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

Monday marked the fourth straight day in Ohio of sunny skies and temperatures in the 80s.  That’s quite remarkable given that we are just five weeks into spring and the summer solstice is almost two months off.   The unusually hot weather was almost nice enough to make one think of being on a Florida spring break vacation - - if the current state of the economy had not already killed that dream. 

But is it really always sunny and warm in Florida?  Is Ohio that much drearier?  Do the two states share similarities other than just the most recent weather conditions? 

 At the end of this final warm day, I found myself reviewing a proxy statement for a fund invested primarily in Florida municipal bonds.  The proxy statement opened my eyes to some of the other similarities between Ohio and Florida. 

 The fund needed to merge with another fund in the same family for what appeared to be a number of good reasons, including that the abolishment of the Florida intangibles tax in 2007 made Florida municipal securities no longer as attractive to certain investors.  Prior to 2007, investments in Florida municipal obligations had been an exception to the intangibles tax. 

 The proxy statement, as are most, was laden with risk factors.  Among others was the following 2008 data relating, generally, to the Florida economy: 

• The unemployment rate in Florida in 2008 was higher than the US average.
• Per capita personal income increased in Florida by a lesser percentage in 2008 compared to increases in the four prior years.
• Home median sale prices were down across Florida by a substantially larger percentage than in 2007.

 The particular economic data quoted in the proxy statement for Florida seemed to be not much better, and perhaps worse, than comparable figures for Ohio.  In large part - - if you trust official statistics released last month - - such a conclusion is correct.

 The Bureau of Labor Statistics recently reported that as of March 2009, both Florida and Ohio had a seasonally adjusted unemployment rate of 7.3%. 

 Similarly, the Bureau of Economic Analysis in March announced that per capital personal income rose in Ohio by 3% in 2008 (over 2007) while increasing only 1.7% in Florida during that same time period.

 Finally, according to the January 2009 S&P/Case-Schiller Home Price Index released last month, home sale prices had dropped more steeply in key Florida markets than in Cleveland:

                                                 1-month change           1-year change              2-year change             

Cleveland                                       -2.2%                          -5.2%                          -13.3%

Miami                                             -3.6%                          -29.4%                        -43.1%

Tampa                                            -4.4%                          -23.3%                        -34.8%                

The foregoing statistics, like the recent weather, cast a warmer glow on conditions in Ohio than one might first imagine.  And it is true that Florida has been hit comparatively harder in some segments than the Ohio economy. 

But all statistics are relative.  Just ask an Ohio resident if he would not mind having a house in Florida despite the recent home price freefall.  Averages and snapshot comparisons do not always tell the whole truth.  After all, the average height of a two-on-two basketball team consisting of Cavs center Zydrunas Ilgauskas and me would be 6'5".

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 In Woda Ivy Glen Limited Partnership v. Fayette County Board of Revision (2009), 121 Ohio St.3d 175, the Supreme Court of Ohio considered whether restrictions on real property resulting from participation in the federal low-income housing tax credit program should be taken into account when appraising the property for real estate tax purposes.  The real property at issue consisted of 60 individual parcels, each of which contained a single-family residence.  As required by Section 42 of the Internal Revenue Code, the property was subject to certain rent restrictions designed to make the rental rates affordable for low-income families.  These restrictions are binding on successor owners and recorded in the chain of title of the property.  Utilizing a cost-based valuation for tax year 2004, the county auditor valued the parcels at an aggregate value of $4,854,970, or approximately $80,000 each. 

Ivy Glen filed a complaint against the auditor’s valuation, alleging the true total value to be $2,400,000.  Rather than using the cost approach, Ivy Glen’s appraiser deemed the 60 parcels to be one economic unit and based his valuation on a rent-income analysis and comparable sales of rental properties.  The Board of Tax Appeals (BTA) rejected that approach and instead adopted the county’s cost-based valuation, reasoning that the properties were only two years old and should be valued as though free of any use restrictions imposed under the federal low-income tax credit program.  The BTA, relying on the Ohio Supreme Court’s previous pronouncement in Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision (1988), 37 Ohio St.3d 16, that property should be valued in its “unrestricted form of title,” questioned the validity of Ivy Glen’s appraiser taking into account the use restriction on the property imposed in connection with the low-income tax subsidy and affirmed the county’s cost-based valuation of the property. 

