Category: Real Estate

The Zoning and Land Use Handbook

The ABA presents The Zoning and Land Use Handbook by Ronald Cope.

zoning land useZoning law has a major impact on the development of our cities and villages, and where we live and work; it also plays a major role in numerous business and real estate transactions. The Zoning and Land Use Handbook is a reference guide for zoning and related land use issues.

This book will help the busy general practitioner answer the most frequently asked questions and provide guidance on basic zoning procedures, property rights, and the nature of zoning litigation. In addition, this handbook provides an introduction to zoning law for land use practitioners, and will be helpful to laypersons and professionals not familiar with land use or zoning law.

Click here to purchase the book.

About the author:

“Ron Cope is the most authoritative and impressive source of knowledge about the legal aspects of land use, urban planning, and zoning. During my 45 years of planning practice, he has remained my go-to expert for every complex issue I have had regarding land use, planning, and zoning law. The Zoning and Land Use Handbook is a must-have resource that condenses Ron’s practical knowledge into a comprehensive guide.”
— Allen L. Kracower, Chairman, Allen L. Kracower & Associates, Inc.

“Ron Cope is the dean of Illinois zoning lawyers. He is legally erudite and knowledgeable in all areas of real estate law and combines those with practical common sense.”
— J. Samuel Tenenbaum, Director, Investor Protection Center, Bluhm Legal Clinic, Northwestern University School of Law

The New Wild West: Considerations for Commercial Landlords and Tenants in the Era of Open and Concealed Carry of Firearms

concealed carryIn a retail setting like a grocery store, it might be shocking for the average customer to see an individual openly carrying a rifle slung over his shoulder. While the gun-toting patron might be shopping for cantaloupe and exercising his open-carry rights, other customers might panic and call 911 to report a “man with a gun.”

Gun ownership laws continue to evolve nationwide and many states have expanded legal open carry laws in recent years. Currently, only a handful of states prohibit open carry of a firearm in any form. “Open carry” is generally characterized as carrying a gun in public where others can see it in plain sight. Every state, including the District of Columbia, allows the carry of concealed firearms in some regulated form. “Concealed carry” is usually defined as carrying a firearm where the casual observer cannot see it.

While most proprietors expect a person carrying a gun onto the property to have benign intentions, accidents (including accidental discharges) do happen. Furthermore, mass shootings and other incidents involving firearms continue to be an unfortunate part of reality in today’s society. Landlords and tenants of retail properties should be aware that bodily injury or death caused by a weapon wielded by an employee or invitee on the property can leave a business open to lawsuits under various theories of liability. Consequently, it is important for landlords and tenants to be aware of the implications of allowing or prohibiting firearms on their property, and the resulting liability that might come from gaps in insurance coverage, or firearms policy decisions.

What options do commercial landlords and tenants have to address the risk of liability?

  • Check your state, city, and municipal laws regarding concealed and open carry

    • Some state laws allow private businesses to ban guns from their premises, but not every jurisdiction permits private owners to ban guns from their property.

    • Some state laws may address liability. For example, Wisconsin law states that a property owner or occupier is immune from liability arising from the decision to allow firearms on the property. By inference, banning weapons from the premises may give rise to a standard of care where the owner or occupier has a duty to enforce the ban.

  • Evaluate the business occupying the premises and requirements under state law

    • For example, bar owners or places where alcohol is served will likely have an affirmative duty under state law to ban firearms from their premises.

  • Engage in a dialogue with your landlord/tenant and property manager about firearms policy

    • Consider making this a part of the lease, or amending the lease as to who can decide what is allowed on the premises (especially if seeking to ban concealed weapons.)

    • Discuss how any policy will be enforced.

    • Address insurance provisions for tenants regarding exceptions in coverage for firearms incidents.

  • Review any signage requirements under state, city, and municipal law

    • States may require certain dimensions, language and placement for signs notifying patrons of firearms prohibitions on the property.

      • For example, in Texas the sign text must be in English and Spanish.

  • Talk to your insurance carrier

    • Do not assume that you are currently covered for incidents relating to firearms.

      • Firearms are commonly excluded from commercial general liability policies.

      • Discuss the impact of allowing or prohibiting guns on the premises with your insurance carrier.

      • Consider purchasing additional gun liability coverage.

