real estate Archives - The National Law Forum

Using an LLC to Protect the Family Vacation Home

Vacation homes offer a retreat from daily life, providing a sanctuary to relax and create cherished family memories. Many owners envision passing down their vacation home for future generations to enjoy, but the lack of proper planning can often lead to intra-family disputes. Leaving a vacation home outright to children or other family members may be the easiest option, but the potential for discord over the control and usage of the property only increases as ownership is passed from one generation to the next. A limited liability company (LLC) can mitigate the risk of conflict and provide a tailored solution to the meet the specific needs of a family.

When a vacation home is owned by an LLC, the membership interests in the LLC are passed down to younger generations, which allows for the continued use and enjoyment of the property by the family. The structure also provides a framework for management through an operating agreement, which governs the LLC. An operating agreement allows the original owner to create a plan for how the property will be used and managed as additional owners are added. The agreement can determine who is responsible for property management, how expenses should be proportioned and paid, how decisions should be made and provide guidelines for scheduling family usage. By establishing clear rules and procedures, an LLC can reduce the likelihood of disputes and encourage fairness among different generations.

Another benefit of an LLC is the ability to prevent unwanted transfers of ownership thus ensuring that the property stays in the family. A well-drafted operating agreement can prohibit membership interests from being transferred to third parties, protecting the family as a whole from an individual’s divorce or creditor problems. The LLC can also hold additional assets, including rental income and deposits of other funds earmarked for property expenditures, which facilitates the proper management and use of resources to cover expenses.

An LLC offers an efficient structure to avoid intra-family turmoil and preserves the spirit of the family vacation home for generations to come.

California’s Housing Overhaul Brings Significant Changes for Landlords and Tenants in 2024

California Senate Bill 567, i.e., the Homelessness Prevention Act, which goes into effect on April 1, 2024, seeks to cap rent hikes at 10% and prevents landlords from evicting tenants without a legal cause. California Assembly Bill 12, i.e., the new residential security deposit law, which goes into effect on July 1, 2024, limits the amount landlords can charge for security deposits. Both bills were signed into law in 2023 by Governor Newsom, and while they signal new protections and legal benefits for tenants, the potential financial exposure for landlords is elevated.

Senate Bill 567

SB 567 changes the rules by which California property owners may remove tenants in certain instances. Effectively, this new law directly impacts two sets of property owners:

Property owners and their close family members (i.e. spouse, domestic partner, children, grandchildren, parents, or grandparents) who plan to move into an occupied/leased property before the expiration of the lease term with the tenant.
“Fix and flip” investors planning on substantially remodeling or rebuilding an occupied/leased property for resale.

Under the current law (California Civil Code § 1946.2), after a tenant has continuously and lawfully occupied a residential property for 12-months, the landlord is prohibited from terminating the tenancy without “just cause.” In fact, the “just cause” must be stated in the written notice to the tenant for the termination of the tenancy to be effectuated. Of note, existing law distinguishes between “at-fault just cause” and “no-fault just cause,” wherein “no-fault just cause” has nothing to do with the nonpayment of rent and/or criminal activity on premises, but rather is defined as:

the intent to occupy the premises by the owner and/or the owner’s spouse, domestic partner, children, grandchildren, parents, and/or grandparents;
the withdrawal of the residential real property from the rental market;
the owner complying with specific government orders that necessitate vacating the real property; or
the intent to demolish or to substantially remodel the residential real property.

Regarding an eviction based on an intent to occupy, the new law now requires the owner and/or the owner’s family member(s) under such a scenario to occupy (i.e., move into) the residential real property within 90-days for a minimum of 12 continuous months, and to use the property as the person’s primary residence. Historically, it was quite simple for property owners to use the “move in” provision under the law as an excuse to evict a tenant that they did not like or as a means to increase the rent by evicting the old tenant and moving in a new tenant who was willing to pay a higher rent. There were no specific guidelines and/or restrictions in this regard. But now, a strict timeline regarding personal occupancy has been codified into law, the violations of which could result in financial exposure for the property owner including, but not limited to, a civil monetary award to the tenant with potential for treble damages (3-times the actual damages amount) and punitive damages.

This new law also requires an owner who displaces a tenant in order to substantially remodel or demolish a unit to provide the tenant with written notice that includes a description of the substantial remodel to be completed and the expected duration of the repairs or the expected date by which the property will be demolished, as well as a copy of the permits required to undertake the substantial remodel or demolition. This means that the property owner must do more than just advise the existing tenant that they are being evicted due to the substantial remodeling of the property or because of the intent to demolish it. Under the new law, the property owner must provide the tenant with written notice and documents setting forth a construction timeline and copies of the permitting for said work.

