New rules promulgated under Ohio’s Public Construction Reform (the “Reform”) have been released by the Joint Committee on Agency Rule Review.  The new rules include:   (1) Rules for Prequalification of Prospective Bidders on Subcontracts; (2) Rules for Best Value Selection of Construction Manager and Design-Build firms; and (3) Rules for the Form of Subcontracts.  The Rules for Prequalification and Best Value become effective 2/02/12, and the Rules for the Form of Subcontracts became effective 12/26/11.  The Joint Committee also released a new form of subcontract for public jobs in Ohio.  

Among other requirements, the new Prequalification Rules: (1) place significant emphasis on a bidding subcontractors' goals and history related to diversity and economic inclusion; and (2) permit a public authority to require a construction manager or design-build firm to employ additional criteria, in order to suit the unique needs of a project, including "knowledge of the local area and working relationships with local suppliers."  As such, local subcontractors with strong supplier relationships, firm diversity goals and proven track records for economic inclusion should have an advantage when bidding public works in Ohio. 

The new Prequalification Rules and other important information concerning the Reform may be found at http://ocr.ohio.gov/

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Commencing January 1, 2012, legal, real estate and insurance professionals will be required to advise clients of KRS 381.280 which creates a forfeiture of property rights for the taking of the life of a party in interest to the same prior to such parties executing deeds and other documents in question. It works like this: take the life (and actually be convicted of a felony) of your spouse, heirs, beneficiaries under wills, trusts or insurance policies or a joint tenant with right of survivorship and you will loose your interest in the property which you shared with the dearly departed. There are several exceptions to the general rule; see the text of the statute at the link provided above.  To all of our friends who are lawyers, real estate and insurance professionals, please take note and prepare for the education of your clients.                       


 

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The Ohio Legislature passed House Bill 153 on May 5, 2011. H.B. 153—a budget bill—which includes significant changes for Ohio’s public construction projects. Some changes will become effective on September 28, 2011, but others are forecast to become effective in early 2012. As such, we will have to wait a while longer to experience the full effect of the public construction reform.

The following is a sampling of impending changes to public construction works in Ohio:

(1)        Prevailing Wage Law (effective September 28, 2011):

These adjustments to Ohio’s prevailing wage law will take effect on September 28, 2011:

Threshold for prevailing wage application to new construction rises from $78,258 to $125,000.00;

Threshold for prevailing wage application to renovation, reconstruction, remodeling, enlargement, repair, or painting work rises from $23,447.00 to $38,000; and

Implementation of a “safe harbor” from liability for a contractor found to have underpaid prevailing wage, if the contractor makes full restitution and each violation is no more than $1,000.00 per employee.           

(2)        New Options for Construction Delivery (forecast to become effective in early 2012):

One aspect of the reform will allow Public Authorities in Ohio to utilize one of several construction delivery systems for Public Improvements. In addition to Ohio’s classic “multiple prime” public contracting, under which the public authority awards several contracts directly to heavy trade contractors, Public Authorities will now have the option to construct a Public Improvement under any of the following construction delivery systems: (1) Construction Manager at Risk; (2) Design-Build Firm; (3) Design-Assist Firm; or (4) General Contractor. 

(3)        Pre-qualification Criteria (forecast to become effective in early 2012):

The Ohio Department of Administrative Services, State Architect’s Office, is currently drafting “prequalification criteria” that will be required of subcontractors before they may work on a Public Improvement. Once the criteria are established and approved by the State Attorney General’s office, we should begin to experience Public Authorities’ implementation of the new construction delivery options. 

(4)        Bonding Requirements (forecast to become effective in early 2012):

H.B. 153 will also impact bonding requirements for Ohio’s public construction projects. The first draft of the new bonding regulations was circulated the week of September 12, 2011. The proposed regulations called for the Construction Manager at Risk, Design-Build Firm, Design-Assist Firm, General Contractor, or Multiple Prime Contractors to procure performance and payment bonds for projects under $20 Million. For projects over $20 Million, however, bonding could be passed down to subcontractors.   

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The Illinois General Assembly has recently amended the Landlord and Tenant Act   to add a new requirement for landlords:  when a unit changes over to a new tenant the locks must be changed or rekeyed.  This applies to dwelling units only.  The Act is not applicable for dwelling units in a building of 4 units or less when the owner occupies one of the units.  Failure to comply will make the landlord strictly liable for all resulting damages from theft suffered by the tenant.  See the Act for specifics.  

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The Ohio Department of Taxation has been enforcing the obligation to pay sales taxes by contractors and property managers for services received when the invoices do not separately identify sales tax as a specific line item.  Look at all of the invoices received for any services contracted for and make sure that sales taxes are separately broken out.  This will avoid an assessment for the unpaid sales tax and related penalties.  Of course the obligation can be shifted to the provider of the service by inserting appropriate language in the contract or invoice.

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The Situation:

Certain covered dwellings that are not designed or constructed in strict compliance with the Fair Housing Act are increasingly subject to suit, with strict liability befalling developers, designers, and contractors alike.  In fact, contractors are strictly liable for FHA violations even if they correctly follow a designer's noncompliant drawings.  Further, courts across America are consistently holding that potentially liable parties cannot sue each other for alleged contribution for a FHA defect, which enhances exposure for those sued directly by FHA protected class  members.  Needless to say, the financial risk of FHA noncompliance is grave.   

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 The Situation:

Certain covered dwellings that are not designed or constructed in strict compliance with the Fair Housing Act are increasingly subject to suit, with strict liability befalling developers, designers, and contractors alike.  In fact, contractors are strictly liable for FHA violations even if they correctly follow a designer's noncompliant drawings.  Further, courts across America are consistently holding that potentially liable parties cannot sue each other for alleged contribution toward an FHA defect, which enhances exposure for those sued directly by FHA protected class members.  Needless to say, the financial risk for FHA noncompliance is grave.   