On appeal, the Court discussed its holding in Alliance Towers and found that, despite holding that “For real property tax purposes, the fee simple estate is to valued as if it were unencumbered,” the Court’s decisions have “broadly acknowledged that ‘all facts and circumstances which may affect the value of property must be taken into consideration.’”  The Court then distinguished between “private” encumbrances and those restrictions that are governmental “police power” limitations on use.  Under Appraisal Institute guidelines, the former are to be disregarded, while the latter should be considered.  Though the Court acknowledged that the federal government does not have a general “police power,” it nevertheless found that the low-income housing tax credit program were a means for Congress to implement public policy and improve the general welfare, and thus qualified as police power restrictions.  Since the BTA failed to consider the effect of the low-income tax credit restrictions in valuing the property, the Court vacated the BTA’s decision and remanded it for further proceedings consistent with Court’s decision.   

The Ohio Supreme Court’s decision provides an opportunity for owners of low-income housing tax credit property to review their tax valuation and determine if a complaint against the valuation is appropriate.  Although the tax complaint filing period for tax year 2008 has ended, tax payers will be able to contest 2009 taxes beginning in January 2010.

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It was reported this week in Crain’s Cleveland Business that the Blue Heron Golf Club in Medina County is for sale.  The golf course, only four years old and ranked in 2006 as one of the best new courses in the country, is surrounded by a residential development consisting of more than 400 home sites. 

 According to Crain’s, the broker for Blue Heron does not believe the fact that the course is on the market will negatively impact the sale of lots in the surrounding development.  He is most likely correct.  The general state of the economy is doing that job just fine on its own, thank you very much. 

Residential developers and new home builders have been two players in the market hit hardest by the current credit crisis and rising unemployment. 

 Data just released today (April 16) by the U.S. Census Bureau and HUD estimates single family building permits issued nationally in March 2009 were down 7.4% from the revised February figures, and down 42% from one year ago.  Estimates for February had been up slightly over those for January 2009.

 While March housing starts are estimated to be unchanged from those in February 2009, they were down a whopping 49.6% from March 2008 national levels.  Total single family units under construction, both nationally and in the Midwest, have declined each of the last 12 months.

 While sale rumors - - now confirmed - - may not have hurt new home sales in the adjoining subdivisions, the sale of the Blue Heron course cannot help unless the sale is to another operator intent on maintaining the property as a golf facility.  That issue can turn on what is or is not required by title covenants, documents which are often ignored by home buyers.

Park use is one alternative which could complement neighboring residential development.  The 2007 sale of Orchard Hills Golf Course to the Geauga Park District is a prime example of a golf course being converted to a use that successfully preserves the green spaces and recreational aspects of the property.  

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               On November 26, 2008, LandAmerica Financial Group, Inc. (“LandAmerica”) and its affiliate, LandAmerica 1031 Exchange Services, Inc. (“LES”) filed for Chapter 11 protection from creditors.  LES abruptly ceased its 1031 exchange intermediary business two days prior to the bankruptcy filing and LandAmerica sold its Lawyers Title and Commonwealth Title underwriting subsidiaries to Fidelity Title and Chicago Title shortly after the petition date. 

Monday, April 6, was the deadline for creditors in each case to file their bankruptcy claims.  A review of the filed claims in each case tells quite a tale of woe, with the 1031 exchange customers of LES hit exponentially hard. 

As a 1031 intermediary, LES held proceeds from the sale of its customer’s “relinquished property” for 180 days or until “replacement property” was purchased if earlier.  For an extended period, LES had been investing its customer’s sales proceeds in auction rate securities (“ARS”), the market for which froze in February 2008.  By November, LandAmerica could no longer fund the cash needs for replacement property purchases and this led to the Chapter 11 filing.

Customers who were in the middle of their 180-day replacement period awoke to find that their cash proceeds were not only unavailable (and likely tied up long term in illiquid investments) but that they would not be able to obtain their planned tax deferral under Section 1031 of the Revenue Code.  If that was not injury enough, many of these customers already had replacement properties firmly under contract and suffered the insult of potential breach lawsuits by the sellers of those properties. 

