Commercial Real Estate Blog by Madison

Boundary Trees, Where to Draw the Line….

In a world where party walls, air rights and subway easements can sometimes make life in real estate somewhat complicated, I took a moment to breathe in some fresh spring air and contemplate the beauty of the world around me. I started to focus on a magnificent oak tree, its large spreading branches and its wide trunk, and let my mind wander… to the law of boundary trees, of course!

It can be an innocent act; even a noble one. A tree is planted. Or, a wayward seed floats to the surface from a branch above, lands and takes root. Regardless, with either of these simple acts, a contentious lawsuit can also take root. It likely will take years, sometimes generations, to come to fruition (pun intended). However, one person’s bucolic shade and privacy can become another’s annoyance and nuisance!

So who has ownership of and responsibility for boundary trees, trees that grow on or near the boundary line between adjacent properties? Who has the legal right and responsibility for the removal or care of such trees? Continue reading

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CAM Negotiations – What You Need to Know before Signing, Part 2

It is news to no one that CAM charges can be a contentious issue for Landlords and Tenants alike.   Generally, Landlords want the CAM clause to be broad and all-encompassing, covering the Landlord’s costs of ownership, management, maintenance, repair, replacement, inspection, improvement, operation, and insurance of the property together with any costs allocated to administration and overhead. The Landlord benefits from a highly expansive CAM definition to avoid the risk that any necessary costs of operation have no corresponding revenue to cover them.

Tenants, on the other hand, generally understand that they need to compensate the Landlord for operating and maintaining the center. But they view the Landlord’s ownership costs as part of the Landlord’s cost of doing business and not a recoverable operation cost.  This “maintenance versus ownership” struggle shapes many of the issues relating to inclusion in and exclusion from CAM costs

When entering CAM negotiations, there are, thus, many considerations for both Tenants and Landlords.  Let’s consider some of the questions Landlords should contemplate when negotiating CAM. Continue reading

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CAM Negotiations – What You Need to Know before Signing, Part 1

Common Area Maintenance (CAM) charges can be a contentious issue for Landlords and Tenants alike. CAM charges are one of the net charges billed to Tenants in a commercial lease, and may be charged in addition to base rent.   On one hand, Landlords may feel that their expenses are high, and this is the chance to be refunded for the outlay. On the other hand, Tenants may feel squeezed by the rent, and are resentful of any additional charges.  CAM becomes the rope in a tug-of-war. 

Before entering CAM negotiations, it is important to understand the various aspects that go into factoring CAM charges. Typically, CAM charges are comprised of fees for expenses incurred in the maintenance of the common areas of the property. CAM usually provides for non-capital expenses, such as parking lot sweeping, snow removal, landscaping, common area janitorial costs, common area electricity, etc. CAM is commonly calculated on a pro rata share basis.

That said, historically, there were gross leases in which the CAM expenses were incorporated into the base rent.  Because it was included in the rent, Landlords could not recover for expenses that significantly increased unexpectedly.  That is why there has been a progression over time toward leases in which Landlords developed more sophisticated formulas for the recovery of CAM expenses.  These formulas have led to increased points of conflict within CAM negotiations. 

When entering CAM negotiations, there are considerations for both Tenants and Landlords.  First, let’s contemplate some questions Tenants would be wise to consider when negotiating CAM. Continue reading

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FIRPTA Withholding Rates have been Increased to 15%

Until a few days ago, The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), IRC Sec. 1445, provided generally that the transferee (i.e., the purchaser) of U.S. real property or a qualified substitute must withhold from closing proceeds 10% of the gross purchase price paid for the U.S. real property.  That amount must then be forwarded to the IRS as a withholding tax on the transferor (i.e., the seller) whenever the transferor is a foreign person (as that term is defined in the act). Real estate attorneys, escrow agents and qualified intermediaries routinely act as qualified substitutes in these transactions. If the transferor or a qualified substitute fails to forward FIRPTA withholding in a timely fashion, that party can be liable for the funds it should have withheld plus penalties and interest. The liability of qualified substitutes however, is generally limited to the compensation it received on the transaction.

The Consolidated Appropriations Act, 2016, Public Law 114-113 is a massive omnibus financial and tax bill (6.75 Meg. in Word format) that recently became law. Division Q of that law is titled the “Protecting Americans from Tax Hikes Act of 2015” (the “PATH Act”). Section 324 increases the FIRPTA withholding rate from 10 percent of the gross sales price to 15 percent of the gross sales price. The 10% withholding rate continues to apply to properties acquired by the transferee as a residence and sold for not more than $1,000,000. The complete exemption from FIRPTA withholding provided by IRC § 1445(5), where the property was acquired by the transferee as a residence and it is sold for not more than $300,000 also continues to apply.

Although the increased withholding rate went into effect on February 16, 2016, the change was very easy to miss. Until roughly March 8, the change was not reflected in the Westlaw text of IRC Sec. 1445. That is probably because the official US Code had not yet been amended to reflect the change. The change is not reflected in much of the literature on the IRS website, although the change is reflected in the 2016 version of IRS Pub. 515 and elsewhere.

On February 19, 2016, three days after the withholding increase went into effect, the IRS issued final and temporary regulations amending regulations that deal with FIRPTA withholding, §§ 1.1445-1(h), 1.1445-2(e), and 1.1445-5(h). Those amendments reflect the new 15% withholding rate. They are explained in by the IRS in PATH Act Changes to Section 1445, February 19, 2016, 81 FR 8398-01, 2016 WL 642618(F.R.).

