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

How can you safely deposit the funds of a condominium association, development entity, municipality or any entity  which needs to know that there is little or no risk of loss to the deposited funds ? The Federal Deposit Insurance Corporation (FDIC) temporarily increased deposit insurance for individuals to $250,000.  The increased deposit insurance is scheduled to expire on December 31, 2009.  Carving up the deposit into separate entities is cumbersome and can be difficult to manage and maintain. 

Along comes the Certificate of Deposit Account Registry Service (CDARS).  CDARS is owned and opperated by Promontory Interfinancial Network, LLC.  Participating banks enter into a CDARS agreement in which the lead bank serves as the account custodian. CDARS then distributes the funds around to its participating banks to be invested in certificates of deposit in amounts less than the FDIC limitations ($100,000 for deposits maturing after December 31, 2009 and $250,000 for deposits maturing prior to December 31, 2009). CDARS will permit the application of FDIC deposit insurance on single deposits up to $50 million.  The benefit to the depositor is working with one bank, one interest rate, one maturity date and one statement.  

In these uncertain times for banks, all individuals, businesses, not for profits and municipalities should review their accounts and determine if there is a need to take advantage of the protections offered by CDARS.

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U.S. EPA took the first big step toward regulation of carbon dioxide and other greenhouse gases this week when it proposed a national system in which major sources would be required to report their greenhouse gas emissions.  Knowing the amount of greenhouse gases emitted by the major sources will aid the federal government in developing climate change regulations, particularly the reduction of greenhouse gas emissions under a cap and trade program.  EPA Administrator Lisa P. Jackson explained, “Through this new reporting, we will have comprehensive and accurate data about the production of greenhouse gases. This is a critical step toward helping us better protect our health and environment.” 

According to U.S. EPA, approximately 13,000 facilities, accounting for about 85 percent to 90 percent of greenhouse gases emitted in the United States, would be covered under the proposed rule.  The reporting requirements would apply to the following facilities:

• Suppliers of fossil fuels and industrial chemicals;
• Manufacturers of motor vehicles and engines; and
• Large direct emitters of greenhouse gases with emissions equal to or greater than a threshold of 25,000 metric tons per year.

 The first annual report would be submitted to U.S. EPA in 2011 for greenhouse gases emitted during calendar year 2010, except for vehicle and engine manufacturers, which would begin reporting for model year 2011.  Facilities self-certify their emissions data to U.S. EPA, who would then verify the emissions.  Facilities must maintain all records that may be required by U.S. EPA to verify the emissions data.  Failure to comply with the rule would be a violation of the Clean Air Act.

 If you believe that your facility is subject to the national reporting system or if you are not certain whether your facility emits more than 25,000 metric tons of greenhouse gases a year, you should begin evaluating your facility’s greenhouse gas emissions now before the proposed start date of January 1, 2010.  If you implement a plan for measuring and recording greenhouse gas emissions now, you will have the remainder of 2009 to perfect the process before it becomes mandatory and subject to U.S. EPA enforcement.

Once the proposed rule is published in the federal registrar, parties will have only 60 days to submit comments.  U.S. EPA will have to finalize the rule by the end of this year if it will be requiring companies to start calculating and recording their greenhouse gas emissions next year.  We can assist you in understanding the requirements of the proposed rule and submitting comments to U.S. EPA.

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In In re Cortner, decided February 4, 2009, the Bankruptcy Court for the Southern District of Ohio held that an Ohio property tax certificate holder was entitled to receive the auction-established rate of interest on its certificate, rather than a reduced, court-determined rate. The creditor held several tax certificates, purchased at auction as described in the Ohio Revised Code, entitling it to payment of delinquent real estate taxes on the debtor’s property. The debtor and Chapter 13 trustee argued for the Court to modify the interest payable on the tax certificates to the “Till” rate of interest. In Till v. SCS Credit Corp., 541 U.S. 465 (2004), the Supreme Court applied a formula to determine the interest rate payable to a creditor receiving installment payments, factoring in the time value of money and risk. The Till rate presumably would have been considerably lower than the eighteen-percent rate the creditor was entitled to based on the auction sale. 

The Court rejected the opportunity to modify the tax certificate interest rate, although it noted it could do so because the tax certificates did not qualify as a protected “security interest” under the Bankruptcy Code. The Court based its decision on § 511 of the Code, which applies the interest rate “determined under applicable nonbankruptcy law” to all “tax claims.” Thus, if the certificates were classified as a “tax claim”, the creditor was entitled to the auction-established interest rate set forth under Ohio law. In determining that the certificate was a tax claim, the Court first noted that the certificate was not only a lien holder under Ohio law, but was entitled to the amount owed for delinquent taxes. Further, there is nothing in the Code limiting “tax claim” holders to governmental units. Finally, the certificate bears all the hallmarks of a real estate tax debt in Ohio – the holder receives a super-priority lien on the property and may foreclose if the debt is not paid. 

The Cortner decision should encourage investment in the Ohio property tax certificates. Since the debtors on tax certificates are very often financially troubled, any investor would be concerned about having its possible return on the tax certificates adjusted in bankruptcy. The Court here, however, offered a strong analysis of why these interest rates should not be adjusted in bankruptcy, thus protecting the investor’s interest and expected return. With statutory interest rates allowed as high as eighteen percent, the possible profit on a tax certificate is very high.

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It is certainly no surprise that the commercial real estate leasing market has turned into a "tenant favorable" market.  How long this will last is anyone's guess.  Give the current leasing market conditions and overall economic conditions tenants should take precautions to prevent becoming victims of their landlord's potential financial defaults and inability to obtain credit.  

1. Build-Out Allowances:  Tenant's should request that build-out allowances are placed in an "escrow" or are secured by a "letter of credit" to make certain that funds exist when the tenant's or the landlord's contractors have completed their work and are requesting to draw upon the same.  Alternatively, any unfunded build-out allowances could be reimbursed to a tenant through a right of "set-off" against future rents;
2. Building Services:  Tenant's should request "self-help" rights in the event the landlord can no longer provide building services as contracted for in the lease agreement.  Services such as maintenance, repairs, janitorial, HVAC and utility services that are interupted can have a negative affect on tenants ability to operate their businesses.  Set-off rights against future rents can enable a tenant to keep services on going;
3. Non-Disturbance:  Lenders want to keep the property occupied and tenants want to remain in their space undisturbed when the landlord is dealing with their lender issues.  Tenants should request that the landlord's lender enter into a "non-disturbance agreement" to permit the tenant to continue to occupy the premises even if the lender steps into the shoes of the landlord.  Tenants should expect that the lender will request that the tenant "subordinate" to the lender's interests in the premises;
4. Subleasing:  Subtenants should request the right to deal directly with the landlord in the event the tenant (sublandlord) defaults on the underlying lease.  

Stability of the project is at the core of ensuring that the interests of the landlord, tenant and lender are balanced.  Today issues we once considered remote can arise and should be contemplated and discussed before the shoe is on the other foot ! 

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