Importantly, the new law prescribes new enforcement mechanisms, including making an owner who attempts to recover possession of a rental unit in material violation of this new law liable to the tenant in a civil action for damages up to three times the actual damages amount, as well as punitive damages and attorney’s fees/costs. Furthermore, the new law also authorizes the California’s Attorney General, and/or the City Attorney, and/or County Counsel within whose jurisdiction the rental unit is located, to bring actions for injunctive relief against the owner who is in violation of this new law. Also, many cities and counties throughout California have different (and often more restrictive) requirements when removing tenants. As such, it is always recommended for landlords to check the rules, regulations, and laws related to the jurisdiction where the property is located for any additional guidelines and requirements.

When using any of the “no fault” grounds for removing a tenant, the tenant is entitled to relocation costs equal to one month’s rent. However, landlords should be mindful that many cities and counties throughout California have even more stringent and/or more substantial relocations costs and requirements. As such, landlords should always check to see if there are any additional jurisdictional costs and/or requirements for removing a tenant.

Further, until January 1, 2030, the current existing law prohibits an owner of residential real property from, over the course of any 12-month period, increasing the gross rental rate for a dwelling or a unit more than 5% plus the percentage change in the cost of living, or 10%, whichever is lower, of the lowest gross rental rate charged for that dwelling or unit at any time during the 12-months before the effective date of the increase, subject to specified conditions. This new law, however, makes an owner who demands, accepts, receives, or retains any payment of rent in excess of the maximum increase allowed liable in a civil action to the tenant from whom those payments are or were demanded, accepted, received, or retained for certain relief including, upon a showing that the owner acted willfully or with oppression, fraud, or malice, damages up to three times the amount by which any payment demanded, accepted, received, or retained exceeds the maximum allowable rent. This new law also authorizes the California attorney general and/or the city attorney or county counsel within whose jurisdiction the residential property is located to enforce the new law’s provisions and to bring action for injunctive relief.

Assembly Bill 12

Under AB 12, landlords are permitted to ask for security deposits equivalent to one month’s rent for both furnished and unfurnished dwellings. This is a notable shift given that under the current existing law, landlords can charge up to two months’ rent for an unfurnished dwelling and three months’ rent for a furnished one. This law does not take effect until July 1, 2024, allowing landlords time to make any necessary adjustments to their practices given this new approach on the security deposit amount.

Also, please note that this new law has an exception for “small landlords” (as defined), if they own no more than two residential rental properties that collectively include no more than four dwelling units that are offered for rent. Additionally, to qualify as a “small landlord,” the owner must hold the real estate as a natural person, as a limited liability company where all members are natural persons, or as a family trust. If all these conditions are met, then the “small landlord” is permitted to collect up to two months’ rent as a security deposit. Again, AB 12 does not take effect until July 1, 2024, which gives California landlords who do not qualify as “small landlords” to make necessary adjustments. In enacting this new law, the California state legislators are hoping to make housing more accessible and affordable, especially for those residents who are struggling financially. Ironically, the law also is effectuating at a time when landlords are facing multiple hardships including limited rent increases, financial risk in the form of potential damage to their property and/or unpaid rent for which there will be no compensation, increasing maintenance and operational costs, having to navigate the complexities of local and state-level regulations, and stalled and/or slowed evictions of tenants who owe back-rent since the COVID-19 pandemic. These factors, amongst others, could hamstring landlords financially and potentially lead to significant portions of the housing market to fall into disrepair, as well as to cause a slow-down of development projects and community engagement. It also may cause landlords to become stricter with the screening processes of their tenants, including adopting higher income requirements and/or charging higher application fees, which can result in an even more challenging housing landscape for high-risk and/or low-income tenants. At this juncture, only time will tell.

Now What?

If you are a landlord, these new laws may seem onerous and riddled with potentially damaging financial exposure. We recommend consulting with a trusted attorney before entering into a landlord-tenant relationship, and also before terminating an existing lease in both the “at-fault just cause” or “no-fault just cause” scenarios.

FinCEN’s Proposed Streamlined SAR — The Real Estate Report

On February 16, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a proposed rule addressing “Anti-Money Laundering Regulations for Residential Real Estate Transfers.” The proposed rule would, among other things, require certain persons involved in real estate closings to maintain records regarding non-financed residential real estate transfers and to submit “streamlined SARs” (suspicious activity reports), called Real Estate Reports, to FinCEN. “The persons subject to these reporting and recordkeeping requirements would be deemed reporting persons for purposes of the proposed rule and . . . [t]he information required to be reported in the Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer.”

As FinCEN describes in the Federal Register notice including the proposed rule, the Bank Secrecy Act has generally required that real estate transaction information falls within the categories of transactions that are subject to appropriate money laundering controls since 1970. However, “for many years, FinCEN has exempted such persons from comprehensive regulation under the BSA and has issued a series of time-limited and geographically focused ‘geographic targeting orders’ (“GTOs”) to the real estate sector in lieu of more comprehensive regulation.” In particular, in 2016, FinCEN specifically extended a Residential Real Estate GTO to “require title insurance companies to file reports and maintain records concerning non-financed purchases of residential real estate above a certain price threshold by certain legal entities in select metropolitan areas.” As a result of that 2016 GTO, the information received has indicated to FinCEN that more comprehensive regulation is necessary, when it comes to non-financed real estate transactions. The goal of this permanent rule would be to “connect non-financed residential real property purchases by certain legal entities with the true beneficial owners making the purchases, thereby decreasing the ability of criminals to hide their identities while laundering money through real estate.”

