Zombie Properties May Haunt Lenders in Wisconsin Foreclosures

von Briesen & Roper, S.C.

A recent Wisconsin Supreme Court case holds that a foreclosure court can require a foreclosing lender to sell an abandoned or “zombie” property at a sheriff’s sale within a court-determined reasonable time after the expiration of the 5-week redemption period applicable in such cases.

In The Bank of New York v. Carson, the lender foreclosed on Carson’s residence in the City of Milwaukee. More than 16 months after the judgment of foreclosure was entered, the lender still had not sold the property through a sheriff’s sale. Carson filed a motion to amend the judgment to include a specific finding under § 846.102(2) that the property was abandoned, and asked that the lender be ordered to sell the property promptly after the expiration of 5 weeks from entry of the amended judgment. The circuit court concluded that it lacked authority to compel a lender to sell an abandoned property and denied the motion.

Carson appealed and the Court of Appeals agreed with Carson, reversing the circuit court and determining that the plain language of the statute “directs the court to ensure that an abandoned property is sold without delay, and it logically follows that if a party to a foreclosure moves the court to order a sale, the court may use its contempt authority to do so.” The lender then appealed to the Wisconsin Supreme Court, arguing that the use of the word “shall” in the statute was “permissive” and not mandatory, and that instead the lender had 5 years to conclude a sheriff’s sale based on a different statute.

The Supreme Court affirmed the Court of Appeals, holding that the trial court has authority to order a lender to sell an abandoned property after expiration of the redemption period because § 846.102(1) states that:

the sale of such mortgaged premises shall be made upon the expiration of 5 weeks from the date when such judgment is entered.

Carson also holds that the trial court can require a lender to sell the abandoned property within a “reasonable” time after the expiration of the redemption period, but does not provide any criteria for determining what a reasonable time is. The decision discussed the challenges posed by abandoned properties and reasoned that the legislature intended a prompt sale of abandoned properties to address such problems.

Carson contrasts with another recent Court of Appeals case not involving an abandoned property, but also involving whether a foreclosing lender can be required to sell a foreclosed property upon the expiration of the applicable redemption period. In the consolidated case of Bank of America, N.A. v. Prissel and Bank of America, N.A. v. Gerlach (“Gerlach”) the lender elected to waive its right to a deficiency judgment thereby shortening the residential redemption period from 12 to 6 months. The lender did not promptly proceed with sheriff’s sales and the borrowers then moved to vacate the foreclosure judgments on the grounds that since the lender did not publish notice of the sales prior to the expiration of the redemption period, valid sales could not be conducted without such publication and therefore the foreclosure judgments could not be satisfied. This argument was based on subsection (2) of § 846.101 which provides that:

the sale of such mortgaged premises shall be made upon the expiration of 6 months from the date when such judgment is entered.

and that

[n]otice of the time and place of sale shall be given… within such 6-month period…

The Gerlach court affirmed the circuit court’s decision denying the motions, holding that the use of the word “shall” in § 846.101(2) is “directory” and not mandatory. In other words, the statute allowed for the publication of the sale notice prior to the expiration of the redemption period to ensure that a sale can occur immediately upon the expiration of the period, but did not require such publication. A lender’s decision not to so publish is not fatal to its ability to publish and direct the sheriff to conduct a sale at a later date.

The Gerlach court noted that the borrowers were in no worse a position due to the lender’s decision not to sell the properties. The Gerlach decision also opined that in a hypothetical situation a borrower would benefit from a lender’s decision against immediately publishing a sale notice (a prerequisite to a Sheriff’s sale) by continuing to occupy a home without having to pay the mortgage and knowing (in these cases) there was no liability for any deficiency. Such extra time would also afford the borrower an opportunity to redeem or work out a loan modification with the lender.

Are Carson and Gerlach Contradictory?