FHA Coverage:

The FHA applies strict liability to developers, designers, and contractors who participate in the design or construction of a covered dwelling.  Under the FHA, each participant in the design and construction of covered dwellings has an independent obligation to comply with the FHA.  The term "covered dwelling" is construed broadly and applies to points of access in popular mixed-use commercial, retail, and residential properties. 

Those held liable for FHA non-compliance risk more than a "slap on the wrist."  Rather, FHA damages include (1) the cost to rebuild a covered dwelling; and (2) the prevailing party's attorney's fees.  Thus, developers, architects, engineers, and contractors must take caution and ensure their own compliance with the FHA. 

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With the current housing crisis, more individuals are voluntarily choosing to cease payments on their mortgages. This scheme, known as “strategic default,” is most common where the mortgage balance exceeds the home value. The phenomenon has fueled a rigorous debate, with some arguing it is immoral to default on a mortgage which is still affordable, and others taking the position that for some homeowners the “benefits” of willingly defaulting outweigh the consequences. 

A cost-benefit analysis as to whether a homeowner should strategically default is not as simple as it seems. Initially, a borrower’s credit score can plummet as much as 160 points. Although a foreclosure will stay on a credit score for seven years, its impact will lessen with time. Another risk depends on whether a homeowner resides in a non-recourse or recourse state. Non-recourse states forbid lenders to pursue borrowers for the money owed which exceeds the value of the home. Recourse states allow lenders to sue borrowers; yet, the overwhelming amount of foreclosures has lenders scrambling to stay afloat without the problem of pursuing defaulting homeowners. Finally, many defaulting homeowners wonder if they will be able to buy a home again. With a poor credit score, it can be difficult to buy a house. But financial institutions across the nation specialize in “mortgage repair” which targets homeowners who have recently defaulted on a mortgage.

Even with the uptick in the current crisis, it is surprising how few homeowners choose to default strategically. Luigi Zingales, author of “The Menace of Strategic Default” in a recent issue of the City Journal, argues this is due to moral implications: “the idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded. What does prevent people from strategic default, it seems, is their sense of what’s right.” Zingales feels social norms have a direct impact on whether an individual chooses to default or not; i.e. knowing someone who has done it makes you more likely to do it.  

On June 10, in response to the wave of mortgage defaults (strategic or otherwise), a Federal Housing Administration (FHA) reform bill passed the U.S. House of Representatives with a 406 to 4 vote. The FHA Reform Act (H.R. 5072), among other goals, seeks to withdrawal FHA approval from lenders with abnormally high default rates.  The bill has organizational support from those such as Robert E. Story, Jr., Chairman of the Mortgage Bankers Association, who hopes the bill “will allow FHA to address lender enforcement without discouraging responsible lenders from participating.”

Although homeowners may individually benefit from strategically defaulting, it raises an additional obstacle to the recovery of the broader housing market.  When a neighbor defaults, home values in the vicinity plummet and mortgage prices increase as lenders cover default costs. Yet, what is to prevent an individual owner making a rational financial decision that it is better to breach than continue paying on a mortgage balance that substantially outweighs home value?  Perhaps the idea of opportunistic, or willful, breach has trickled down to the American consumer.

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Ohio House Bill 292, which prohibits the future creation of transfer fee covenants, was signed into law on June 14, 2010 and will become effective on September 13, 2010. Transfer fee covenants in effect prior to September 13, 2010 are not affected by the new law.

Transfer fee covenants create revenue streams for real estate developers. A transfer fee covenant is created by a seller (the “Covenantor”), usually a real estate developer or builder. It requires subsequent buyers of the Covenantor’s grantee to pay a transfer fee back to the original Covenantor each time the property is sold. Transfer covenant fees generally range from 1% to 3% of the purchase price of the property and are payable to the Covenantor. 

Covenants often provide for a lien in favor of the Covenantor if the transfer fees are not paid. If recorded, the lien makes financing for future purchasers difficult because the lien created by the transfer fee covenant takes priority over the interest of a subsequent lender.

Transfer fee covenants may create problems for subsequent owners. The covenants require subsequent owners to pay the transfer fee to the original Covenantor, but as time passes, it may be difficult to determine to whom and where the fee should be paid. Transfer fee covenants also pose potential title problems because the covenant may only be contained in the original deed and could be missed during a title exam if the exam covers a shorter period of time than the typical 99-year existence of a transfer fee covenant.     

Creditors should obtain thorough title exams prior to issuing a loan or proceeding with a foreclosure action to avoid any potential problems created by existing permitted transfer fee covenants.

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Thank you to our friend Drew Stacey of First Place Bank for reminding us of the extension of the The First-Time Homebuyer Credit for the benefit of Military families for an additional year through May 1, 2011.  According to the IRS:

No credit is allowed for a home bought after April 30, 2010 (after June 30, 2010, if you entered into a written binding contract before May 1, 2010). However, if you (or your spouse) are on qualified official extended duty outside the United States for at least 90 days after 2008 and before May 1, 2010, you have an extra year to buy a home and claim the credit. In other words, you must buy the home before May 1, 2011 (before July 1, 2011, if you entered into a written binding contract before May 1, 2011)."

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According to FEMA the National Flood Insurance Program is no longer in effect.  See the post from the FEMA website below and on this link:

"The NFIP will not be reauthorized by Congress by midnight of May 31, 2010. Therefore, the Program will experience a hiatus – a period without authority to:

• issue new policies for which application and premium payment dates are on or after June 1, 2010, or
• issue increased coverage on existing policies for which endorsement and premium payment dates are on or after June 1, 2010, or
• issue renewal policies for which the renewal premium is received by the company on or after June 1, 2010, and after the end of the 30-day renewal grace period, until Congress reauthorizes the Program.

While awaiting Congressional reauthorization, FEMA is issuing the guidance contained in the attached bulletin (PDF 92KB, TXT 21KB). Within this bulletin, is a set of Frequently Asked Questions concerning NFIP authorization to help you in communicating with your insurance agents and policyholders.

The hiatus period is expected to end soon. We will inform you when the NFIP is again authorized to sell new policies, issue increase coverage on existing policies, or issue renewal policies."

