Real Estate Advisor Law Blog : Ohio Real Estate Lawyer & Attorney : Ulmer & Berne Law Firm : Columbus, Cleveland OH

"Every night before I rest my head; See those dollar bills go swirling ’round my bed."

So sang Patti Smith in the composition Free Money on her critically acclaimed 1975 debut album, Horses.

That’s a tune that cash-desperate real estate developers and project owners may have found themselves humming during the current credit crisis. But it may be more than just wishful thinking - - or wishful singing - - at least for certain projects in Cleveland.

In 2008, the City of Cleveland instituted its Vacant Property Initiative Fund which makes available up to $1,250,000 for acquisition, demolition, remediation, construction and some soft costs for non-residential projects. Big-box, mall projects and most tax-exempt uses are excluded from the program.

The money takes the form of a 6% one-year loan, but up to 40% of the loan amount is forgivable depending upon project size. A bonus 5% of loan forgiveness is available if certain green sustainability standards are met. Take out financing must be in place at the time the loan is made.

Certain vacancy or underutilization standards must be met to be eligible. Approval of the Mayor’s office and Cleveland City Council along with a recommendation of the City’s CDC is also required.

Like any program there are a host of requirements imposed on the borrower: prevailing wages, MBE/FBE and local hiring compliance, job creation and retention benchmarks and a shared first priority mortgage lien among them.

Despite the attached strings, the chance to get as much as $562,500 of free money for acquisition, construction and remediation should have project developers singing along with Patti Smith.

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As I mentioned in an earlier post, Ohio Governor Ted Strickland recently signed legislation creating a new “land bank” in Cuyahoga County. Like a dose of cold medicine, Senate Bill 353 is not a cure for the foreclosure crisis, but it should help solve one of its primary symptoms – abandoned and vacant housing. 

More than any other area in the state, Greater Cleveland has struggled with vacant properties due to its dramatic population decline over the past fifty years. In 1950, Cleveland’s population stood at 914,808, making it the seventh largest city in the U.S. Today, the population is estimated at 438,000. In other words, the city was built for twice as many people, leaving Clevelanders with easy commutes and plentiful abandoned properties. 

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After much wrangling, the House and Senate came together in Conference Committee and each subsequently passed President Obama’s Stimulus Bill in record time. President Obama has now signed this historic legislation. The Stimulus Bill provides in part for a refundable tax credit for first time home buyers (who are defined as buyers who have not owned their primary residence for the past three years). Although previous versions of the bill included a credit of as much as $15,000, the final bill provides a credit equal to 10% of the purchase price of the home with a cap of $8,000. The purchase must be made between January 1 and November 30, 2009 and the credit is phased out for individuals with incomes in excess of $75,000 and married couples filing jointly with incomes in excess of $150,000. Purchasers must own the home for three years or the credit is subject to recapture. The previous law that the stimulus bill amends provided a “credit” of up to $7,500, however, the “credit” had to be re-paid with $500 per year payments. This requirement has been stricken in the new legislation.

The change will be an incentive for some home buyers to enter the market, particularly those who may have been sitting on the sidelines waiting for the market to reach bottom. Limiting the availability of the credit to prior to December 1, 2009 will help to force prospective buyers off the fence—if they wait for the market to further decline, they will miss the opportunity of the tax credit. 

Will the tax credit change the housing market? Some. It targets those most likely to buy (i.e. those who do not have to first sell their home) and it eases some of the fear that once purchased the home value will immediate fall. We do not expect to see a large swing in either the volume of home sales or the value of home sales, but a small swing is possible. Chief Economist for the National Association of Realtors, Lawrence Yun, was quoted on CNNMoney.Com estimating that the tax credit will bring approximately 300,000 new buyers to the market. Congress is hoping that this small group of buyers will provide momentum for the overall housing market and help to clean out the excess inventory of homes for sale on the open market due to foreclosures. 

Will home builders feel an immediate impact? Unlikely. Those selling “starter homes” will benefit the most. Luxury home builders will have to wait until the momentum is in full swing. 

What about lenders? Lenders should see a slight up tick in new home loans.  

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The impact the aging baby boomer class affectionately known as “Boomers” is having on many segments of the economy has been discussed in the media for some time now.  As life expectancy expands the type of home the “Boomer” wants to live in needs to fit their life style and physical demands.  A recent article in the Chicago Tribune entitled What Boomers Really Want in Housing describes some of the wants and dislikes of the Boomers as determined by the Consumer Preference Survey of the National Association of Home Builders.  For instance, there is a preference for single-level homes with three bedrooms and higher end finish levels.  Anything that reminds a Boomer that they are aging is out; such as grab bars in bathrooms. 