Effectively, the proposed rule would require that at least one person involved in the real estate transaction would have to submit the Real Estate Report. And, that one person would not need to exercise any discretion regarding whether to file the Real Estate Report (unlike when traditional SARs are filed) and the proposed rule would not require confidentiality to be maintained by any of the persons involved in the filing of the Real Estate Report (again, unlike the confidentiality covered institutions must maintain regarding whether they have filed a SAR). While there is a hierarchy in terms of which person would, under the rule, be obligated to submit the Real Estate Report, the parties may also sign a “designation agreement” that would designate a particular person identified in the hierarchy as being the reporting person. Primarily, that person should be “the person listed as the closing or settlement agent on a settlement (or closing) statement.” If there is no agent on the closing statement, then the person that has prepared the closing statement should submit the Real Estate Report. If there is no closing statement, then the person that underwrites the title policy should submit the Real Estate Report. And, if there is no title policy underwritten, then reporting should be done by the “person that disburses the greatest amount of funds in connection with residential real property transfer”, meaning disbursement from an escrow account, a trust account or from a lawyer’s trust account, but excluding direct transfers between transferees. If there is no person disbursing on behalf of the transferees, then the person who prepares an evaluation of the title should submit the Real Estate Report. And, if all else fails, then the person that prepares the deed for the transaction should submit the Real Estate Report. This so-called “reporting cascade” is designed to “capture both sales of residential real estate and non-sale transfers of residential real estate . . . to ensure uniform coverage of non-financed transfers and to ensure that nominees do not purchase homes for criminal actors and then transfer the title on free of charge to a legal entity or trust.”

There are three elements that determine whether a transaction is a “reportable transaction”:

1) Is the kind of property involved in the transaction covered by the rule?

2) Is any transferee considered a “transferee entity” or “transferee trust”?

3) Is the transaction not covered by any of the following exceptions?

Transaction is financed;
Transaction is low-risk because it involves an easement, death, divorce or bankruptcy; or
Transaction involves transfer directly to an individual person.

In terms of the transactions that would be subject to being reported through the Real Estate Report, FinCEN cast an intentionally broad net. “The proposed rule is meant to broadly capture residential real property such as single-family houses, townhouses, condominiums, and cooperatives, as well as apartment buildings designed for one to four families. These properties would be captured even if there is also a commercial element to the property, such as a single-family residence that is located above a commercial enterprise.” Further, many kinds of land-only transactions would be reportable.

In terms of the types of transferees involved, as mentioned, any transfer directly to an individual, even if that transfer was not financed and was not deemed to be low-risk, would not result in a reportable transaction. But, if the transferee is any person other than an individual and that transfer is not financed or is not low-risk, then the transfer would most likely be deemed a reportable transaction. The definition of “transferee entity” generally means “any person other than a transferee trust or an individual.” The definition of “transferee trust” generally means “any legal arrangement created when a person . . . places assets under the control of a trustee for the benefit of one or more persons . . . or for a specified purpose, as well as any legal arrangement similar in structure or function[,] whether formed under the laws of the United States or a foreign jurisdiction.” There are specific exemptions to both of these transferee definitions, including statutory trusts and trusts that are securities reporting issuers, and for the most part, FinCEN points to protocols described in its rules under the Corporate Transparency Act (“CTA”), especially its Beneficial Ownership Reporting Rule, as being applicable to defining which entities and trusts may or may not be exempt from these transferee definitions. Having said that, the inclusion of most trusts involved in non-financed transactions is especially interesting.

In addition to the proposed rule provisions, FinCEN lists no less than 50 questions for comment from interested parties. These questions include everything from how likely “designation agreements” are likely to be used to concerns that may arise in transactions that are partially non-financed to whether concerns relating to non-financed real estate transactions extend to commercial real estate, as well. Comments are due to FinCEN on or before April 16, 2024.

Open Permits, Empty Pockets

Real estate transactions can be influenced by various factors. One often-overlooked aspect is the existence of open building permits at a municipal building department. These seemingly minor components may significantly affect the dynamics of buying or selling commercial or residential properties, potentially causing delays, financial burdens, and legal complications.

UNDERSTANDING OPEN PERMITS:

Open permits refer to permits that have been issued for construction or renovation projects and that appear as uncompleted at the local building department. They may have been left open because the construction was commenced but not completed, or the contractor failed to obtain final inspections, or the required land use or operational approvals were not obtained, such as a board of health license. Such permits remain open in the property’s records until properly closed out, potentially posing significant challenges when buying or selling commercial real estate. This occurrence is especially problematic in the context of commercial real estate where a landlord may have multiple tenants who engage contractors for construction projects. Such permits may remain open without landlord’s knowledge. Landlords may also be unaware of the specific contractor undertaking the work, thus preventing landlord from directing such contractor to cause the permit to be closed. The COVID-19 pandemic exacerbated this problem, as closures of municipal offices interfered with filings and on-site inspections, and the tenants that engaged the contractors (and sometimes the contractors themselves) went out of business, resulting in numerous permits being left open.