Carson and Gerlach both involved appellate court interpretation of the word “shall” in the applicable statute governing the deficiency election and applicable redemption period, and each addressed the issue of whether a lender can be compelled to sell a property after the redemption period. However, the cases are differentiated by the nature of the property being foreclosed; Carson involved an abandoned home and Gerlach did not. In fact, theCarson decision (from the Supreme Court, and decided after Gerlach) was careful to limit its holding to abandoned homes. Therefore, the holdings are not contradictory.

Practical Implications of the Decisions

Although Carson permits a circuit court to require a lender to sell an abandoned property within a reasonable time after the redemption period expires, the case does not require the lender to buy the property. Foreclosing lenders are often the first and only bidders for their collateral at sheriffs’ sales, but there is no law requiring the lender to bid. However, if the lender does not bid, anybody else (including the owner) could attend the sale and win the bidding for the property with a very small bid. If that did not happen and there are no bids at the sale, further court involvement may be necessary to address the limbo status of the unsold abandoned property. This would lead to further delay in the ultimate disposition of the zombie property, which Carson was trying to avoid.

Other takeaways for lenders from Carson are:

  1. Lenders should recognize before starting a foreclosure if they may be dealing with an abandoned property. The statutory criteria that will evidence abandonment include:

    • Boarded, closed, or damaged windows or doors.

    • Missing, unhinged, or continuously unlocked doors.

    • Terminated utility accounts.

    • Accumulation of trash or debris.

    • Reports to law enforcement officials of trespassing, vandalism, or other illegal acts.

    • Conditions that make the premises unsafe or unsanitary.

  2. If some or all of those factors are present in the lender’s pre-foreclosure due diligence, an early informed decision should be made as to whether the lender really wants to own the property through foreclosure.

  3. Some municipalities (notably the City of Milwaukee) have ordinances that put registration and maintenance obligations on the lender after just starting a foreclosure action, which should also be considered prior to filing.

  4. Lenders should consider just suing the borrower on the note and not foreclosing on the property if there is a risk that it is abandoned and the lender does not want to own the property or let it be sold at a sheriff’s sale for a minimal amount. More money judgments against borrowers who abandon their properties may be an unintended consequence of Carson because in a foreclosure on residential property, the deficiency is usually waived.

  5. If the facts permit, lenders should seek a finding in the foreclosure judgment (a final judgment for purposes of appeal) that the property is not abandoned, thereby increasing the procedural burden on the borrower to seek a different finding post-judgment.

Carson should encourage lenders to make an earlier decision as to whether they really want to own an abandoned property at the end of the foreclosure process. If not, then the lender still has the option to just sue on the note.

Gerlach confirms the current practice as to properties that are not abandoned, so its impact may be minimal. Borrowers frequently lack creditworthiness for post-foreclosure refinancing or modification of their mortgage loans, and therefore there is generally little incentive for lenders to delay a sheriff’s sale of unabandoned foreclosed property after the expiration of the redemption period to allow additional time for such negotiations. As a result, the perceived benefit of additional time being afforded to borrowers by not compelling a sale at the conclusion of the redemption period (which is the holding in Gerlach) may be limited.

Real Estate Joint Venture Tips

recent New York Times article described the increased presence of New York developers in the South Florida condominium market. The fact is that Miami real estate market has always been a seductive one for out of state developers, and the upside in the development opportunities in the South Florida real estate market simply continues to proliferate. Best of all, more interest in South Florida means more opportunities for local developers to partner with or enter into joint ventures with those venturing into this market.

As South Florida developers look to partner with real estate firms and investors to develop projects in South Florida, South Florida developers should pay particular attention to the removal provisions of the joint venture agreements or management agreements entered into with these firms and investors.  Typically, the removal of the developer should be limited to “cause,” such as  the developer committing some kind of “bad act” or materially breaching an agreement. Developers should be cautious about agreeing to any “performance standards” or similar removal triggers, which can allow a developer to be removed from the deal through no fault of its own. In connection with a breach of the agreement, developers should negotiate materiality standards and notice and cure rights. In addition, developers should negotiate the right to cure any default caused by any employee by firing that employee and having the opportunity to cure any damage caused by the employee.

