(US) Creative Financing: Using Crowdfunding to Finance Real Estate Projects

Part of a series on creative Real Estate financing.
Using New Market Tax Credits to finance projects
Let the Purchaser do the Financing

Although the economy is showing signs of recovery in fits and starts, the traditional commercial real estate lending market is still tight for many developers. A number of non-traditional, non-bank financing sources have blossomed in response, with crowdfunding at the forefront.
 
“Crowdfunding” takes its name from crowdsourcing, and is based on a similar model. A crowdfunded project is financed by a large pool of backers, who each contribute a small amount towards a development goal. Crowdfunding typically takes place on a web-based platform, such as RealCrowd, Groundfloor, and FundRise, allowing developers to reach a huge number of contributors.

Unlike the traditional development model, which requires large lump sums of cash, crowdfunding has a low-capital entry requirement (often allowing pledges of $100 or less), and gives investors greater control over which projects get funded.

Previously, the only other option for the small-capital investor was to invest in a Real Estate Investment Trust (often shorthanded to “REIT”). Purchasing a share in a REIT allows an investor to buy into a professionally managed portfolio of existing investment properties. REITs offer only indirect ownership, however, and can have relatively high fees required to support the trust’s management.

In contrast, crowdfunding offers investors the opportunity to select specific projects, rather than a portfolio, without hefty management fees. The crowdfunding development process is theoretically more transparent because progress reports and dividend payouts are posted on the Internet as the project progresses.

It’s too soon to tell whether crowdfunding is merely a fad or whether we’re really seeing a change in the way projects are funded. Driven by the 2012 JOBS Act mandate, the SEC is currently mulling over comments to proposed crowdfunding rules. Regulators are expected to complete the rules by the end of 2014, which, when promulgated, could significantly help or hinder the future of crowdfunding. But for now, banks and REITs are certainly taking notice of this new upstart competitor.
 

 

(US) Property Owners: Don't pay for the same work twice. A discharge from liability to subcontractors under CERCLA

On March 18, 2014, the United States Court of Appeals for the Second Circuit decided that under the federal environmental cleanup law known as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") (42 U.S.C. §9607), a subcontractor cannot recover the value of unpaid work directly from a landowner if the landowner has already paid the general contractor for the subcontractor's work and the general contractor had failed to make the required payments to the subcontractor.
 
In this case, Price Trucking Corp. v. Norampac Industries Inc., the defendant landowner hired a general contractor to perform environmental remediation work, including excavation and the removal of contaminated soil, on its property in Erie County, New York. The general contractor hired the plaintiff subcontractor to remove contaminated soil from the site and transport it to a licensed disposal facility. The subcontractor performed and completed all of the required work at the site, but was not paid in full by the general contractor for its services. The landowner paid the general contractor for all costs associated with the cleanup of the site, but the general contractor failed to remit the portion of the payment due to the subcontractor. As a result, the subcontractor sought payment of its unpaid balance directly from the landowner, claiming that such recovery from the landowner was permitted under CERCLA’s contribution provisions.

CERCLA's purpose is to encourage the timely cleanup of hazardous waste sites and to place the cost of such cleanup on those responsible for creating or maintaining such hazardous condition. CERCLA imposes strict liability on owners and operators- regardless of whether they caused such release of hazardous substances. The subcontractor argued that under CERCLA any party who incurs “response costs” is entitled to recover those costs from any responsible party in a contribution action.

Since the landowner was a “responsible party”, and since the subcontractor had incurred “response costs” in connection with the removal of the contaminated soil, the subcontractor reasoned that it was entitled to sue the landowner to recover those costs. However, the Second Circuit found that CERCLA did not intend to hold a landowner perpetually liable in any dispute relating to the cleanup among general contractors, subcontractors, employees and suppliers.
 
Once the landowner has paid the total costs for the cleanup of its property, its liability for payments under CERCLA is discharged. As such, under CERCLA, a landowner does not have to pay twice for the same work performed on its land.

The court also said that a subcontractor can seek recourse under the N.Y. Lien Law, which provides that a subcontractor can place a mechanic's lien on the landowner's property to hold such landowner responsible for any unpaid work, but only to the extent that such landowner has not paid the general contractor for such work in question.
 

