“Mixed-use” developments, which incorporate residential units with retail or other commercial uses, have steadily gained in popularity over recent years. This is due to the fact that mixed-use developments offer advantages to developers, owners, tenants and residents when compared to traditional single-purpose developments. Many of today’s home buyers are increasingly interested in living within walking distance of amenities such as restaurants, movie theaters and shopping. From the developer’s perspective, mixed-use projects provide diversification in the product they have to offer. Commercial owners and tenants benefit from having a built-in customer base and consistent traffic through their stores due to their proximity to the residential units.

The condominium form of ownership and governance is flexible enough to accommodate a mixed-use project, though it can also be combined with other forms of ownership for even more flexibility. The overall structure must be well-planned in order to balance the sometimes competing interests of the various uses. In a residential-only development, dealing with commercial uses is easy—the developer simply prohibits them in the governing documents. In a mixed-use development, however, commercial and residential must coexist peacefully. This can be accomplished in a variety of ways, but careful planning is the key to ensure that the “balance of power” between residential and commercial is maintained. 

 

One of the most important considerations in developing the ownership and governance structure is the physical layout of the development.  For example, will residential and commercial uses be located in the same building? If so, the developer and design professionals must pay close attention to access, noise and light issues, trash disposal and parking, among other issues. If the residential and commercial uses are located in separate buildings, the same issues often exist, but usually to a lesser degree. In a high-rise mixed use development, the parcel may sometimes be “horizontally subdivided” so that two separate condominiums can be created, one stacked on the other. Or, the ground level parcel may be a fee parcel used for a hotel, retail shops or other purposes with a residential condominium created from the upper parcel. In either case, a variety of easements for access, support and utilities will be required. Once the basic organizational structure of the development has been determined, the governing documents—usually consisting of one or more declarations, codes of regulations or reciprocal easement agreements—must be meticulously drafted to provide the easements, covenants and restrictions necessary for the successful operation of the development. 

 

Financing for a mixed-use development can also be complex, as funds often come from a mix of public and private sources, each with its own lending standards and requirements. Lenders may require that one or more portions of the project be held under separate ownership to minimize the risk of default. This is another factor to consider when planning the ownership structure of the various project components and the content of the governing documents.

 

Is mixed-use development just a short-term trend or is it here to stay? The International Council of Shopping Centers recently held a conference on mixed-use developments at which one leading developer told participants that mixed-use developments have gone from “novelty to normality” and that “[i]t’s been established that all of the other components—apartments, hotel, office—do better in concert with the retail component.” As the economy recovers and new real estate development projects take flight, expect to see mixed-use developments at the forefront.

 

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.

 

In In re Cortner, decided February 4, 2009, the Bankruptcy Court for the Southern District of Ohio held that an Ohio property tax certificate holder was entitled to receive the auction-established rate of interest on its certificate, rather than a reduced, court-determined rate. The creditor held several tax certificates, purchased at auction as described in the Ohio Revised Code, entitling it to payment of delinquent real estate taxes on the debtor’s property. The debtor and Chapter 13 trustee argued for the Court to modify the interest payable on the tax certificates to the “Till” rate of interest. In Till v. SCS Credit Corp., 541 U.S. 465 (2004), the Supreme Court applied a formula to determine the interest rate payable to a creditor receiving installment payments, factoring in the time value of money and risk. The Till rate presumably would have been considerably lower than the eighteen-percent rate the creditor was entitled to based on the auction sale. 

The Court rejected the opportunity to modify the tax certificate interest rate, although it noted it could do so because the tax certificates did not qualify as a protected “security interest” under the Bankruptcy Code. The Court based its decision on § 511 of the Code, which applies the interest rate “determined under applicable nonbankruptcy law” to all “tax claims.” Thus, if the certificates were classified as a “tax claim”, the creditor was entitled to the auction-established interest rate set forth under Ohio law. In determining that the certificate was a tax claim, the Court first noted that the certificate was not only a lien holder under Ohio law, but was entitled to the amount owed for delinquent taxes. Further, there is nothing in the Code limiting “tax claim” holders to governmental units. Finally, the certificate bears all the hallmarks of a real estate tax debt in Ohio – the holder receives a super-priority lien on the property and may foreclose if the debt is not paid. 

