Category: Construction Law

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.

© 2024 SHERIN AND LODGEN LLP
For more news on Open Permits in Real Estate, visit the NLR Real Estate section.

Pay-When-Paid Provisions Still Unenforceable in New York State

While New York State’s Prompt Payment Act (“PPA”) provides a potential workaround for the invalid pay-when-paid provisions that appear in many construction contracts, a recent decision from the State’s Appellate Division narrows, if not closes, that loophole.

In the construction industry, it is common for a general contractor to include “pay-when- paid” or “pay-if-paid”1 clauses in its contracts with subcontractors, essentially allowing the general contractor to avoid paying its subcontractors for their work until it receives payment from the owner and forcing subcontractors to assume the risk that the owner will fail to pay the general contractor. In 1995, New York State’s highest court in West- Fair Electric Contractors v. Aetna Casualty & Surety Co. invalidated such practice, declaring that pay-when-paid provisions are void and unenforceable as contrary to public policy. 87 N.Y.2d 148, 159 (1995). The Court found that pay-when-paid provisions prevent a subcontractor from enforcing its rights under New York State’s Lien Law because if the owner failed to pay the general contractor, then payment to the subcontractor would never be due, which is a “necessary element of the subcontractor’s cause of action to enforce its lien against the owner.” Id.; see also N.Y. Lien Law § 34 (holding that “[n]otwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable”).

Despite the holding in West-Fair, contractors continue to include pay-when-paid in contracts, and until recently the PPA offered a workaround to validate these seemingly invalid provisions.

In 2002, the New York State Legislature passed the PPA in order to facilitate the prompt payment to contractors and subcontractors. N.Y. Gen. Bus. Law § 756-a. The PPA contains a provision, however, that seems to provide an alternative to the disallowed pay-when-paid provision in construction contracts. Section 756-a(3)(b)(i) states:

Unless the provisions of this article provide otherwise, the contractor or subcontractor shall pay the subcontractor strictly in accordance with the terms of the construction contract. Performance by a subcontractor in accordance with the provisions of its contract shall entitle it to payment from the party with which it contracts. Notwithstanding this article, where a contractor enters into a construction contract with a subcontractor as agent for a disclosed owner, the payment obligation shall flow directly from the disclosed owner as principal to the subcontractor and through the agent.

N.Y. Gen. Bus. Law § 756-a(3)(b)(i) (emphasis added).

While the provision does clearly state in its second sentence that a subcontractor is entitled to payment “from the party with which it contracts,” the third sentence concerning agency seems to provide a way around the West-Fair Court’s clear mandate that pay-when-paid provisions are void, as long as the contractor is acting as an “agent for a disclosed owner.” Id. In that situation, the PPA arguably mandates that the payment obligation to the subcontractor flows directly from the owner, and not the general contractor. This principal-agent relationship is merely a reflection of the common law rule that an agent for a disclosed principal “will not be personally bound unless there is clear and explicit evidence of the agent’s intention to substitute or superadd his personal liability for, or to, that of his principal.” Mencher v. Weiss, 306 N.Y. 1, 4 (1953). Theoretically, the agency exception should not impair a subcontractor’s Lien Law rights because it can still file and enforce a mechanic’s lien, but it shifts the responsibility for payment from the general contractor to the owner, giving the general contractor a defense to the subcontractor’s nonpayment claims.

Until recently, not much has been said about the PPA’s agency provision. In March 2022, however, New York’s Appellate Division in Bank of America, N.A. v. ASD Gem Realty LLC rejected a general contractor’s claim that it was acting as an “agent for a disclosed owner” pursuant to § 756-a(3)(b)(i), holding that the general contractor was liable to the subcontractor regardless of whether or not the owner had paid the general contractor. 205 A.D.3d 1, 8-12 (1st Dep’t 2022). In that case, an owner (ASD Gem Realty LLC and ASD Diamond Inc., together “ASD”) hired a general contractor (Sweet Construction Corp. or “Sweet”) to perform construction and renovation work at its property. Id. at 3. ASD solicited proposals for the installation of partitions for the project and selected plaintiff Arenson Office Furnishings, Inc. (“Arenson”), who then entered into a subcontract with Sweet. Id. The subcontract provided that “[a]ll work to be performed pursuant to the ATTACHED SCOPE LETTER . . . and ‘SCC General Requirements.’” Id. at 4 (alterations in original). The Scope Letter contained the following clause: “Subcontractor understands that Contractor is acting as an agent for the Owner, and agrees to look only to funds actually received by the Contractor (from the Owner) as payment for the work performed under this Subcontract.” Id.

As it so happened, ASD ran into financial difficulties and Arenson did not receive payment from either ASD or Sweet. Id. at 5. While Arenson filed a mechanic’s lien against the property and commenced a lien foreclosure action, there was no surplus available to pay either Sweet or Arenson after the construction lender obtained a judgment of foreclosure and conducted a foreclosure sale of the property. Id. Arenson then filed a complaint against Sweet for violation of the PPA, claiming Sweet failed to pay Arenson for the stated reason that Sweet had not been paid by ASD. Id.

