get houses and buildings out of ownership limbo more quickly.

It will be interesting to see if the results of the new ordinance once implemented along with any state legislation that passes have the intended consequences or not.
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CLE Updates: current real estate seminars in Ohio

noreply@blogger.com (Connie Carr) — Thu, 27 Oct 2011 12:00:00 +0000

Here's a sampling of real estate related seminars scheduled in Ohio in the coming weeks:

NBI is sponsoring a one-day live seminar titled "Advanced Issues in Real Estate Law" in Akron (Sheraton Suites, Cuyahoga Falls) on Tuesday, November 1, 2011 and in Cleveland (Holiday Inn Independence) on Wednesday, November 2, 2011. For more information, visit http://www.nbi-sems.com/.

SES is sponsoring a one-day live seminiar titled "10th Annual Commercial and Residential Landlord-Tenant Law" in Cleveland (Hilton Garden Inn in dntn Cleveland) on Tuesday, December 13, 2011. For more information visit http://www.sterlingeducation.com/.

NBI is sponsoring a one-day live seminar titled "Top 8 Title Defects - Cured" in Cleveland (Holiday Inn Independence) on Monday, December 5, 2011. For more information, visit http://www.nbi-sems.com/.

The OSBA is sponsoring a one-day video replay seminar titled "Titles to Real Estate in Ohio" in Fairfield (Receptions Conference Center North) on Friday, November 11, 2011, in Columbus (OSBA offices) on Monday, November 21, 2011, in Perrysburg (Hilton Garden Inn) on Tuesday, November 29, 2011, in Cleveland (The Ritz-Carlton) on Tuesday, December 13, 2011 and in Akron (John S. Knight Center) on Friday, December 16, 2011. For more information, visit http://www.ohiobar.org/.

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How “Rent” Can Mean Attorneys Fees- Watch Your Language with Commercial Lease Guaranties

noreply@blogger.com (Stephen D. Richman, Esq.) — Mon, 24 Oct 2011 04:01:00 +0000

Generally speaking, courts will typically uphold language in a commercial lease (and guaranty), unless it is contrary to statutory law or public policy. Consequently, commercial landlords, tenants and guarantors have a lot of leeway in allocating the risk and responsibility of issues inherent in commercial leases/guaranties. Because of this deference to the language in a commercial lease/guaranty, landlords, tenants and guarantors are strongly advised to “say what they mean, precisely, or a judge will decide what they meant”.

Failure of a lease to clearly define if repairs include replacements, for example, or what improvements stay with the landlord and what goes with the tenant upon expiration of the lease (i.e., the “fixture” vs. “trade fixture” issue) often results in disputes that could easily have been avoided with clear, specific lease language (See “Getting a Fix on Fixtures”, Ohio Real Estate Blog, by Stephen Richman, June 30, 2008). Additionally, if one intends for a party in a commercial lease to pay for general real estate taxes and assessments, as well as special assessments and “PILOT’s, it must be specifically spelled out in the lease. The landlord in Chu Bros. Tulsa Partnership, P.L.L. v. Sherwin-Williams Co., 187 Ohio App. 3d 261, 2010-Ohio-85, was unpleasantly surprised to learn that the phrase “Tenant shall pay all general real estate taxes and assessments” did not include responsibility for “PILOTs”. (See “PILOTs = Special Assessments according to the 12th District Court of Appeals”, Ohio Real Estate Blog, by Stephen Richman, October 22, 2010).

In light of the recent Stark County Court of Appeals case known as Strip Delaware LLC v. Landry’s Restaurants, Inc., 2011-Ohio-4075, identifying what a guarantor is guaranteeing in a lease guaranty can now be added to the growing list of lease and guaranty provisions that must be drafted carefully, and precisely to avoid unintended and often, costly results.

The facts of the “Strip Delaware” case are simple enough. Strip Delaware, LLC (the “Landlord”) owned a parcel of real estate known as “the Strip” in Stark County that was leased to Landry’s Seafood House - Ohio, Inc. (the “Tenant”) to operate a “Joe’s Crab Shack” restaurant. Landry’s Seafood Restaurants Inc. (the “Guarantor”), an affiliate of the Tenant signed a guarantee of the lease. After nine (9) years of operations, Joe’s Crab Shack closed (in 2006), stopped paying rent and as a result of these defaults, the Landlord sued the Tenant and the Guarantor.

The lower court awarded the Landlord damages against the Tenant and the Guarantor for base rent, common area maintenance charges, taxes, brokerage fees, costs to restore the premises for a new tenant; and costs and attorneys fees totaling approximately $47,000. Both the Tenant and Guarantor appealed the decision, raising a number of “assignments of error” (claimed mistakes in the original decision). The Guarantor’s basic position was that the guarantee only guaranteed the Tenant’s periodic payments of basic rent, common area maintenance and taxes. The Guarantor further argued that nowhere in the guarantee agreement was there a provision calling for the Guarantor to pay for attorneys fees.

