(US) Act 13 in the news: Commonwealth Court of Pennsylvania Holds Additional Act 13 Provision Unconstitutional

This post was written by Steven Chadwick and Sean Delaney.

On Thursday, July 17, 2014, in the matter of Robinson Township, et. al. v. Commonwealth of Pennsylvania, the Commonwealth Court of Pennsylvania issued the latest decision in the state judicial system’s ongoing review of amendments to Pennsylvania’s Oil and Gas Act (“Act 13”).

Under a prior decision issued on July 26, 2012, the Commonwealth Court held as unconstitutional those portions of Act 13 requiring the implementation of uniform zoning ordinances applicable to oil and gas development by municipalities throughout Pennsylvania. Following an appeal by the Governor, the Supreme Court, by decision dated December 19, 2013, ultimately agreed with the Commonwealth Court, although for different reasons, remanded the matter back to the Commonwealth to determine whether certain previously undisturbed provisions of Act 13 were severable from the stricken section.

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(UK) Landlord's Liability to Pay Rates Following Disclaimer

This post was written by Katherine Campbell and Siobhan Hayes.

We have just had a reminder that a landlord’s obligation to pay rates can arise when it has the legal right to take possession even though it is careful not to do so. The case in question is Schroder Exempt Property Unit Trust v Birmingham City Council.

In this case, the liquidator disclaimed the interest in the property but the guarantor continued to pay rent pursuant to the guarantee covenants in the lease. The landlord did not exercise any right to physical possession of the property following the disclaimer. The question was whether the landlord was the owner (within the meaning of sections 45(1)(b) and 65(1) of the Local Government Finance Act 1988) and thus liable for rates.

The landlord argued that a disclaimer has the effect of ending the liabilities of a tenant, but not ending the lease for all purposes. They maintained that the lease continued for certain purposes.

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(US) Oil and Gas Development on Public Lands Clears the PA State Legislature

On Tuesday, July 8, 2014, the Pennsylvania State Senate passed the Commonwealth’s fiscal code by a margin of 26 to 22. Included within the fiscal code, as a companion piece to the legislation, were provisions critical to the Commonwealth’s commitment to future natural gas development on state lands. Specifically, the fiscal code included measures which: 1) allow drilling for natural gas on state land; and 2) separate regulations applicable to conventional oil and gas drilling from unconventional drilling. The measure was passed by the Pennsylvania State House last week and is now awaiting the signature of Governor Tom Corbett.

Prior bills seeking to differentiate regulations imposed upon conventional and unconventional drilling failed to survive review by the State Legislature. Consequently, the inclusion and passage of both measures in conjunction with the fiscal code have drawn the ire of Governor Corbett’s political opposition as lacking transparency and circumventing the legislative processes of debate and discourse. Moreover, prior to passage of the fiscal code by the State Senate, concerns were raised by opponents of the measure (which was comprised of more than 31 separate provisions, some of which were unrelated) that the bill violated the single-subject provision of the Pennsylvania Constitution. However, despite that argument, the fiscal code, and the pro-Oil and Gas Industry provisions included therewith, passed.

It is anticipated that Governor Corbett will sign the measures into effect, as doing so will enable him to fulfill his recent promise to lift former Governor Ed Rendell’s moratorium on additional leases of public land. The result will certainly be a mutually beneficial result for oil and gas operators and the Commonwealth as it will renew oil and gas operators the potential ability to develop previously inaccessible public lands, while raising an estimated $95 million for the state budget.
 

(US) Pennsylvania Legislature Clarifies Open-End Mortgage Exception to Priority of Mechanics' Liens

On July 9, 2014, Governor Corbett signed Act 117 of 2014, amending Pennsylvania’s Mechanics’ Lien Law of 1963 (Act of August 24, 1963, P.L. 1175, No. 497, 49 P.S. §1101, et seq.). One of the principal purposes of the amendments appears to be the overruling of the Pennsylvania Superior Court’s decision in Commerce Bank/Harrisburg, N.A. v. Kessler. In Commerce Bank, the Court determined that under the 2006 amendments to the mechanics’ lien law (effective January 1, 2007), the exception in the mechanics’ lien law giving priority to open-end mortgages would not give an open-end mortgage priority over a mechanics’ lien unless all of the proceeds secured by the mortgage had been used to pay the costs of “completing erection, construction, alteration or repair of the mortgaged premises.

