Tag: real estate

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.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

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.

  1. 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.
  2. 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.
  3. Include provisions protecting the future use, development and value of the property with the lease.
  4. 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.

© 2022 Varnum LLP

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.

Copyright 2022 K & L Gates

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.

©2022 Roetzel & Andress
For more articles on local state litigation, visit the NLR Litigation section.

Retaining a Cell Tower Lease When Selling Property

When selling property with a cell tower lease, keeping the lease is a good option. Done properly, you get the best of both worlds: full value for the property and ongoing lease payments, with the option to sell the lease in the future should you desire.

Selling a property and cell lease together will rarely yield the full value for the lease; however, selling the lease in advance of selling the property may also not be attractive. You may not have other places to invest the proceeds where you will get the same return, for example, and taxes can take a big bite. Additional options, such as 1031 like-kind exchanges, are complicated with short deadlines.

Increasingly, real estate investors are opting to sell property — commercial, residential, land for development and, in a unique case, an office condo — but keeping the cell leases and future leasing rights.

To do this successfully, you should aim to establish balance with purchasers by retaining sufficient future rights to (1) renew the lease, (2) expand it some, and (3) satisfy their requirements for paying full value of the lease, should you decide to sell it in the future. You do not want to grant yourself so many rights that it interferes with a purchaser’s ordinary use and development of the property in question, thus decreasing its selling price.

Essentially, you are trying to attain the balance that would occur in a well-drafted cell lease sale to a third party, whereby keeping the lease is the equivalent of “selling” to yourself!

Specific subject areas where rights must be balanced include:

  • Permitted and restricted uses by both parties within the leased area;
  • Restrictions on uses or devices allowed on portions of the property outside the leased area, such as Wi-Fi using radio frequencies, which cell companies and lease purchasers alike desire;
  • Access rights and rights-of-way for tenants and utilities, as well as who pays for same;
  • Height and building envelope restrictions on new construction outside the leased area;
  • Property owner approval rights of changes in the leased area, and;
  • Relocation.
© 2022 Varnum LLP
For more articles about telecommunications, visit the NLR Cybersecurity, Media & FCC section.

Eviction Moratoriums—A Light at the End of the Tunnel? It Depends

With increased cases of COVID 19, most industries are holding their breath as to how these cases will continue to affect their businesses.  This is especially true for residential landlords.  Since this past March there has been a mix of federal and state moratoriums restricting landlords from evicting tenants for non-payment of rent.  The most recent moratorium on residential evictions was issued by the Centers for Disease Control and Prevention (CDC).  The CDC’s order entitled “Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19,” which took effect upon publication in the Federal Register on Sept. 4, declares a national moratorium on certain residential evictions in the name of protecting the public health. See 85 Fed.Reg. 55292 (Sept. 4, 2020).

The creation of Order established a protection for a certain category of tenants, so long as they executed a Declaration Form asserting their qualifications as a “covered person.”  Once a tenant provides the declaration, the text of the order states that a landlord shall not “evict” the tenant from residential premises. See 85 Fed.Reg. at 55296.

While the CDC Order was issued to protect tenants, the ambiguities of the CDC moratorium have left the state courts to issue a patchwork of local Administrative Orders interpreting the moratorium and putting new process in place at the Magisterial District Court and Court of Common Pleas levels.  The result?  Unequal access by landlords to challenge the truthfulness of the CDC Declaration.

A review of the 67 judicial districts reveals a handful of counties that address the CDC moratorium and how it affects current landlord-tenant procedures.  Additionally, certain counties provide remedies for landlords to challenge the truthfulness of the Declaration Form.  By certain counties allowing landlords to challenge the truthfulness of the Declaration Form, it allows the moratorium to protect those truly defined as a “covered person.”  A majority of the judicial districts however are silent as to the landlord’s ability to challenge the Declaration Form, thus leaving landlords frustrated in scenarios where the tenant may not truly be a covered person and are allowed to remain in their apartment with little to no consequence.