Regardless of personal position, commercial landlords and tenants must be aware of the state and local firearms laws that apply to their property. The intersection between premises liability and firearms statutes continues to develop, and sound risk management calls for review of current policies and insurance coverage to help mitigate any existing gaps in coverage.

ARTICLE BY Chris A. Jenny, William R. West & Brittany Finlayson of von Briesen & Roper, S.C.

©2016 von Briesen & Roper, s.c

Big Box Redux: Dilemma of Abandoned Big Box Stores

During the 1980s and 1990s “big box” retail locations popped up all over the United States. In the past few years, however, a number of larger chains, including Sears, Kmart, Circuit City, and Sports Authority, to name a few, have closed or announced that they will be closing their doors. The question remains: what can and should be done with an empty big box location?

While it would be easiest to replace one big box tenant with another, three main hurdles exist to this approach. First, some big box retailers may choose to just “go dark” and continue to pay the rent at the location in order to maintain market share. Second, many big box leases include clauses prohibiting the landlord from leasing space to a tenant’s competitors even after the tenant has vacated. Third, and most significantly, abandoned big box buildings in popular retail locations likely already have other successful big box retailers nearby, thus limiting the pool of potential new tenants for that space. As a result, very often the space will need to be demolished or repurposed, adapted, and redesigned.

Adaptive reuse and redesign of abandoned big box retail locations requires property owners, developers, and financiers to get creative and be committed in pursuing reuses that fill the specific retail needs of their geographic markets. The large space may need to be subdivided and leased to multiple tenants. Adaptive use of large retail spaces requires vision, foresight, a deep understanding of the local retail market, and the marketing expertise to find alternative categories of tenant. Potential tenants for adapted big box locations are those that can take advantage of some of the features of these abandoned stores, such as large open spaces, ample parking and a centralized location close to major transportation routes. Some of these alternative reuses of big box locations include: apartments/condominiums, hospitals/health care clinics, museums, churches, commercial gyms, and offices.

Like owners and developers, municipalities also have an important part to play in redevelopment of abandoned big box locations. Municipalities must be flexible and utilize any number of tools at their disposal to ease the development costs and bureaucratic burden to the reuse and adaption of abandoned locations. One municipal tool that could minimize the barriers to reuse is the creation or revision of local zoning ordinances to incentivize reuse and ease some of the financial development hurdles. This process may include rezoning of the area in question to allow for residential, office and light industrial, instead of strictly commercial uses. Second, the municipality could create a tax incremental financing district to make a potential redevelopment more financially attractive or viable to potential developers. Finally, the municipality or its community development authority could acquire title to the abandoned property to utilize for its own purposes (such as a school, library or community center) or to better control and manage redevelopment and associated financial incentives.

In summary, one size does not fit all. Rather, the dilemma of what to do with an abandoned big box retail location often requires all involved (the leasing, design, finance and legal teams, as well as the municipality) to think outside of the box and be flexible, thoughtful and creative in crafting an individualized plan and solution tailored to that particular locale.

ARTICLE BY Chris A. Jenny, William R. West & Nathan S. Fronk of von Briesen & Roper, S.C.

©2016 von Briesen & Roper, s.c

Ninth Circuit Weighs In: Nevada “Superpriority” Law for HOA Superliens Violates Due Process

HOA superliensIn a 2-1 decision, the United States Court of Appeals for the Ninth Circuit overruled the 2014 decision from the Nevada Supreme Court about which we previously wrote. In Bourne Valley Court Trust v. Wells Fargo Bank, N.A., (August 12, 2016), the federal appellate court holds that the non-judicial foreclosure of Nevada HOA superliens cannot constitutionally extinguish a mortgage lender’s security interest.

In 2014, the Nevada Supreme Court held that, as a matter of lien priority, the foreclosure of a superlien for HOA assessments can extinguish a first mortgage. However, the Nevada Supreme Court did not address whether the provisions of Nevada state law governing notice to purported junior lienholders, including mortgagees, were constitutional.

In Bourne Valley, the home in question had a mortgage loan for $174,000 from Plaza Home Mortgage. The beneficial interest in the noted and deed was subsequently assigned to Wells Fargo, N.A. in 2011.  After the homeowner fell behind on her HOA payments, the HOA recorded a notice of delinquent assessment lien for $1,298.57 in August 2011.  In October 2011, the HOA recorded a notice of default and election to sell the home. Then, on April 9, 2012, the HOA recorded a notice of trustee/foreclosure sale against the property.  The Horse Pointe Avenue Trust then paid $4,145 for the home at a foreclosure sale, before conveying its interest in the property to the Bourne Valley Court Trust, which then filed an action to quiet title and extinguish any other junior liens.