THE IMPACT ON COMMERCIAL REAL ESTATE TRANSACTIONS:

Open permits can complicate real estate transactions in several ways. Firstly, they can signal potential safety or code compliance issues, raising concerns for buyers about a property’s integrity and potential code violations. Moreover, open permits can hinder the closings, as lenders may hesitate to provide financing; buyers may similarly be unwilling to take on the burden of owning a property subject to open permits. Resulting delays may jeopardize a deal, or result in price reductions to offset risks associated with open permits. Sellers may also be required to spend time and money to undertake necessary filings and obtain inspections. Longstanding open permits may result in fines or penalties, further complicating matters and potentially souring the deal.

MITIGATING AND PREVENTING HARM:

To mitigate the impact of open permits on real estate transactions, proactive measures are essential. For buyers, conducting thorough due diligence is paramount, including comprehensive inspections of building records at the municipal building department to identify any open permits and/or notices of building violations early in the sale process. Sellers should prioritize closing out permits before listing a property in order to streamline the transaction and enhance marketability.

Commercial landlords should take additional measures with tenants to ensure these issues do not arise in the first place. For example, landlords should include lease provisions requiring tenants to obtain landlord’s prior consent for any work requiring a permit, and require that all open permits be closed within a stated period of time (within 30 days of completion), with proof of closure furnished to landlord. Landlords can enforce such provisions by mandating that the failure to adhere constitutes an event of default under the lease. They may also stipulate in the lease that a security deposit will not be released unless and until all open permits attributable to the specific tenant are closed out.

CONCLUSION:

In conclusion, open permits can pose significant complexities in commercial real estate transactions. By taking proactive steps to address them, stakeholders can minimize disruptions and facilitate smoother transactions.

The Silicon Valley Bank Failure: Implications on Commercial Leasing

This past Friday, March 10, 2023, the Federal Deposit Insurance Corp. (FDIC) announced its takeover of the failed Silicon Valley Bank (“SVB”) after a run on the bank late last week caused the largest-scale U.S. bank failure since Washington Mutual in the 2008 financial crisis. Two days later, New York regulators shuttered Signature Bank (“Signature”). The federal government has made it clear that, while FDIC will guaranty all deposits, including uninsured ones, bailouts of these banks will not occur. The failures of SVB and Signature are likely to have widespread ramifications across many industry sectors, including commercial leasing.

How will the bank failures impact landlords in the commercial leasing sector?

SVB was a very common issuer of tenant letter of credit security deposits. A letter of credit security deposit is the issuing bank’s contractual obligation to pay the landlord beneficiary the amount that such landlord’s tenant is in default.
Landlords holding tenant letters of credit issued by SVB or Signature as security deposits will be directly impacted by the bank failures. Any undrawn standby letters of credit issued by SVB, Signature or any other bank under FDIC receivership may be repudiated by the FDIC, making any such letter of credit worthless. Any affected landlord will want to act promptly to provide proper protection of their interests under any applicable lease.

How can landlords protect their interests under such leases?

Any landlord holding a letter of credit security deposit should identify the issuing bank.
In any lease where the security deposit is a letter of credit issued by SVB or Signature, the landlord should carefully review the terms of the lease regarding the security deposit and the landlord’s approval rights over the issuing bank, but in any event require the tenant to provide it with a letter of credit issued by a different financial institution.
All landlords should review the terms their lease agreements relating to landlord approval rights over issuing banks, draw procedures and requirements and the process for replacing a letter of credit.
In the event the lease agreement in question does not provide landlord with adequate approval rights over the issuing bank, clear draw procedures and stringent replacement requirements, the landlord should consider amending the lease agreement to so require.

Article By Jeff Bates and Blake Young of Winstead

For more finance and banking legal news, click here to visit the National Law Review.

More Places, Less Spaces: California is Driving Down Development Costs

In an effort to decrease the skyrocketing development costs and reduce greenhouse gas emissions, Assembly Bill 2097 (AB 2097) aims to eliminate a key obstacle for new developments: parking. More specifically, starting on January 1, 2023, this law prohibits public agencies from imposing minimum automobile parking requirements for residential, commercial and other development projects if the project is located within a 1/2-mile of a “High-Quality Transit Corridor”[1] or a “Major Transit Stop.”[2]