One LES creditor’s claim is reflective of the many similarly situated customers.  Deblu Realty Corporation had almost $1.5 million deposited with LES from the sale of relinquished property, but its proof of claim was not only for that amount but for $373,000 in lost deferral of taxes (at capital gains rates), $3.7 million in potential lost profits on the thwarted acquisition of replacement property as well as yet to be determined amounts for alternate financing costs and legal fees. 

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Recent activity in Washington, D.C. suggests that the federal government is moving one step closer to regulating greenhouse gas emissions.  US EPA has determined that greenhouse gas emissions are pollutants that endanger the public’s health and welfare.  US EPA’s endangerment finding could lead to regulation of greenhouse gas emissions under the Clean Air Act.  Alternatively, a new cap-and-trade bill has been introduced, which would remove greenhouse gases from regulation under the Clean Air Act, but would require a reduction in greenhouse gas emissions of 85% from 2005 levels by 2050. 

What does the potential regulation of greenhouse gases mean for real estate development? 

INCREASED ENERGY COSTS !

Energy-utility companies will be greatly impacted by regulation of greenhouse gases.  Particularly, in Ohio and other Midwest states, where electricity production is almost entirely dependent upon coal-burning, reducing greenhouse gas emissions could be quite costly.  Moody’s has estimated that consumer electricity costs will rise between 15-30% as a result of any cap-and-trade regulation.

With the expectation of increased energy costs, real estate developers should look to energy-efficient building systems or alternative energy sources as ways to reduce these costs.  The Ohio Department of Development and the Ohio Air Quality Development Authority offer grants to help offset some of the initial costs for installing alternative energy sources.  Additionally, tax credits are available for certain projects.

If you would like to learn more about potential climate change regulation and Ohio funding for alternative energy projects, these topics will be presented at the CREW of Greater Cincinnati 2009 Midwest Regional Conference.  The conference will take place April 23-25, 2009 at the Cincinnati Hilton Netherland Plaza.  Other topics presented at the Conference include:  "Successful Urban Renaissance Developments"; "Diversity by Design: Successful Inclusion Projects"; "Case Studies in Brownfield Redevelopment"; and "Capital Markets -- Effects from Washington Decision Making".  

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According to the Community Associations Institute, nearly 60 million people across the country live in association-governed communities. Many of these communities have been severely affected by the current economic downturn and increase in foreclosure rates. In a condominium or homeowners’ association, delinquencies and foreclosures create a ripple effect that impacts all owners. Once an owner ceases paying assessments, the association must either incur costs to collect the assessments, increase the amount of assessments to other owners, cut back on services, or some combination of the three. The problem is compounded when multiple owners become delinquent. 

The biggest mistake an association board can make is ignoring the problem and hoping that delinquent owners will eventually catch up. An association must have a properly enacted collection policy and adhere to it. For example, the policy may state that an owner whose payment is 30 days late will receive a reminder letter from the board. An owner who is 60 days late will receive a collection letter from the association’s attorney indicating that a lien will be filed if the past due amount is not paid promptly. At 90 days past due, the board should authorize the association’s attorney to file a lien to secure the delinquent assessments. Beyond 90 days, the matter should be reviewed by the board to determine if it is appropriate to file a foreclosure action. 

The decision to file a foreclosure action can be a difficult one and must be made on a case-by-case basis. The association’s lien is generally going to be lower in priority than the owner’s first mortgage, and possibly a second or third mortgage as well. This means that unless the property sells at sheriff’s sale for more than the total amount due under the mortgage or mortgages, the association will not receive payment. Additionally, the association will have to bear the costs associated with pursuing a foreclosure action. Nevertheless, it may be worthwhile for the association to file the foreclosure action because it may prompt the owner to pay the delinquent assessments. Even if the owner fails to pay, and the property is ultimately sold at sheriff’s sale without the association receiving any of the sale proceeds, the association may ultimately be much better off having a new owner who will (hopefully) be better about paying assessments. State law and the association’s declaration may permit the association to assess its costs of collection, such as attorneys’ fees and court costs, to the delinquent owner. The association should carefully track these expenses and consult with its attorney to determine if they can be recovered from the delinquent owner.    

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