In Bourne Valley, the Ninth Circuit panel notes that Nevada state law requires a purported junior lienholder to “opt in” before receiving notice of an HOA foreclosure sale, which the Court calls a “peculiar scheme” for providing mortgage lenders with information about when an HOA intended to foreclose on a property.  “Even though such foreclosure forever extinguished the mortgage lenders’ property rights, the [Nevada] statute contained “opt in” provisions requiring that notice be given only when it had already been requested,” the Court noted.  “Thus, despite that only the homeowners’ association knew when and to what extent a homeowner had defaulted on her dues, the burden was on the mortgage lender to ask the homeowners’ association to please keep it in the loop regarding the homeowners’ association’s foreclosure plans,” the Court continued. “How the mortgage lender, which likely had no relationship with the homeowners’ association, should have known to ask is anybody’s guess.”

Therefore, the Court concludes, Nevada’s laws violate the Due Process Clause of the U.S. Constitution.  From the Court’s decision:

Nevada Revised Statutes section 116.3116 et seq. strips a mortgage lender of its first deed of trust when a homeowners’ association forecloses on the property based on delinquent HOA dues. Before it was amended, it did so without regard for whether the first deed of trust was recorded before the HOA dues became delinquent, and critically, without requiring actual notice to the lender that the homeowners’ association intends to foreclose.

We hold that the Statute’s “opt-in” notice scheme, which required a homeowners’ association to alert a mortgage lender that it intended to foreclose only if the lender had affirmatively requested notice, facially violated the lender’s constitutional due process rights under the Fourteenth Amendment to the Federal Constitution. We therefore vacate the district court’s judgment and remand for proceedings consistent with this opinion.

The Court gets specific:

But that the foreclosure sale itself is a private action is irrelevant to Wells Fargo’s due process argument. Rather than complaining about the foreclosure specifically, Wells Fargo contends—and we agree—that the enactment of the statute unconstitutionally degraded its interest in the property. Absent operation of the statute, Wells Fargo would have had a fully secured interest in the property. A foreclosure by a homeowners’ association would not have extinguished Wells Fargo’s interest. But with the statute in place, Wells Fargo’s interest was not secured. Instead, if a homeowners’ association foreclosed on a lien for unpaid dues, Wells Fargo would forfeit all of its rights in the property.

For now, the Bourne Valley opinion is binding on all Nevada federal courts. It will also serve as strong persuasive authority (at the very least) in actions pending in Nevada state court, as well as throughout the U.S. in states with similar paradigms.

Delta, Boarding Line

“HOA liens, the elderly, and those with military service may now board.”

Copyright © 2016 Womble Carlyle Sandridge & Rice, PLLC. All Rights Reserved.

New Opportunities for Credit Union Ownership of Real Estate in Massachusetts

Proposed changes to National Credit Union Administration’s rule on federal credit union (FCU) ownership of real estate and to the Massachusetts credit union parity rules, promise to open new areas of credit union investment in real estate as an ancillary business line. Assuming both proposed rule changes take effect this summer, FCUs and MA state charters will have the ability to buy, develop, own and sell commercial real estate, provided that the FCU eventually (within six years of purchase or such longer period as NCUA may allow) occupies at least half of each property. The remaining space in each property may be leased by the FCU to unaffiliated tenants or to a developer entity, for re-leasing to third parties. In calculating how much of a property a specific CU occupies, space occupied by a CUSO that is controlled – through voting rights, without necessarily majority economic ownership – by the CU may be included.House, Real Estate

Combined with last year’s NCUA action which eliminated the 5% cap on fixed asset ownership by non-RegFlex FCUs, NCUA is now about to allow FCUs to acquire commercial properties they can never fully utilize, by treating up to half the property for investment/rental purposes. This will allow FCUs to consider ownership of small strip malls and other income-producing properties which were previously off-limits, and could signal a shift away from leasing and toward ownership as FCUs site their branches and operations centers.