Prior to the enactment of AB 2097, cities and counties retained the authority to impose a minimum number of parking spaces required for new developments. This condition is typically the result of a calculation found in the city or county’s zoning code, and is usually determined based on the use or type of project being developed, regardless of project specifics. Oftentimes, the use of a universal calculation results in excess parking. For example, a new restaurant may be required to provide 4 parking spaces for every 100 square feet of use even if the restaurant concept does not necessitate a large number of parking spaces or if the restaurant is in a pedestrian- or transit-friendly location. While California remains in the throes of a housing crisis, some areas within the state boast an oversupply of parking spaces. For example, Los Angeles County has 18.6 million parking spaces, which equates to almost 2 parking spaces for every 1 resident.[3] This statistic is similar in the Bay Area where there are 1.9 parking spaces for every 1 resident.[4]

Moreover, not only can a static calculation result in unnecessary parking (and blacktop), it can add untenable costs to new developments. For example, new residential developments are typically required to provide 1 to 2 parking spaces per unit. The requirement results in an additional cost of approximately $36,000 per unit.[5] As the cost to develop residential projects is at an all-time high,[6] builders are welcoming all efforts to reduce the cost and eliminate unnecessary development “standards.”

To avoid a complete free-for-all, under AB 2097, public agencies will still retain the ability to impose a minimum parking requirement, if, within 30 days of the receipt of a completed application, the public agency makes a written finding that not imposing a minimum automobile parking requirement would have a substantial negative impact. However, there are a number of exceptions to this caveat that wholly restrict public agencies from imposing a minimum parking condition. These exceptions include certain affordable housing projects or small residential housing projects.

For parking spaces that are voluntarily included in proposed project designs, public agencies may still require: (i) spaces for car share vehicles; (ii) parking spaces to be shared with the public; or (iii) for the project to charge for parking. Nothing in AB 2097 shall reduce or eliminate the requirement that new developments provide for the installation of electric vehicle supply equipment (i.e., EV-charging stations) or to provide parking spaces accessible to persons with disabilities.

AB 2097 is intended to give developers more flexibility and lower the costs associated with development, which will – hopefully – result in an influx of housing and the redevelopment of vacant buildings where it may not have been previously feasible to provide parking in a quantity necessary to meet a jurisdiction’s minimum requirements. By reducing the oversupply of parking, there is the expectation that the use of mass transit will increase, thereby reducing traffic, greenhouse emissions and air pollution.

Critics of AB 2097 are concerned that the elimination of parking requirements could actually weaken local efforts to provide more affordable housing as many public agencies offer reductions in parking requirements to incentivize developers to add on-site affordable housing units to the project.[7] There is also concern that, despite the decrease in availability, many residents will continue to own vehicles, which – ironically – will lead to increase parking demand and congestion.

Although there is a lot of speculation of AB 2097, many are hopeful that it is a step in the right direction when it comes to addressing California’s housing crisis. As Governor Gavin Newsom stated when he signed the bill: “Reducing housing costs for everyday Californians and eliminating emissions from cars: That’s what we call a win-win.”

FOOTNOTES

[1] “High-Quality Transit Corridor” means a corridor with a fixed-route bus service with service intervals no longer than fifteen minutes during peak commute hours.

[2] “Major Transit Stop” means a site containing an existing rail or bus rapid transit station, a ferry terminal served by bus or rail, or the intersection of two or more major bus routes with a frequency of fifteen minutes or less during peak commute periods.

[3] Aguiar-Curry, Cecilia. Assembly Committee on Local Government – AB 2097 (Friedman) – As Introduced February 14, 2022. (April 20, 2022. )

[4] Inventorying San Francisco Bay Area Parking Spaces: Technical Report Describing Objectives, Methods, and Results. Mineta Transportation Institute – San Jose State University. (February 2022.)

[5] Some estimates place the aveage cost of one residential unit at $1,000,000 in development costs. (The Costs of Affordable Housing Production: Insights from California’s 9% Low-Income Housing Tax Credit Program. Terner Center for Housing Innovation – UC Berkley. A Terner Center Report [March 2020].)

[6] Dillon, Liam and Posten, Ben. Affordable Housing in California Now Routinely Tops $1 Million per Apartment to Build. Los Angeles Times. (June 2, 2022.)

[7] California Daily News.

Article By Amanda S. Lee of Sheppard, Mullin, Richter & Hampton LLP

For more real estate legal news, click here to visit the National Law Review.

The Top 10 Do’s and Don’ts of Selling a Cell Lease

When you sell a cell lease, in addition to assigning the lease and rents to the purchaser, you also sell the purchaser the right to put communications antennas on your property for 50 years or more. Done properly, this can be very advantageous, but if done improperly, the right, coupled with its lengthy term, can be harmful, especially for valuable properties.

While the intricacies of such sales should be left to professionals (the sale documents are often 15-20 pages long to protect the property owner), here is a short list of items unique to cell lease sales which property owners should keep in mind. This list is based on years of experience helping clients sell over 100 leases.

Sell the cell lease first if you will be selling the property with the lease. Recently, leases have sold for around 20 times annual revenues. Done properly, a lease sale will add dollar for dollar to the sales price of the property it’s on.
Don’t use the documents from the purchaser without extensively revising them (we often toss them out and use our own documents). They are usually so overreaching that using them “as is” can reduce or destroy the value of the property with the lease.
Include provisions protecting the future use, development and value of the property with the lease.
Have a relocation provision so you can require the leased area to be moved to another location on the property if needed for the maintenance, repair or redevelopment of the property.

