To follow up on a series of prior posts, the Internal Revenue Service will now allow taxpayers with defective drywall to deduct the cost of repairs and replacement of damaged appliances in the year in which the loss occurred.  In Revenue Procedure 2010-36, the IRS has, however, imposed certain restrictions which include that the losses are not compensated by insurance or other parties and the taxpayer must itemize their federal returns to claim the deductions (which are allowed only on amounts that exceed $500 and ten percent of the taxpayer’s gross income for the year).

A taxpayer can claim the full tax break, provided they have no pending claims for reimbursement (and do not intend to file for any). For those taxpayers with pending claims, a loss for 75% of the unreimbursed amount can be claimed.

 

In related news, the importers, manufacturers and distributors of Knauff Plasterboard Tianjin drywall have entered into a settlement with over 300 homeowners in four states. The Agreement, approved by a New Orleans federal judge, will cause Knauff and related firms to remove and replace the company’s drywall, the electrical wiring, gas tubing and appliances, as well as paying relocation expenses while the homes are being repaired (which repairs are expected to take several months to complete). The cost of such repairs is estimated to be about $150,000 for a 2,500 square foot home. This settlement (a product of a special committee appointed by a federal judge) is seen as a possible model for the resolution of other pending state and federal lawsuits. 

 

One area to watch going forward, however, is the possibility of additional claims regarding health concerns. The settlement does not preclude future suits concerning potential adverse health effects of the drywall on residents, as the parties agreed to table that issue to resolve the home repair aspects of the lawsuits.

Landlord’s have gone to fixed CAM to reduce administrative expenses and disputes with their tenants. The government could accomplish the same by going to a flat tax – no need for complicated tax regulations that create unintended consequences; no need for intrusive audits where the government is at odds with its constituents; in fact maybe no need for the IRS. Take for example the so called "self-rental rule." The Code ( Reg. 1. 469-2(f)(6) if your are keeping score at home) provides (unfairly) that if a taxpayer owns property that it rents to a company in which it has an ownership interest, then any rental loss is passive, but any rental income is active. Really?  This means the loss in the first year cannot offset against  income in the second year.  In fact the loss can never be used at all unless the taxpayer has some passive income from an unrelated deal not involving the rental of property to any entity in which he or she has an interest. Classic case of tails, the taxpayer loses and heads, the IRS wins. 
  • The residential housing market is stalling; and perhaps non-existent for homes priced in the top third of the market;
  • Public funds for roadway expansions are going to become harder to come by;
  • There is and will continue to be an over supply of low density fringe suburban homes (exurban);
  • Baby Boomers and their children are showing a desire to downsize and live in walkable closer in communities with mass transit options, with no let up in sight at least through 2025; 

The Brookings Institute published a well reasoned article recently entitled The Next Real Estate Boom.  The authors raise the above and several other facts which lead them to the conclusion that inner ring communities and suburbs will see a quicker stabilization of real estate prices and development, long before the exurban areas of our metropolitan markets.  

So, how can developers and real estate professionals respond to these trends ?  

  • Advocate for more and better public transportation options;
  • Find ways to promote alternative energy and power options (charging stations);
  • Enhance walkable communities through intelligent residential and commercial development.

One statistic mentioned by the authors is that when a household eliminates a car from its budget the household can afford an additional $100,000 in mortgage expenses.  This statistic alone should be enough to motivate governmental bodies to create incentives for taking advantage of these trends.  According to the authors, transportation policies drive development activity.  

 

No one in the real estate business – – whether a broker, attorney, developer or contractor – – can engage in any conversation with someone in or out of the business without being asked “when will the recovery begin?” And, as everyone knows, there is no assuredly correct answer.

 

Predictions and prognosticators, however, are bountiful. They are often wrong or – – at a minimum – contradicted by the next real estate Nostradamus.

 

In May 2009, Fed Chairman Ben Bernanke predicted that the U.S. economy would begin to “turn up later this year [2009].” By January 2010, Time magazine reported that foreclosures and home price declines would continue “through at least the first half of 2010.”

 

But the first half of 2010 has come and gone without a noticeable change in the real estate market. Last month, HousingWire (which provides financial news for the mortgage market) reported that commercial real estate prices, in August, hit their “lowest point since the beginning of the downturn.” 

 

Finally, just last Friday, November 5, the Real Estate Roundtable, noting a $1 trillion equity gap in commercial real estate, pointed to “a long, slow recovery in commercial real estate markets amid persistently high unemployment, ongoing concern over government policy, uneven availability of capital for refinancing, and other factors dampening market activity.”

 

Fits and starts of hopeful optimism mixed with continuing reports of discouraging economic indices, makes it difficult – if not down right impossible – to predict an end to the real estate downturn.