If you currently own real property in or around an insurable flood zone you should contact your insurance carrier to determine what sort of coverage you now have, especially in light of the fact that hurricane season is about to commence !

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Parts 1 and 2 of this series on “The Commercial Real Estate Loan Market” examined differing views on the fallout of current and anticipated loan failures in the commercial real estate (“CRE”) industry. While all agree that losses will be significant, just how significant remains to be seen. Unfortunately, we don’t have a crystal ball to let us know which scenario or combination of factors will play out, and, like any forecast, we have to accept that there will be yet unknown events and circumstances which change the outcome. In the meantime, however, it is important for any participant in the CRE industry to understand the economic factors which shape the business decisions and perspectives of the players who hold and/or deal in CRE. These forces will impact all aspects of the CRE market, including, but not limited to, the market for and terms of CRE sales, the availability of financing and underwriting requirements, workout options (or lack thereof) for troubled CRE loans, and local and regional development. Understanding of the macroeconomic and microeconomic environment and acting strategically using that knowledge is an important key to success – or, perhaps, given the current economic climate, survival – in not only the CRE industry but any industry.  Regardless, there are now and going to be abundant opportunities !

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In contrast to the recent position taken by the Congressional Oversight Panel in their February 10, 2010 report mentioned in Part 1 of this series, there are economists, businesspeople and policymakers who have a less bleak forecast for the commercial real estate (“CRE”) loan market. One such example of this “non-crisis” position was presented in a research report by UBS Financial Services, Inc. entitled “Commercial Real Estate: Exorcising the Shoe” (the “UBS Report”). Some of the main points in UBS’ Report include the following:

(1)   CRE Loan Market Smaller. The CRE loan market is one-third the size of the residential market arguably lessening the reach of any fallout from mass CRE loan failures;

(2)   CRE Supply in Check. Unlike the residential real estate market, the CRE market was not overbuilt and therefore does not suffer from the excess supply issues in the residential sector. As a result, CRE valuations should not plunge as dramatically as residential home values have in many areas of the country;

(3)   Better Underwriting. While CRE loans certainly weren’t immune from the more liberal underwriting standards experienced during the recent “bubble” or boom years in real estate, the underwriting on commercial mortgage loans were more thorough than residential loans and generally had lower loan-to-value ratios than typical residential loans;

(4)   CRE Losses can be Absorbed. Most of the larger banks now have higher capital reserves to handle CRE losses;

(5)   Some CRE Losses have already been Recognized. Some argue that the market has already taken into consideration both actual and potential defaults in the approximately $700 billion worth of CRE loans (about 20% of all CRE loans) that are in the form of commercial mortgage backed securities (“CMBS”);

(6)   CRE is an Income Generating Asset. Unlike most residential real estate, commercial real estate generates (or has the potential to generate) income making workout options more viable.

The UBS Report considers the distinctions between CRE and residential real estate to be important factors in why we won’t see a repeat of the severe credit crunch created by the residential loan market in 2008 and 2009. Let’s hope they’re right!

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The commercial real estate (“CRE”) loan market is floundering and is expected to increasingly experience high levels of losses over the next several years. The question on interested minds is whether the fall-out from CRE loan failures will mimic the devastation caused by the crisis in the residential mortgage loan market. Recently, the Congressional Oversight Panel, established pursuant to the Emergency Economic Stabilization Act of 2008, issued a bleak, if not frightening, report on the implications these anticipated losses in the CRE market and repercussions to the greater economy. The report, entitled “Commercial Real Estate Losses and the Risk to Financial Stability” (the “Report”), cautions that we could soon face a wave of CRE loan failures as approximately $1.4 trillion in CRE loans become due sometime between 2010 and 2014 causing our already weakened economy to suffer prolonged negative effects. The Panel believes the impact of a fallout from the CRE loan industry will be far-reaching, affecting not only those in the commercial real estate industry, but also small business owners, communities and the general public.

Notwithstanding the grim picture painted by the Report, there are some economists who argue that while the forecast from the fallout from the CRE loan market will be cloudy, it won’t be “the perfect storm” envisioned by the Report. Retail Traffic Magazine, for example, a leading authority on retail real estate trends, finds that “according to many real estate economists,…[the] fear [that fallout from the commercial real estate loan market will do as much damage as that done from the residential real estate loan market fallout] is largely misplaced. Commercial real estate debt will likely stall the recovery in the credit markets, they note, but because of a combination of factors, including the limited impact of commercial real estate loans on the overall economy, it won't bring about the same wave of distress as the housing downturn did."  Watch for upcoming posts which provide a snapshot of each of these positions.

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The Ohio Department of Development has announced the availability of $8,000,000 in grant funding for qualifying energy efficiency projects undertaken at existing multi-family, commercial, and institutional buildings. The goal of the program is to encourage the installation of energy efficiency equipment that will measurably improve the energy efficiency of existing multi-family, commercial, and institutional buildings. The program is competitive, and awards will range from $125,000 to $1,000,000 per project. The funds available under this program were originally allocated to Ohio under the American Recovery and Reinvestment Act of 2009. 

Individuals and businesses within Ohio may apply for funding, although government agencies, individual residential building owners and schools are generally not eligible.  Applicants must have match funding equal to at least 50% of the total project cost. Additionally, projects should demonstrate job creation or retention through: (1) retrofit or installation hours; (2) new jobs directly created through the project; or (3) retention of existing jobs at the site. 

Funds may be used on energy efficiency improvements such as:

·        Insulation

·        LED Lighting

·        Energy Efficient Lighting Technologies

·        Efficiency Equipment

·        HVAC Upgrades

·        Weather Sealing

·        ENERGY STAR Appliances

·        Replacement of Windows and Doors

·        Installation of Geothermal Heat Pumps

·        Energy Audits/Commissioning/Retro-commissioning

·        Retrofits with Green Energy Techniques

·        Above Energy Code Pilot Projects

Applications for funding are filed in two stages. First, the applicant must submit a project summary on the http://recovery.ohio.gov website by April 23, 2010. Next, a complete proposal must be submitted to ODOD by April 30, 2010. Grants are to be announced around May 28, 2010.