The following items are particularly important for areas where the leased space is on a building rather than for a tower on open land. Buildings are generally much more valuable than open land (so the potential harm from bad terms is greater), there often are two or more parcels being leased (equipment on the ground, antennas on the roof, cables in between) and property owners need to be specific on the rights being sold and retained.

Clearly describe, with engineering drawings if needed, the areas of the building the purchaser can use.
Spell out the types of communications uses the purchaser can conduct and the equipment it may place in these areas.
Also spell out the rights the building owner and tenants retain to use these same areas (as well as other parts of the building) for their antennas, HVAC, elevators, etc.
Describe the types of communications uses and radios that the building owner, residents and tenants have retained and do not violate the sale.
Attach engineering drawings showing the equipment currently on the building.
Require landlord approval of changes to the preceding and the reasons the approval can be withheld.

Article By John W. Pestle and Peter A. Schmidt of Varnum LLP

For more communications, media, and internet legal news, click here to visit the National Law Review.

An Investment Worth Making: How Structural Changes to the EB-5 Program Can Ensure Real Estate Developers Build a Good Foundation for Their Capital Projects

The United States has made major changes to the rules governing its EB-5 program through the enactment of the EB-5 Reform and Integrity Act of 2022 (RIA). The RIA was a component of H.R. 2471—the Consolidated Appropriations Act, 2022—which President Biden signed into law on March 15, 2022. And while the RIA made many sweeping changes to the EB-5 landscape, including establishing an EB-5 Integrity Fund comprised of annual funds collected from regional centers to support auditing and fraud detection operations, two changes in particular are pertinent to developers funding capital investments. First, the RIA altered how developers calculate EB-5 job creation. Second, the RIA prioritizes the processing and adjudication of EB-5 investment in rural area projects, and it tweaked the incentives for high unemployment area and infrastructure projects. Paying careful attention to each of these two areas will enable developers to maximize the benefits afforded to it through the changes enacted by the RIA.

THE RIA MODIFIES JOB CREATION CALCULATIONS

New commercial enterprises under the EB-5 program must create full-time employment for no fewer than 10 United States citizens, United States nationals, or foreign nationals who are either permanent residents or otherwise lawfully authorized for employment in the United States. The RIA made three major changes to how regional centers measure job creation to meet this 10-employee threshold:

First, the RIA permits indirect job creation to account for only up to 90% of the initial job creation requirement. For example, if a developer invests in a small retail-residential complex that will eventually create 30 new jobs with the retail stores that will move into the shopping spaces, the developer could count only nine of those jobs toward the 10-employee threshold.
Second, the RIA permits jobs created by construction activity lasting less than two years to account for only up to 75% of the initial job creation requirement. The RIA does allow for these jobs to count for direct job creation, however, by multiplying the total number of jobs estimated to be created by the fraction of the two-year period the construction activity will last. For example, if construction on the small retail-residential complex will last only one year and create 100 new jobs, then the RIA would calculate 50 new jobs (100 total jobs multiplied by one-half (one year of a two-year period)) but the developer could count only 7.5 of those 50 jobs toward the 10-employee threshold.
Third, while prospective tenants occupying commercial real estate created or improved by the capital investments can count toward the job creation requirement, jobs that are already in existence but have been relocated do not. Therefore, if a restaurant is opening a new location in the small retail-residential complex, the developer could count toward those new jobs toward the job creation requirement. If the restaurant is just moving out of its current location into a space in the retail-residential complex, however, the developer could not count those jobs toward the job creation requirement.

THE RIA CREATES NEW EB-5 VISAS RESERVED FOR TARGETED EMPLOYMENT AREAS AND INFRASTRUCTURE PROJECTS

Under the previous regime, the U.S. government would set aside a minimum of 3,000 EB-5 visas for qualified immigrants who invested in targeted employment areas, which encompassed both rural areas and areas that experienced high unemployment. Now, the RIA requires the U.S. government to set aside 20% of the total number of available visas for qualified immigrants who invest in rural areas, another 10% for qualified immigrants who invest in high unemployment areas, and 2% for qualified immigrants who invest in infrastructure projects. Therefore, at a minimum, the RIA reserves nearly a third of all total EB-5 visas issued by the U.S. government for rural projects, high unemployment area projects, and infrastructure projects. Furthermore, and most significantly, the RIA provides that any of these reserved visas that are unused in the fiscal year will remain available in these categories for the next fiscal year.
The changes to the reserved visa structure create significant incentives for qualified immigrants to invest in rural, high unemployment area, and infrastructure projects. If, for example, the United States government calculates that it should issue 10,000 visas in Fiscal Year 1, then the RIA mandates reserving 2,000 visas for rural projects (20% of total), 1,000 for high unemployment area projects (10% of total), and 200 for infrastructure projects (2% of total). These numbers are significant when considering the RIA’s roll-over provision because it pushes projects in these categories to the front of the line for the green card process. If only 500 of the 20,000 visas for rural projects are used in Fiscal Year 1, then the 1,500 unused visas set aside for rural projects roll over to the next fiscal year. Therefore, if the United States government issues 10,000 new visas in Fiscal Year 2, then 3,500 visas will be reserved for rural projects in the new fiscal year (the 1,500 rollover visas from the previous year plus a new 20% of the total number of visas per the RIA), and the high unemployment area and infrastructure project reserved visas would have a new 1,000 (10% of total) and 200 (2% of total) visas in reserve, respectively.

