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

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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In what has become an ongoing series here on the UB REAL Blog, we wanted to issue another update on the now year old Cuyahoga County Land Reutilization Corporation, better known as the land bank.  Over the past six months, the Cuyahoga County Land Bank has obtained more properties and received millions in funding from the federal government.

A South Euclid lot donated to the Cuyahoga County Land Bank is soon to become one of the program’s community gardens. As of January 13, 2010, the property is the first of its kind to complete both the acquisition and disposition processes. The 50x108 lot, located at 3915 Warrendale Road, was given a market value of $22,800.

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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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I often think of an African proverb shared by Kip Reader, Managing Partner of Ulmer & Berne:

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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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So by now you’ve been to at least three conferences which tell you the economy has hit the bottom, it’s a U curve, 2010 will still be slow with savings and not consumption being the key characteristic, 2011 is a comeback year, but real estate will never get back to the boom boom days of only a few years ago. So what does it all really mean to the real estate professional?

1. Increased Competition. Whether it be for legal services, brokerage services, or commercial space, there is less demand and thus greater competition. But price is only one component of the decision factor. Service and quality still will be key decision factors. For example, while new centers have issues, retailers will still be looking to get into the established market leading centers and will pay the higher rent to get there. And having or obtaining a good relationship with a customer by providing over the top service is a great hedge against competition.

2. Marketing is Still Important. We all need to pay attention to expenses, but marketing is not one of the expenses to be cut. In the face of increased competition, it is more important than ever to get the quality message across. However, the marketing budget should be examined to make sure that the budget is allocated wisely. Place an emphasis on direct, active marketing most likely to get face to face with prospective customers.

3. Be Careful Extending Credit. There will still be higher than normal business failures, even by well established companies.

4. Do Not Sign Long Term Deals at Today’s Rates. Consider short term deals even where you normally want long term ones. Although no one can say with certainty, there is a good chance that rates will increase in 2012, so signing a long term deal now could tie you up at lower than market rates. Also, a credit tenant may have really good leverage now. Resist the temptation to sign a deal at any price. The balance of power may shift in a couple of years and that credit tenant may not have such great credit in a few years. As a tenant, consider the goodwill you will get, which can translate into tangible benefits, by merely being reasonable and not taking undue advantage of the economic climate.

5. Consider Other Sources of Income. Can the attorney branch out to other areas? Can the landlord come up with alternative uses for its vacant properties or monetize unused space ? Can the broker branch out to other consulting services?

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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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 Thank you to Realtor Magazine: Online   for the wonderful article written by Mariwyn Evans about the new and unique challenges the real estate industry is addressing during the current economic times.  I was fortunate enough to be interviewed by Mariwyn for the article which you can read by following this link.  The article touches on landlord/tenant issues, lender/borrower issues and partnership/development entity issues as well as real estate litigation issues.  

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A mechanics’ lien claim can give the contractor, subcontractor or material supplier making the claim a significant amount of leverage over a property owner in a payment dispute. This makes sense, of course, because the concept behind mechanics’ lien law is to provide some assurance that people will receive payment for work and materials they provide to improve real property. But what can the owner do where the claim for payment is disputed and the mechanics’ lien threatens to put the owner in default of its mortgage covenants or disrupt a sale or refinancing of the property?

When there is no external pressure from a lender or pending sale of the property, the owner does not necessarily need to do anything to address a lien. Ohio mechanics’ liens are valid only for a period of six years from the date of recording. If the owner believes the lien is invalid and therefore unlikely to be foreclosed upon, the owner can simply wait six years until the lien expires. 

If, however, the lien needs to be removed prior to the expiration of the six-year period, the owner has several options. Ohio’s mechanics’ lien law is complex and contains many traps for the unwary that may render a mechanics’ lien invalid.  For instance, on commercial projects, a mechanics’ lien claimant only has 75 after the last date of work in which to file the lien affidavit with the recorder’s office. The lien must then be served upon the owner or owner’s designee within 30 days. Failure to meet either of these deadlines will render the lien invalid. 

Another stumbling block for potential lien claimants occurs when the owner has recorded a notice of commencement (which the owner typically should). The recording of the notice of commencement triggers an obligation on behalf of subcontractors or material suppliers to serve a notice of furnishing upon the owner in order to preserve their right to claim a lien. Check to see that a notice of furnishing was properly served by the lien claimant. If not, the claimant may have lost the right to file a lien. Note that the requirement to serve a notice of furnishing does not apply to someone who has a contract directly with the owner. 

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

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

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

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

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

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

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

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

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

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

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

Cleveland                                       -2.2%                          -5.2%                          -13.3%

Miami                                             -3.6%                          -29.4%                        -43.1%

Tampa                                            -4.4%                          -23.3%                        -34.8%                

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

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

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Have you ever asked the question when researching a property: "Where did the tanks go ?" or "What were the prior improvements ?"  Now Google Earth can help you out with the recent release of Google Earth v.5.0(beta).  A new tool will display satellite images for a parcel for as far back as satellite images exist for the same.    

Once you open version 5.0(beta) and locate a parcel of interest, you will see a tool bar across the top of your screen.  In the center of the tool bar you will notice an icon of a clock.  When you click on the clock icon a dialog box will appear with a timeline displaying the dates of the satellite images Google has stored of your parcel in question.  Slide the marker across the timeline and the history of the parcel is displayed.  

Although with Sanborn Maps  you can typically go back much further in time, having this information at your fingertips can be a valuable resource.

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