Finally, the developer should make sure to have its removal conditioned on the developer being released from any guarantees related to the project or, if the release cannot be obtained, being indemnified from a credit-worthy affiliate of the joint venture partner for such guarantees. The developer should not continue to be on the hook for the project guarantees after the developer is no longer involved with the management of the project.

ARTICLE BY

OF

What You Need To Know: Boston and Cambridge Energy Use Disclosure Ordinances

logo

On July 28, 2014, Cambridge, Massachusetts enacted an energy use disclosure ordinance, joining Boston and several other cities.  The Cambridge ordinance is similar to its Boston counterpart, but contains several differences.  Property owners in each municipality should be familiar with these ordinances.

1.  Properties Covered By Each Ordinance

Cambridge:

  • Municipal buildings of 10,000 square feet or larger;
  • Non-residential buildings of 25,000 square feet or larger; and
  • Multi-family residential buildings with 50 or more units.

Boston:

  • City buildings (those the City owns or for which the City regularly pays energy bills);
  • Non-residential buildings (those located on a parcel of land with one or more buildings of at least 35,000 square feet and of which 50% or more is used for non-residential purposes, and which are not City buildings); and
  • Residential buildings (i) (a parcel with one or more buildings with 35 or more dwelling units that comprise more than 50% of the building, excluding parking, or (ii) any parcel with one or more buildings of at least 35,000 square feet and that is not a City building or a non-residential building, or (iii) any grouping of residential buildings designated by the Commission as an appropriate reporting unit).

2.  Obligations of Owners and Tenants of Covered Properties

Both ordinances broadly defined “Owner” to include owners of record or a designated agent, and net lessees for a term of at least forty-nine years.

Cambridge:

No later than May 1st of each year, all covered properties must disclose energy consumed by such property during the prior year, together with other information required by an EPA Benchmarking Tool:  (i) address; (ii) primary use type; (iii) gross floor area; (iv) energy use intensity; (v) weather normalized source energy use intensity; (vi) annual greenhouse gas emissions; (vii) water use; (viii) energy performance score; and (ix) compliance or noncompliance with ordinance.

Tenants (those who lease, occupy, or hold possession) of a covered property must comply with an owner’s request for information within thirty days or risk a fine.

Boston:

No later than May 15th of each year, owner of each covered non-city building shall accurately report previous calendar year’s energy, water use, and any other building characteristics necessary to evaluate absolute and relative energy use intensity of each building through Energy Star Portfolio Manager.

Owners must request information from tenants separately metered by utility companies in January for the previous year, and tenant must report information to owner no later than end of February, though a tenant’s failure to respond does not relieve an owner’s duty to report.

Enforcement and Penalties

Cambridge:

Failure to comply with the ordinance or misrepresentation of any material fact may result in a written warning on the first violation, and a fine of up to $300 per day for any subsequent violation.

Boston:

The Air Pollution Control Commission may issue written notice of violation, including specific delinquencies, to those failing to comply, giving thirty days within which an owner may cure the violation or request a hearing.  The Commission also may seek injunctive relief requiring an owner or non-residential tenant to comply with the ordinance.

Boston provides a sliding scale fine schedule for failure to comply with a notice of violation, depending on the type of property, which ranges from $35 per violation up to $200 per violation.  Each day of noncompliance is a separate violation, but owners or non-residential tenants may not be liable for a fine of more than $3,000 per calendar year per building or tenancy.

Both cities are actively developing programs to address climate change and adaptation.  Property owners should monitor these efforts as well as similar initiatives by federal and state agencies.

ARTICLE BY

OF

“Is this the airport, Clark?”: Home Owner's Associations and Holiday Decorations

McBrayer NEW logo 1-10-13

Your guests have arrived and you’ve just spent that last ten hours Griswolding your home and now you and your company are standing in the front yard ready to bask in the warm glow of a million tiny lights, when your neighbor strolls over and says, “I wouldn’t do that. The homeowner’s association won’t allow it. Oh, and you can’t park there.” What? But you nearly died placing those reindeer on the roof! And where are all these people supposed to park??

