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

Currently pending before the Ohio General Assembly is Senate Bill 165, which would significantly revise Ohio’s regulation of oil and gas drilling. Senator Tom Niehaus introduced the bill to increase the safety and regulation of drilling in Ohio, including concerns related to drilling in urbanized areas. To address these concerns, SB 165 requires, among other things, compliance with mandated well construction techniques, revises the application process and eligibility requirements, and gives the Chief of the ODNR Division of Mineral Resource Management increased enforcement authority. 

Well Construction Requirements

The new well construction requirements were proposed in response to an incident in Bainbridge Township, Geauga County. Due to faulty well construction, gas had infiltrated the aquifer and caused severe damage to one house and impacted twenty water wells. ODNR concluded that the primary cement job on the well production casing was deficient.

SB 165 eliminates all existing statutory provisions related to well construction and states that a well must be constructed in a manner that is approved by the Chief as specified in the permit, using materials that comply with industry standards for the type and depth of the well and the anticipated fluid pressures that are associated with the well. The bill also contains language specifically protecting all underground sources of drinking water. The bill authorizes the Chief to adopt rules that are consistent with the statutory well construction standards, for evaluating the quality of well construction materials and for completing remedial cementing.

Application Process and Eligibility Requirements

SB 165 proposes to revise portions of the law related to application for a permit to drill a well. For example, if the well will be drilled in an urbanized area, the application must contain a sworn statement that the applicant has provided notice by regular mail to the owner of each parcel of real property that is located within 500 feet of the surface location of the well, excluding any parcel of real property that is included in the drilling unit. In addition to terms related to safety, location and fencing, permits issued under the proposed rule will also include terms related to noise mitigation.

Some of the bill’s most significant revisions pertain to the mandatory pooling process. Under the proposed law, an applicant seeking mandatory pooling must pay a $5,000 fee. The bill also prohibits a person from submitting more than five applications for mandatory pooling orders per year unless the Chief approves additional applications. 

Chief’s Enforcement Authority

Current law requires the Chief to enforce the Oil and Gas Law and the rules, permits and orders issued pursuant to them. SB 165 takes this one step further and authorizes the Chief to issue a citation to an owner for a violation of any law, rule, permit or order. The citation may be a compliance notice or an administrative order. The Chief may also initiate an enforcement action for a material and substantial violation. If the owner fails to comply with a prior enforcement action, the Chief may issue a suspension order.

This article is intended to provide only a sample of the changes proposed by SB 165. For all the changes proposed please refer to the text of SB 165.

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One of my business law professors often started the class with an anecdote that had nothing to do with anything on our syllabus. One morning he entered the class and told of the frustrations he had in trying to execute a deed on behalf of his wife who was out of the country and for whom he held a perfectly drafted and executed power of attorney. Alas, the title company refused to accept the deed. 

I have had issues of power of attorney pop up in three different contexts of my practice recently. First, two underwriters refused to insure title to a property because the vesting deed was a transfer on death deed (ugh, see my prior comments about the dreaded transfer on death deed) executed by a power of attorney. Although there is no statutory prohibition with respect to the validity of such a transfer, initially, neither underwriter would insure title. One underwriter was swayed by the fact that the deceased’s will provided the same disposition for the property as the deed (although with the hassle of probate), the other underwriter was unmoved. 

Second, it is common for commercial leases to provide that if a tenant refuses to execute a tenant estoppel or a subordination agreement, then the landlord has a power of attorney to execute the documents on behalf of the tenant. When I represent tenants, I regularly strike this language. However, practically speaking, lenders will not accept documents executed by a power of attorney. With respect to estoppel certificates, the lenders already have the information from the lender—they want to hear directly from the tenant. With respect to the subordination, using a power of attorney leaves open too many openings for the tenant to push through in the event the subordination becomes an issue in the future. For example, a judge may find that the power of attorney should have been recorded when given or may refuse to enforce certain provisions for equitable reasons which the judge may have been more likely to enforce had the tenant been the party executing the subordination directly.    

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When it comes to taking care of our own health, all too often we rely upon reactive maintenance. For example, you ignore your doctor’s warnings and continue to eat fast food and fail to exercise on a semi-regular basis. You had the chance to help control the situation with some basic preventive maintenance, but you were too busy working and focused on more immediate issues. Now, crisis strikes suddenly in the form of a heart attack. Assuming you survive, you are now left with complicated reactive maintenance, hoping to repair the damage that has already been done. But could this have been avoided with simple preventive maintenance?

Often, the answer is yes. The same holds true for the environmental health of a commercial landlord’s property investments. If you choose to look the other way while your tenants operate your property, environmental issues could be like ticking time bombs waiting to explode into a full scale emergency. The problem is simple. It is the tenant, not the landlord, that has physical control of your property. Yes, your lease agreement requires the tenant to comply with environmental laws, but what if they don’t and their failure is not immediately obvious? It could be years and years before the contamination is discovered by a Phase I analysis conducted by a potential buyer of your property. By that time, the old tenant may be out of business or impossible to locate, not to mention you just lost your sale and may be stuck with the costly clean-up expenses.