Unfortunately for the Guarantor, the specific language in the guarantee agreement did not state what the Guarantor had intended; rather, it stated the complete opposite. The guarantee provided that the Guarantor “shall be liable for rent payable under the Lease”, however, “rent” was defined in the guarantee as “the maximum (base) rent, additional rent, and all other sums and charges payable by Tenant to Landlord under the Lease”. Finding a specific directive in the guarantee to look to the lease for the guarantee’s complete definition of “rent”, the justices found clear language in the lease calling for Tenant to pay “any deficiency that arises by reason of re-letting the premises”, attorneys fees, and “costs and expenses relating to Tenant’s default and the re-letting of the premises, including without limitation brokerage fees… and the costs of repairing, to put the leased premises into good condition”. The difference between the guarantor’s unwritten intent (of guaranteeing only periodic rent/additional rent payments) vs. the comprehensive definition of guaranteed “rent” clearly stated in the guarantee/lease cost the guarantor approximately $92,000.00.

The moral of this story? Say what you mean, precisely, in a commercial lease and guarantee, or a judge will decide what you meant. If you intend a guarantor to only guarantee periodic payments of rent, common area maintenance charges and taxes, that is precisely how the guarantee should read. On the other hand, if the guarantor is to be liable for anything and everything stemming from a tenant’s default, a provision comparable to the language used in the Strip Delaware guarantee would be in order. Of course, the best way to avoid unintended and costly consequences, “later” is to engage a legal professional to review the lease and guarantee prior to signing. Paying one attorney “now” is always less expensive than paying two attorneys “later”.

CLE Update: Curing Title Exceptions

noreply@blogger.com (Connie Carr) — Thu, 20 Oct 2011 13:00:00 +0000

Lorman Educational Services is sponsoring an audio seminar titled: Curing Title Exceptions on December 8, 2011. It's a 90 minute live audio conference beginning at 1 pm ET (12 pm CT, 11 am MT, 10 am PT).

For more information, click here.
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Navigating lending options for real estate financing

noreply@blogger.com (Connie Carr) — Mon, 17 Oct 2011 13:00:00 +0000

Often, even in today's lending environment, there are several options for Borrowers to consider when seeking financing secured by real estate, both commercial and residential.

However, there are pros and cons to consider when seeking out options for a mortgage loan.

Whether commercial or residential, borrowers can look to large bank and institutional lenders. Some examples for commercial and/or residential lending in this category would be Wells Fargo, JPMorgan Chase or Bank of America. Residential borrowers can also seek mortgage loans from online loan programs such as quickenloans.com or lendingtree.com, or go to a local credit union.

Then there are the mid-market and local community banks for both commercial and residential borrowers and the savings and loan associations for primarily residential borrowers.

Finally, for commercial borrowers there are the CMBS loans (commercial mortgaged back securities). This latter market may be going dormant again, but we'll pretend there are still CMBS loans being made for this discussion.

When borrowers look at loan options they typically focus on where they can find the best rate . The best rates are often with the large national lenders or online. It's hard for the small local lending institutions to compete in this arena. However, going with the lender with the lowest rate is only the best option if everything goes perfect for the life of the loan. Given today's economy it is worth considering all of the pros and cons, and not just the money.

There are several negatives to obtaining loans from the large national lenders. CMBS loans in particular are heavily papered with documents that are rigid and not subject to much negotiation, and are expensive to obtain up front with the diligence reviews and legal opinions etc that are required for closing. The loans issued by these larger lenders are frequently sold, so a borrower is typically dealing with some office in another state that is not affiliated with the original lender. CMBS loans are serviced by a mortgage servicer who doesn't own the loan. Try dealing with the loan servicer when things start to go sideways. Decisions cannot be made quickly, if at all. Opportunities to salvage the loan and minimize the losses are typically lost due to the slow bureaucratic maze to be navigated.

Everyone has heard the horror stories about robo-signers that have led to erroneous and improperly filed foreclosures. This is a large lender problem; not for the local lenders.

On the flip side, local lending institutions, such as smaller regional banks, community banks, S&L's and credit unions, tend to hold the mortgages they issue for the life of the loan, are more involved in the community where the loans are being made and are more likely to work with a borrower when trouble hits.

When considering the lending options it is important to consider all of these issues and determine what works best for a given situation and the risks involved.
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What a Faltering CMBS Markets Means for Commercial Property

noreply@blogger.com (Connie Carr) — Mon, 10 Oct 2011 04:01:00 +0000

The market for commercial mortgage backed securities (CMBS) is faltering as investors are demanding more security and better terms for the riskier portions of the deals or avoiding such portions altogether. The weaker demand leads to more attractive structures being offered obtain investors.

This means higher rates for commercial RE borrowers as the more attractive structures translate into a more expensive loan. The lower interest rates can act as a counter balance, but it is too soon to see how it will play out.

Due diligence by the CMBS lenders in reviewing surveys and leases will be more intensive, looking for any problem that could impact their ability to market the securities. Current owners of commercial property getting ready to sell or refinance the property should do a review of the leases and other diligence information to spot potential issues and try to resolve them while there is time to do so. Also, owners will need to be realistic in setting the asking price. The pricier the CMBS becomes to continue attracting investors, the less a buyer will be able to offer, suppressing the price of commercial properties.