Holiday Lights

Beloved by some, and loathed by others, homeowners associations or HOAs seem to be misunderstood and ubiquitous these days. If you live in a community subject to a homeowners association or are thinking of moving into one that does, it’s a good idea to get a lay of the land before you make your move…or try to clamber up on the roof with those reindeer.

Some things to think about are:

  1. Have you read a copy of the rules and restrictions?

  2. Does the homeowners association require advance notice or written approval for certain activities?

  3. Are there parking restrictions that could lead to trouble for you or your guests?

  4. Are there any limitations about the type of signage or decorations you may display in your yard? Must signs or decorations be approved by the HOA in advance?

  5. Are there any provisions prohibiting special activities in or around your home (i.e., no burning the yule log out back)?

  6. Are you subject to possible fines for non-compliance?

By understanding in advance what sort of things may and may not be allowed, homeowners or potential homeowners can reduce the possibility of misunderstandings and disputes that can arise from some of the activities we are often accustomed to doing without a thought. You can’t always control whether you live next to the Chesters, or the Griswolds for that matter, but you can at least understand your rights.

OF

‘Tis The Season To Think About Your Retail Lease

McBrayer NEW logo 1-10-13

With November nearly upon us, the holiday shopping season is right around the corner. For retailers, the peak season can bring a whole host of issues to be considered in connection with a commercial lease. The best time to think about these issues is now – before the droves of eager customers start lining up at the doors. So, if you are a retailer and lease a space for your business, take a few minutes and consider the following:

  1. Does your lease require that you only operate during certain hours, preventing you from participating in “Black Friday” or staying open late during especially busy days?
  2. Is there available parking for seasonal employees?
  3. Are there any limitations in the lease about the type of signage or decorations? Must signs or decorations be approved by a landlord?
  4. Are there any provisions prohibiting special activities in or around the store (i.e., having carolers, a gift wrapping station, or passing out hot chocolate to bystanders)?
  5. If you are in a multi-unit building, how will advertising and general maintenance costs be divided? In other words, who is really paying for Santa and his elves to be stationed in the center?

Shopping Christmas Santa Claus

By addressing these issues early, landlords and tenants can reduce the possibility of misunderstandings and disputes during the shopping season. A little forethought and communication can go a long way in making everything merry and bright.

© 2014 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.

St. Jude’s Church Loses Historic Designation

Bilzin_logo300 dpi

Last month, the Miami-Dade Circuit Court stripped St. Jude Melkite Catholic Church of its recently acquired historic designation. This church is located at 1501 Brickell Avenue, in the midst of multiple high rise condominiums and office buildings. It occupies one acre of some of Miami’s most valuable property.

St. Jude's ChurchThe court held that, in making the designation, the City failed to properly consider the church’s religious significance. Miami’s Historic Preservation Ordinance “expressly excludes properties owned by religious institutions or used for religious purposes unless the religious property derives its primary significance from its architecture, artistic distinction or historical importance rather than its religious purpose. This criterion requires a comparison of the site’s religious importance.” Diocese of Newton Melkite Church v. City of Miami, 2014 WL 4730075 (Fla. Cir. Ct. Sept. 16, 2014), at *3. Writing for the court, Judge Miguel de la O wrote, “[t]he record before us is devoid of any comparative analysis of St. Jude’s religious importance versus its historical and architectural importance. . . . This failure is fatal under the [Historic Preservation] Ordinance and compels us to conclude that the City did not follow the essential requirements of the law.”

This legal battle ensued in 2013, prompted by rumors that St. Jude’s may sell the property to capitalize on its prime real estate. Fearing sale and destruction of the 67-year-old church, concerned congregation members and preservationists banded together to lobby for the designation of the church as a historically and architecturally significant site under the Miami Historic Preservation Ordinance. Such a designation impedes the owner’s ability to sell and architecturally modify the property. According to St. Jude’s attorney, parishioners opposing the designation worried that historical status would make upkeep more expensive and would limit St. Jude’s ability to make certain aesthetic modifications to bring the architecture into conformity with the Melkite doctrine.