So what can be reasonably done to help prevent this from happening? One potential solution is what has come to be known as a Tenant Environmental Evaluation, or “TEE”. A TEE is a simple process handled by your environmental consultant that evaluates a new tenant’s expected use, periodically monitors that use throughout the lease term, and supervises the tenant’s exit from the property upon lease expiration to ensure all equipment and chemicals are properly removed. It is not nearly as involved, exhaustive, or costly as a Phase I since you are monitoring real time activities, not investigating past covered-up abuses. When it comes to your real property investments, the best advice and practice is to be proactive, not reactive. After all, a simple change to your diet beats a quadruple bypass any day!

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Ohio’s Budget Bill, signed by Governor Ted Strickland on July 17, contained provisions authorizing Ohio’s first state-run New Markets Tax Credit, as well as substantially revising the state’s Historic Preservation Tax Credit. Here is a breakdown of each:

New Markets Tax Credit

Modeled after the federal New Markets Tax Credit, the state program allows up to a nearly $1 million cumulative, nonrefundable tax credit for an entity that holds an investment in a “qualified community development entity” over the next seven years. Like the federal Credit, the Program is intended to aid development in low-income areas where new projects are typically more difficult to finance.

Only insurance companies and financial institutions are eligible to receive the credit, and they may do so by holding a “qualified equity investment.” A “qualified equity investment” is an investment in a “qualified community development entity” (i.e. an entity with an allocation agreement under the Federal Credit that does business in Ohio) that: (1) is acquired solely for cash after July 17, 2009; (2) has at least 85% of its purchase price used to invest in low-income communities; and (3) is designated by the issuer as a qualified equity investment. 

To receive the credit, the community development entity must invest in a “qualified active low income community business” (“QALICB”). The intention behind this provision is to ensure the credit is used for new projects that actively promote job creation in the state. The QALICB definition excludes from such businesses those that derive 15% of annual revenue from real estate, such as developers. The language may permit a developer to be a QALICB, however, if it is the end user of the property through a sale-leaseback transaction. The program permits investment in a special purpose entity (“SPE”), principally owned by the property user, if the SPE was formed solely to rent or sell the property back to the principal user. Therefore, a developer could form an SPE and lease the property to itself as the owner of a separate end user entity, so long as the user is not itself a real estate developer.

An eligible entity may receive the credit if it holds such an investment on the first day of January in 2010 through 2016. The Program credit is equal to the “applicable percentage” of the purchase price. In years 2010 and 2011, however, the applicable percentage is zero. In 2012, the credit is seven percent, and in 2013 through 2016 the credit is eight percent. At the end of seven years, the entity may receive a 39% credit on a statutorily capped maximum investment price of $2,564,000, for a total credit of up to $999,960. The total amount of credits allocated by the state under the Program each year may not exceed $10 million.

Ohio joins a number of states that offer a New Markets Tax Credit in conjunction with the federal Credit. The Program should be a useful tool, along with the Historic Preservation and Low Income Housing Tax Credits, for encouraging investment in underserviced areas.

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Some time ago in this space I wrote about the prospects for revitalization from the creation of the Cuyahoga County Land Reutilization Corporation, better known as the County Landbank. Since then the Landbank has gotten up and running, or walking perhaps, but has made little progress toward its goal of returning significant amounts of abandoned and vacant property to productive use. 

As stated on its website, the Landbank acquired its first two properties, not the estimated six “test cases” that had been reported, on September 3, 2009. Both properties are vacant land abutting the Big Creek Trail in Brooklyn and are slated to be added to the Trail. The Landbank should become more active in acquiring abandoned properties toward year’s end as it expects to receive its first installment of bond and loan money in November.

The Landbank is also considering a new method for acquiring properties that would proactively assist homeowners prior to the initiation of foreclosure proceedings. A proposed “better bank” would buy mortgages from lenders at a discounted rate and then pass the savings along to the homeowner in the form of a reduced mortgage payment. This new mortgage would then be sold to a lender to recoup the Landbank’s initial expense. The proposal seems like a winning situation for everyone except the original lender who would take a significant hit against its expected return on the mortgage. However, the discounted rate offered by the Landbank on properties that are seriously deteriorating and at risk for foreclosure may be its best outcome as well. 

While some have questioned the legality of this “better bank” under the enacting provisions of Senate Bill 353, the idea is in fitting with the Landbank’s general purpose to “[f]acilitat[e] the reclamation, rehabilitation, and reutilization of vacant, abandoned, tax-foreclosed, or other real property within the county for whose benefit the corporation is being organized.” Further, S.B. 353 specifically stated that the Landbank’s purposes were not limited to those enumerated items. 

Even if the “better bank” was outside the original scope intended for the Landbank, it shouldn’t be difficult in the current political and economic climate to drum up support for a minor change in the law that would allow the Landbank to work to keep people in their homes. It may prove a useful tool in helping the Landbank reach its lofty goals and aiding lenders and homeowners alike in navigating through the economic downswing.

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