The Court stated that “any other interpretation of the statute would permit lenders and owners to improperly manipulate the system to defeat lien rights.” The Court’s interpretation, however, was contrary to the longstanding practice of having open-end mortgages secure a variety of project costs in addition to direct costs of construction, including in some cases, the cost of acquisition of the underlying property. The Commerce Bank interpretation of the 2006 amendments to the mechanics’ lien law created a great deal of consternation in the Pennsylvania construction lending market.

The new amendments provide priority to an open-end mortgage over mechanics’ liens if at least 60% of the proceeds of the mortgage “are intended to pay or are used to pay all or part of the costs of construction.” A definition of “costs of construction” has been added to section 201 of the mechanics’ lien law (49 P.S. §1201), as follows:

“Costs of construction” means all costs, expenses and reimbursements pertaining to erection, construction, alteration, repair, mandated off-site improvements, government impact fees and other construction-related costs, including, but not limited to, costs, expenses and reimbursements in the nature of taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees, architect fees, engineering fees, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commissions, payment of prior filed or recorded liens or mortgages, including mechanics liens, municipal claims, mortgage origination fees and commissions, finance costs, closing fees, recording fees, title insurance or escrow fees, or any similar or comparable costs, expenses or reimbursements related to an improvement, made or intended to be made, to the property.

Therefore, open-end mortgages have regained their “super-priority” over mechanics’ liens, as long as at least 60% of the proceeds of the open-end mortgage are used to pay or intended to pay all or part of the costs of construction. These amendments restore a great deal of the simplicity which construction loans enjoyed in Pennsylvania prior to the 2006 amendments to the mechanics’ lien law.

The new amendments also allow a party who has paid a contractor to obtain a discharge of liens filed by subcontractors on certain types of residential property to the extent of the payment to the contractor.

The amendments will be effective September 7, 2014, and apply to mechanics’ liens perfected on or after that date, even if the work for which the lien is filed was performed prior to the effective date.
 

(US) Construction Allowance in Commercial Leases: Do You Want Income Taxes With That?

Negotiation of the construction allowance is an important part of most commercial lease transactions and usually centers around the size of the allowance and the type of improvements to be constructed. However, the tax consequences flowing from the construction allowance are frequently subject to far less negotiation. If the tenant owns the improvements after construction, the value of the construction allowance will be considered as current taxable income to the tenant and taxable in the year in which it is received.
 
There is, however, a safe harbor for commercial tenants who received a “qualified lessee construction allowance” under the Taxpayer Relief Act of 1997 (the “Act”) and the Treasury Regulation promulgated under Section 110 of the Act (Treas. Reg § 1.110.1) (the “Regulation”). Section 110 of the Act provides that a retail tenant with a “short-term lease” for “retail space” that receives cash or rent reductions from a landlord is not required to include the cash or credit in gross income if the funds are used to construct improvements of “qualified long-term real property.”
 

  • A “qualified lessee construction allowance” is defined as any amount received in cash, or treated as a rent reduction, by landlord or tenant (i) under any short-term lease of retail space; (ii) for the purpose of constructing or improving qualified long-term real property for use in tenant’s trade or business; (iii) to the extent that the amount is expended by the tenant “in the taxable year received.”
     
  • A “short-term lease” is defined as a lease with a term of 15 years or less including option periods (unless renewable at fair market value).
     
  • “Retail space” is defined as real property leased, occupied or otherwise used by a tenant for the sale of tangible personal property or services to the general public, and includes not only the space where the retail sales are made, but also space where activities supporting the retail activity are performed (such as an administrative office, a storage area, and employee lounge). This broad definition of retail space extends to office and warehouse leases of retail tenants. In addition, the Regulation provides examples of “services [sold] to the general public” such as hair stylists, tailors, shoe repairmen, doctors, lawyers, accountants, insurance agents, stock brokers, securities dealers (including dealers who sell securities out of inventory), financial advisors and bankers, and goes on to state that a taxpayer will be considered as selling to the general public if the products or services for sale are made available to the general public, even if the product or service is targeted to certain customers or clients.
     