Historical designation is available if a property…

• maintains significance in the historical, cultural, archeological, aesthetic or architectural heritage of the city, state or nation

• possesses integrity of design, setting, materials, workmanship, feeling and association

• is associated with important people, events or community developmental patterns or trends

• is representative of distinctive architectural styles, periods, methods of construction, a particular architect or builder’s work, or demonstrates significant innovation or adaptation to the South Florida environment, and ability to yield information important in prehistory or history.

In order to procure the designation, proponents pointed to the church’s Romanesque architecture, its connection with Operation Pedro Pan and the fact the church was host to an all-girls academy run by Sisters of Assumption, a Catholic order, for three decades. The diocese, which opposed the designation, argued that the church’s religious use far outweighed any purported historical significance. When the designation failed to receive the requisite number of commissioner votes, the City passed a special resolution to designate the church as a “local historic site.” The City did not make any findings of its own, but instead relied solely upon the Designation Report created by the Preservation Board.

The recent appellate ruling quashed the designation, creating speculation about whether the church will eventually sell the property or its air rights.

© 2014 Bilzin Sumberg Baena Price & Axelrod LLP
ARTICLE BY

OF

Real Estate “Change in Ownership” Can Trigger Documentary Transfer Tax

Sheppard Mullin Law Firm

926 North Ardmore Avenue, LLC v. County of Los Angeles, (9/22/14, B248536)

The California Court of Appeals has recently held that, as a general rule, the Documentary Transfer Tax (“DTT”) applies whenever there is a “change in ownership” of real property under the California Revenue & Taxation Code. In the case, 926 North Ardmore Avenue, LLC v. County of Los Angeles, the court held that the phrase “realty sold” under the DTT Act includes a “change in ownership” (subject to the limited exceptions expressly included in the DTT Act).  San Francisco and Santa Clara Counties have already enacted amendments to their DTT ordinances to provide for this result, and there are several other counties (most notably Los Angeles and San Diego) that have taken this position without any change to their ordinances.

OF

Wisconsin – Don’t Forget to Take the Real Estate Developer’s Rights as Collateral

Michael Best Logo

The long real estate recession is over, and thank goodness for that. New developments are sprouting up everywhere in response to pent-up demand. There are even condominium developments beginning or long-stalled condominium developments resuming, and it’s time for a reminder about taking collateral in these unique projects.

A condominium is purely a creature of statute. Chapter 703 of the Wisconsin Statutes, the Wisconsin Condominium Act, defines what rights are created when a developer, called a “Declarant,” records a condominium declaration which contains the magic language, “I hereby submit this land to the condominium form of ownership.

As soon as that declaration, and its accompanying condominium plat, are recorded in the Register of Deed’s Office in the county where the land is located, they create condominium units, which are legally existing separate boxes of air, whether anything is physically built or not. Everything inside the boundaries of the land submitted to the declaration is either a unit, or a common element. Each unit can be separately owned and mortgaged, carries a separate real estate tax bill, and is capable of being assessed a lien for that unit’s share of the expenses of owning, maintaining, and insuring the common elements.

Under the Condominium Act, the Declarant can write into the Declaration, special rights reserved only to the Declarant, and to those the Declarant authorizes to specifically receive those rights, including the Declarant’s lender. These rights are very important, and taking a security interest in those rights can make a significant financial difference to a lender, should the lender need to foreclose those rights, or put them into a receivership. Those rights can include:

  • the right to expand the condominium into more land reserved as the “Expansion Land;”

  • the right to create more units in the condominium;

  • the right to avoid paying a full association assessment for each of the units, as long as it pays the associations’ costs above what other unit owners pay under the association budget;

  • the right to reconfigure the boundaries between units by combining units and separating units;

  • the right to control the condominium association until a sufficient number of the units in the condominium have been sold to unrelated third parties;

  • in some limited circumstances, the power to unilaterally amend the declaration; and

  • the right to declare easements over the common elements of the condominium.