In response, Sweet argued that it was not liable to Arenson because Sweet was acting as an agent for ASD; Sweet was merely complying with ASD’s directive to hire Arenson. Id. Sweet claimed ASD told Sweet that ASD would be responsible for paying Arenson and, citing the subcontract’s payment language, claimed that Arenson could only expect payment from ASD, not Sweet. Id. Sweet also relied on § 756-a(3)(b)(i) of the PPA, arguing that pursuant to the third sentence, Sweet was only an agent for a disclosed owner and therefore was exculpated from personal liability. Id. at 6. Sweet argued that the agency provision of this section negated the second sentence of the provision (entitling the subcontractor to payment from “the party with which it contracts”). Id. (quoting N.Y. Gen. Bus. Law § 756-a(3)(b)(i)).

The lower court rejected those arguments, holding that the subcontract language was an unenforceable pay-when-paid clause and that the exception in the PPA at § 756- a(3)(b)(i) clearly provides (in its second sentence) that a subcontractor is entitled to payment “from the party with which it contracts” (and Sweet contracted with Arenson). Id. The lower court also explained that the PPA and related case law demonstrate that an unpaid subcontractor is entitled to multiple sources of payment, perhaps explaining any conflict between the second and third sentence of § 756-a(3)(b)(i). Id. at 6.

The Appellate Division in turn held that the lower court correctly determined that Sweet was not an agent for an undisclosed principal. Id. at 7. The Court relied on the fact that the signature line in the subcontract did not “indicate that Sweet signed the contract as agent on behalf of a disclosed principal or reflect any limitations,” and that the referenced SCC General Requirements included indemnifying Sweet, obtaining liability insurance in Sweet’s favor, and recognizing Sweet’s authority to issue safety violations and correct unsafe conditions. Id. at 7-8. The Court “reject[ed] Sweet’s attempt to divide a single contract into one that creates an agency for purposes of payment but not for any other purpose,” reaffirming “that the ‘dual roles’ of general contractor and agent are inconsistent.” Id. at 8 (quoting Blandford Land Clearing Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 260 A.D.2d 86, 95 (1st Dep’t 1999)).

As for the PPA, the Court also held that § 756-a(3)(b)(i) was inapplicable because, as explained, Sweet was not ASD’s agent and its interpretation of that provision “overlooks the entire purpose of the PPA and turns the statute on its head.” Id. at 11. The Court explained that the provision is actually designed to provide the subcontractor “with the panoply of statutory benefits and remedies that ordinarily would have inured to the contractor had the contractor acted on its own behalf, instead of as the owner’s agent,” and therefore, the “subcontractor is entitled to all of the article’s benefits and remedies that would have ordinarily flowed to the contractor.” Id. at 11-12. The Court pointed out that the principles of West-Fair applied to this case as well, even if West-Fair did not involve an agent relationship, because the central issue in both cases was forcing a subcontractor to assume the risk of an owner’s failure to pay its contractor. Id. at 12.

Therefore, despite clear language that Sweet was acting as an agent for the Owner, and despite Arenson’s agreement “to look only to funds actually received by the Contractor (from the Owner) as payment for the work performed under this Subcontract,” id. at 4, the Court found that this PPA exception to otherwise invalid pay- when-paid clauses did not apply.

In sum, contractors should be wary when attempting to use § 756-a(3)(b)(i) in conditioning payment to a subcontractor on payment from an owner, especially if the contractor is really just trying to separate its payment obligations from its general contracting responsibilities. Thus far, it appears New York State courts will not be sympathetic to such an arrangement, despite any potential carve out in the PPA.

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© 2022 Phillips Lytle LLP

FOOTNOTES

1 While there is a difference between “pay-when-paid” and “pay-if-paid,” for purposes of this article, the two phrases are used interchangeably to mean a condition in a contract in which payment by the contractor to the subcontractor is contingent on the owner first paying the contractor. See Bank of Am., N.A. v. ASD Gem Realty LLC, 205 A.D.3d 1, 6 n.3 (1st Dep’t 2022).

If You Can’t Stand the Heat, Don’t Build the Kitchen: Construction Company Settles Allegations of Small Business Subcontracting Fraud for $2.8 Million

For knowingly hiring a company that was not a service-disabled, veteran-owned small business to fulfill a set aside contract, a construction contractor settled allegations of small business subcontracting fraud for $2.8 million.  A corporate whistleblower, Fox Unlimited Enterprises, brought this misconduct to light.  We previously reported on the record-setting small business fraud settlement with TriMark USA LLC, to which this settlement is related.  For reporting government contracts fraud, the whistleblower will receive $630,925 of the settlement.

According to the allegations, the general contractor and construction company Hensel Phelps was awarded a General Services Administration (GSA) contract to build the Armed Forces Retirement Home’s New Commons/Health Care Building in Washington, D.C.  Part of the contract entailed sharing the work with small businesses, including service-disabled, veteran-owned small businesses (SDVOSB).  The construction contractor negotiated all aspects of the contract with an unidentified subcontractor and then hired an SDVOSB, which, according to the settlement agreement, Hensel Phelps knew was “merely a passthrough” for the larger subcontractor, thus creating the appearance of an SDVOSB performing the work on the contract to meet the set-aside requirements.  The supposedly SDVOSB subcontractor was hired to provide food service equipment for the Armed Forces Retirement Home building.