The financial benefit from this major regulatory change can be enhanced if FCUs are able to create CUSO-based joint ventures with private real estate capital sources to reduce the portion of the equity investment required from the credit union. Further regulatory guidance on this potential aspect of FCU real estate investment is needed, but insofar as all FCUs and many state CUs (soon to include Massachusetts, through the currently proposed amendments to its CU parity rules, to allow state chartered Massachusetts CUs to partner with non-credit union co-owners of CUSOs, just as FCUs have been able to do for more than a decade) can through CUSOs partner with non-credit union co-owners/capital sources, it is possible that through a CUSO credit unions may  acquire commercial property partly for use and partly for investment/rental, and raise at least a portion of the acquisition’s equity capital  from non-CU third party equity sources. Of particular interest is the ability of CU executives to share ownership of CU real estate as partners in a CU-led CUSO, an arrangement that would allow select individuals to co-invest privately in these new real estate ventures. Completing the financing picture could be a commercial first mortgage loan from the sponsor credit union to the CUSO, perhaps with customary limited guaranties from some of the non-CU co-investors in the CUSO.

While this action by NCUA is a welcome step toward more rational, flexible facility ownership and management practices for affected credit unions, and offers those institutions a new ancillary revenue source, NCUA is clear that its action does not allow real estate speculation or full-scale CRE investment by credit unions. All acquired properties must eventually, typically within six years, be at least 50% devoted to housing the CU-owner and/or any CUSO controlled by it.

Whatever deal structures ultimately emerge, NCUA is about to open the door to limited but meaningful credit union equity investment in the kind of commercial real estate deals that previously CUs could finance only on the debt side. And with Massachusetts about to allow state charters to partner with non-credit union co-investors through CUSOs, we can expect to see both federal and state charters here explore equity co-investment opportunities with more traditional real estate investors and developers, and possibly even individual CU executives, as CUs move into this newest investment arena.

© 2016 SHERIN AND LODGEN LLP

Distressed Assets in Connecticut: What to Know Before Jumping In

There are many benefits for out of state lenders or investors looking to engage in business in Connecticut, one of the wealthiest (per capita) states in the United States of America. For example, Connecticut has relatively stable property values. However, Connecticut also has a number of legal pitfalls for lenders or investors who acquire Connecticut mortgages as part of a loan sale transaction. These pitfalls may end up causing undue delays and unnecessary expense when it comes to the legal process. A lender or entity unfamiliar with Connecticut specific laws and procedures should, prior to committing to acquire an asset secured by property in Connecticut, undertake due diligence and seek advice on what programs and statutes are or are not applicable prior to consummating the deal. Below are a few of the procedural thickets that must be navigated prior to being able to seek to foreclose a mortgage deed, the most common form of collateral for a real estate transaction, in Connecticut.

Preliminarily (and interestingly), Connecticut is unique in the United States in that it, as of January 1, 2015, recognizes three separate and distinct methods of foreclosure of a mortgage deed: Strict Foreclosure (appropriation of the mortgaged property after passage of law days set by judicial order); Foreclosure by Sale (created by statute and permits judicially ordered and overseen auction process); and Foreclosure by Market Sale (created by statute and permits agreement for marketing and private sale of property by mortgagor with consent of the mortgagee). Every foreclosure commenced in Connecticut is a judicial proceeding regardless of which of the above three forms the judgment of foreclosure will eventually take. The fact that every foreclosure is a judicial action alone can create havoc to the plans of a party who is otherwise unfamiliar with the foreclosure process in Connecticut and is best understood up front before committing any sum to a transaction where the main source of potential recovery is a parcel of property in Connecticut.

Secondly, Connecticut has many legislatively imposed requirements which must be met prior to even commencing an action for foreclosure of a mortgage deed. The vast majority of these programs were implemented either during or immediately after the nancial crisis of 2007 through (roughly) 2014 and, accordingly, revolve around 1 to 4 family owner-occupied residential property but are nonetheless worded vaguely enough so that they arguably apply to non-owner occupied or commercial properties as well. Amongst these programs are the Emergency Mortgage Assistance Program (“EMAP”), codified at Conn. Gen. Stat. 8-265dd, et seq., and the Foreclosure by Market Sale procedure, codi ed at Conn. Gen. Stat. 49-24b, et seq.

Article By Alena C. Gfeller & Andrew P. Barsom of Murtha Cullina

© Copyright 2016 Murtha Cullina

What Does the US Supreme Court Ruling Mean for Local Affordable Housing Laws?