(US) Ohio 7th District Court of Appeals provides much needed clarity on Dormant Mineral Act

On April 8, 2014, the Court of Appeals for the Seventh District of the State of Ohio issued its opinion in the matter of Walker v. Noon (2014-Ohio-1499). In Walker, the Court considered competing claims to a previously severed mineral estate between a surface owner, Jon Walker, Jr. (“Walker”), and the purported owner of the mineral estate underlying the Subject Land, John R. Noon (“Noon”)

In finding that the severed mineral estate reverted back to the owner of the surface estate automatically under the 1989 version of Ohio’s Dormant Mineral Act, O.R.C. §5301.56, et. seq. (the “1989 D.M.A.”), the Court held that surface estate conveyances which merely reference a previously severed mineral estate do not qualify as title transactions for purposes of preserving that severed estate under the Dormant Mineral Act. The case also provides some clarity as to when the 1989 version of Ohio’s Dormant Mineral Act may control in present-day disputes over severed mineral interests (as opposed to the Act, as amended in 2006).

By way of brief factual background, on July 26, 1965, Noon separately conveyed two tracts of land (the “Land”), reserving unto himself the mineral estate (including oil and gas) underlying the tracts. Between 1970 and 1977, the surface estate of the Land was conveyed three separate times, and each deed referenced Noon’s prior reservation of the mineral estate.

In 2009, Walker acquired the surface estate of the Land. On December 2, 2011, Walker filed a Notice of Abandonment of Mineral Interests in compliance with the 2006 version of Ohio’s Dormant Mineral Act (“2006 D.M.A.”). Thereafter, Noon timely filed an Affidavit and Claim to Preserve Mineral Interest, as required under the 2006 D.M.A.

On April 27, 2012, Walker filed a Complaint for Declaratory Judgment with the Noble County Court of Common Pleas, seeking to quiet title as to the mineral estate. Walker claimed that the severed mineral estate had not been the subject of a title transaction or “title savings event” as required by the 1989 D.M.A. and, as such, the mineral estate reverted back to the surface estate on March 22, 1992. Conversely, Noon claimed that the mineral estate had not automatically revered back to the surface estate and his filing of an Affidavit and Claim to Preserve Mineral Interest in accordance with the 2006 D.M.A. preserved his ownership of the severed mineral estate.

Walker claimed ownership of the mineral estate, asserting that the previously severed mineral estate merged back into the surface estate on March 22, 1992, in accordance with the 1989 D.M.A., based on Noon’s failure to preserve his mineral interest. In response, Noon claimed that his filing of the Affidavit and Claim to Preserve Mineral Interest under the 2006 D.M.A. effectively preserved his mineral interest.

The trial court granted summary judgment in favor of Walker, holding that the conveyances in 1970 or 1977 did not qualify as “title transactions” as to the mineral estate and any rights which Noon may have had in the mineral estate had been abandoned and merged into the surface estate on March 22, 1992.

Noon timely appealed the decision of the lower court to the Seventh District Court of Appeals. [Note: Noon passed away after filing his appeal. Noon’s daughter, Patricia J. Shondrick-Nau, was substituted as Appellant in her capacity as Executrix of Decedent’s estate (hereinafter “Appellant”).]

In affirming the lower court’s decision, the Court first considered whether the 1970 and 1977 conveyances of the surface estate qualified as title transactions for purposes of preserving the severed mineral estate. Appellant claimed that the conveyances should have preserved the severed interest under the 1989 D.M.A. because the 1989 D.M.A. required only that the mineral estate be part of any title transaction, not that the mineral estate be the subject of the title transaction. In Dodd v. Croskey, 2013-Ohio-4257, the Court held that mere reference to a prior mineral reservation within a deed did not make the reserved mineral interest the “subject of” that title transaction. The Court reasoned that, when applied to the instant matter, Dodd makes clear that the conveyances in 1970 and 1977 did not qualify as title transactions for preserving the severed mineral estate under the 1989 or 2006 versions of the Dormant Mineral Act.