“Set aside” contracts are government contracts intended to provide opportunities to SDVOSB, women-owned small businesses, and other economically disadvantaged companies to do work they might not otherwise access.  Large businesses performing work on government contracts are often required to subcontract part of their work to these types of small businesses.  “Taking advantage of contracts intended for companies owned and operated by service-disabled veterans demonstrates a shocking disregard for fair competition and integrity in government contracting,” said the United States Attorney for the Eastern District of Washington, as well as a shocking disregard for proper stewardship of taxpayer funds.

Whistleblowers can help fight fraud and protect taxpayers by reporting government contracts fraud.  A whistleblower can report government contracts fraud under the False Claims Act and become a relator in a qui tam lawsuit, from which they may be entitled to a share of the funds the government recovers from fraudsters.

Article By Eva Gunasekera and Renée Brooker at Tycko & Zavareei LLP

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

© 2022 by Tycko & Zavareei LLP

EPA Will Propose to Ban Ongoing Uses of Asbestos

The U.S. Environmental Protection (EPA) announced on April 5, 2022, that it will propose to prohibit ongoing uses of chrysotile asbestos, the only known form of asbestos currently imported into the United States. EPA notes that the proposed rule will be “the first-ever risk management rule issued under the new process for evaluating and addressing the safety of existing chemicals under the Toxic Substances Control Act (TSCA) that was enacted in 2016.” EPA will propose to prohibit manufacture (including import), processing, distribution in commerce, and commercial use of chrysotile asbestos for all ongoing uses of chrysotile asbestos. EPA will also propose targeted disposal and recordkeeping requirements in line with industry standards, Occupational Safety and Health Administration (OSHA) requirements, and the Asbestos National Emission Standards for Hazardous Air Pollutants (NESHAP). EPA has posted a pre-publication version of the proposed rule. Publication of the proposed rule in the Federal Register will begin a 60-day comment period.

Background

As reported in our January 4, 2021, memorandum, EPA released on December 30, 2020, the final risk evaluation for asbestos, part 1: chrysotile asbestos (Asbestos RE Part 1). Of the six use categories evaluated (chlor-alkali diaphragms, sheet gaskets, other gaskets, oilfield brake blocks, aftermarket automotive brakes/linings, and other vehicle friction products), EPA found that there is unreasonable risk to workers, occupational non-users (ONU), consumers, and/or bystanders within each of the six chrysotile asbestos use categories. EPA found no unreasonable risk to the environment. According to the final risk evaluation, chrysotile is the prevailing form of asbestos currently mined worldwide, and “so it is assumed that a majority of commercially available products fabricated overseas that contain asbestos are made with chrysotile. Any asbestos being imported into the U.S. in articles is believed to be chrysotile.” The other five forms of asbestos are now subject to a significant new use rule (SNUR), as reported in our April 18, 2019, memorandum, “EPA Announces Final SNUR for Asbestos Will ‘Close Loophole and Protect Consumers.’”

Proposed Rule

EPA will propose a rule under TSCA Section 6(a) to prohibit manufacture (including import), processing, distribution in commerce, and commercial use of chrysotile asbestos in bulk or as part of chrysotile asbestos diaphragms used in the chlor-alkali industry and chrysotile asbestos-containing sheet gaskets used in chemical production. EPA will propose that these prohibitions take effect two years after the effective date of the final rule.

EPA will also propose pursuant to TSCA Section 6(a) to prohibit manufacture (including import), processing, distribution in commerce, and commercial use of chrysotile asbestos-containing brake blocks used in the oil industry, aftermarket automotive chrysotile asbestos-containing brakes/linings, other chrysotile asbestos-containing vehicle friction products (not including the National Aeronautics and Space Administration (NASA) Super Guppy Turbine aircraft use), and other chrysotile asbestos-containing gaskets. EPA will propose that these prohibitions take effect 180 days after the effective date of the final rule.

EPA will further propose pursuant to TSCA Section 6(a) to prohibit manufacture (including import), processing, and distribution in commerce of: aftermarket automotive chrysotile asbestos-containing brakes/linings for consumer use, and commercial use of other chrysotile asbestos-containing gaskets for consumer use. EPA will propose that these prohibitions take effect 180 days after the effective date of the final rule.

EPA will also propose disposal and recordkeeping requirements under which regulated parties would document compliance with certain proposed prohibitions. EPA states that it does not intend the proposed prohibitions on processing or distribution in commerce to prohibit any processing or distribution in commerce incidental to disposal of the chrysotile asbestos waste in accordance with the proposed requirements.

According to EPA, because a determination has been made that chrysotile asbestos presents an unreasonable risk to health within the United States or to the environment of the United States, pursuant to TSCA Section 12(a)(2), the proposed rule would apply to chrysotile asbestos even if being manufactured, processed, or distributed in commerce solely for export from the United States.

Commentary

Bergeson & Campbell, P.C. (B&C®) commends EPA on this historical achievement. Unsurprisingly, there are aspects of this precedent-setting proposed rule that invite discussion and warrant comment from affected parties. Key among these issues is a potential significant legal vulnerability in the underlying risk evaluation (i.e., Asbestos RE Part 1) for the proposed rule, an issue that may overshadow this historic achievement in a manner reminiscent of EPA’s failed ban of asbestos in 1991 (Corrosion Proof Fittings v. EPA, 947 F.2d 1201 (5th Cir., 1991)).