  •  “Qualified long-term real property” is defined as nonresidential property that is part of, or present at, the retail space and reverts to the landlord when the lease terminates.

The construction allowance will qualify for the safe harbor only if the lease agreement provides that the allowance is for the purpose of constructing or improving qualified long-term real property for use in the tenant's trade or business at the retail space. However, an ancillary agreement between landlord and tenant providing for a construction allowance, executed contemporaneously with the lease or during the term of the lease, is considered a provision of the lease agreement so long as the agreement is executed before payment of the construction allowance.

Expenditures will be deemed first made from the tenant’s construction allowance and tracing of expenditures to the allowance is not required. An amount is deemed expended by the tenant “in the taxable year” in which it was received only if the amount is spent within 8 ½ months after the close of the taxable year, or if the amount received represents a reimbursement from the landlord for amounts spent by the tenant in previous years for which the tenant has not claimed any deductions.

Because most retail leases are for terms of less than 15 years and allowances rarely exceed construction costs, Section 110 provides a safe harbor for most retail tenants receiving construction allowances. However, Section 110 is not a cure-all. It applies only to realty improvements, and allowances for non-realty improvements may be subject to tax. Tenants should also be mindful of the time frame for spending the construction allowance. If the funds to be received cannot be spent within 8 ½ months after the taxable year in which they are received, it would be preferable to receive the allowance in installments.

Finally, both landlord and tenant should remain aware of another important tax principle that comes into play here: the owner of a leasehold improvement must depreciate the improvement ratably over 39 years. Therefore, if the tenant owns the improvements, the tenant must depreciate the improvements constructed with the construction allowance over 39 years even if the allowance qualifies for the safe harbor. For the landlord, this means the construction allowance can be “written off” over the lease term. If the lease includes options periods, the write-off period may include the option periods if there is reasonably certainty at the time of lease execution that the options will be exercised. However, this certainty does not exist for options exercisable at market rates, and these types of option terms are rarely added to the period over which the construction allowance may be written off.
 

(US) The Doctor Is In: A Review Of The Medical Office Building Market

What’s happening in the medical office building market in 2014?

Data supplied by Real Capital Analytics Inc reveal a slight downturn in early 2014 for sales of medical office properties. That is somewhat surprising considering the very strong 4th Quarter 2013 results for this market segment.

Nationally, we have seen a number of notable sales above the $5 million mark. These include the sale of Rockville, MD based Washington Real Estate Investment Trust (NYSE: WRE) to Chicago based Harrison Street. This transaction developed in tranches, with the final tranches resulting in the transfer of 20 medical office buildings to the buyer in early 2014 .

Other medical office transactions show a relatively steady market developing, with an average price per square foot of $245. That is a slight reduction over year-end 2013. Cap rates around 6.7% are seen in the deals.

Brokerage firms are reporting strong demand. The national healthcare group at CBRE estimates investors have allocated over $8 billion for medical office building transactions in 2014.

Here’s an example concerning the medical office marketplace. I’ve recently worked on a transfer of medical office building interests for a client in Southern California. This complex deal involved three main campus-style buildings on separate parcels as well as a fourth land parcel permitted for a future medical office building.

Our Reed Smith team guided the buyer through the purchase, negotiating the loan documents with a California based fund. We also provided assistance with the finance Head Lease, sublease arrangements and ownership interests of the investors. The intricate consummation of the transfer included a simultaneous land swap as part of the closing process. This was achieved in record time, allowing our buyer to quickly sell off one asset under a separate contract.

While certainly not an everyday transaction, this example demonstrates the length to which investors will reach to purchase desirable medical office properties in strong markets.
 