 

But, as when Punxsutawney Phil has seen his shadow, I have seen the true sign that we have hit rock bottom. On ebay no less! There it was – – on sale through November 11 at a minimum bid of $2.99 plus $1.99 shipping – – a used Ulmer & Berne logo golf ball. Since these are only given away, the seller either found it (probably in the woods off my slice) or got it free. Based on the logo design, the ball is at least five years old.  Do things get any lower than this??

 

 

Purchasing foreclosed real estate has never been easy or risk-free. In Ohio, all purchases are “AS-IS” and purchasers generally do not have an opportunity to inspect the property. A 10% cash deposit is due upon bidding and payment in full is due within thirty days with the threat of contempt of court if the purchase price is not paid. And the risks to purchasers are increasing.

 

Recently several banks have elected to stop residential foreclosures due to questions about their internal procedures. The attorneys general of all 50 states are now conducting a joint investigation into possible false or unverified information contained in affidavits and improper notarization of affidavits. Remedies for homeowners whose homes have been wrongfully foreclosed are determined by state law, but may include an unwinding of the foreclosure and returning legal title to the borrower. But what happens when that home has been purchased by a third party at foreclosure sale? Or flipped to another owner?

 

 

 

Continue Reading Foreclosed from Foreclosure?

The retail industry is changing, or depending upon your current situation, the retail industry has already changed. The days of throwing up a center on every open suburban vacant parcel are long gone and likely not to return anytime soon. Just knowing how to build a retail center is no longer enough. What can you do to make a difference, promote responsible development and responsible consumer behavior?  Close your eyes and imagine a zero emission community where gasoline and diesel powered vehicles share the road with pure electric vehicles.  

How can your center differentiate itself from the pack, get loads of free press and be environmentally responsible at the same time?  Look into the future when electric vehicles are the norm and not the exception. Some say that day is not so far off. BMW intends to launch its Megacity Vehicle by 2013; Nissan intends to launch the Leaf late this year.  Electric vehicles will stop where they can plug in and recharge. A center which offers charging stations will attract shoppers; usually educated high earning shoppers which many retailers are trying to attract into their stores. Now do you get it?  

Charging stations = shoppers = quality retail tenants.

Contact your electric utility and state government to see if they will support your efforts through grants and low interest rate loans. Be creative and look for an opportunity to be a leader into the future.

 

Recently, The New York Times  published an article entitled Resale Fees That Only Developers Could Love . The article does a nice job describing what resale fees are and how they are created and even the securitization of future resale fees so we will not go into it here.  Briefly, resale fees run with the land as covenants binding all subsequent owners to their conditions.  The typical place you would find them, if created for a project, would be in the project declarations of covenants, conditions and restrictions.  Since this is a somewhat novel concept just starting to receive the attention of law makers and regulatory agencies, if you are a developer considering resale fees, make sure that your state does not prohibit them and that your buyers have full disclosure of the issue to avoid any possible future problems.  Also, lenders might consider the existence of resale fees and receiving an assignment of the same as collateral for a project’s financing.  Creative and novel so caveat emptor !

The Ohio Housing Council (the "Council") recently issued the following alert: "Sales tax must be listed separately on invoices or the buyer may be charged by the State of Ohio for the tax."  According to the Council, the State of Ohio has been assessing sales tax and penalties to contractors and property management companies for tax services they purchased when the invoice did not break out sales tax as a separate line item.  Thus, per the Council, invoices for taxable services, such as landscaping or painting, must contain a separate sales tax line item instead of the simple phrase "sales tax included."  The Council advises contractors and property managers to review all invoices to make certain that property tax is listed separately.

Continue Reading Ohio Housing Council Issues Alert That Sales Tax Must Be Listed Separately on Invoices for Taxable Services

Insurance Coverage Update

In TMW Enterprises, Inc. v. Federal Insurance Company, the United States Court of Appeals for the Sixth Circuit held that a “construction defects” exclusion in an “all risk” insurance policy barred coverage for water damage caused by faulty construction, even though the policy covered water damage and the exclusion did not apply to “ensuing losses.” 

The insured in TMW Enterprises, Inc. argued that water infiltration, and not faulty construction, was the true culprit for approximately $3.9 Million in damages to a recently constructed condominium and retail complex. Thus, according to the insured, water damage was an “ensuing loss” of defective construction and, therefore, coverage was in order. 

The insurer, however, convinced the Court that, since water damage naturally flows from faulty construction, to allow coverage for water damage proximately caused by faulty construction, would illogically “undo the exclusion [for construction defects].” The Court consoled the insured, noting that there is a purpose for “ensuing loss” provisions: “[t]he clause means simply that what is not excluded is covered.” “[T]he caveat at the end reminds us that if an exclusion does not apply, then coverage exists.” In other words, “[a]n ensuing loss clause does not cover loss caused by the excluded peril, but rather covers loss caused to other property wholly separate from the defective property, such as a fire started by water leaking into an electric socket when such water is from faulty construction work.”

 

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.