EPA proposed that the prohibition on specific conditions of use (e.g., chrysotile asbestos diaphragms used in the chlor-alkali industry) would take effect two years after the effective date of the final rule. EPA stated that it “believes an aggressive transition away from chrysotile asbestos will spur adoption of superior technology [e.g., membrane cells with increased concentrations of per- and polyfluoroalkyl substances (PFAS)].” The clear need to consider EPA’s intended action on asbestos in the context of its ongoing actions on PFAS is of course not lost on the Agency. EPA acknowledged that “the transition away from asbestos-containing diaphragms could result in greater usage and release of PFAS.”

B&C notes that innovative new technologies, such as alternative membrane cells, may be available in the future, but those technologies must be proven to be economically and technically viable. Once proven effective, the underlying chemical substances must be reviewed as new chemicals if so classified under TSCA. The development, review, and approval are all on indeterminate timelines, so it is speculative when novel, non-PFAS-based technologies will be commercially available and, of course, whether that time will be prior to the effective date of EPA’s proposed ban on asbestos.

EPA requested comment on specific aspects of the proposed rule that B&C encourages potentially impacted parties to consider. For example, EPA discussed its authority under TSCA Section 6(g) to grant a time-limited exemption for a specific condition of use, such as the chlor-alkali industry, where EPA finds “that compliance with the proposed requirement would significantly disrupt the national economy, national security, or critical infrastructure.”

EPA also requested comment on a primary alternative regulatory option that EPA discussed for the chlor-alkali diaphragm and sheet gasket categories that would allow a prohibition to take effect five years after the effective date of the final rule. As part of this option, EPA would include establishment of a risk-based performance standard known as an existing chemical exposure limit (ECEL). EPA developed an eight-hour time-weighted average (8-hr TWA) ECEL of 0.005 fibers/cubic centimeter (f/cc) for inhalation exposures to chrysotile asbestos as an eight-hr TWA ECEL-action level of 0.0025 f/cc, with associated requirements for initial and periodic monitoring and respirator usage/type if exceedances are found.

As part of the monitoring requirements, EPA stated that it would “require use of appropriate sampling and analytical methods to determine asbestos exposure, including: … Compliance with the Good Laboratory Practice Standards at 40 CFR Part 792,” despite the fact that EPA acknowledges that other standards, such as Industrial Hygiene Laboratory Accreditation Program (IHLAP), are more appropriate for industrial hygiene monitoring. EPA’s TSCA Section 5(e) order template states the following under Section III.D:

Compliance with TSCA GLPS, however, is not required under this New Chemical Exposure Limit Section where the analytical method is verified by a laboratory accredited by either: the American Industrial Hygiene Association (“AIHA”) Industrial Hygiene Laboratory Accreditation Program (“IHLAP”) or another comparable program approved in advance in writing by EPA.

EPA devoted one paragraph in the proposed rule to “TSCA section 26(h) considerations.” EPA stated, in part, that its unreasonable risk determination “was based on a risk evaluation, which was subject to peer review and public comment, was developed in a manner consistent with the best available science and based on the weight of the scientific evidence as required by TSCA sections 26(h) [and 26(i)] and 40 CFR 702.43 and 702.45.”

B&C notes that EPA stated in the Asbestos RE Part 1 the following:

TSCA § 26(h) and (i) require EPA, when conducting Risk Evaluations, to use scientific information, technical procedures, measures, methods, protocols, methodologies and models consistent with the best available science and base its decisions on the weight of the scientific evidence. To meet these TSCA § 26 science standards, EPA used the TSCA systematic review process described in the [2018] Application of Systematic Review in TSCA Risk Evaluations document [citation omitted] [2018 SR Document].

Prior to completing Asbestos RE Part 1, EPA requested the National Academies of Science, Engineering, and Medicine (NASEM) to review the 2018 SR Document. In February 2021, NASEM released its consensus study report on EPA’s 2018 SR Document and concluded that it did not meet the criteria of “comprehensive, workable, objective, and transparent” and that “The OPPT approach to systematic review does not adequately meet the state-of-practice.”

NASEM recommended that “With regard to hazard assessment for human and ecological receptors, OPPT should step back from the approach that it has taken and consider components of the OHAT, IRIS, and Navigation Guide methods that could be incorporated directly and specifically into hazard assessment.”

In response to the NASEM review, EPA revised its systematic review method. On December 20, 2021, EPA released the “Draft Systematic Review Protocol Supporting TSCA Risk Evaluations for Chemical Substances” (2021 Draft Protocol) for public comment. EPA acknowledged in the 2021 Draft Protocol that:

Previously [in the 2018 SR Document], EPA did not have a complete clear and documented TSCA systematic review (SR) Protocol. EPA is addressing this lack of a priori protocol by releasing [the 2021 Draft Protocol].

EPA further stated that the:

[2021 Draft Protocol] is significantly different [from the 2018 SR Document] in that it includes descrition [sic] of the Evidence Integration process…, which was not previously included in the [2018 SR Document].

B&C recognizes that the scientific methods used to inform systematic review are not static and that updates will be required as the science evolves. In this instance, however, many of the documents cited as supporting information for updating the 2021 Draft Protocol (e.g., Office of Health Assessment and Translation (OHAT), 2015) were available prior to EPA issuing the 2018 SR Document. Rather than utilizing these documents at the time, EPA developed the 2018 SR Document de novo. In other words, EPA chose to develop its own methodology in 2018 rather than incorporating and adapting existing methodologies that represented the best available science at the time.