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 “I have some prime swampland in Florida to sell you” is a slang expression used to poke fun at the gullibility of a person. This saying is based on events of the 1960s and 1970s where local scammers would attempt to induce out of state purchasers to acquire “lucrative” land which, in reality, turned out to be worthless, undevelopable plots. The federal Interstate Land Sales Full Disclosure Act (“Act”), 15 U.S.C. §§1701, et. seq., passed by Congress in 1968 and patterned after the Securities Law of 1933, was a reaction to that and other scams involving the sale of land. The Act was intended to provide a mechanism to inform buyers of land and to curb fraud and misrepresentation by sellers. In short, the Act forbids a “developer” or “agent” (for purposes of this article, a “seller”) who uses interstate commerce to sell or lease any nonexempt “lot” without first filing an acceptable “statement of record” with the U.S. Department of Housing and Urban Development and delivering to the buyer, prior to the sale, a “property report” which meets the requirements of the Act. When a buyer brings an action against a seller under the Act, the remedy sought, more times than not, is complete rescission of the purchase (as opposed to damages or equitable relief). While not all land sales require compliance with the Act (such sales being exempt under §1702 of the Act), for those sales and sellers that do fall under the jurisdiction of the Act, failure to comply can have serious consequences.

            Despite the Act’s good intentions, sellers and their advisors are citing three related concerns with the structure and application of the Act:

            (1) Buyer’s Remorse. Sellers argue that instead of shielding buyers from unscrupulous sellers, the Act is being used by buyers to combat buyer’s remorse. This is especially true for buyers of investment properties or vacation homes who are looking for a way out of purchases and construction contracts made prior to the downturn in the real estate market. Sellers are arguing that the Act is being used as a vehicle by buyers – even sophisticated buyers who went into the transaction with their eyes wide open – to leave the seller holding the bag and incurring the buyer’s loss on a bad real estate investment.  

            (2) The Punishment Doesn’t Fit the Crime. Related to the first point is the seller’s second argument that outright rescission of the transaction, is an unfair, even severe, remedy for a situation where the developer or agent unintentionally failed to comply with the Act and where no fraud or misrepresentation was alleged. Instead of fraud and misrepresentation, recent litigation under the Act has focused on the following issues: whether the Act applied to a particular transaction, availability of exemptions, including partial exemptions, under the Act; and whether a limitation period contained in the Act bars a suit. To quote another saying, sellers contend that “the punishment doesn’t fit the crime”.   An appropriate middle ground on this issue remains to be seen.

            (3) Even Courts are Conflicted. Combine the above two points with the fact that there is a conflict in the courts over the interpretation of the Act, and it leaves sellers and their advisors playing an elaborate guessing game (or, perhaps a game of “Russian Roulette”) in navigating the complexities of the Act. In addition to being knowledgeable about the Act and the regulations promulgated thereunder, sellers must also be vigilant to consult local applicable case law on interpretation of the Act. It is for these reasons that some practitioners believe Congress must revisit the Act and update or modify it accordingly.

            In summary, sellers who deal in and with real estate transactions would like to see changes to the Act to bring it in line with the lessons that have come to light in the past forty years, including, most notably, those derived from the issues discussed above. Nevertheless, the other side of the same coin is the admonishment to sellers to make review of and compliance with (if required) the Act a standard part of any real estate development project and to seek out professional help when needed. Don’t create an unintended escape hatch for a buyer in an otherwise solid, well-planned and executed development project.

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In 2001 when Congress repealed the estate tax for the far off year of 2010, with the estate tax returning in full force in 2011, everyone assumed that Congress would act to revise the 2001 law before January 1, 2010. However, to everyone’s surprise, Congress did not act. The new year has come and gone and so has the tax—at least for now. But is this a good result? Is 2010 a “good year to die”? 

First, although there is no estate tax in 2010, in 2011 there is a $1,000,000 exemption and 55% tax on the remainder of the estate. 

Second, the estate tax could change before the end of the year. There is precedent for Congress retroactively restoring taxes that have been upheld by the courts. This means that while there is still time for Congress to do something about the estate tax repeal, what they may agree to is unknown.  

Third, in 2009 and 2011 the basis of an asset inherited or received will receive a step-up in basis to the value as of the date of the owner’s death (or the alternate valuation date six months later).  In 2010 there is no step-up in basis, but instead there is a carry-over of the decedent’s basis to beneficiaries. However, an estate representative can elect assets for a basis increase of up to $1,300,000 and an additional $3,000,000 of basis increase if there is a surviving spouse of the deceased. Anything exceeding those amounts is subject to carryover basis—the basis for the heir is the same as the basis for the deceased. On very large estates that may have held real estate, stock and other assets for decades, the carryover basis may be a fraction of the current fair market value of the asset which will result in a large taxable gain to the heir when the asset is sold.   

Fourth, most wills and trusts are currently drafted on the assumption that there is a federal estate tax. Language in trusts often refers to the exempt portion of the estate, but under the current repeal this language does not make sense since all of the estate is exempt. 

Fifth, the tax rate for lifetime gifts has been lowered from 45% to 35%. But again, it is unclear if Congress will change this tax rate if they patch the estate tax. That makes this year a year of uncertainty for lifetime gifts as well, although the $1,000,000 lifetime gift exemption is still in effect.

Be careful not to assume that your assets (e.g. cash, securities, business interests, real estate, retirement accounts and the face value of life insurance policies) fall below the exemption. Now is the time to review your family’s assets, your beneficiary designations and your estate planning no matter the current value of your estate.  Check back here periodically for updates on this issue as Congress is expected to act sooner or later.