The RIA changed the structures for investing in both targeted employment areas and non-targeted employment areas, however. The RIA raised the minimum investment amount for a targeted employment area by over 50%, increasing the sum from its previous level of US$500,000 to its new level of US$800,000. The RIA similarly raised the non-TEA, standard minimum investment amount from its previous level of US$1 million to now be US$1.05 million. Additionally, the RIA modified the process for the creation of targeted employment areas: While under the previous regime, the state in which the targeted employment area would be located could send a letter in support of efforts to designate a targeted employment area, the post-RIA EB-5 regime now permits only U.S. Citizenship and Immigration Services to designate targeted employment areas.

IMPLICATIONS AND RECOMMENDATIONS

The new developments resulting from the RIA will have tangible effects on developers seeking to fund new capital investments. The percentages caps imposed on indirect job creation, relocated jobs, and other categories toward the job creation requirement will likely lengthen the amount of time spent on project creation and completion. These changes also likely should incentivize developers to focus their job creation metrics toward directly created jobs rather than through indirectly created ones. While these changes might increase the length of projects, the broadening of visa reserves through both the percentage caps and the creation of the rollover provisions will likely increase the number of projects in rural areas and high unemployment areas. Developers should carefully consider the composition of their job creation goals and calculate workforce sizes in line with these new requirements. Additionally, developers seeking to ensure they are able to succeed in obtaining visas for their desired employees by avoiding the typical backlog of visa applicants through the EB-5 program should consider investing in rural and high unemployment area projects to take advantage of the broadened application pool.

Article By Brian Graham, Adriana Reyes, and Gregory T. Lewis of K&L Gates

For more immigration legal news, click here to visit the National Law Review.

After EPA Rule Changes, Which ASTM Phase I ESA Standard Should You Use?

On November 1, 2021, ASTM International released its revised standard for Phase I Environmental Site Assessments. On March 14, 2022, the U.S. Environmental Protection Agency (the “EPA”) published a Direct Final Rule that confirmed the new ASTM standard, ASTM E1527-21, could be used to satisfy the EPA’s All Appropriate Inquiry (“AAI”) regulations. That, in turn, would mean that satisfying the ASTM E1527-21 standard could help a potential buyer of contaminated property satisfy some of the EPA’s requirements to qualify as a Bona Fide Prospective Purchaser, which may lead to being protected from liability under the federal Superfund statute.

However, on May 2, 2022, EPA withdrew the Final Rule it had published on March 14, 2022, and indicated it would address the comments it received concerning the previously Final Rule in a subsequent final action.

Why the change and, more importantly, which ASTM standard should a potential purchaser of contaminated property use when having a Phase I Site Assessment prepared?

EPA withdrew its Direct Final Rule in response to the negative comments it received concerning that rule. EPA had planned to allow both the November 2021 ASTM standard and its predecessor from 2013 (the ASTM E1527-13 standard) to be used to satisfy certain AAI requirements. Those commenting said that approach would lead to confusion in the marketplace, and would allow reports that did not meet the ASTM E1527-21 standard to be considered adequate, even though the 2021 ASTM standard represented what the real estate and environmental community had determined to be good commercial and customary practice. In other words, because the 2021 standard required a more rigorous approach to the relevant environmental due diligence work needed to prepare a Phase I Environmental Site Assessment, EPA’s approach would have meant that less thorough reports could have been deemed sufficient. As noted in the comment letter submitted to the EPA by the Environmental Bankers Association, “ASTM E1527-21 includes important updates that will reduce the risk of Users [of the ESA report] failing to identify conditions indicative of hazardous substance releases, potentially jeopardizing landowner [and prospective purchaser] liability protections to [potential] CERCLA [liability].” All of that makes sense: the better the environmental due diligence, the less risk of unpleasant surprises later.

But, where does that leave potential purchasers of contaminated real estate? Should they have their consultants prepare their Phase I Site Assessment reports based on the 2021 ASTM standard, or its 2013 predecessor, or both?

Contaminated real estate buyers, and any other parties involved in the transaction, such as lenders and equity investors, should require their environmental consultants to prepare their Phase I Environmental Site Assessment in conformance with the ASTM E1527-13 standard, because that is the ASTM standard that is currently referenced in EPA’s AAI regulations. It is necessary to do so, at least for now, in order to be able to qualify for Bona Fide Prospective Purchaser protection from CERCLA liability.