(US) Virginia Zoning: Landowners Can Get Damages from Unconstitutional Government Actions

Effective July 1, 2014, Virginia landowners will have a new mechanism to use to protect their interests when seeking zoning or subdivision approvals. On April 6, 2014, Governor McAuliffe signed SB 578 into law (which will be codified as Virginia Code section 15.2-2208.1). SB 578 provides that an applicant who is disappointed by the grant or denial by a local government entity of any approval or permit, where such grant included, or denial was based upon, an unconstitutional condition, shall be entitled to an award of compensatory damages and may be awarded reasonable attorney fees and costs. The bill creates a presumption that a condition proven to be unconstitutional was a factor in the grant or denial of the permit. The bill also provides that the applicant shall be entitled to an order remanding the matter to the local government with a direction to grant or issue such permits or approvals without the unconstitutional condition.

For Virginia landowners, SB 578 provides a damages remedy for applicants seeking zoning or subdivision approvals and who are faced with accepting the imposition of unconstitutional conditions as the price for such approval. The law provides the following tools for Virginia landowners seeking zoning or subdivision approvals:

  • Compensatory damages, and potential attorney’s fees and costs, for permits that are granted or denied based upon the imposition of a condition that is unconstitutional under either the United States Constitution or the Virginia Constitution.
     
  • The Court must remand the application back to the local government with instructions to grant a permit or approval without the unconstitutional condition. Where an applicant proves the condition is unconstitutional and objected in writing to the condition before the application was granted or denied, the court must presume that the applicant’s acceptance or refusal to accept the condition was the controlling basis for the local government granting or denying the permit.

If the applicant appeals the grant or denial to the Circuit Court in a timely manner, then the court must hear the case “as soon as practical.” SB 578 will apply to any approvals or permits that are granted or denied on or after July 1, 2014 and will not be applied retroactively.
 

(US) Not in MY Backyard: Houston Case Signals Increasing Challenges to Development

No zoning, no problem?

Think again.

The Houston real estate market has seen an escalation of commercial, mixed use, and residential projects. This upturn in overall development activity has been met with increased scrutiny by community groups. At the same time, the proliferation of social media has lowered the barriers to organizing coordinated opposition to development, culminating in litigation in some instances.
 
Recently, a group of Houston homeowners was awarded approximately $1.2 million in loss of property value damages for private nuisance against a developer of a twenty-one story multi-use development known as the Ashby High Rise. Penelope Loughhead, et. Al. v. 1717 Bissonnet, L.L.C., Cause No. 2013-26155, 157th Judicial District, Harris County, Texas. The homeowners also sought to enjoin the developer from proceeding with construction of the project. However, the court determined that:

  1. the nuisance was localized.
  2. enforcement of the injunction would prove to be difficult, and
  3. enjoining construction would inequitably harm the defendant and the City of Houston as a whole.

Although there are reasons to question whether the verdict will stand on appeal and if similar verdicts will become more common in the construction industry, the Ashby High Rise case signals that there may be increased transaction costs and delays in construction when developing projects near residential areas, despite the lack of zoning.

Background
The developer, 1717 Bissonnet, L.L.C. (“Defendant”), initially sought to build a twenty-three story development. After approving the traffic analysis in September 2007, the City of Houston rescinded approval later that month in response to neighborhood opposition. After several years and ten rejected permit applications, Defendant sued the City of Houston for wrongfully denying its building permit. The suit against the City of Houston was settled in February 2012, resulting in the approval of a twenty-one story residential or mixed-use and commercial development with 228 residential high-rise units, 10,075 square feet of restaurant use, and four residential townhouses. The settlement agreement also provided that Defendant must construct a pedestrian plaza, implement traffic and noise mitigation measures, construct green wall screening along the parking garage, and to direct lighting away from nearby residences.

Plaintiffs filed suit in 2013 and, after a month-long jury trial, the jury determined that the project, if completed, would constitute a nuisance to 20 of the 30 plaintiffs. The prevailing plaintiffs were those whose homes were generally closest to the project. Approximately $1.2 million was awarded for diminution of property value and over $400,000 was awarded for loss of use and enjoyment of plaintiffs’ property.