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Representatives Ken Yuko and Brian Williams recently introduced House Bill 408, which would create a condominium “super lien” in Ohio. Ohio condominium associations currently have the right to lien a condominium owner’s unit for unpaid assessments; however, that lien almost always sits behind the first mortgage lien. When the unit is foreclosed upon and sold at sheriff’s sale, the association often finds that the sale proceeds all go to the first mortgage holder and the association is unable to collect what it is owed despite having filed a lien. Condominium associations have argued that their right to collect past due assessments deserves priority over the first mortgage because the association uses those assessments to keep up the entire condominium property, thereby protecting the collateral of the first mortgage holders. Thus, the associations have argued, it’s unfair for the first mortgagee to take all the sale proceeds and leave the remaining owners to make up for the lost assessments. To address this problem, some states have adopted “super lien” legislation, which allows a condominium association to collect up to six months of assessments from foreclosure proceeds before any other liens on the unit are paid. Not surprisingly, most mortgage lenders are opposed to these super liens. We will follow this legislation and keep our readers apprised of the latest developments.

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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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In 2005 the United States Supreme Court in Kelo v. City of New London upheld the actions of the City of New London, Connecticut (the “City”) in forming a non-profit corporation to redevelop the Fort Trumbull area of the City. In order to capitalize on Pfizer, Inc.’s (“Pfizer”) private development of an adjacent research facility, the New London Development Corporation prepared a detailed development plan which included 115 privately held parcels. The Supreme Court upheld the City’s right to take the privately held properties in order to complete its development plan. 

Although the 5 to 4 decision was in line with a long history of Fifth Amendment eminent domain cases, it ignited a backlash throughout the country. 42 states enacted legislation placing further restrictions on the use of eminent domain for economic development. In Ohio, the Ohio Supreme Court held in Norwood v. Horney that the use of eminent domain merely for economic benefit violated the Ohio Constitution. The Ohio legislature also amended Ohio’s eminent domain law to make the “slum” and “blight” standards more stringent. Horney and the legislative changes tie the hands of government and swing the Kelo pendulum too far to the side of private property owners.

Although tax credits given to Pfizer were not a part of the Kelo litigation, Pfizer’s announcement last week that it would pull out of its research facility when its partial tax abatement ends re-ignited the discussion on Kelo. Those opposed to a public entity’s right to take property for private economic development point to the fact that, not only was the City’s plan never enacted, leaving the Fort Trumbull area vacant, but now Pfizer is leaving and taking over a thousand jobs with it. 

However, in urban areas, it is often impossible to complete any project of scale without involving private property owners. Often times these private property owners are able to hold an entire project hostage by demanding excessive values for their properties. Although the development in New London never came to pass, other developments which have civic value should not be permitted to die on the vine due to the self-interest of one property owner.  

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We have been following the continuing saga of the homeowners affected by Chinese drywall used mainly throughout Florida, Louisiana and Virginia when U.S. supplies ran low. According to affected homeowners, the Chinese drywall emits a gas that causes health problems such as headaches and nosebleeds, erodes metal and electrical fixtures, and leaves a foul rotten egg odor throughout the home. The only known remedy—removing and replacing all the Chinese drywall in the home—is costly and to this point has not been covered by insurance. Unable to sell the property, and unable to live in it, some owners have been forced into temporary housing and bankruptcy, the New York Times reports. 

Homeowners have filed hundreds of lawsuits against the Chinese companies that manufactured the drywall. These lawsuits, however, face a number of significant hurdles. For one thing, much of the drywall is simply stamped “Made in China,” with no indication of the specific manufacturer. Even when the manufacturer is known, many of them have gone out of business or refuse to respond to the lawsuits. China does not enforce civil judgments from U.S. courts and international court is costly and time-consuming. Some lawyers have proposed creative solutions to the problem, such as seizing the ships that transported the drywall to the U.S., but it’s not clear that any court would approve that remedy.   

The affected homeowners may have other avenues for a successful resolution outside of the legal process, however. Congress ordered the Consumer Products Safety Commission to conduct a study of the Chinese drywall. That study, while finding that the Chinese drywall had higher levels of sulfur and strontium than U.S. drywall, was unable to make a connection between those higher levels and the health and other problems experienced by U.S. homeowners. Further testing to establish a connection is under way. The chairwoman of the Consumer Products Safety Commission met recently with Chinese officials and discussed the drywall issue with the hope of reaching some agreement to help U.S. homeowners. Whether political pressure results in any substantial relief for U.S. homeowners remains to be seen.

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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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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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In December 2007, a Lake County Common Pleas Court judge issued a landmark decision holding, among other things, that an owner of real estate that touches Lake Erie owns title extending as far as the water’s edge. State ex rel. Merrill v. Ohio Dept. of Natural Resources (2007), Lake County Common Pleas Case No. 04CV001080. Lake County is one of eight Ohio counties which contain Lake Erie shoreline.

On August 21, 2009, the Court of Appeals for the Eleventh Appellate District affirmed that holding in State ex rel. Merrill v. Ohio Dept. of Natural Resources, 2009-Ohio-4256. In particular, the Court of Appeals determined “that the waters and submerged bed of Lake Erie when under such waters is controlled by the state and held in public trust, while the littoral owner takes fee only to the water’s edge.” 2009-Ohio-4256 at ¶129. The Court of Appeals reasoned that “[t]he water’s edge provides a readily discernible boundary for both the public and littoral landowners.” 2009-Ohio-4256 at ¶128. The actual water’s edge, or shoreline, is the line of contact of a body of water and the land between the high and low water marks. 2009-Ohio-4256 at ¶¶97 and 127. 

In reaching its decision, the Court of Appeals reviewed appeals by environmental organizations representing members who make recreational use of the shores of Lake Erie, and cross-appeals by individual landowners and a non-profit corporation representing owners of littoral property on Lake Erie. In an interesting twist, the Court of Appeals found that the attorney general lacked the authority to pursue an appeal on his own behalf and ordered the state of Ohio’s assignments of error and briefs stricken.

The Court of Appeals did vacate that part of the trial court’s decision whereby the trial court attempted to reform any deed granting to its owner land extending lakeward of the water’s edge. The Court of Appeals found the issue of reforming the deeds was not before the trial court and, therefore, the parties had not been afforded the opportunity to argue their positions. 2009-Ohio-4256 at ¶103.