These issues raise interesting procedural questions and issues around whether EPA demonstrated that Asbestos RE Part 1 was based on the best available science and weight of scientific evidence, as required under TSCA Sections 26(h) and 26(i) and the implementing regulation under 40 C.F.R. Part 702.

B&C encourages stakeholders to review EPA’s proposed risk management rule on chrysotile asbestos, even for entities that do not manufacture, process, distribute, or use this substance. We urge this review because of the precedential nature of EPA’s decisions. B&C also encourages interested parties to provide public comments on the proposed rule, given that risk management decisions in the proposed rule will likely serve as a basis from which EPA regulates other chemical substances EPA is evaluating under TSCA Section 6.

Article By: the Government Regulation practice at Bergeson & Campbell, P.C.

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©2022 Bergeson & Campbell, P.C.

How to Improve Cities After COVID-19: What to Know About the Revitalizing Downtowns Act

In July, Democratic Senators Gary Peters and Debbie Stabenow (along with Democratic  Representatives Dan Kildee, John Larson, and Jimmy Gomez) introduced the Revitalizing Downtowns Act (“The Act”) to Congress. With the goal of reviving urban districts and downtown commerce, the Act would establish a new federal tax credit that encourages property developers to convert unused office space into residential or mixed-use space.

The Act defines an obsolete office structure as a building at least 25 years old, and at least 20 percent of the residential conversion must be dedicated to affordable housing. If these criteria are met, 20 percent of the conversion expenses will be covered by the tax credit. The Act has  growing support from economic development organizations across the country, including the International Downtown Association and the Federal City Council. Together, 37 organizations formed the Revitalize Our Cities coalition, committed to reenergizing downtown spaces and strengthening the U.S. economy.

The Act presents a substantial opportunity to improve American cities of all sizes. Justin P. Weinberg, Partner in Charge at Taft Stettinius & Hollister’s Minneapolis office, said of the Act, “It’s an opportunity to revitalize and reenergize existing spaces. Giving new purpose – and attracting new tenants – to buildings that would otherwise be vacant means more people, customers, and workers to build and sustain a strong community and business district where there wasn’t one before.”

How Can Federal Tax Credits Help Unused Office Space Redevelopment?

With employees still working from home and a permanent return to the office for countless businesses seeming more uncertain as the COVID-19 pandemic continues, many office buildings may remain vacant and unused, leaving downtowns with fewer opportunities for investment and revenue generation.

“This Act would be huge in encouraging all types of business to invest in downtown markets. It would be most helpful though if the tax credit provided could be used in conjunction with other credits, such as historic tax credits, Low-Income Housing Tax Credits (“LIHTCs”) and/or new markets and also incentivized business owners to open. Residential development works best if it is in conjunction with other retail, services and other amenities and, of course, plenty of parking,” said Kelly Rushin Lewis, partner in Jones Walker’s tax practice and leader of the firm’s tax credit finance team.

For buildings needing a lot of work, tax credits are essential to ensuring the project has the necessary financing. Without them, many projects requiring a lot of renovations and updates may not be able to move forward, Ms. Lewis said.

“Tax incentives are a key tool in attracting private capital in neighborhoods or towns in need of revitalization. These conversions can be much more challenging than building from the ground up, especially if dealing with vacant buildings that may have environmental, zoning, code compliance, or other latent issues that may be expensive to correct. The projects often are just not financially feasible and will not get done without those incentives,” she said. “A credit or some other incentive for potential tenants in the commercial spaces would be helpful – many business owners may be reluctant to be the first or one of few to open in what may be an otherwise quiet downtown. Tax incentives would encourage them to come and hopefully give them a cushion while the neighborhood is being revitalized.”

Another potential impact of the bill would be the increased investment in affordable housing. With many cities large and small struggling to provide enough affordable housing, the Act would create an opportunity to develop vacant buildings into much-needed affordable housing developments.

“Now more than ever, investment in affordable housing is critical.  Housing costs are at an all-time high with demand outpacing supply. The costs of acquiring housing is high and the cost of building it is as well,” Ms. Lewis said. “Affordable housing developments do so much more than create housing – they create jobs and careers in everything from construction, accounting, legal work, property management, and more.”

In addition to creating jobs, the creation of affordable housing has the potential to slow down the gentrification affecting many large cities, said Lacy Clay, a former congressman from Missouri and a Senior Policy Advisor at Pillsbury Winthrop Shaw Pittman LLP.

“If you can convert these older buildings into affordable housing units, then you will slow down the gentrification process taking place in quite a few of these urban centers. You can look at any major city now and see that low to moderate income families and people of color are being pushed out of those cities, and then to further into the suburbs,” he said. “This would help reverse those trends.”

How Investing in Affordable Housing Actually Can Help with the Current Labor Shortage.

The Revitalizing Downtowns Act is a timely piece of legislation for investing in urban centers during the COVID-19 pandemic. For many industries, it appears that widespread remote work is here to stay, and it is critical that American cities reflect that new reality. By providing incentives for developers and property owners, the Act makes these necessary overhauls far more viable. “Tax incentives reduce investors’ financial risk,” explained Mr. Weinberg. “[This makes] taking on such a project highly attractive.”

The bill’s emphasis on affordable housing is especially notable. Through this provision, legislators hope to provide equal footing for renters and thereby attract young talent to fill employment needs.