The court ruled that since the project has not been built, the loss of use and enjoyment damages should not be awarded yet and granted Defendant’s motion to disregard jury findings as to the loss of use and enjoyment damages. The court agreed with the plaintiffs that their homes have already lost market value due as a result of the planned project and denied Defendant’s motion to disregard the jury findings with respect to loss of market value damages.

Distinguishing Factors
It is notable that a two-story 67 unit apartment complex previously occupied the Ashby High Rise property and other residential and mixed use mid-rise projects are presently in the vicinity of the proposed Ashby High Rise. In this instance, it is clear that multi-family residential or mixed-use development is not, in and of itself, “abnormal and out of place in its surroundings” to substantiate a nuisance claim since such uses are currently in place in the surrounding area. At root, the plaintiffs are dissatisfied with size of Defendant’s planned project and the resulting increase in population density of their neighborhood.

The court’s ruling does not lend itself to a generally applicable standard to be used by other developers when determining the scope of their projects. It is difficult to supply a hard and fast rule to determine an appropriate building size and property density standard such that construction would not be considered “abnormal and out of place in its surroundings” in a rapidly changing market that is increasingly becoming more dense and more vertical.

The holding that loss of use and enjoyment damages are not yet ripe and speculative while maintaining that loss of market value damages are ripe and determinable as to a planned project may be appealed. Even if the ruling is overturned, it may merely cause prospective plaintiffs to delay filing any suit for damages until construction is complete.
 
Lessons to Be Learned
The Ashby High Rise ruling was preceded by seven years of neighborhood opposition covered through traditional  and Internet media outlets. As message boards, Twitter, and Facebook have become the initial battleground against construction projects, the Ashby High Rise case has become somewhat of a how-to guide for other groups opposed to increased urban development in the Houston market. The grass roots opposition has been successful in the Ashby High Rise case regardless of the ultimate resolution of the litigation.

The Construction of Defendant’s project has been delayed for seven years (and may be delayed further), increasing Defendant’s costs and preventing Defendant from realizing any income stream from the project while allowing the opposition group to spread awareness of their cause and to gather more support. This opposition to development mirrors the national trend of grass roots opposition to big-box retail construction and other commercial projects.

Enacting a zoning code likely is not in Houston’s future. Litigation may continue to be a proxy for zoning where sufficient opposition is organized. Increased uncertainty as to the ability to complete development projects on time and at the targeted profit margins may be where the market is headed.

Developers should create social media strategies in advance of opposition and seek to engage community stakeholders (such as civic associations) as allies in their development efforts. Due diligence may include determining whether anti-development groups are already operating in planned development areas. Getting ahead of potential backlash and stressing benefits of development for the surrounding community may be a practical way to minimize the risk of legal challenges to development projects.
 

(UK) Use Clauses in Leases can be Unenforceable as being Anti-Competitive

This post was written by Siobhan Hayes, Catherine Johnson and Angela Gregson, with contributions from Marjorie Holmes and Edward Miller

In the first case subjecting a permitted user clause in a lease to scrutiny under the Competition Act, a landlord local authority seeking to impose use restrictions on its tenant (to promote mixed use in a parade of shops) lost its case on the grounds that it would breach competition law by doing so and that it had not proven that the requirements for individual exemption under the Act were met

Whilst this decision may ultimately be appealed, at present the decision in Martin Retail Group Ltd v Crawley Borough Council serves as a warning that the Courts are prepared to find restrictive user covenants in land agreements to be in breach of competition law and therefore unenforceable.

The absence of a robust analysis of the likely restriction of competition on the relevant economic market concerned and whether this could be said to be appreciable, leaves little guidance for landlords and tenants as to the boundaries of the user restrictions that may, under competition law, legitimately be agreed between them (and in what context).

However, the case cautions against the use of restrictive user covenants without due consideration for the resulting restrictive effect on competition in the relevant economic market concerned.

The case also serves as a reminder that, where a restriction of competition is found, the burden of proof in demonstrating that the cumulative conditions for individual exemption are met rests firmly with the party seeking to benefit from it.