On February 29, the US Supreme Court denied certiorari in California Building Industry Association v. City of San Jose, 61 Cal. 4th 435 (2015), and leaves standing a unanimous decision by the California Supreme Court upholding the city of San Jose’s affordable housing ordinance.

San Jose’s ordinance compels all developers of new residential development projects with 20 or more units to reserve a minimum of 15 percent of for-sale units for low-income buyers, and the price of those units cannot exceed 30 percent of the buyers’ median income. The ordinance requires these restrictions to remain in place for 45 years. Alternatively, the developer can pay the city a fee in lieu. The California Building Industry Association argued that the ordinance was an unlawful exaction in violation of Nollan v. California Coastal Comm’n, 483 U.S. 825 (1987), Dolan v. City of Tigard, 512 U.S. 374 (1994), and Koontz v. St. Johns River Water Management District, 133 S. Ct. 2586 (2013). In a June 15, 2015 decision, the California Supreme Court disagreed, concluding that the ordinance is not an exaction because it does not require a developer to give up a property interest, but instead a typical zoning restriction subject to rational basis review.

In concurring with the US Supreme Court’s denial of certiorari in this case, Associate Justice Clarence Thomas acknowledged the important issues raised in California Building Industry Association, perhaps signaling the Court may revisit this issue. In particular, Justice Thomas stated, “For at least two decades . . . lower courts have divided over whether the Nollan/Dolan test applies in cases where the alleged taking arises from a legislatively imposed condition rather than an administrative one. . . . I continue to doubt that ‘the existence of a taking should turn on the type of governmental entity responsible for the taking. . . . Until we decide this issue, property owners and local governments are left uncertain about what legal standard governs legislative ordinances and whether cities can legislatively impose exactions that would not pass muster if done administratively.”

Ultimately, however, Justice Thomas determined that California Building Industry Association did not provide an opportunity to decide the conflict: “The City raises threshold questions about the timeliness of the petition for certiorari that might preclude us from reaching the Takings Clause question. Moreover, petitioner disclaimed any reliance on Nollan and Dolan in the proceedings below. Nor did the California Supreme Court’s decision rest on the distinction (if any) between takings effectuated through administrative versus legislative action.”

The denial of certiorari leaves in place similar “inclusionary” affordable housing programs that have been adopted in more than 170 California municipalities.

Article By Bryan K. Brown, Cynthia L. Burch, David P. Cohen & Kenneth G. Lore

©2016 Katten Muchin Rosenman LLP

Pontiff’s Visit to Philadelphia (Part III) – Top Five (5) Last Minute Tips for Landlords/Owners

It’s just a few days away! The papal visit is expected to bring more than 2 million visitors to the Philadelphia area. Our last two articles (here and here) dealt with the positive economic impacts for the region and managing the masses during this event. Here are five (5) tips that should be at the top of the list for landlords and owners of commercial, retail and multi-family properties.philadelphia skyline

Review your Leases. With an event of this magnitude, it is a good time to take a last minute look at your leases to ensure all items are appropriately addressed. For instance, does your lease have certain notice requirements for limiting access to parking areas designated for tenants and their customers? If you plan on sectioning off certain parking areas, did you send notice out in time? Sometimes leases will have a provision that allows you to circumvent certain notice requirements, if actions are done for health and safety reasons.

Consider Beefing Up Your Property Management for the Next Few Days. If you are an owner or landlord for a smaller shopping center or property, you may not have an onsite property manager. Even if you have an on-site manager, they may be assigned to multiple addresses, and this influx of visitors will leave him or her feeling stretched too thin. With more than 2 million people expected to visit the region this weekend, you may want to contact a reputable property management company to ascertain an on-site person or add to your existing property management team. They say “Cleanliness is Next to Godliness.” Ensuring that trash, landscaping and other property management issues are addressed properly and timely can make your property sparkle to the masses.

Consider Alternate Routes to Access Your Property. Considering this enormous occasion, security and police presence will be high to protect the Pope, as well as ensure everyone has an enjoyable experience. If you are a property owner or landlord, you may want to advise your tenants of possible alternate routes to ensure they can cater to the crowds. Further, you probably want your property management team to know about these alternate routes as well to guarantee they can access your property in the event traffic is diverted.

Check Your Insurance Coverage. It’s times like these that remind you to check both your insurance policy coverage, as well as your tenants’. Have you requested evidence of your tenants’ coverage? As Philadelphia’s own Benjamin Franklin said, “An ounce of prevention is worth a pound of cure.” You may want to contact your insurance broker to obtain increased or special coverage.