With the number of COVID-19 cases increasing and the lack of any additional economic stimulus packages available will the CDC Moratorium be further extended? If it is, will the state Courts address the inequitable remedies currently created amongst the local counties?  Only time will tell.

©2020 Strassburger McKenna Gutnick & Gefsky
For more articles on evictions, visit the National Law Review Real Estate section.

COVID-19 Update: NY Governor Cuomo Extends Tenant Protections, Including Eviction and Foreclosure Moratorium

On August 5, 2020, New York State Governor Andrew Cuomo issued Executive Order 202.551 (the “New Order”) to provide additional relief to renters impacted by the COVID-19 pandemic and extended the time periods for certain other protections that had been previously granted to renters and property owners pursuant to Executive Order 202.82, as extended by Executive Order 202.283 and Executive Order 202.484 (the “Prior Orders”).

The Prior Orders provided for (i) a moratorium on evictions of commercial tenants through August 5, 2020, and residential tenants through July 5, 2020, and (ii) a moratorium on eviction and foreclosure of any residential or commercial tenant or owner through August 20, 2020, if the basis of the eviction or foreclosure is the nonpayment of rent or the mortgage, as applicable, and the tenant or owner, as applicable, is eligible for unemployment insurance or benefits under state or federal law or is otherwise facing financial hardship due to the COVID-19 pandemic.

Executive Order 202.48 previously had removed the restrictions on residential foreclosures and residential evictions, as those has been superseded by legislative action.  The Laws of New York 2020, Chapter 112 provides for 180 days of mortgage forbearance for individuals, which period may be extended by the mortgagor for an additional 180 days.5  The Laws of New York 2020, Chapter 127 prohibits evictions of residential tenants that have suffered financial hardship during the COVID-19 pandemic for the non-payment of rent.  In each case, the relief granted extends through the period commencing on March 7, 2020, until the date on which “none of the provisions that closed or otherwise restricted public or private businesses or places of public accommodation, or required postponement or cancellation of all non-essential gatherings of individuals of any size” continue to apply.

The New Order extends a number of existing Executive Orders, including the Prior Orders for an additional 30 days, to September 5, 2020, effectively continuing the moratoria on commercial and residential evictions and foreclosures – whether instituted by executive order or passed into law by the legislature – until such date.

1       Executive Order 202.55, available here.

2       Executive Order 202.8, available here.

3       Executive Order 202.28, available here.

4       Executive Order 202.48, available here.

5       The Laws of New York 2020, Chapters 112 and 127.

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

For more on COVID-19 related rental relief, see the National Law Review Coronavirus News section.

Proposition 13 Overhaul Qualifies for November Ballot

California Secretary of State Alex Padilla announced on Friday, May 29, 2020, that the revised initiative entitled “The California Schools and Local Communities Act of 2020” officially qualified for the November ballot. If passed, the initiative would establish a “split roll” where retail, office, commercial, and industrial real property would be taxed based on their market value, while residential property would continue to be assessed based on its purchase price.

THE CURRENT TAX REGIME: PROPOSITION 13

The current property tax regime under Proposition 13 generally provides that real property is taxed at one percent of its fair market value, which usually is the property’s purchase price. Unless there is a change in ownership of the property such as a sale, this “base value” can only increase by an inflationary rate that cannot exceed two percent per year. When property changes ownership, it is reassessed and the property’s base value is reset to its then current fair market value. Under Proposition 13, a property’s base value can be lower than its current fair market value, which in turn can reduce the amount of property tax that might otherwise be owed.

THE SPLIT ROLL

The ballot initiative creates a “split roll” if voters approve it in November. Under the split roll, commercial and industrial property with a fair market value of more than $3 million would be reassessed at its current fair market value at least every three years. The current tax regime under the Proposition 13 rules described above would continue to apply to all residential property, including both single-family and multi-unit structures and the land on which those structures are constructed or placed. The current rules also would remain in place for real property used for commercial agricultural production.