In this case the landlord opined (but without expert evidence) that there were benefits to the community from a series of restrictive user clauses in the shop leases for a parade of 11 shops (such as facilitating access to a range of goods and services within a local community, and promoting small businesses). However, the landlord had not documented its lettings policy and failed to demonstrate any written evaluation of the competitive effects of its scheme.

Landlords and tenants investing in new developments are advised to understand the economic market in which they operate and to fully analyse the potential anti-competitive effect of any restrictive covenants they seek to obtain. We have posted previously on this subject and this case does not change the conclusions we reached then.

For full detail and critique on the case and on the criteria considered when justifying a clause that may be restrictive of competition, follow this link to read our Client Alert.
 

(US) It's tax appeal season in Pennsylvania: 2015 Real Property Assessment Appeal Deadlines Are On The Horizon

This post was written by Dusty Elias Kirk and Peter Schnore

Pennsylvania real property tax appeal “season” is upon us once again. It's important that a property owner not take an assessment at face value. 

For 66 of Pennsylvania’s 67 counties, the 2015 real property tax appeal deadlines fall between August 1 and the first Monday of October 2014. The current annual deadlines are as follows:

  • August 1: Bucks, Cambria, Chester, Dauphin, Delaware, Erie, Fayette, Franklin, Indiana, Lancaster, Lawrence, Lehigh, Luzerne, Monroe, Montgomery, Northampton and York
  • August 15: Berks
  • August 31: Wyoming and Butler
  • September 1: Adams, Armstrong, Beaver, Bedford, Blair, Bradford, Cameron, Carbon, Centre, Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Elk, Forest, Fulton, Greene, Huntingdon, Jefferson, Juniata, Lackawanna, Lebanon, Lycoming, McKean, Mercer, Mifflin, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union, Venango, Warren, Washington, Wayne and Westmoreland
  • October 6: Philadelphia
  • March 31, 2015: Allegheny

Nearly all of the counties above may move their appeal dates up to as early as August 1 with as little as two weeks’ notice via publication in a local newspaper. We will continue to monitor changes in appeal deadlines.

Labor Day falls on September 1 this year. Because of this, the September 1 appeal deadline is extended to September 2. Nonetheless, we recommend filing any appeal in such a county before the Labor Day weekend to avoid problems arising from delays in mail delivery.

STEB to Release the New Common Level Ratios July 1

By July 1 of every year, the Pennsylvania State Tax Equalization Board must publish the latest Common Level Ratio figures for each of Pennsylvania’s 67 counties.
 
Pennsylvania law contemplates that the county’s Common Level Ratio is to be applied to a property’s assessment to determine the alleged current market value. Common Level Ratios vary widely because most Pennsylvania counties do not regularly reassess.
 
Here is an example: The Common Level Ratio published last year for Beaver County was 31.5 percent. if a property in that county has an assessment of $1 million, its fair market value based upon the Common Level Ratio is $3,174,600. If the real estate is worth less than that amount, the property owner should consider filing a real estate tax assessment appeal. This example shows why it is important not to take a property’s assessment at face value.

Because of the short period of time between when the Common Level Ratios are released and the appeal deadlines, property owners have a narrow window of time to analyze the fair market values being applied to their properties using the applicable Common Level Ratio.

Reed Smith’s Real Estate Practice Group in Pennsylvania is well prepared to assist property owners and tenants who are responsible for paying real estate taxes with this evaluation. Often tax assessment appeals can be handled on a contingency fee basis calculated upon the taxes saved as a result of the appeal, which is an effective way to budget and pay for this work. Any individual or business with an interest in commercial real estate may be interested in discussing the prospects of an appeal with us.

Please contact us if you have questions regarding the appeal deadlines or the evaluation of an assessment.
 

 

(US) Buy versus Lease: Why Organizations Should Consider Purchasing Their Space

We have been approached by many clients who contemplate the advantages of buying versus leasing space to serve as their headquarters facility. More often than not, the underlying decision is based on the numbers. In order to make a well informed business decision, we recommend a comprehensive side-by-side comparison of each option.