Always Remember, When in Doubt, Contact Counsel. There are a multitude of issues that can arise when so many people attend a once in a lifetime event like this. The Pope’s visit is a true blessing, highlighting our region. It will be something that we will never forget. Now, more than ever, it is important to discuss your commercial, retail, and other property needs with experienced legal counsel to achieve your goals and resolve any issues.

Restaurants, caterers and vendors will feed the hungry. Retailers will cloth the attendees. And the Pope will provide a spiritual lift to everyone. Make sure that you and your property are well prepared for this fantastic event.

Article By Thomas S. Onder, Brian H. Smith & Jerry A. Nelson of Stark & Stark
COPYRIGHT © 2015, STARK & STARK

Supreme Court Fair Housing Ruling: Will Plaintiff Housing Victory Help Employers?

Today, in a 5-4 decision, the Supreme Court made clear that disparate impact discrimination claims are cognizable under the Federal Housing Act (“FHA”) despite the lack of explicit language authorizing such a cause of action. Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc.

In the process of justifying its ruling, the majority opinion spoke generally about disparate impact and cited to several prior rulings applying disparate impact in the employment context. The Court’s broader guidance on disparate impact liability may be helpful for employers faced with disparate impact lawsuits.

Brief Primer on Disparate Impact Law

Sometimes referred loosely as “unintentional discrimination,” disparate impact claims arise when an employer’s (usually) neutral employment practice has a disparate impact against a group protected by Title VII. For example, in the criminal background context, the EEOC asserts that failing to hire employees based on prior criminal activity has a disparate impact against racial minorities. These lawsuits are largely statistical in nature.

In a Title VII disparate impact lawsuit, the initial burden is on the plaintiff to point to a policy or practice that causes a statistical disparity. If the plaintiff establishes impact, the employer must then show that the policy or practice is job related to the position in question and consistent with business necessity. Over the years, with varying degrees of success, plaintiffs have argued that the “job related and consistent with business necessity” defense is a high hurdle. The Supreme Court itself has struggled to properly define this defense.

Welcome Words from the Supreme Court

In the Inclusive Communities majority opinion, the Supreme Court found the FHA disparate impact defense to be “analogous” to the Title VII defense. The court went on to cite to language from employment discrimination precedent indicating that the “job related and consistent with business necessity” defense should not be an impossible hurdle for employers:

  • Quoting the seminal Title VII ruling Griggs v. Duke Power Co.: an employer may maintain a practice which is a “reasonable measurement of job performance.”

  • Citing Griggs again: “policies are not contrary to the disparate impact requirement unless they are artificial, arbitrary, and unnecessary barriers.”

  • Stressing that limitations on disparate impact claims are “necessary to protect potential defendants against abusive disparate-impact claims.”

  • “Were standards for proceeding with disparate-impact suits not to incorporate at least the safeguards discussed here, then disparate-impact liability might displace valid governmental and private priorities, rather than solely removing artificial, arbitrary and unnecessary barriers.”

In short, the Court has provided support for employers to argue that an employer meets the “job related and consistent with business necessity” defense if its practice is reasonable and “necessary to achieve a valid interest.”

The majority opinion also provided explicit instructions to lower courts:

  •  To be on guard for disparate impact lawsuits that might interject “racial considerations” into decision making.

  • To hold plaintiff’s to sufficient pleading standards: “a plaintiff who fails to allege facts at the pleading stage or produce statistical evidence demonstrating a causal connection cannot make out a prima facie case of disparate impact.”

Time will tell if lower courts rigorously apply Inclusive Communities’ “safeguards” and “limitations” in the employment context. In the meantime, management attorneys will be doing their best to remind lower courts of the need to show restraint when evaluating disparate impact claims.

ARTICLE BY Paul Patten of Jackson Lewis P.C.
Jackson Lewis P.C. © 2015

Real Estate Promoter Carlton Cabot Arrested – Is He the Worst Fraudster in Modern History?

The name Carlton Cabot was once synonymous with tenant in common (TIC) real estate projects. Cabot claimed to have raised hundreds of millions of dollars and public records show that he promoted approximately 18 large real estate projects nationwide.