“I want to compliment Senator Stabenow and Gary Peters and Dan Kildee for coming up with this innovative way to be able to bring populations back in a way that does not exclude communities of color, but will include communities of color,” Mr. Clay said. “If you build enough affordable housing units, according to the legislation, at least 20 percent of any of those redevelopments have to be dedicated to affordable housing.”

Through investing in affordable housing, downtowns would benefit from an increased flow of commerce, as well as a buffer against the ongoing U.S. labor shortage and or talent mismatch.

“The trick is to prioritize affordable housing without eliminating or displacing families in market-rate housing that do not otherwise qualify for affordable housing,” said Mr. Weinberg. “But if done well, a city that strikes the right balance of available affordable housing benefits from additional economic stability and makes itself a sustainable destination for business, families, and communities.”

Copyright ©2021 National Law Forum, LLC
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Miami Condo Collapse: What Role Can Whistleblowers Play to Prevent Such Tragedies?

In the early morning hours of June 24, 2021, a 13-story condominium building in the town of Surfside on Miami Beach, Florida, collapsed. Tragically, four people have been confirmed dead, and search and rescue crews continue their efforts to find other survivors, with at least 156 people still unaccounted for. According to recent reports, nearly three years before the collapse, in October 2018, a consultant found evidence of “major structural damage” to concrete slabs beneath the pool deck and beams and walls of the parking garage under the building. While the cause of the collapse remains unknown, the 2018 report suggests that the complex’s management association knew of the potentially severe structural damage to the building.

This tragedy was not the first time a building has collapsed in the County. In 1974, the federal Drug Enforcement Agency building in downtown Miami collapsed. In response, Miami-Dade County created a recertification process for buildings over 40 years old to ensure these buildings’ structural integrity. Because of weather conditions in South Florida and exposure to corrosive salt air, damage to rebar and steel beams can impact the structural integrity of a building over time. The Miami-Dade County Code requires inspections to be conducted to evaluate the general structural condition of the building and to ensure building safety. The association was set to begin plans to repair the building this year, in connection with this recertification process.

This recent disaster leaves many wondering what could have been done to prevent it, and how we can avoid such tragedies. Employees and contractors in the construction industry are uniquely positioned to discover safety risks and other violations in building projects. As such, they can play a significant role in alerting the government, and in turn the public, of serious risks. What laws exist to protect and incentivize these whistleblowers?

Protections for Whistleblowers in Florida

Florida provides broad protection to employees who report legal violations. For employees in the public sector, the law protects public employees, as well as independent contractors with a government agency, who report to an appropriate government agency violations “that create a substantial and specific danger to the public’s health, safety or welfare.” The state’s private sector whistleblower law also protects private employees who disclose wrongdoing to a government agency. Significantly, the law also protects private employees who have “objected to, or refused to participate in, any activity, policy, or practice of the employer which is in violation of a law, rule, or regulation.” An employee who faces retaliation for reporting wrongdoing may be entitled to damages, including lost wages, benefits, and other types of compensatory damages.

False Claims Acts

Protections under the federal False Claims Act (FCA) apply across a wide range of industries, including in the construction industry. The FCA prohibits the intentional presentation of false claims to the government for payment, which includes providing false information in connection with any claims for payment. If a construction whistleblower discovered a violation of the FCA – for example, if a company received federal funds to complete building repairs that were not completed – he or she could file a lawsuit on behalf of the federal government, known as a qui tam. An individual who brings a successful qui tam lawsuit can receive 15 to 30 percent of the damages received by the government. The FCA also includes worker protections so that an individual who brings a qui tam action or tries to stop the FCA violations may be entitled to relief if he or she experiences retaliation on the job.

Like many other states, Florida has a statute modeled on the federal FCA that protects employees for reporting an employer who presents false claims to the state or otherwise misappropriates state property. An individual who brings an action under the Florida FCA may be entitled to a percentage of the amount recovered by the government. Similar to the federal FCA, individuals who report violations under Florida’s FCA are also protected from retaliation for trying to stop such violations or bringing a qui tam action.

Conclusion

News reports state it may take months to know what caused the horrific collapse of the condo building in Miami. Miami-Dade County will undoubtedly evaluate how it may prevent such tragedies in the future. In Miami and elsewhere, whistleblowers can play an integral role in protecting public safety. Federal and state laws provide protections and incentives to those who come forward to report potential violations.

Katz, Marshall & Banks, LLP
For more articles on whistleblowers, visit the NLR Criminal Law / Business Crimes section.

New Jersey Closes all Non-Essential Construction Projects

On April 8, 2020, New Jersey Governor Phil Murphy signed Executive Order No. 122, requiring the closure of all non-essential construction projects beginning at 8:00 p.m. on Friday, April 10, 2020. The executive order does not define “non-essential construction project”; instead, it lists the following “essential construction projects” that may continue to operate:

  • Projects necessary for the delivery of health care services (e.g., hospitals, health care facilities, and pharmaceutical manufacturing facilities);
  • Transportation projects;
  • Utility projects;
  • Affordable housing residential projects;
  • School projects (e.g., pre-K-12 schools and higher education facilities);
  • Projects already underway involving single-family homes or apartments with a construction crew of five or fewer individuals;
  • Projects already underway involving a residential unit for which a tenant or buyer has legally agreed to occupy by a certain date and the construction is necessary for the unit’s availability;
  • Projects involving facilities in which “the following takes place: the manufacture, distribution, storage, or servicing of goods or products that are sold by online retail businesses or essential retail businesses (as defined by Executive Order No. 107 (2020) and subsequent Administrative Orders)”;
  • “Projects involving data centers or facilities that are critical to a business’s ability to function”;
  • “Projects necessary for the delivery of essential social services, including homeless shelters”;
  • “Any project necessary to support law enforcement agencies or first responder units in their response to the COVID-19 emergency”;
  • “Any project that is ordered or contracted for by Federal, State, county, or municipal government”;
  • “[A]ny project that must be completed to meet a deadline established by the Federal government”;
  • Any work on a non-essential construction project that is required to physically secure the site, ensure building structural integrity, abate hazards, or confirm that the site is protected and safe during the suspension of the project; and
  • “Any emergency repairs necessary to ensure the health and safety of residents.”

The New Jersey State Director of Emergency Management (who is the Superintendent of the State Police) has the discretion to amend this list of essential construction projects.

Essential construction projects that continue to operate must continue to adhere to guidelines and directives issued by the New Jersey Department of Health, the Centers for Disease Control and Prevention (CDC), and the Occupational Safety and Health Administration to maintain a clean, safe, and healthy work environment for employees. These businesses must also implement policies and protocols to enforce best practices regarding social distancing and good hygiene, including but not limited to:

  • Prohibit all non-essential visitors from entering the worksite;
  • Limit worksite meetings and groups to fewer than 10 people;
  • Require individuals to maintain a minimum 6 feet of social distancing when possible;
  • Stagger work start and stop times to limit the number of individuals entering and leaving the worksite at the same time, to the extent possible;
  • Stagger lunch breaks and work times to enable operations to safely continue while utilizing the fewest number of individuals as possible;
  • Limit the number of individuals who can access common areas at the same time;
  • Provide employees with cloth face coverings and gloves, and require workers to wear them while on premises unless there is a medical reason prohibiting it (Note: If any individual (employee or visitor) declines to wear a face covering on premises due to a medical reason, the business cannot require the individual to produce medical documentation verifying his or her condition.);
  • Require essential visitors to wear cloth face coverings while on premises (Note: If a visitor refuses to wear a face covering for a non-medical reason and if a covering cannot be provided to the visitor, then the business must deny entry to the individual);
  • “Require infection control practices, such as regular hand washing”;
  • “Limit sharing of tools, equipment, and machinery”;
  • Provide hand sanitizer and wipes to employees and visitors; and
  • “Require frequent sanitization of high-touch areas” (e.g., restrooms, breakrooms, equipment, and machinery).

These businesses must also implement policies and protocols in the event the worksite is exposed to COVID-19, including but not limited to:

  • “Immediately separate and send home workers who appear to have symptoms consistent with COVID-19”;
  • “Promptly notify workers of any known exposure to COVID-19 at the worksite, consistent with the confidentiality requirements of the Americans with Disabilities Act and any other applicable laws”; and
  • “Clean and disinfect the worksite in accordance with CDC guidelines when a worker at the site has been diagnosed with COVID-19.”
© 2020, Ogletree, Deakins, Nash, Smoak & Stewart,P.C., All Rights Reserved.

Commercial PACE Works: National Study Shows Only One Default Out of 1,870 Deals

A recent study by the US Department of Energy’s Lawrence Berkeley National Lab shows that commercial property assessed clean energy loans (PACE) are growing in popularity and are a good bet for lenders and property owners. Through 2017, projects worth $887 million have been completed, creating more than 13,000 jobs.1 The study found just one default on a PACE loan out of 1,870 deals nationwide since 2008.2

PACE is an innovative program that enables property owners to obtain low-cost, long-term loans for energy efficiency, renewable energy, and water conservation improvements. Projects financed using PACE can generate positive cash flow upon completion with no up-front, out-of-pocket cost to property owners—eliminating the financial barriers that typically prevent investment in revitalizing aging properties. The term of a PACE Financing may extend up to the useful life of the improvement, which may be as high as 20 years or more, and can result in cost savings that exceed the amount of the PACE financing. The result is improved business profitability, an increase in property value, and enhanced sustainability. PACE financing is also available for new construction under Wisconsin law.

Along with the Wisconsin Counties Association, Slipstream and other partners, von Briesen had a leadership role in creating PACE Wisconsin, a joint powers commission comprising a consortium of Wisconsin counties. von Briesen’s vision of a uniform PACE program throughout the state was implemented through creation of a joint powers commission open to any county that wishes to join. PACE is now available in 43 Wisconsin counties, representing 85% of the state’s population.

The recent PACE study also showed that most jurisdictions adopting PACE programs are using a model similar to the one adopted in Wisconsin, because it is easy for local governments to administer.3 Midwestern states are leading the way in expanding PACE. Wisconsin now ranks 11th in PACE financing deals completed, according to PACENation data through 2017.4 In 2019 PACE Wisconsin closed an $8.8 million deal on a historic hotel renovation in Green Bay, financed with a taxable bond offering by the Public Finance Authority. PACE Wisconsin has $15 million in total closings so far in 2019, and over $10 million in the pipeline for the rest of the year.