WHAT FACTORS TO CONSIDER

Some important factors to consider include interest rates, flexibility to expand or downsize, building equity for future cash reserves and control in operation and management.

Interest Rates
Current market rates are extremely favorable for organizations seeking to purchase space that will serve as their headquarters facility. For example, nonprofit organizations are able to obtain interest rates in the 3% range which can be amortized over 25 years. These rates are typically locked in anywhere from 3 to 15 years. For-profit organizations typically obtain interest rates 1.5 to 2 percentage points higher than the nonprofit rates. These rates are still relatively competitive in the 4.5% to 5% range. By comparison, these rates tend to be more favorable to the organization than lease terms that are subject to escalation on an annual basis as well as pass-through operating expenses. A Tenant is typically subject to a 2.5% to 3% escalation on an annual basis plus pass through fees for utility, custodial, real estate taxes and other operating expenses.

Flexibility
Many organizations sign long term leases for ten or more years that contain severe early termination penalties or rigid assignment and subletting provisions. As a result, the organization may be unable to move to service the current and future needs of their business. Ownership allows the property owner flexibility in structuring their space to suit their current and future needs regarding expansion. For example, the organization may elect to occupy a portion of its space and lease the balance to other organizations for a limited period of time. This structure enables the organization to expand its businesses and occupy more space when the lease expires or earlier if properly negotiated within the lease terms.

Equity
Property ownership is an investment that can yield significant cash rewards in the future. In many areas in the nation, purchase prices remain relatively low and organizations can take advantage by purchasing a building or even a floor in a condominium building. Annual debt service is typically comparable to lease rates or even lower in later years. As an additional benefit, the organization is building equity in the building while paying down its debt service. The organization may elect to sell the building when the market value appreciates and realize significant cash reserves or investment capital for a newer/bigger building.

Control in Operation/Management
Tenants typically do not have rights in the control of the operations or management of a building. This can become extremely frustrating when issues arise within the building. As a property owner, all decision making authority regarding operations and management rests the organization.
 

(UK) Non Residents to pay CGT on UK Residential Properties

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

Our tax team has written a Client Alert on the extension of UK CGT to gains arising from the disposal of UK residential property after April 2015 by non-resident individuals and entities. This will extend UK CGT beyond its current scope: historically, non-UK resident individuals and companies disposing of UK property were not subject to UK CGT. This changed in April 2013 when UK CGT was extended to gains by UK resident and non-UK resident “non-natural persons” on UK residential property within the scope of the annual tax on enveloped dwellings (ATED). The new rules represent a further extension of UK CGT.

Government consultation is open until 20 June 2013 so read our detailed alert and reply to the consultation if you are concerned about the proposals which include a possible withholding tax on a disposal.
 

(US) "Rocket-Docket" Launches in New York: Implications for Real Estate Practice

This post was written by Thomas Maira and Joshua Leventhal

In an effort to expedite the litigation process, reduce court costs and to offer contracting parties an alternative to arbitration, the New York State Supreme Court Commercial Division has adopted an “accelerated adjudication” rule, effective as of June 2, 2014, for all disputes exceeding $500,000.

The “accelerated adjudication” rule, also known as Rule 9 of the Rules for Practice for the Commercial Division (22 NYCRR §202.70), accelerates all pre-trial proceedings to be completed within nine (9) months from the date of the filing of a Request for Judicial Intervention (RJI), by providing the following:

Waiver of Certain Rights. The parties are deemed to irrevocably waive:

  1. Objections based on lack of personal jurisdiction or forum non-conveniens
  2. Trial by jury
  3. Punitive and exemplary damages
  4. Interlocutory appeals

Limited Discovery. Unless otherwise agreed to by the parties, discovery is limited to:

  1. No more than 7 interrogatories and 5 requests to admit per party
  2. No more than 7 depositions per party, each deposition not to exceed 7 hours
  3. Document discovery limited to those “relevant to a claim or defense in the action” and “restricted in terms of time frame, subject matter and persons or entities”
  4. Certain e-discovery limitations, including where the court may require the requesting party to advance costs “where the costs and burdens of e-discovery are disproportionate to the nature of the dispute of the amount in controversy”

Rule 9 provides the following specific language (which can be amended or changed by the parties) to be used by the parties in any contract to consent to accelerated adjudication:

“Subject to the requirements for a case to be heard in the Commercial Division, the parties agree to submit to the exclusive jurisdiction of the Commercial Division, New York State Supreme Court, and to the application of the Court's accelerated procedures, in connection with any dispute, claim or controversy arising out of or relating to this agreement, or the breach, termination, enforcement or validity thereof.”
 