The Court next considered Appellant’s argument that the lower court had improperly applied the 1989 D.M.A. and should have instead applied the 2006 D.M.A. which was in effect at the time Walker’s initially brought suit. In considering when to apply the 1989 or 2006 D.M.A., the Court first reviewed the language of the Act and determined that it was intended to be applied prospectively. Having so determined, the Court held that the 2006 D.M.A. had no effect on any “validation, cure, privilege, obligation or liability previously acquired.” See, R.C. §1.58(A)(1)(2). The Court then confirmed that the 1989 D.M.A. required that any mineral interest which had not been the subject of a title transaction during the preceding twenty years (or within the subsequent three year grace period) to be deemed abandoned and vested in the surface owner as of March 22, 1992. Accordingly, the Court held that Appellant’s interest in the severed mineral estate had automatically been deemed abandoned and reverted back to the surface estate owner on March 22, 1992.
 

(US) Property Assessment in Pennsylvania: The Judge behind widespread reassessment speaks out

this post was written by Ronald Krasnow and Peter Schnore

The Honorable R. Stanton Wettick, Jr., Senior Judge of the Allegheny County Court of Common Pleas, spoke at the monthly meeting of the Real Estate Section of the Allegheny County Bar Association held on April 10, 2014. It is not surprising that Judge Wettick’s topic was real estate tax assessments in Allegheny County because Judge Wettick has been handling cases related to real estate tax assessments for many years.

Judge Wettick began by stating that the reason so few other counties in Pennsylvania have experienced constitutional challenges to their assessments is that such a challenge must be brought as a uniformity challenge under the Pennsylvania Constitution, which, unlike claims under 42 U.S.C. § 1983, does not entitle a successful litigant to recover attorneys’ fees. Judge Wettick’s point was that while well-accepted statistical measurements show that most other Pennsylvania counties’ assessments are far less uniform than Allegheny County’s assessed values, the incentive to commence assessment litigation in other counties is lacking.

Judge Wettick also recognized that one of the reasons there has been so much consternation about real estate taxes in Pennsylvania is that Pennsylvania relies too heavily on real estate taxes for government services. In most other states, real estate taxes are relied upon much less to support government services. In those states, other taxes, such as income and sales taxes, are of greater concern.

The results of a survey of the assessment practices of all 50 states appeared in a 2007 opinion Judge Wettick handed down regarding the constitutionality of Pennsylvania’s “base year” assessment scheme. Judge Wettick pointed out that his research reflected that only two states (one of which is Pennsylvania) do not require periodic reassessments. Judge Wettick indicated that his aim in including the state-by-state survey in his opinion was to demonstrate to the Pennsylvania Supreme Court that requiring the Commonwealth to develop a procedure in which there are regular assessments would pull it within the mainstream.
 
When that opinion was handed down in 2007, it appeared to us to be intended as a guide for the Pennsylvania legislature for fixing Pennsylvania’s broken assessment system. We believe that Pennsylvanians would be well served if the General Assembly was to again review that opinion and take action, as it still has not addressed the many problems inherent in Pennsylvania’s system of real estate taxation.

In response to a question regarding the municipal practice of appealing only the assessments of properties that have recently sold, Judge Wettick noted that the law affords taxing jurisdictions the right to file tax assessment appeals. However, he also observed that we cannot expect the appeals process to serve as a mechanism for remedying inequities in uniformity. The only fair way to correct errors in relative assessed values is with a full county-wide reassessment, and if adequate funding for the reassessment is lacking, so might the quality of the final product.
 

(US) Reaffirmations: A Guaranteed Good Idea

When landlords negotiate amendments or extensions of leases with existing tenants, it can be easy to overlook a very simple but important part of the documentation process: the reaffirmation of an existing guaranty of lease.
 
A reaffirmation of guaranty from a guarantor of the tenant’s obligations under a lease can be as simple as a few sentences appended to the end of the lease amendment, whereby the guarantor certifies that it consents to the terms and conditions of the amendment, and affirms that its obligations under the guaranty remain in full force and effect.

Without such a reaffirmation, if the tenant defaults and the landlord needs to enforce the lease guaranty, a guarantor may be able to raise a defense to such enforcement by claiming that the modifications in the amendment are so material that they go beyond the scope of the obligations under the original guaranty, and that the guaranty did not extend to the tenant’s obligations under the lease as amended.