The process of administering this new tax regime will be determined by the California legislature, which will include, among other things, a process for reassessment appeals. The taxpayer will have the burden of proving that the property was not properly valued. The legislature also will determine a process by which to allocate mixed-use property between its commercial and residential uses for purposes of implementing the split roll.

The new regime will not apply to commercial or industrial property with a fair market value of $3 million or less unless any of the direct or indirect owners of such real property also own interests in other commercial and/or industrial real property. In that case, the new regime will apply if all such real property has an aggregate fair market value in excess of $3 million.

TANGIBLE PERSONAL PROPERTY TAX RELIEF

If passed, the ballot initiative would exempt small businesses from property tax on all of its tangible personal property. A small business is a business that: (1) has fewer than 50 annual full time employees, (2) is independently owned and operated such that the ownership interests, management and operation are not subject to control, restriction, modification, or limitation by an outside source, individual or another business, and (3) owns real property located in California.

For all other taxpayers, an amount up to $500,000 of combined tangible personal property and fixtures (other than aircraft and vessels) will be exempt from taxation.

WHEN WOULD THE SPLIT ROLL TAKE EFFECT?

The split roll would become operative beginning January 1, 2022, and the tangible personal property tax relief would become operative on January 1, 2024.

Despite the split roll becoming operative on January 1, 2022, the reassessment of undervalued commercial and industrial property will be implemented through a phase-in over two or more years. An owner of commercial or industrial property would only be obligated to pay taxes based on the new assessed value beginning with the lien date for the fiscal year when the assessor has completed the reassessment. In addition, if 50% or more of the square footage of a commercial or industrial property is occupied by a small business, such property will not be subject to the new regime at least until the 2025-26 fiscal year.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

For more on real estate taxation, see the National Law Review Tax law section.

Issues Facing Commercial Mortgage Lenders in the COVID-19 Pandemic

The far-reaching impacts of the COVID-19 pandemic will create challenges for commercial mortgage lenders and their borrowers. Rents, and therefore borrowers’ ability to make debt service payments, will be curtailed as, for example, retail tenants are forced to shutter their businesses and apartment dwellers face economic hardship on a rising tide of unemployment. In this environment, lenders will face tough decisions on how to proceed with transactions that have yet to close and with closed transactions that are running into trouble.

Deals in the Pipeline

In the commercial real estate world, whether you are a borrower or a lender, one question you will be asked countless times during the pandemic is, “What do you have in the pipeline?”

From the commercial mortgage lender’s perspective, the pipeline likely means the loan transactions for which a term sheet or a commitment letter has been issued to a borrower, and for which no closing date has been set or for which various closing conditions have not yet been satisfied. Most loans require as a closing condition that on the date of closing, no adverse change in the economic viability of the project or the borrower shall have occurred since the date the loan terms were agreed upon. Given the extreme economic uncertainty now pertaining in the United States, and virtually everywhere else, it is hard to imagine a lender with deals in the “pipeline” that is not asking, “Do I have to fund?”

Many times the answer to this will be found in the list of closing conditions set forth in the term sheet or commitment letter. The condition addressing material adverse changes can vary greatly from lender to lender and deal to deal. One version of this condition is the following: “The absence of any material disruption or material adverse change in current financial, banking, or capital market conditions that in the sole judgment of the lender, could materially impair the loan.” The clause may also appear more simply and require only that there is “no material change in the market value of the project or condition of the borrower.”

As long as this terrible pandemic is impacting the country, it would seem to be nearly impossible for a lender to be able to accurately underwrite an asset under existing conditions, even one for which it had planned to lend against as recently as two and a half weeks ago. Borrowers who have based major equity investments and personal guaranties on the value of a project will have the same concerns.

However, there are borrowers that retain confidence of the same level as they had a month ago, and who may insist on closing. It will behoove lenders with deals in the pipeline to immediately review the closing conditions in their documents to determine the answer to “Do I have to fund?”  If the answer is “no,” a lender could decide to either close regardless or terminate the transaction. However, a third option also exists, whereby a lender could invoke the material adverse change clause as the basis for introducing new lender protections to the deal. For example, a lender could require that the borrower fund a debt service reserve at closing, require additional guaranties, or require that the loan terms include cash management features such as a lockbox.