Parties in real estate transactions should understand potential advantages and disadvantages of including “accelerated adjudication” in real estate documents. While such option may prove to be an attractive alternative to extended litigation and arbitration in certain real estate contracts such as purchase agreements, joint venture agreements and leases, parties will need to consider:

  • the time and costs that “accelerated adjudication” will still require
  • whether the waiver of certain rights are in such party’s best interest for such transaction 
  • whether this new and untested rule will prove to be effective

In a loan transaction, lenders will likely favor this provision in their loan documents to minimize delay tactics by defaulting borrowers and guarantors, while borrowers and guarantors should carefully review any such accelerated adjudication provisions to make sure they are not unknowingly waiving certain rights with respect to the collateral.
 

(US) Technology Companies in the SF Bay Area are searching for space; and willing to pay for it

Commercial real estate in the San Francisco Bay area is competing with New York City for the title of the hottest market in the United States. The boom is fueled by the rapidly growing technology sector, with companies like Google, Apple and Facebook paying premiums for space because they fear the risk of losing new talent more than they fear overpaying for real estate.

Transaction speeds have stepped up the pace this year. It is becoming increasingly common for terms around document negotiation to be addressed by the parties in their Letter of Intent. Owners are increasingly reluctant to remove a listing in exchange for an exclusivity period without some assurance that their contract will be signed before the expiration of this arrangement. This places additional pressure on the legal teams and business representatives to provide advice and reach decisions in days rather than the weeks or months that is the historical norm in many markets. Clients are finding value in firms like Reed Smith that have the necessary 'bench strength' to handle this heavy lifting under tight time-line constraints. 

In a recent Law360 article, I suggested that technology companies and their attorneys should take an assertive approach to this volatile market. There is a need to communicate to all levels of the client’s company the high-pressure nature of the commercial real estate environment in the Bay area.

Our advice on Bay Area commercial real estate: “Act now. Don’t wait.”

For the complete article, please see Law360’s “Tech Cos.’ Chase for Space Adds Deal-Making Complexity.”
 

(US) Foreign Direct Investments get some help from China's new NDRC system

There is no question that Chinese investors have played an important role in maintaining deal flow over the past several years, especially for trophy properties in gateway cities like London and New York. However, until recently, these investors have been at a competitive disadvantage due to a lengthy government review and approval process.

Under prior Chinese regulations, any outbound investment in excess of USD 100 million (USD 300 million in natural resources sector) required approval by the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), and the State Administration of Foreign Exchange (SAFE). These approvals could take more than a year to obtain, much longer than most sellers can tolerate, even in a recovering market.

The NDRC recently announced a new notice based system with lowered approval thresholds and a streamlined approval process, as follows:
 

  • Foreign investments under USD 1 billion only require a notice filing with the NDRC.
  • Foreign investments exceeding USD 1 billion, but less than USD 2 billion, are subject to approval by the NDRC, which approval is to issue within 20 days following application.
  • Foreign investments exceeding USD 2 billion require an endorsement by the NDRC and China State Council approval. The NDRC endorsement is to issue within 20 days of application.

The new rules do not apply to investments in countries with China has no formal diplomatic relations. Similarly, the new rules do not apply to countries subject to international sanctions or which are at war or subject to internal unrest. There are similar carve-outs for sensitive industries, including telecommunications and new media investments. Nonetheless, this new regulatory regime effectively removes a barrier of entry for Chinese real estate investors around the globe, which should be good for sellers and good for competition.