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

Vacancy rates are up; occupancy rates are down.  This spells opportunity for tenants and challenges for landlords.   The instinct which once prevailed in the real estate industry was to "go for the jugular" and cut the best deal you possibly can.  But real estate professionals know that today's "tenant market" will become tomorrow's "landlord market."  So, savvy real estate professionals are approaching the present  "soft" market with a creative approach which has the intention to make everyone a winner.  

Consider surplus space give backs; move-up to better space for the tenant with better terms for the landlord; percentage rent structured office leases for certain types of revenue generating space users (such as micro-office suites).  The options and opportunities are endless.   So, before you slit the throat of your adversary remember, what goes around comes around !

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The federal government recently announced several changes to U.S. immigration legislation. Two key topics involve increased enforcement efforts of the Immigration and Customs Enforcement (ICE) and changes in request for prevailing wage procedures. 

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The Cleveland Plain Dealer has reported that Fannie Mae, a player in the national secondary mortgage market and unwitting owner of numerous abandoned properties in the Greater Cleveland area, has reached a deal with the newly formed Cuyahoga County Land Reutilization Corporation to sell properties to it for $1 each.

Compared with our last report here, the deal represents a significant step forward for the Landbank which until now had acquired approximately 20 properties with 60 more under evaluation. The first set of transfers from Fannie Mae will consist of 25 properties, 24 of which have homes on them that will likely need to be demolished. Fannie Mae has agreed to pay up to $3500 of demolition costs on each property.  

Going forward, Fannie will essentially provide the Landbank with a purchase option on any foreclosed properties valued at under $25,000. The Landbank will have 30 days to evaluate the properties for acquisition prior to them being listed on the wider market. 

In other Landbank developments, the Board of Directors will consider authorizing a line of credit with KeyBank at its December 18, 2009 meeting. The credit line would go up to $7.5 million and would be a significant portion of the $15 million in financing the Landbank is looking to generate in 2010. 

Both the Fannie Mae deal and the Landbank’s new financing options demonstrate that the bank has substantive long-term plans to redevelop established Cleveland neighborhoods. The Landbank has already been cited by experts as a national model for addressing lingering problems from the foreclosure crisis. In the near future, once the influx of abandoned properties have gone through the demolition and cleanup process, there should be a substantial opportunity for investors and nonprofit organizations to take the lead in transforming once-residential space into new neighborhood uses.

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On October 30, a coalition of federal regulators issued the Policy Statement on Prudent Commercial Real Estate Loan Workouts. The Statement is designed to give greater flexibility to lenders in renegotiating or restructuring loans secured by commercial real estate, and should aid the flow of financing to credit-worthy borrowers. 

The first purpose of the Statement is to shield institutions from criticism for restructuring loans if an adequate review of the borrower’s financial condition has been performed. A review of the borrower’s condition is adequate if the management has:

            (1)        Put in place a workout policy establishing loan terms and amortization schedules and that allows for modification of terms in the event there is a default in repayment;

           (2)        An individual credit plan that analyzes current information on the borrower and guarantors and supports ultimate repayment, including (i) updated financial information; (ii) current valuations of the collateral; (iii) analysis and determination of loan structure; and (iv) appropriate legal documentation;

            (3)        A global analysis of the borrower’s debt service;

            (4)        The ability to monitor ongoing performance;

            (5)        An internal loan grading system that accurately reflects risk; and

            (6)        An Allowance for Loan & Lease Losses (ALLL) methodology that recognizes credit losses.

Second, the Statement provides that restructured loans will not be subject to an adverse credit classification solely due to a deterioration in the underlying collateral value, or because the borrower is associated with a particular industry that has been experiencing financial difficulty of late. 

As an example of these more favorable classification guidelines, the Statement offers a scenario where a lender refinances a $13.6 million balloon payment at maturation over the next 17 years. The borrower was paying timely up until the maturation date, but has experienced a decrease in cash flow and, per a recent appraisal, the LTV ratio is 104%. Under the Statement, the loan is properly classified as “pass” because the borrower has demonstrated the ability to make continuing payments even with the decline in collateral value and decreased cash flow.

This ability to avoid adverse credit classifications will prompt institutions to be more willing to engage in loan workouts where there is a realistic probability of repayment. Borrowers that have a sensible repayment plan going forward may also be more willing to approach lenders about restructuring as they will not be tied to other failures within their industry.

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On November 6, 2009, President Obama signed the Worker, Homeownership and Business Assistance Act of 2009. The new law extends the first-time homebuyer temporary federal tax credit for qualifying home purchases to April 30, 2010 and expands the eligibility requirements for purchasers.

Under the new law an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. The new law also authorizes the credit for long-time homeowners buying a replacement principal residence and raises the income limitations for qualified homeowners claiming the credit.  

Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

• Applies only to homes used as a taxpayer's principal residence.
• Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

Under the new law, the maximum credit amount remains at $8,000 for a first-time homebuyer (single person or married filing jointly or $4,000 for married persons filing separate returns). A “first-time buyer” is a purchaser who has not owned a primary residence during the three years up to the date of purchase.

The new law also provides a “long-time resident” tax credit of up to $6,500 to others who do not qualify as “first-time homebuyers” (single person or married filing jointly or $3,250 for married persons filing separate returns). To qualify as a “long-time resident,” a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns. To claim the credit, a taxpayer must file Form 5405 with the Internal Revenue Service, which you file with your original or amended individual federal income tax return.

Income Limits Increased under New Law

The new law raises the income limits for people who purchase homes after November 6, 2009. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

For homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements under the New Law

The new law contains new restrictions on purchases after Nov. 6, 2009:

• Dependents are not eligible to claim the credit.
• The purchase price of the home cannot be more than $800,000.
• A purchaser must be at least 18 years of age on the date of purchase.

For Members of the Military

Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and close on the purchase no later June 30, 2011.

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