The correct way for a lender to take a security interest in these Declarant rights is to take a collateral assignment of declarant’s rights, in a manner similar to an assignment of rents, which gives an immediate grant to the lender of these rights, with a limited license back to the Declarant to exercise these rights, as long as the Declarant is not in default.

OF

IRS Ruling Creates Opportunities for Tax Savings by Companies With Substantial Real Estate Assets

Katten Muchin Law Firm

On July 29, Windstream announced that it plans to spin off certain telecommunications network assets into an independent, publicly tradedreal estate investment trust (REIT). Windstream made the announcement after it obtained a favorable private letter ruling from the Internal Revenue Service (IRS) regarding the tax-free nature of the spin-off and the qualification of the spun-off entity’s assets as real property for REIT purposes.

Under the transaction, Windstream will spin off its existing fiber and copper network, real estate, and other fixed assets into a publicly traded, independent REIT. The REIT’s primary activity will be to lease the use of the assets back to Windstream through a long-term “triple net” exclusive lease. Windstream shareholders will retain their existing shares and receive shares in the REIT commensurate with their Windstream ownership. The transaction is intended to effectively enable Windstream to deduct, for federal income tax purposes, the amount of rent paid to the REIT without a corresponding corporate level income tax inclusion in income by the REIT—estimated to generate up to a $650 million annual overall reduction in taxable income between Windstream and the REIT.

Particularly notable about this transaction is that the private letter ruling obtained by Windstream is seemingly an indication by the IRS that it will respect the tax-free transaction of a spin-off even when coupled with an election for REIT status. The fact that the ruling recognized transmission infrastructure (e.g., wires and cable), in addition to the related real estate, as qualifying assets for REIT purposes is also a key development. The IRS issued proposed regulations in May that provided more specific guidance on what types of assets would be considered “real property” for purposes of meeting the requirements for making a REIT election, and Windstream’s private letter ruling is among the first to address the issue in light of the new regulations.

These developments mean that a REIT spin-off transaction might be available to many kinds of businesses. Companies (other than master limited partnerships) with similar assets, such as telecommunications, cables, fiber optics, and data centers, may be wise to explore opportunities to realize substantial tax savings through a similar transaction. However, there are several challenges that must be overcome to execute a successful REIT spin-off transaction.

ARTICLE BY

 
OF

Will Governor Christie Extend the Moratorium on Non-Residential Development Fees?

Giordano Halleran Ciesla Logo

A new bill (A1907) that would extend the statewide moratorium on the collection of non-residential development fees (“NRDFs”) recently passed both the New Jersey State Assembly and Senate. It now awaits Governor Christie’s signature. If signed into law, the bill would reinstate the moratorium on the collection of NRDFs that expired July 1, 2013, extending it to December 31, 2014. Developers who paid NRDFs during that period would be eligible to seek a refund, which must be granted so long as the NRDF has not already been expended for affordable housing.

NRDFs were initially established in New Jersey by P.L. 2008, c. 46 and codified in the Municipal Land Use Law. For any non-residential development, the required NRDF is 2.5% of the equalized assessed value of land and proposed improvements. The NRDF is collected at the municipal level and paid into a state fund for the development of affordable housing.

The initial moratorium on the collection of NRDFs was contained in P.L. 2009, c. 90 and ended July 1, 2010. The second moratorium was found in P.L. 2011, c. 122, which extended the moratorium to July 1, 2013. As of July 1, 2013, municipalities were again required to impose a n NRDF on new non-residential development. No NRDFs may be assessed against projects that received site plan approval prior to July 1, 2013, provided that a construction permit is issued by July 1, 2015.

If signed into law, the re-imposition of the moratorium would be an important albeit relatively short lived, benefit to non-residential developers.

ARTICLE BY