Any party wishing to appeal the decision must file a notice of appeal to the Supreme Court within 45 days from the entry of the Court of Appeal’s judgment.

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A perpetual letter of credit (LOC) does not last as long as you might think.  In physics “perpetual motion” is movement that goes on forever.  Commercial law is less ambitious.  Under U.C.C. § 5-106(d), a “perpetual” LOC expires after five years.  To further complicate the issue, a recent case from the 9^th Circuit held that a LOC that continues indefinitely is not “perpetual.”

According to Golden West Refining Co. v. SunTrust Bank, 538 F.3d 1233 (9th Cir. 2008), a letter of credit is only "perpetual" if that word is used explicitly.  Under U.C.C. § 5-106(d), "[a] letter of credit that states that it is perpetual expires five years after its stated date of issuance, or if none is stated, after the date on which it is issued."  In Golden West the bank argued that its LOC was "perpetual" and had expired 5 years after it had been issued.  Its LOC terminated after 1 year, but "automatically renewed" if the lender did not elect to terminate it. The 9th Circuit rejected the bank's argument.  It found that "a letter of credit is only perpetual if it expresses in words that it is perpetual."  Because the LOC in question terminated after a year and did not explicitly state that it was perpetual, it was not "perpetual" under U.C.C. § 5-106(d) and did not terminate after 5 years.

Golden West has not been cited by any court outside the 9^th Circuit yet.  Although not binding on states outside the 9^th Circuit, its holding is instructive for anyone drafting a LOC, at least until there is further law interpreting perpetual LOCs.  Accordingly, if you want a LOC to last indefinitely, state that it “renews automatically.”  But if you want it to be “perpetual” and expire after 5 years, use the word “perpetual.”

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The Home Affordable Modification Program (HAMP) was announced on February 18, 2009.  The first set of details were published by the Treasury Department on March 4, 2009.  Those details were revised and republished on April 21, 2009 and updated on June 8, 2009.

The mission of the HAMP is to save risky home mortgages from foreclosure. The means is to reduce the homeowner’s monthly mortgage payments to a manageable amount. The HAMP features a sharing of the reduction by the lender and the Treasury Department. The HAMP also offers incentives to the lender, the loan servicer and the borrower.

The monthly mortgage payment reduction may be accomplished in one or a combination of ways: lowering the mortgage loan interest rate or extending the term of the mortgage loan or freezing some of the principal of the mortgage loan. The HAMP is supposed to be available to homeowners who are at risk of defaulting on their home mortgage. It is not supposed to matter whether the problem is caused by a serious family hardship, a sudden drop in income or a decline in market value of the home to a level below that of the principal balance of the mortgage loan.

The HAMP relies on mortgage servicers to promote a loan modification. Each servicer must first qualify and sign a contract with Fannie Mae. To date more than thirty servicers have qualified. However, some media have complained that the level of understanding among the servicers varies widely. In turn, that uncertainty has slowed the process in some cases.

The homeowner must satisfy the requirements for the Program. A Hardship Affidavit form must be completed by the homeowner and backed up by appropriate proof (showing income and other financial information). Then, with the assistance of the lender and the Treasury, the homeowner can arrange to have the monthly mortgage payment reduced to no more than 31% of the homeowner’s monthly income. This 31% level is supposed to be low enough to allow homeowners to make their monthly payments and avoid foreclosure. Once a homeowner has qualified, there is a 3-month trial period to make sure that the homeowner can satisfy the new, lower payment obligation.

Late in June, the Treasury Department announced a nationwide campaign to promote the HAMP and to let homeowners know that the HAMP might be able to save their home from foreclosure. The campaign is supposed to utilize housing counselors, community organizations and public officials to publicize the Program. A nationwide bus tour has been organized to bring the word to the hardest-hit cities suffering a high number of foreclosures.

A July 28 meeting was held at the U.S. Treasury in Washington to discuss ways to speed up the process. Twenty-five loan servicers attended the meeting and reportedly promised to ramp up the rate of modifications substantially.  The Treasury Department announced that the new goal is to reach 500,000 home loan modifications by November 1, 2009.

On August 4, the Treasury Department issued its first report on modifications under the HAMP. The report confirms the perceived difficulties in the ramp-up, but does suggest that many servicers are beginning to understand the complicated process and are accelerating their responses to home loan modification requests. In addition to continuing these monthly reports, the Treasury Department announced that Freddie Mac will implement an audit procedure to test applications that have been declined.

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So you finally got a buyer for your house after having it on the market for nine months. As frosting on the cake the buyer says she can close within a week. 

Great! Right? Well, if your buyer made her mortgage loan application on or after July 30, 2009, it may take a little longer.

On July 30, Federal Reserve System rules (http://edocket.access.gpo.gov/2009/E9-11567.htm) went into effect implementing the Mortgage Disclosure Improvement Act of 2008 (MDIA). The rules - -applicable to purchase, construction and refinance situations - - impose various waiting periods between the time a transaction specific disclosure is made by the lender and the time when the residential loan transaction can close. The rules apply to all institutions engaged in closed-end, dwelling-secured lending for consumer purposes that is subject to RESPA.

The rule was going to go into effect in October 2009, but the date was moved up by the Fed two months in mid-May. Home equity lines of credit are excepted from the rule and are instead subject to separate rules for “open-end” credits. Different rules also apply for timeshare interests. 

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The U.S. Court of Appeals for the District of Columbia recently upheld a 2007 Federal Communications Commission ("FCC") order prohibiting the owner's of apartment buildings, condominiums and other multi-unit residential properties from entering into exclusive contracts for providing cable T.V. services.  The FCC relied upon Section 628(b) of the Communications Act.  The FCC's position is that to restrict a multi-unit residential project's access to only one cable provider forecloses the expansion of fiber and phone, video and internet bundling services; thereby, denying residences the benefits of increased competition, lower prices and improved content and services. Take note of this ruling when the issue arises in the multi-unit residential projects you own, manage or are developing.