Furthermore, if a tenant negotiates a new or substitute lease with the landlord, or amends and restates an existing lease, a landlord can run the risk that a court may decline to impose liability on a lease guarantor if such “new” lease includes provisions that were not contemplated in the original lease. For example, in Lo-Ho LLC v. Batista, 881 N.Y.S.2d 33 (A.D. 1 Dept. 2009), a New York court declined to find that a lease guaranty included obligations under a so-called “Extension of Lease” negotiated between the landlord and tenant because the original lease did not contain an express renewal or extension option and the terms were too different from the original lease to be considered a mere extension of the lease. The court ruled against enforcement of the lease guaranty even though the guaranty provided that “this guaranty shall remain and continue in full force and effect as to any renewal, change or extension of the Lease.” See also Atlantic Properties LLC v. DiFiore, 968 N.Y.S.2d 847 N.Y.City Ct. Jun 24, 2013.

A well-drafted guaranty should include language that provides that the guaranty will not be affected by any extensions, amendments, renewals or terminations of the lease. The guaranty should also include language providing not only that no notice from the landlord is required as to modifications to the lease but also that no consent from the guarantor will be required with respect to any such modifications.

Nevertheless, depending on the jurisdiction, it can be left to a court to interpret the language of the guaranty and determine whether the changes to the lease are so material that a guarantor’s liability should be limited or discharged. Therefore, as an additional safeguard, it is always prudent for a landlord to request a reaffirmation of guaranty, rather than to rely on waivers in the guaranty of lease, particularly when a side letter or substitute lease is entered into with an existing tenant, or other modifications that may not be expressly contemplated in the lease guaranty.
 

(US) A "XXX Freak Fest" Follow-up: State occupancy laws still a concern for AirBnB

This is a follow-up to an earlier blog post on this issue from March, 2014.

On March 25th,  I posted about the legal implications of using on-line apartment-renting services like AirBnB. Specifically, the post discussed how AirBnB hosts should be mindful of their state’s tax laws and occupancy laws. A few days after the post, AirBnB addressed the tax issue in a letter to New York City Mayor De Blasio, encouraging the Mayor to tax the City’s hosts (which would bring in over $21 million in revenue to the city). Early last week, AirBnB announced their efforts to start collecting a 15% hotel sales tax in San Francisco.

Although these actions by AirBnB have alleviated some of the tax concerns, AirBnB still hasn’t addressed state occupancy laws. As mentioned in the earlier blog post, it is a misdemeanor in New York to rent out an apartment for less than 30 days unless the owner is present. If you go on the AirBnB website to list your apartment, you can filter by “Entire Place”, “Private Room”, and “Shared Room”. Thus, because hosts seeking to rent their “Entire Place” for less than 30 days would be breaking the law, the question becomes:

Is AirBnB liable for the actions of its users?

Many on-line service providers have faced lawsuits over this very question, such as eBay (users selling forged autographs), Craigslist (users using the erotic services section to facilitate prostitution), and StubHub (users illegally re-selling tickets). In response, these companies have relied on Section 230 of the Communications Decency Act to shield them from liability for the content being posted. Section 230, which preempts contrary state law, states that:

No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

Using this defense,  a company like Yelp has argued that its users are “information content providers” and that Yelp - as the “interactive computer service” - is merely serving as a conduit for its users’ information (i.e., business reviews).

The issue is less clear-cut, however, when it comes to sites that actually shape the content that is being posted. By narrowing the scope of user responses through the use of drop down menus and filters, courts have sometimes considered such companies the “information content providers” themselves, thus making them ineligible for the Section 230 safe harbor. For instance, Roommates.com (a roommate matching service), a website somewhat analogous to AirBnB, was denied Section 230 immunity when it posted questions that required answers allegedly in violation of the Fair Housing Act and state housing discrimination laws.

The roommates.com example is more the exception than the rule, however. Courts have increasingly applied Section 230 to protect on-line service providers, especially when such providers have taken other steps to prohibit illegal use of its platform. Although AirBnB does shape the content provided through the use of filters (such as renting an “Entire Place”), a court would most likely find that Section 230 would be applicable. Whether the issue appears in court, however, AirBnB appears to be taking the right steps to tackle some of these issues head on. And who knows – a $21M “gift” to the State of New York may be just enough incentive to overturn an obscure and little known occupancy law.
 

(US) Another Step Toward Regulatory Relief for Condominium Developers

This is a followup to an earlier blog post on this issue in October, 2013.