The opportunities the Boomers present to the development industry are enormous since this segment of the population has accumulated buying power, even in a down economy, as the result of decades of working and saving.  Eriech Horvath of Stone Works Development LLC, an Epcon community builder, explained that the Boomer/buyer wants access to recreation/golf courses, shopping, restaurants and medical facilities.  Horvath described his company’s “single style” one floor homes which contain many of the amenities of custom homes, but as maintenance free as possible; which is a major “want” of the Boomer class.  So, if there is a take away from all of this it is that if you are planning a town house style community, you might consider adding into the mix “Boomer” type housing stock. 

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The Stimulus Plan is supposed to create jobs. In the retail sector, jobs will be created only if consumers start spending again. Some of you may remember the eighties when consumers were able to deduct credit card interest from taxable income. With the need to motivate consumers to spend, reinstituting this kind of tax credit should be part of the plan.  The tax credit would apply only if consumers spend.  This kind of direct assistance would seem to be more effective than building water parks.  

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Mortgage lenders scored a victory at the Ohio Supreme Court in the recently decided Wilborn v. Bank One Corporation, 2009 Ohio 306 (2009). In Wilborn, eleven borrowers brought suit against their lenders.  Ten of the eleven cases (the eleventh did not involve a reinstatement provision and was decided differently) went like this: Lender brought foreclosure action against borrower. Borrower sought to reinstate the loan by paying the full amount due prior to judgment. Under the mortgage, borrower was required to pay lender’s foreclosure related attorney fees to receive reinstatement. 

The borrowers objected to paying the attorney fees based on Ohio statutory and case law that precludes the collection of fees in actions enforcing a debt obligation, including foreclosure proceedings. They further argued that the attorney fee provisions of their mortgages were void because the contracts were not the product of free, bilateral negotiation. The oral arguments articulated the public policy concerns on each side.

In rejecting their claims and allowing the lenders to collect the foreclosure-related fees, the Court made a couple significant points. First, the contractual right to loan reinstatement is not the enforcement of a debt obligation but, rather, is a private contractual right. Second, even though the individual mortgages were not negotiated between borrower and lender, the Fannie Mae and Freddie Mac forms used were the products of extensive negotiation. The Court went into great detail on the creation of these forms and the inclusion of all parties’ interests in the drafting process. This precluded the borrowers’ claim that the mortgages were “adhesion” contracts. 

The case attracted the attention of both the banking industry and consumer advocates, with coalitions of both groups filing amicus briefs in the case. Although the decision immediately benefits lenders, in the long run it likely aids borrowers. If a lender could not collect these fees, it would be fearful of filing a foreclosure action only to see the borrower reinstate and thereby lose the hundreds or thousands of dollars it spent in foreclosure. Lenders would, then, be very reluctant to insert reinstatement provisions in mortgage forms and borrowers would lose a valuable foreclosure alternative. Moreover, federally-backed loans are required to contain a reinstatement provision, so a contrary decision here would have made Ohio law inconsistent with federal policy and put borrowers who do not qualify for the federal loans at a distinct disadvantage. 

With this decision in mind, lenders should take a moment to review current mortgage forms to make sure they require reimbursement of all attorney fees as a condition to reinstatement. The Fannie Mae form, for example, requires payment of “all expenses incurred in enforcing this Security Instrument, including, but not limited to, reasonable attorneys’ fees.”

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 In March 2007, Governor Strickland created the “Ohio Foreclosure Prevention Task Force” to address the ever-increasing number of foreclosures plaguing the state. The group’s final report, issued in September 2007, identified 27 recommendations for state action. Since the rise in foreclosures likely won’t be going away anytime soon, perhaps it’s appropriate to take stock of Ohio’s progress on the recommendations issued over 16 months ago. 

Here are a few of the Task Force’s ideas where notable progress has been made recently:

1. Facilitate land banking of properties.

2. Encourage mediation and alternative dispute resolution.

3. Expedite the post-judgment process of property transfer. 

The Ohio legislature deserves a fair amount of credit for getting substantial legislation passed quickly on these issues. Most recently, Governor Strickland signed Senate Bill 353 that authorizes Cuyahoga County to create a “county land reutilization corporation” to manage, develop, and maintain vacant property. Much more can be said about the pros and cons of this land-bank effort (and will be in a later post), but suffice to say it is a positive step toward addressing the mass amounts of abandoned properties in the Cleveland area that have resulted from the rise in foreclosures. At a recent presentation to the Cuyahoga County Law Directors Association, County Treasurer Jim Rokakis was very upbeat about being to tackle the “land” aspect of the foreclosure problem.