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Congress has recently introduced a number of measures in response to the problems caused by defective drywall imported from China. Both the House and Senate introduced identical bills titled the Drywall Safety Act of 2009 (H.R. 1977; S. 739), which, if enacted, would require the U.S. Consumer Product Safety Counsel to study at least ten samples of drywall imported from China between 2004 and 2007 taken from homes in Florida, Louisiana, Mississippi, Texas and Virginia. The study is to include an analysis of (1) the chemical and organic composition of the drywall, (2) the effect of the drywall compounds on metal wiring, air conditioning and heating units, and other metal fixtures, and (3) any health or environmental impact of the compounds. The Act further directs the CPSC to initiate a proceeding to determine whether a consumer product safety standard regulating the composition of materials used in drywall is necessary to protect the health and safety of residential homeowners and imposes a temporary ban on the importation of drywall exceeding five percent organic compounds.

Additionally, the House passed a measure to amend the Mortgage Reform and Anti-Predatory Lending Act, H.R. 1728, to direct the Secretary of Housing and Urban Development to study the effect on residential mortgage foreclosures of (1) the presence of defective Chinese drywall in such residences and (2) the availability of property insurance for residences where such drywall is present.  HUD is required to report its findings, conclusions and recommendations to Congress. This bill has been referred to committee.

The focus of the legislation under consideration is the evaluation of the drywall problem and its impact upon residential owners, and addressing future drywall imports, as opposed to providing any relief to those whose homes contain the defective Chinese drywall. If the proposed studies show that Chinese drywall issues have caused environmental, health, foreclosure or insurance issues for residential property owners, there may be another round of legislation to address those issues. Check back here for updates as we track the progress of these measures through Congress.       

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US EPA has amended the Standards and Practices for All Appropriate Inquiries (“AAI”) to acknowledge another ASTM standard can be used to satisfy the AAI requirement for the landowner defenses to liability under Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) – innocent landowners, bona fide prospective purchasers, and continuous property owners. In addition to ASTM International Standard E1527-05, you can now use, when applicable, ASTM International Standard E2247-08 entitled Standard Practice for Environmental Site Assessments:  Phase I Environmental Site Assessment Process for Forestland or Rural Property (“ASTM E2247-08”).

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In the past, we have spoken about grants and loans available through the Ohio Department of Development for advanced energy residential projects, such as solar and wind energy installation.  Federal funding is also available for residential energy-reduction projects through The American Recovery and Reinvestment Act of 2009 (ARRA).  A total of $250 Million from ARRA was allocated to HUD for its Assisted Housing Green Retrofit Program (GRP).  Under GRP, HUD is offering up to $15,000 per residential unit for projects that reduce energy costs, reduce water use, and improve indoor environmental quality.  HUD expects to fund about 25,000 units (approximately 300-350 properties), with an average $10,000 provided to each unit.

Beginning June 15, 2009, HUD is accepting applications for GRP funding on a first come, first served basis, and subject to allocations for project categories, geographic location and owner/affiliate concentration.  HUD may offer either a Green Retrofit Grant or a Green Retrofit Loan repayable from a share of surplus cash and from sale and refinancing proceeds.  The performance period for completing all Green Retrofits will generally be twelve (12) months, but in no event may it exceed twenty-four (24) months.  The program requirements differ depending on the type of project-based assistance contract and depending on the owner entity (nonprofit or for profit).

The properties eligible to receive GRP funding are the following: Section 202 funded properties that have at least 32 units; Section 811 funded properties that have at least 8 units; properties receiving assistance pursuant to Section 8 with USDA Section 515 loans and which have at least 20 units; and all other Section 8 funded properties having at least 72 units.

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The rights of owners and tenants in post-foreclosure property have been dramatically altered by new legislation signed by President Obama. On May 20, 2009, President Obama signed the “Helping Families Save Their Home Act,” which contained provisions to aid renters whose landlords go through foreclosure. Title VII of the Helping Families Act (the “Act”) is entitled “Protecting Tenants at Foreclosure” and generally requires the immediate successor-in-interest on foreclosed property to recognize the lease rights of existing tenants on the property. 

The Act applies to any property where there has been a foreclosure on a “federally-related mortgage loan or on any dwelling or residential real property” after May 20. “Federally-related mortgage loan” is defined in RESPA as being limited to mortgages on property “designed principally for the occupancy of from one to four families.” Therefore, the Act’s requirements apply only to residential, and not commercial, property. 

If there are “bona-fide-tenants” on the property that signed leases prior to the foreclosure, the Act appears to require landlords to recognize the remaining term of the lease, although there is some ambiguity in the text of the Act regarding whether a landlord may choose instead to require existing tenants to vacate on ninety-days notice. “Bona-fide tenant” is a defined term essentially meaning that the tenant’s lease was the product of an arms-length transaction. 

There are two situations under the Act where it is clear a post-foreclosure owner may require a tenant to vacate upon ninety-days notice. First, if the new owner sells a tenant’s unit to a purchaser who will occupy it as a primary residence, the owner may require the tenant to vacate after expiration of the notice.  Second, a tenant who does not have a lease or whose lease is terminable at will must also receive a ninety-day notice before being required to vacate. The Act does not displace any federal or state requirements for terminating subsidized tenancies, or any state laws that offer greater protections to tenants. If not renewed, the Act will expire on December 31, 2012. 

It is especially important for lenders to be aware of this new law, as many are becoming owners of real property through foreclosure proceedings. Anyone acquiring property post-foreclosure must carefully examine existing tenancies to ensure it recognizes leases or gives appropriate notice as required by the Act. Hopefully, better guidance will be offered in the near future concerning when a landlord may terminate an existing tenancy after giving proper notice.