Last October, the U.S. House of Representatives voted to approve H.R. 2600, which would have expressly exempted condominium developments from the Interstate Land Sales Full Disclosure Act (“ILSA”). Ultimately, the bill was left to languish during the discussions surrounding the budget. However, just a few weeks ago, an identical bill was introduced in the Senate (S.2101), and was referred to the Committee on Banking, Housing and Urban Affairs. If the bill is eventually passed, it will provide real relief for condominium developers and their lenders.

As of July 21, 2011, the administration and enforcement of ILSA has been the purview of the Consumer Financial Protection Bureau (“CFPB”). Although the CFPB has not yet been particularly active in enforcing ILSA, it has been quite aggressive in its enforcement efforts under other statutes and is expected to be just as aggressive under ILSA once it has put the necessary regulations and guidelines in place.

The CFPB intends to make use of consumer complaints to identify targets for investigation and enforcement actions under ILSA. Multiple complaints against the same developer or project could lead to a Civil Investigative Demand which can require the production of documents, answers to interrogatories and/or appearance for testimony. The CFPB also has the power to initiate administrative proceedings and civil actions and has a wide array of remedies at its disposal, including civil money penalties. With respect to civil penalties, the CFPB has taken the position that it may seek penalties under both the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and ILSA. Under the Dodd-Frank Act, the CFPB could seek penalties of up to $1 million per day for each day during which a knowing violation of ILSA occurs.

A link to the Bill Summary and Status can be found HERE.
 

(US) Creative Financing: Using New Markets Tax Credits To Finance Projects

A successful real estate project often requires blending several sources of funding. New Market Tax Credits (NMTC) are an alternative method of financing projects located within a specific ‘Low income urban/rural community (LIC). The NMTC program was enacted as a part of the Community Renewal Tax Relief Act of 2000. Administered by the Treasury Department, the goal of the NMTC program is to stimulate job creation and encourage investment and revitalization of low income communities found in urban and rural settings. The next round of competition for funds under the NMTC Program combines calendar years 2013 and 2014 for a total tax credit allocation of $8.5 billion ($3.5 billion for 2013 and $5 billion requested in the President’s 2014 Budget , pending Congressional authorization).

The NMTC program attracts private investment to LICs by providing investors a substantial federal tax credit. Investors receive a 39% credit of the total Qualified Equity Investment (QEI) made in a Community Development Entity (CDE). As a result of the credit, the investor accepts a lower rate of return, often forgiving all or part of the debt. In turn, the Borrower/Project receives significant benefits which include lower interest rates and interest only loan payments for the first seven years. Sometimes, projects receive a capital contribution gift of 23 – 28%, along with a flexible structure that can be blended with other financing mechanisms to completely fund the project.

Here is an example of how NMTCs work.

  • A leveraged lender makes a loan in the amount of $7,800,000 to a pass through entity also known as an upper tier investment fund (Investment Fund).
  • An equity investor (NMTC Investor) makes a capital contribution of $2,200,000 into the Investment Fund.
  • The Investment Fund provides a $10,000,000 QEI to the CDE in exchange for $3,900,000 (39% of the QEI) in tax credits for the NMTC Investor.
  • The credits are taken by the NMTC Investor over a seven year period.
  • The CDE then makes loans to a Qualified Active Low Income Community Business (QALICB). The benefit to the QALICB is that it will generally not have to repay the equity investment of $2,200,000. Please note that a for-profit entity may be subject to taxation on the forgiveness of indebtedness.

Thus, NMTC’s can be a financially advantageous funding mechanism for both investors and project developers.
 

(US) Building Heights in Washington, DC: you may soon have permission to grow

On March 12, 2014, the House Committee on Oversight and Government Reform advanced a bill proposing to make the first changes to the Height of Buildings Act of 1910, a federal law establishing height limits on Washington, D.C. buildings. The height restrictions were implemented in response to the construction of the 164-foot Cairo Hotel in 1894. The original Height of Buildings Act, passed by Congress in 1899, limited building height to 90 feet on residential streets and 110 feet on business streets. It also made an exception for buildings on business streets 160 feet wide – such buildings were permitted to be 130 feet tall. The 1899 act was amended in 1910 to add the restriction that the height of any building would be limited to the width of the adjacent street plus 20 feet up to a maximum of 90 feet on residential streets, 130 feet on commercial streets, and 160 feet on a small portion of Pennsylvania Avenue. Thus, a building facing a 90-foot -wide commercial street could be 110 feet tall.