The goals of encouraging mediation and expediting post-judgment transfer were realized earlier through Substitute House Bill 138, signed by Gov. Strickland in September 2008. The bill made sweeping changes to Ohio’s foreclosure process, all aimed at expediting the process and locating parties who purchase properties at sheriff’s sales. It also explicitly authorizes courts to require the mortgagor and mortgagee to engage in mediation at any stage of the foreclosure. 

These actions may not be enough to stem the tide of the current crisis, but addressing foreclosure-related issues through legislation now could certainly help minimize similar problems that arise in the future. Now, about those other 24 recommendations…

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Many counties in Ohio, Hamilton and Franklin included, have just completed their triennial valuation of real property. In this day and age of falling real estate values and 401(k) balances, saving money is on everyone’s mind. That makes today a good day to review the Auditor’s new value of your property and ask yourself, “Am I paying taxes based upon my property’s correct value?”

Many factors influence property values, and the Auditor’s appraisers, despite their best efforts, are all too often not privy to all the information. The burden therefore falls on the shoulders of the property owner to provide additional information to the Auditor when necessary. In order to do this, a properly completed Complaint Against the Valuation of Real Property form (see links for  Hamilton County, Franklin County, and  Cuyahoga County forms) must be filed with the Auditor’s office on or before March 31st of the following tax year. This means if you are filing by March 31st of this year, you are actually challenging the valuation of your property as of January 1, 2008. And each county typically has its own set of procedural rules for filing a complaint, so be sure to familiarize yourself with the correct process to avoid dismissal of your case.

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In the past 20 years or so, China’s real estate market has experienced phenomenal growth. Hundreds of skyscrapers bursted into the sky during the two decades and many more are coming. This dramatically changed the landscape of many cities in China. All these skyscrapers and other real estate developments are built on a unique land ownership system. The system is still in its primary state of formation, thus uncertainties exist in many crucial areas. In 2007, the first Property Law of People's Republic of China was enacted and clarified some of the uncertainties but it is far from eliminating them all. Many land ownership issues are still left undefined. The following is an overview of some aspects of China’s unique system. 

In China a private party cannot “own” land. All land is either “owned” by the State or by the Collectives. The State owns most of urban area land (i.e. commercial land) and the Collectives are the owners of most rural land (i.e. farm land). Under the current system, even though the land itself can not be transferred, the State may pass the right to use its land to private parties through the granting of “Granted Land Use Right” (“GLUR”) or “Allocated Land Use Right” (“ALUR”). In contrast, Collectives are not allowed to transfer the use right of the land they own. Collectives’ land must be converted from Collective ownership into State ownership before the use right of the land can be transferred. There are efforts, including legislative and administrative, to “free” the land owned by Collectives.  The general purpose behind these efforts is to give farmers more “property right” to energize the rural economy in China. 

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Have you ever asked the question when researching a property: "Where did the tanks go ?" or "What were the prior improvements ?"  Now Google Earth can help you out with the recent release of Google Earth v.5.0(beta).  A new tool will display satellite images for a parcel for as far back as satellite images exist for the same.    

Once you open version 5.0(beta) and locate a parcel of interest, you will see a tool bar across the top of your screen.  In the center of the tool bar you will notice an icon of a clock.  When you click on the clock icon a dialog box will appear with a timeline displaying the dates of the satellite images Google has stored of your parcel in question.  Slide the marker across the timeline and the history of the parcel is displayed.  

Although with Sanborn Maps  you can typically go back much further in time, having this information at your fingertips can be a valuable resource.

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On January 27, 2009, the front page of the Columbus Dispatch read, “44,000 Jobs Gone.”Other articles report of companies shuttering their facilities or filing bankruptcy. As one affected employee interviewed for the Dispatch article succinctly stated, “It’s scary.” And it’s no less scary for landowners and lenders dealing with properties that have been abandoned.  Landowners whose tenants have abandoned their facilities are trying to recover past rent due and expenses related to cleaning up the equipment, products and chemicals remaining at the facility. Banks are foreclosing on property or are working within the bankruptcy court to recover their money. 

Landowners and first mortgage lenders in these situations should also be aware that they may be subject to environmental clean-up obligations under the Cessation of Regulated Operations (“CRO”) program. CRO was created to protect the public against exposure or pollution from hazardous chemicals left at abandoned facilities. CRO requires the owner or operator of the facility to secure the facility from trespass or vandalism and to comply with 30-day and 90-day deadlines in removing regulated substances and reporting on the progress. If the owner or operator of the facility fails to perform its CRO obligations, then the landowner or first mortgage holder may be responsible to perform certain CRO activities. 

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