PACE Wisconsin has registered more than 80 contracting firms that are ready to make buildings more efficient and more comfortable, and has 17 capital providers available to finance building upgrades and new construction. PACE Wisconsin is also supporting legislation to improve the program by reducing paperwork requirements and making financing available for electric vehicle charging equipment. More information about PACE Wisconsin can be found on its website, www.pacewi.org.

1 PACE Market Data, PACENation website, https://pacenation.us/pace-market-data/(accessed August 4, 2019)
2 Commercial PACE Financing and the Special Assessment Process: Understanding Roles and Managing Risks for Local Governments, Greg Leventis and Lisa Schwartz, Lawrence Berkeley National Laboratory, June 2019, http://eta-publications.lbl.gov/sites/default/files/final_cpace_brief_1_ 112308-74205-eere-c-pace-report-arevalo-fz.pdf (accessed August 4, 2019).
3 Commercial PACE Financing and the Special Assessment Process: Understanding Roles and Managing Risks for Local Governments, Greg Leventis and Lisa Schwartz, Lawrence Berkeley National Laboratory, June 2019, http://eta-publications.lbl.gov/sites/default/files/final_cpace_brief_1 _112308-74205-eere-c-pace-report-arevalo-fz.pdf (accessed August 4, 2019).
4 Study: Nonpayment risk remote for commercial clean energy loans, Frank Jossi, Midwest Energy News, July 31, 2019, https://energynews.us/2019/07/31/national/study-nonpayment-risk-remote-for-commercial-clean-energy-loans/ (accessed August 4, 2019) (citing PACE Market Data, PACENation website, https://pacenation.us/pace-market-data/ (accessed August 4, 2019)).

©2019 von Briesen & Roper, s.c

Beware of the Barter: A Cautionary Tale

A recent ruling by Tennessee’s top court sends a strong message: be leery of waiving traditional forms of payment in favor of accepting goods or services. In TWB Architects, Inc. v. The Braxton, LLC, et al., an architecture firm and a cash-strapped developer executed an agreement for the architect to receive a penthouse condominium instead of his design fee. When the developer could not deliver a deed for the condominium, the architecture firm sued the developer for its fees.

So far, the ensuing litigation has lasted over 10 years and, most recently, resulted in an opinion by the Supreme Court of Tennessee that reversed summary judgment in favor of the architect and remanded the matter back to the trial court for still more proceedings.

The parties originally entered in a standard Architect Agreement, whereby the plaintiff, TWB Architects, was to be paid for its design services based on two percent of the construction costs for the project. After failing to obtain sufficient financing for the project, the defendant, The Braxton, informed TWB that it could not pay the design fees and suggested TWB accept a condominium in the project as payment instead. TWB agreed, and the parties executed the Condominium Agreement.

Thereafter, TWB’s owner acted as though he owned the condominium contemplated in the deal, which just so happened to be a penthouse. He invested nearly $40,000 in upgrades and repeatedly referred to the penthouse as “his penthouse.” In December 2008, he moved into the penthouse and represented himself as its owner.

However, shortly thereafter, issues arose with Braxton’s ability to deed the condominium to TWB’s owner. At that point, TWB decided to change course. It claimed that it was still entitled to the original design fee under the Architect Agreement and filed a mechanic’s lien for the unpaid fees. Braxton claimed the Condominium Agreement had acted as a novation, nullifying the Architect Agreement and, accordingly, TWB’s ability to collect its fee thereunder.

The trial court granted summary judgment in favor of TWB, holding it could still recover its design fees because there was insufficient evidence that the parties intended a novation by substituting the Architect Agreement for the Condominium Agreement. The court of appeals affirmed, but the Tennessee Supreme Court reversed. The Supreme Court found that summary judgment was improperly granted because disputed questions of material fact existed about whether TWB and Braxton intended a novation when they executed the condominium agreement.

Unless the parties can settle the matter, the case will now require a trial to determine whether TWB can recover its fees. It’s unknown whether TWB’s owner is still living in the penthouse.

This case is a great example of how a tempting barter – like accepting a penthouse from a cash-strapped developer – may sound like a nice solution at the time, but can lead to further headaches and protracted litigation.

© 2019 BARNES & THORNBURG LLP

For more developer-architect concerns, see the National Law Review Real Estate law or Construction Law pages.

Chicago’s Willis Tower – No Longer the Highest Roof in the Western Hemisphere

Well, it had to happen someday. Though Chicago’s Willis Tower hasn’t held the honor of being the world’s tallest building since 1998 and dropped off the world’s 10 tallest list in 2016, the famous 1973 skyscraper had still held on to the claim of tallest roof height in the Western Hemisphere. Until now. As reported in Curbed Chicago on July 29, New York’s Central Park Tower overtook the 1,453-foot-tall Chicago icon on its way to an eventual final roof height of 1,550 feet.

Roof height took on special importance among Chicago skyscraper fans in 2013 when Willis officially lost its status as the tallest building in the U.S. to New York’s One World Trade Center under somewhat contentious circumstances. Despite the East Coast skyscraper’s considerably lower 1,368-foot roof, it managed to dethrone the Chicago tower by using a 1,776-foot-tall decorative spire. The twin antennas of Willis, however, were determined not to count toward official building height, per the Council on Tall Buildings and Urban Habitat rules.

 

© 2019 BARNES & THORNBURG LLP
For more in building-related news, see the National Law Review Construction Law page.