The House Committee on Oversight and Government Reform voted to submit H.R. 4192, introduced by Chairman Rep. Darrell Issa, (R-CA). and co-sponsored by Rep. Eleanor Holmes Norton, (D-D.C). to the U.S House for consideration. The bill will slightly amend the Height of Buildings Act of 1910 to clarify the rules regarding “human occupancy” of certain penthouses above the top story of a building. At present, the Height Act prohibits the use of the penthouse level (i.e. roof) for needs other than mechanical structures.

The height of a building as calculated by the Height Act does not include roof top structures used for mechanical needs within the total allowable height. However, if structures on the roof top (such as a pool house associated with a roof top pool) are constructed for human occupation, the structure is included when calculating the overall height of the building under the Height Act. As a result, developers, architects and designers currently have to lower their building designs by an entire floor to allow for some human occupied space on the roof, if the building is to reach the maximum allowable height. The bill proposes replacing existing language establishing an all-out ban on other uses for such rooftop mechanical penthouses with language stating “and, except in the case of a penthouse which is erected to a height of one story of 20 feet or less above the level of the roof, no floor or compartment thereof shall be constructed or used for human occupancy above the top story of the building upon which such structures are placed.’’

By allowing usable, human occupying space at the penthouse level, proponents of the bill argue that there will be no real impact on the overall height limit and it would not change the “human scale” of the current landscape within the city. The current allowable height within the downtown area of the city prohibits “people’s enjoyment of some of the city’s greatest spaces and most striking views”

The modest changes are a response to a larger debate over whether to amend the century-old height restrictions in the D.C. Heights Act to allow for private sector building enhancement.
 

(UK) The capital allowances pooling and fixed value requirements - don't lose out!

This post was written by William Reay-Jones and Siobhan Hayes.

We have seen a number of articles that refer to the risk of unclaimed capital allowances being lost as a result of the new capital allowances rules. It is estimated that there is over a billion pounds of unclaimed capital allowances in the UK. The concern is that any such unclaimed allowances could be lost forever if an owner of fixtures does not identify and document the allowances available when the property is sold.

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(US) A "XXX Freak Fest" May Not Be the Worst of Your Problems:How to Avoid Eviction in the Sharing Economy

this post was written by Matthew Kane and Leah Speckhard

Last weekend, I came across an interesting story  on my Facebook news feed. It detailed how a New York comedian had rented out his apartment for the weekend using a popular website, AirBnB, only to come back and find that his apartment had been used to host a massive sex party (or a “XXX Freak Fest” as the comedian succinctly put it). What interested me wasn’t the illicit nature of the story; instead, I was curious about the legality of renting out one’s apartment for profit.

Background
AirBnB is an online platform that allows users, known as “hosts”, to rent out their residences to third parties. Valued at $10 billion last week, AirBnB is a leader in what is known as the “sharing economy”, an economy built around individuals sharing or selling their goods or assets to others (think Zipcar, Craigslist and eBay). The types of AirBnB users can generally be broken down into two categories: those who rent out their apartment from time to time to make extra cash on the side, and those with multiple listings who use the service as a commercial enterprise. For both types of users, AirBnB and similar services, such as HomeAway and VRBO, can be an incredibly lucrative venture; AirBnB’s CEO stated in 2012 that the average AirBnB host in New York City made $21,000 per year.

However, this type of venture is not without its pitfalls. The comedian’s party resulted in $87,000 worth of property damage and he now faces eviction by his Landlord. In addition to facing eviction, hosts can also face hefty fines and back taxes. While those who use AirBnB as a business may have the resources to understand and comply with state laws, it can be a daunting task for individual hosts who are less sophisticated. For instance, although AirBnB provides some informative legal guidelines on their website, their main competitor, HomeAway, simply states that “users agree to abide by all laws, rules and regulations”. To make things more complicated, many state laws were written in the pre-sharing economy and thus are “unconstitutionally vague” (as stated by AirBnB in response to a subpoena issued by the New York Attorney General late last year).
 
New York Law
For those of you who live in New York, there are two laws that you should take into account before listing your apartment on AirBnB.

First, under the New York Multiple Dwelling Law (specifically, Chapter 225 of the Laws of New York State of 2010), it is a misdemeanor to rent out your apartment for less than 30 days. There is an exception, however, permitting occupancy for less than 30 days when the permanent resident is present. Aside from Chapter 225, there may also be specific building bylaws or provisions in individual leases that prevent such short-term leasing, such as prohibitions on running a commercial enterprise and on leasing your apartment to someone you’ve known for less than a year.
 