The Cortner decision should encourage investment in the Ohio property tax certificates. Since the debtors on tax certificates are very often financially troubled, any investor would be concerned about having its possible return on the tax certificates adjusted in bankruptcy. The Court here, however, offered a strong analysis of why these interest rates should not be adjusted in bankruptcy, thus protecting the investor’s interest and expected return. With statutory interest rates allowed as high as eighteen percent, the possible profit on a tax certificate is very high.

 

 

It is certainly no surprise that the commercial real estate leasing market has turned into a "tenant favorable" market.  How long this will last is anyone’s guess.  Give the current leasing market conditions and overall economic conditions tenants should take precautions to prevent becoming victims of their landlord’s potential financial defaults and inability to obtain credit.  

  1. Build-Out Allowances:  Tenant’s should request that build-out allowances are placed in an "escrow" or are secured by a "letter of credit" to make certain that funds exist when the tenant’s or the landlord’s contractors have completed their work and are requesting to draw upon the same.  Alternatively, any unfunded build-out allowances could be reimbursed to a tenant through a right of "set-off" against future rents;
  2. Building Services:  Tenant’s should request "self-help" rights in the event the landlord can no longer provide building services as contracted for in the lease agreement.  Services such as maintenance, repairs, janitorial, HVAC and utility services that are interupted can have a negative affect on tenants ability to operate their businesses.  Set-off rights against future rents can enable a tenant to keep services on going;
  3. Non-Disturbance:  Lenders want to keep the property occupied and tenants want to remain in their space undisturbed when the landlord is dealing with their lender issues.  Tenants should request that the landlord’s lender enter into a "non-disturbance agreement" to permit the tenant to continue to occupy the premises even if the lender steps into the shoes of the landlord.  Tenants should expect that the lender will request that the tenant "subordinate" to the lender’s interests in the premises;
  4. Subleasing:  Subtenants should request the right to deal directly with the landlord in the event the tenant (sublandlord) defaults on the underlying lease.  

Stability of the project is at the core of ensuring that the interests of the landlord, tenant and lender are balanced.  Today issues we once considered remote can arise and should be contemplated and discussed before the shoe is on the other foot ! 

 

 

"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.

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. 

 

 

Continue Reading Cuyahoga County’s New Land Bank – A Step Toward a “Sustainable Cleveland”

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.  

Courtesy of Stone Works Development LLC (www.villagesofriveroaks.com)The impact the aging baby boomer class affectionately known as “Boomers” is having on many segments of the economy has been discussed in the media for some time now.  As life expectancy expands the type of home the “Boomer” wants to live in needs to fit their life style and physical demands.  A recent article in the Chicago Tribune entitled What Boomers Really Want in Housing describes some of the wants and dislikes of the Boomers as determined by the Consumer Preference Survey of the National Association of Home Builders.  For instance, there is a preference for single-level homes with three bedrooms and higher end finish levels.  Anything that reminds a Boomer that they are aging is out; such as grab bars in bathrooms. 

The opportunities the Boomers present to the development industry are enormous since this segment of the population has accumulated buying power, even in a down economy, as the result of decades of working and saving.  Eriech Horvath of Stone Works Development LLC, an Epcon community builder, explained that the Boomer/buyer wants access to recreation/golf courses, shopping, restaurants and medical facilities.  Horvath described his company’s “single style” one floor homes which contain many of the amenities of custom homes, but as maintenance free as possible; which is a major “want” of the Boomer class.  So, if there is a take away from all of this it is that if you are planning a town house style community, you might consider adding into the mix “Boomer” type housing stock. 

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.  

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.”