The entire concept of TIC financed projects began in 2002 after the IRS issued a revenue ruling allowing investors to defer capital gains from the sale of real estate involving an “exchange” of properties. (These are sometimes called 1031 exchanges because of section 1031 of the Internal Revenue Code.) For the first time, the IRS said individuals could pool their gains and invest in larger projects.

Unfortunately, along with legitimate developers came a number of scam promoters. Overnight, a new industry was born. Obviously, not all TIC projects are scams but many were.

The first few years of operations saw Cabot building his empire. A golf course in Georgia, a shopping center in Green Bay and an office park in Connecticut are but a few of Cabot’s many TIC financed projects.

The pooled money of the newly created TICs was used to make a down payment and the balance was financed. The borrowers were the TICs but most were told the loans were nonrecourse meaning the lender was only looking to the value of the property and not relying on the TIC members’ credit.

Unfortunately, stockbrokers who had no understanding of the complex loan documents and tax law behind 1031 exchanges sold many of these TIC investment interests including the TIC interests behind Carlton Cabot’s projects. The brokers relied on rosy projections and glossy brochures and other slick marketing materials. Few, if any, read the 1000+ page offering documents. Much higher than average sales commissions didn’t hurt their enthusiasm, either.

Two more factors made these TIC projects the recipe for disaster. First, Carlton Cabot was the master tenant in each of the projects. That gave him the ability to collect rents on behalf of the TICs. Cabot also set up the loan documents so that the mail addressed to the TIC investors was sent to him.

By 2012, we believe that Carlton Cabot was skimming rents. Mortgage payments therefore began being missed. Had the TIC investors known these things, they could have easily cured any default and removed Cabot as the master tenant. Many of the projects had sufficient reserves that could have been used to pay a missed mortgage payment or two.

Unfortunately, Cabot didn’t tell the TICs about his misdeeds. Nor did the lenders, loan trustees or loan servicers. Instead, the TICs often received phony financial statements from Cabot. Even though defaults were occurring everywhere, the TICs had no idea.

By the time the TICs found out, the loans had been accelerated and were in serious default. The TICs went from being investors to owing tens of millions on defaulted mortgages.

The criminal complaint against Carlton Cabot and his manager Timothy Kroll claims that $17 million was stolen from the projects. The feds say some of that money went into Carlton Cabot’s pocket while some was used to pay off and silence the few investors who were beginning to ask questions. We are sure that the money wasn’t going to the mortgage payments, however.

Theft of $17 million is already a serious charge. Because the TICs were forced into default, the problem is much larger. The TICs lost not only the rent payments but also their equity in the property and their investments. For many Cabot victims, the money they lost was their life savings. Worse, they may still be on the hook for any shortfall or deficiency upon foreclosure.

Many of the investors are also quite elderly. Some have died since the various lawsuits began. For those folks, they will never see any justice. The Justice Department says both Carlton Cabot and Timothy Kroll were arrested at their homes. Both men are charged with seven felony crimes including wire fraud, securities fraud, money laundering and conspiracy. Both men face 105 years if convicted on all counts.

We suspect that absent an immediate plea, the charges will increase as the IRS and U.S. Postal Inspection Service continues its investigation.

In announcing the arrests, U.S. Attorney Preet Bharara said, “As alleged, Carlton Cabot and Timothy Kroll conspired to defraud investors out of millions of dollars by misappropriating investor funds, in part to pay for personal luxuries, and they falsified financial statements in an attempt to cover their tracks.  The investigative work of the Postal Inspection Service and the IRS put an end to the alleged scheme.”

Is there hope for investors? Maybe. Investors who purchased from a stockbroker or other financial professional may have a claim against the person who sold or recommended the investment.

Unfortunately, there was such a wave of TIC frauds that many of the broker dealers selling TIC investments are already out of business.

Investors facing foreclosure or the lost of their investment may have valid claims against the servicers, loan trustees, property managers and others who turned a blind eye or actively participated in the crimes. Suing Carlton Cabot is probably not a great idea. We suspect that getting money from him is nearly impossible. Any justice from Cabot will be had if he is convicted and forced to face his victims at sentencing.

In summary, what was once billed as the investment of a lifetime has turned into a life sentence for many victims.  Even if you lost everything, don’t give up. A good fraud recovery lawyer may be able to help defend you against suits from lenders and may even be able to get back some of your lost money from third parties.

ARTICLE BY Brian Mahany of Mahany Law
© Copyright 2015 Mahany Law