Second, under New York City’s Hotel Occupancy Tax law, hotel operators are required to collect and pay a 14.75% tax on room rentals. Although the word “hotel” doesn’t conjure up the image of a 400 square foot studio apartment, the New York City Department of Finance states that a “hotel” includes an apartment, boardinghouse and bed-and-breakfast. Like the New York Multiple Dwelling Law, there are exceptions, however. The tax is not required for (1) rentals of only one room in an owner occupied home; (2) rentals for less than 14 days during any year; (3) rentals for fewer than three occasions during any year; and (4) rentals for a continuous period of 180 consecutive days.

Recommendations
Though the legal issues on the table have yet to be put to rest, one thing is clear – if you intend on using services like AirBnB and don’t want to face eviction or government fines, there are at a minimum four steps that you should take:

1. Review the Terms and Conditions of the service you are using. Most often these can be accessed by a link at the very bottom of a service’s website.

2. Review your lease or building bylaws to make sure that there are no provisions preventing short-term rental. Also be mindful of other rules that may come into play such as noise and common area policies.

3. Review your state’s occupancy laws. In New York, if you plan on renting out your apartment for less than thirty days, make sure that either you or a roommate are present while your guest stays over.

4. Review your state’s tax laws. If New York City’s Hotel Occupancy Tax may be applicable to your rental, report income earned from the rental on federal, state, and city tax forms.

While it’s important to be aware that these steps may not cover the gamut of regulations that a host may be subject to, they are a good first step towards minimizing risk. After all, as the title of this article suggests, if you do not follow them, you may face more than bad guests – large fines and eviction could be on the way.
 

(US) Superior Court Holds Estoppel By Deed Preserves Oil and Gas Lease

this post was written by Steven Chadwick and Ronald Hartman

On March 14, 2014, the Superior Court of Pennsylvania ruled in favor of an oil and gas exploration company, applying the doctrine of estoppel by deed to prevent a landowner from partially repudiating an existing oil and gas lease. This decision is significant for oil and gas lessees as it stands for the proposition that oil and gas leases will remain valid in their original form despite the later discovery of clouds on the lessor’s title requiring legal action to resolve.

The dispute arose in relation to a 2006 agreement between Leo and Sandra L. Sheddon and Anadarko E&P Co., LP. Under the lease agreement, the Sheddons agreed to lease 62 acres to Anadarko for oil and gas exploration for a primary term of 5 years. The lease also gave Anadarko the option to extend the term of the lease upon additional bonus payment by Anadarko.

After executing the lease, Anadarko performed customary due diligence to confirm the Sheddon’s ownership of the leased oil and gas estate. Anadarko’s investigation revealed an 1894 reservation of one-half (1/2) interest in the oil and gas estate underlying the Sheddon’s 62 acre tract, creating a cloud on title as to that interest. Based on its discovery, Anadarko only issued an original bonus payment to the Sheddons for one-half of the leased premises, or 31 acres.

In 2008, the Sheddons filed suit to quiet title as to the 1894 one-half (1/2) oil and gas reservation. The Sheddons prevailed, vesting them with ownership in the entire 62 acre oil and gas estate.

In 2011, Anadarko exercised its extension option. Pursuant to the extension provision, Anadarko issued payment to the Sheddons in the amount of $70 per acre as to the entire 62 acre tract. However, the Sheddons believed that Anadarko had forfeited the right to extend the lease as to the entire 62 acre tract and could only extend the lease as to 31 acres. The Sheddons sued to repudiate the lease agreement as to 31 acres. In April of 2013, the Court of Common Pleas of Tioga County, Pennsylvania, disagreed with the Sheddon’s position and entered summary judgment in favor of Anadarko.

On appeal, the Superior Court of Pennsylvania affirmed the lower court’s decision. In reaching its decision the Court specifically relied on the lease’s covenant of warranty provision. Under that provision, the Sheddons guaranteed that they “ha[d] full title to the premises and to all the oil and gas therein at the time of granting [the] lease.” Further, the Court noted that both the lease and the Memorandum of Lease (which had been recorded in lieu of the lease to provide notice to outside parties) reflected that the leasehold estate was comprised of 62 acres, whether actually more or less [emphasis added]. The Court held that the subsequently acquired 31 acres of oil and gas were covered by the original agreement and the Sheddons were barred under the doctrine of estoppel by deed from repudiating any portion of the lease.
 