Those parties should also consider having their environmental consultants prepare the same Phase I Environmental Site Assessment in conformance with the updated ATSM E1527-21 standard. While some additional cost may be involved, nonetheless it may be worthwhile in order to meet what ASTM sees as the current standard of practice regarding these reports.

Another important consideration in the preparation of these reports is whether additional issues that are not formally included in the scope of either the ASTM E1527-13 or the ASTM E1527-21 standard should be addressed. For example, as noted in an appendix to the E1527-21 standard, petroleum products are within the scope of the practice “because they are of concern with respect to commercial real estate, and current custom and usage is to include an inquiry into the [past or present] presence of petroleum products when doing an environmental site assessment of commercial real estate.” That is so even though petroleum products generally do not lead to liability under CERCLA.

The non-scope issues appendix to the ASTM E1527-21 standard also addresses “substances not defined as hazardous substances” and does a good job addressing why a user of an ASTM-compliant report should at least consider whether to include certain emerging contaminants such as per- and polyfluoroalkyl substances, also known as PFAS, within its scope. The point is to think about whether to evaluate potential environmental liability for PFAS on a case-by-case basis in light of state law considerations, even though PFAS compounds have not yet been designated “hazardous substances” under CERCLA.

EPA’s recent rule-making activities have not provided clear guidance for potential purchasers of contaminated property regarding which ASTM standard should be used in preparing environmental site assessment reports that comply with EPA’s AAI regulations. At the moment, what seems to make the most sense is to have these reports prepared so that they comply with the ASTM E1527-13 standard and to consider whether to comply with the E1527-21 standard in addition. The user should also carefully evaluate whether certain considerations, such as potential PFAS contamination, should be included within the scope of the report.

Article By Ned Abelson and Justin Rheingold of Goulston & Storrs

For more environmental legal news, click here to visit the National Law Review.

2022 Goulston & Storrs PC.

One Less Way for Ohio Landowners to Challenge Royalty Severances

On February 15, 2022, the Ohio Supreme Court issued a significant decision in Peppertree Farms, L.L.C. v. Thonen establishing that, unless expressly stated otherwise, an oil and gas royalty interest retained in a deed executed prior to 1925 is not limited to the lifetime of the grantor. In so holding, the Ohio Supreme Court cut off one of the only grounds, other than the Dormant Minerals Act and Marketable Title Act, for landowners to quiet title and eliminate past oil and gas severances.

Ohio follows a legal tradition under which the default rules of English “common law” were adopted and then adapted by statute to form the basis of our legal system. At common law, a conveyance of real property had to include “words of inheritance” (i.e., an express statement that the royalty interest would last in perpetuity and be inheritable) or the interest being conveyed would be limited to the lifetime of the grantee (a life estate). Additional complications arose when a grantor sought to retain an interest by deed. If the grantor was retaining a right which had already been conveyed to him in perpetuity, then the retention qualified as a “technical exception” of a pre-existing right and additional words of inheritance were not required. However, if the grantor was creating and then retaining a new right, the retention qualified as a “technical reservation” and was limited to a life estate.

As new modes of production and corresponding property rights were discovered, it became unclear exactly what rights pre-existed a severance and the whole system of distinctions fell apart. In 1925, the General Assembly passed a law establishing that all future conveyances of real property were presumed perpetual unless stated otherwise. While eliminating this issue as to future deeds, the General Assembly did not settle the issue as to deeds executed before 1925 or clarify whether the retention of an oil and gas royalty was a “technical exception” or “technical reservation.”

In the Peppertree Farms case, Plaintiffs Peppertree Farms, Jay Moore and Amy Moore (collectively, “Peppertree”) sought to quiet title to certain lands in Monroe County, Ohio, against a severed oil and gas royalty interest (the “Royalty Interest”) originally retained by the grantor under a 1921 deed. In addition to a claim for extinguished under Ohio’s Marketable Title Act, Peppertree asserted that the Royalty Interest did not include words of inheritance and was therefore a newly created right which terminated upon the death of the grantor under the 1921 deed. Conversely, the defendant royalty owners (“Royalty Owners”) argued that the Royalty Interest was a pre-existing right which the grantor already held, and therefore could retain, in perpetuity without words of inheritance.

While Peppertree was able to convince both the trial and appellate court that the Royalty Interest was a newly created interest which was limited to a life estate, it was unsuccessful with the Ohio Supreme Court. Reasoning that a royalty was nothing more than the retention of part of the right to receive the proceeds of oil and gas production, the Court ultimately found that the Royalty Interest was a “technical exception” which survived the lifetime of the grantor. As a result, Peppertree was limited to its claims for extinguishment under the Marketable Title Act and Ohio surface owners lost another means to challenge ancient royalty reservations.

Article By J. Benjamin Fraifogl with Roetzel & Andress LPA.

For more articles on local state litigation, visit the NLR Litigation section.

Tag: real estate

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