Modifications to Loans That Have Closed

With the economy in turmoil, borrowers will be contacting secured lenders to discuss their actual or anticipated inability to make debt service payments. Most lenders will require that borrowers in distress propose specific modification terms, as opposed to non-specific requests for relief. A borrower might request modifications such as a reduction in the interest rate, the conversion of an amortizing loan to require interest-only payments for a period, or some other waiver, reduction or deferral of payments. A borrower might also want to take the approach of adding investors to its capital stack, and therefore request that the lender consent to the addition of one or more new equity partners.

When faced with such requests, a lender will need to perform its underwriting on the proposed modifications to determine their feasibility and prudence. It would therefore be appropriate for a lender to ask for additional property and financial information and reports, perform a site visit, and require additional due diligence materials such as title, judgment and lien searches.

Such borrower requests for relief also present the lender with an opportunity to better protect itself. Upon receiving a loan modification request, a lender should review its loan file in order to identify and correct any deficiencies.The following are but a few of the inquiries that should be included in such a review of the loan file. Are any documents missing?  Have all documents been properly recorded or filed?  Do the documents contain any errors?  Is all insurance up to date with the lender properly named?

In the end, a lender might agree to the borrower’s requested loan modifications (or some variation thereof). The lender could also add its own conditions to the changes requested by the borrower. For example, a lender could require new reserves, a letter of credit or other additional collateral, a new guaranty and/or new cash management arrangements.

If some sort of a deal seems possible, the lender should require a pre-negotiation agreement before discussing terms. If it turns out that a deal is not to be had, the lender might agree to enter into a forbearance agreement, in order to give its borrower time to turn things around or find takeout financing. Both of these types of agreements are discussed in more detail below.

Pre-Negotiation Agreements

Before having any substantive discussions, the lender should require any borrowers and guarantors (the “Borrower Parties”) sign a “pre-negotiation” or “pre-workout” agreement (“PNA”) in order to allow the parties to have frank and open discussions about a potential resolution to the borrower’s distress. The PNA should, at a minimum, provide the current status of the loan, including the admission of any defaults, and have the Borrower Parties admit the genuineness of the loan documents. The PNA should also (1) provide that any negotiations, discussions, draft documents, or loan modification proposals are non-binding until a definitive agreement is executed, (2) include provisions preserving the lender’s rights and remedies under the loan documents, (3) provide for the mutual termination of the PNA by either party for any reason, and (4) confirm the ground rules governing settlement discussions, including that all discussions and writings be confidential and inadmissible for evidentiary purposes. Finally, and most controversially, the lender could require a full general release from the Borrower Parties to protect the lender from future lawsuits.

Forbearance Agreements

Because a lender may want to give the Borrower Parties some breathing room, one option is for the lender and Borrower Parties to execute a forbearance agreement. The purpose of such agreement is for the lender to agree to wait to begin exercising remedies (namely, foreclosure or suing personal guarantors), while giving the borrower time for the economy to recover or to seek refinancing. In exchange for the lender agreeing not to proceed against the Borrower Parties, the Borrower Parties should reaffirm the validity of the loan documents, the amount due on the loan, and provide the lender with a general release through the date of the Forbearance Agreement. The lender also can require the borrower to make reduced payments during the forbearance period. Lastly, the parties could use the forbearance agreement to cure any defects in the loan documents discovered after closing.

Conclusion

The economic impact of the COVID-19 pandemic spells bad news for commercial mortgage borrowers. In this environment, lenders will need to re-examine transactions that are currently in their pipelines. In addition, lenders should expect an uptick in requests for relief from borrowers of closed loans. In these uncertain times, lenders will need to be careful and exercise diligence in deciding how to proceed with troubled properties.

© Copyright 2020 Sills Cummis & Gross P.C.

For more on COVID-19 impacts on real estate and beyond, see the Coronavirus News section of the National Law Review.