(UK) Impact of budget for residential buyers

This post was written by William Reay-Jones.

There was a surprise announcement in today’s Budget in relation to “high-end” residential property. 

The government has significantly extended the scope of the SDLT 15% “penal” rate that applies to acquisitions of residential property by non-natural persons (i.e. corporate entities). The 15% rate currently applies to individual residential properties worth over £2,000,000. From midnight tonight the 15% rate will also apply to individual residential properties worth over £500,000 (where the property is acquired by a non-natural person).

This new measure takes effect in respect of transactions with an effective date on or after 20 March 2014. 

This is part of a wider package in relation to “high-end” residential property, as changes to the rules on ATED and the ATED-related capital gains tax charge will be introduced in 2015 and 2016.

Extension of the ATED to residential properties valued over £500,000 – applies for those properties held by a non-natural person. The Government has announced 2 new bands in respect of properties worth £500,000 to £1 million and £1 million to £2 million. The £1 million to £2 million band comes into effect from April 2015 (with a £7,000 charge in 2015-16), and the £500,000 to £1 million band comes into effect from April 2016 (with a £3,500 charge for 2016-17). The government has also announced a consultation on possible simplifications to ATED administration to reduce compliance burdens for genuine businesses.

Extension of ATED-related capital gains tax charge - (28%) extended to properties in the new ATED bands. The ATED related CGT charge on disposals of properties liable to ATED will apply in respect of residential properties worth over £1 million and up to £2 million with effect from 6 April 2015 and for residential properties worth over £500,000 and up to £1 million with effect from 6 April 2016.

(US) Tenant's Proportionate Share of Taxes: Don't Overpay

Many commercial leases pass through to tenants a proportionate share of the landlord’s operating expenses and taxes for the property based on terms expressed in the lease. However, some landlords attempt to pass-through certain taxes that a tenant should not be expected to pay.
 
A recent lease negotiation on behalf of an industrial client was jeopardized because the landlord insisted that the tenant was obligated to pay a proportionate share of the landlord’s Texas franchise tax. A franchise tax is a general corporate tax often based on the entity’s income or assets. It has nothing to do with the benefits the tenant derives from the lease and leased space.

In short, a franchise tax is a landlord’s cost of doing business.

From the tenant’s perspective, a proportionate share of taxes should exclude taxes that are related to the landlord’s business that have nothing to do with the building or the benefit the tenant derives from the leased space. Justifiable exclusions from taxes should include franchise taxes, excise taxes, income tax, inheritance and gift taxes, and transfer taxes.

A tenant should pay close attention not only to the tenant’s proportionate share and how it is calculated, but also as to what expenses and taxes the landlord intends to pass-through. There may be savings realized by challenging expenses and taxes that the tenant is not obligated to pay.
 

(US) Open and Transparent -or- Hide the Ball? Some Leasing Best Practices

Recently, the Commercial Lease Law Insider advised landlords to avoid lease disputes by refusing to disclose the square footage of the space. The Landlord is well advised to follow a course of action that creates trust and fosters a mutually beneficial long term Landlord/Tenant relationship.

https://www.commercialleaselawinsider.com/article/dont-put-square-footage-or-dimensions-lease.

The size of the tenant’s space, expressed in square feet, is part of the equation used to calculate the tenant’s base rent and proportionate share of operating expense and taxes. An inaccurate calculation, due to a faulty measurement of the tenant’s space, will likely never be in the tenant’s favor. This means the tenant, over the course of the lease, will pay thousands of dollars it would not have otherwise paid had the square footage of the tenant’s space been disclosed, accurate and accepted by the tenant at lease inception.

The landlord tenant relationship, like any relationship, requires a certain level of trust to be successful. A landlord is best served by being open and transparent  before lease execution . A tenant will be less likely to dispute additional rental amounts and initiate audits of the landlord’s books if the landlord is  honest with the tenant at the outset. A failure to disclose these critical lease terms will create an environment of suspicion and mistrust, neither of which is healthy for the Landord's reputation or its relationship with the Tenant.