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Ohio’s Transfer on Death Statute became effective at the beginning of 2002. Prior to the law being passed, there was much buzz in the real estate and trusts and estates legal community about why Ohio did not have a vehicle permitting owners of real estate to transfer real property on death to a named beneficiary, thereby avoiding probate of the property. After all, bank accounts could be transferred by naming a transfer on death beneficiary. Why could the same not be done for real estate? Ohio’s transfer on death statute had several problems, most notably the ambiguity with respect to whether or not joint tenants could be transfer on death grantors and, if so, what was the effect of the death of one, but not all, joint tenants? The debate and discussion became so heated that a multiple choice question was circulated on the Ohio State Bar Association’s Real Property Listserv suggesting five different vesting possibilities with the sixth multiple choice answer being “I don’t give a rat’s @$$. I have heard entirely too much on this topic and I want to be left alone.” Choice 6 knocked all others out of the ballpark.      

 A new Senate bill was introduced on April 30 which throws out the old transfer on death statute, getting rid of transfer on death deeds entirely, and replacing them with a transfer on death affidavit. In fact, the bill actually answers many of the questions that those of us in the real estate business have been debating since the law’s inception. For example, it makes very clear that joint tenants may name a transfer on death beneficiary. It also clarifies that upon the death of one joint tenant, the property is owned by the remaining joint tenants. In the event that there is a transfer on death affidavit in effect upon the death of the last joint tenant, the property transfers to the beneficiary. The bill cleans up the confusion of transferring on death to the trustee of a trust when the trustee of the trust may change. It also addresses ambiguities left open in the original statute with respect to a spouse’s dower interest.

In fact, the new bill is so well drafted that I thought it was the perfect fix. That is, until I described the changes to my trusts and estates colleagues. They expressed the concern that they will now have to do a full title search on every individually owned piece of real property in every estate to confirm that there is no transfer on death affidavit of record. Previously, they only obtained the last deed of record which would contain the transfer on death beneficiary, if any. As a real estate attorney who regularly orders title commitments, I believe that this is a small price to pay for the clarity that the statute brings to the dreaded transfer on death deeds. Hopefully it will put a stop to multiple choice questions on the Real Property Listserv.       

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How low will they go?

Bending to market pressures, Cuyahoga County Auditor Frank Russo recently announced that the County’s 2009 valuation update will likely result in significant decreases in the County’s assessed value of residential homes – with an 8% average reduction across the County. 

The media reports note that the State intends to compare Mr. Russo’s proposed values to the actual sales figures from each community and will ultimately approve new fair market values likely between 92% to 94% of the fair market value.  The State’s suggestion of a 6% to 8% discount off of the appraised fair market value is really aimed at those properties that have not been recently sold. This “discount” should not be applicable to those non-residential properties where there was a recent arm’s length sale of the property. 

School districts (when the sale exceeds the current assessed value) and property owners (when the sale is below the assessed value) actively seek adjustment of the market value of the non-residential properties to an amount equal to the purchase price. The Ohio Supreme Court has held that the purchase price paid in an arm’s length sale is the best indication of the fair market value of real property.  

The Auditor’s decision to seek an 8% average reduction in value comes at the close of the property tax complaint filing season which ended March 31. In Cuyahoga County alone, a reported 17,000 decrease complaints were filed at the Cuyahoga County Board of Revision with respect to the 2008 tax year. Compared to the record 10,000 decrease filings last year with respect to the 2007 tax year, the 2008 “off-year” filings (the last year of the 2006-2008 triennium) are extremely notable.  

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Two foreclosure related bills of great interest to both borrowers and lenders were introduced in the Ohio House of Representatives in February but are moving slowly, if at all, through the legislative process.  One of the bills is too bold to have a serious shot at getting signed by Governor Strickland, but the other is modest enough that it may pass. 

House Bill 3, the more sweeping of the two, has languished in the Housing and Urban Revitalization Committee.  At a very basic level, the bill would: 

1.         Impose a six-month foreclosure moratorium, during which a court could not hear or issue judgment on a foreclosure complaint.  The moratorium loses a bit of its teeth, however, as a mortgagee an petition the court to proceed with the action if a borrower is more than thirty days late on a payment during the moratorium.

2.         Establish new filing requirements for residential foreclosure complaints, including certain notices to be given to borrowers by loan servicers, a statement of mortgage information (including the identity of the note holder), an appraisal, and a $1,500 filing fee.

 3.         Allow common pleas judges to modify mortgage terms, including principal amount, in residential foreclosures if the judge determines the modification would benefit both parties.

 4.         Require mortgage loan servicers to register with the state and be subject to extensive regulation and oversight.

 5.         Establish a loan modification program, run by the Director of Commerce, which would allow borrowers to modify loans when a modification would result in a greater recovery to the lender than a foreclosure. 

 The drastic nature of HB 3, particularly the mortgage modification provisions, has led to strenuous opposition and even promises of constitutional challenges (and here) should it pass.   While the bill as a whole likely won’t move much further, it wouldn’t be surprising to see small pieces of it come up for a vote.  If any significant portion of HB 3 passes, lenders will be faced with sharply increased mortgage-related operating costs.  They would need to quickly develop processes to determine which distressed properties are eligible for the moratorium bypass and whether the $1500 filing fee makes a workout preferable to foreclosure on a given property. 

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Effective June 1, 2009 all residential properties (single family homes, condominium units and buildings with up to four units) in Cook County, Illinois will become subject to the amendments to the Illinois Notary Public Act contained in Illinois Public Act 095-0988 (the "Act") in an effort to combat mortgage fraud in Illinois residential real estate transactions.  The practical effect of the Act is that Illinois notaries will have to comply with the Act for all covered Cook County conveyances.

The Act is a pilot program applicable only to Cook County real property conveyances from June 1, 2009 through July 1, 2013.  The Act will require Illinois notaries to take and save a copy of the right thumbprint of all individuals selling residential property in Cook County.  The Act provides that if a right thumbprint is not available, alternative digits can be used.  The thumbprint record must be saved by the notary for seven years and is not subject to copying or inspection under the Freedom of Information Act.  The Act proscribes a Notarial Record form for the collection and retention of the record of the thumbprint.  The Act does not exclude developers of individual condominium units in multi-unit projects from the fingerprinting requirements.  Developers who do not want their in-house notaries to be bothered with the Act's record retention requirements should plan on attending closings at a title insurance company for at least the next five years !

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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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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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"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 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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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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