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Inadvertent Mortgage Fraud: A Day Late Means Many Dollars Short

There are situations that arise in real estate transactions that can result in inadvertent mortgage fraud. That’s right. Unintentional and without malice, but mortgage fraud just the same. Case in point.

Mr. Jones arrived at the sale of his property fully prepared. At the closing, all title exceptions had been cleared, and payoff letters have been obtained for the remaining open mortgages. The first mortgage, a purchase money mortgage, had a payoff of $500,000, which would be paid off at closing. The second mortgage, a home equity line of credit (HELOC), had a maximum allowable draw of $50,000. Mr. Jones had only drawn $10,000 of the HELOC. He obtained a payoff letter, confirming this amount was also to be paid at closing.

The closing proceeded smoothly and Mr. Jones left the room, confident that all of his bills had been paid and debts satisfied. Newly flush with cash from the sale, Mr. Jones invited a group of friends to his favorite restaurant to celebrate. Continue reading

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Off-the-Wall Savings – How Businesses with Demountable Walls are Saving on Taxes

The traditional office workspace has come a long way since the classic mahogany desk in a corner office. Thanks to technological advances, many employees can and do work from anywhere, which makes creating a vibrant and thriving office a new challenge. Today’s leading companies are creating office space that encourages collaboration with an interactive atmosphere. The modern office environment focuses on the employee experience within the company culture.

Many times, this environment is created with moveable office space made from demountable walls. Demountable or moveable walls are partitions that are pre-engineered and manufactured. Demountable walls offer businesses a simple way to build out and customize their work space.

Companies opt for walls that can be configured with customizable panels and different options for desk and storage spaces. These flexible interiors allow organizations to change the aesthetics, functionality and size of various office spaces in order to suit changing needs. Demountable walls also come with technological add-ins, such as plug-and-play power and data, so there is no need to rewire cables every time there is a change.

This trend in demountable walls has spread to corporations, educational institutions, health care and government organizations. While the initial project costs for demountable walls are higher than standard construction, this cost difference can be offset by major tax savings. Demountable walls are not considered a structural component of the building and therefore qualify for accelerated tax depreciation. Under Revenue Procedure 87-56, demountable walls fall under Asset Class 00.11: office furniture, fixtures and equipment, which allow it to be depreciated over a five or seven year life-span for tax purposes, rather than 27.5 or 39 years.

For example, XYZ Corporation is a full-service accounting firm with employees that perform tax functions and others that perform audit functions. The audit employees tend to be out at client locations for a large part of every week. XYZ wants to reconfigure its 10,000 SF office to include flexible work environments. Based on several quotes XYZ received from local contractors, they are considering two options:

A) Build permanent workspaces, using drywall. This would cost the company approximately $500,000.

B) Build temporary, flexible spaces using a combination of demountable partitions and accessories that include flexible and moveable/sliding cabinets. This would cost the company approximately $850,000.

In reviewing both options, XYZ needs to take into account the fact that on their own corporate tax return, the $500,000 would be capitalized and depreciated over a 39-year life-span, giving the company a deduction for depreciation of about $12,500 per year. On the other hand, if XYZ were to invest into the demountable option, XYZ would be able to depreciate the entire $850,000 over a five or seven year life-span if they did a cost segregation study. This would give the company a tax deduction of approximately either $170,000 or $120,000 (over five or seven years). The after-tax benefits of Option B, combined with the flexibility of the workspace, would provide a very suitable and worthwhile investment for XYZ.

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Real Estate Fraud – “Stealing” a Home

An increasingly common type of real estate fraud occurs when someone impersonates the true owner of real property and does one of two things- sells the home or obtains a mortgage on it.

Typically, the wrongdoer first identifies a low risk transaction.  The wrongdoer may look for a home nearing foreclosure for unpaid taxes.  This is very easy information to obtain because so much data is accessible on the Internet now.  The wrongdoer will then visit the property and confirm it is vacant.  The ideal target has no mortgages (or only a very small mortgage) encumbering it.

The wrongdoer will obtain fake identification in the true owner’s name.  He may then sell the property to a bona fide purchaser.  He collects the net sale proceeds and moves on to the next victim.  In criminal proceedings against Maria Leyna Albertina in Brooklyn a decade ago, it was alleged that she had identified and purportedly “sold” 32 such properties. Continue reading

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Let’s Go CFPB!

At the time of this writing, the Green Bay Packers are heading to the NFL playoffs with a record of 10-6.  I happen to be a Packers fan for a few reasons. For starters, my favorite NFL player is Sam Shields – great name for a great player! Additionally, the city of Green Bay is commonly referred to as “Titletown” – great name for a great city! While many think this name is a nod to the many title championships of the Packers, I am rather certain the name is a tribute to Green Bay resident and title insurance legend, Florence K. Cornelisen. She founded Green Bay Abstract Company in 1935.

While the team’s record is reason for most Packer fans to rejoice, certainly there are some fans with more on their mind. Specifically, members of the Orlando-based fan club, the Central Florida Packer Backers (CFPB).

By way of background and according to their website, the CFPB gathers together on game-day to cheer on their Green Bay Packers. Membership is a mere $20/season and their motto is “Your $20 will get you plenty”. The leadership of the club donates their time to make every season “as fun as we can”. To their credit, I see that some of their gatherings over the year involve raising funds for charity. For that alone, I say “Go CFPB!” Continue reading

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The Pervasiveness of Mortgage Fraud – Forged Documents

Mortgage fraud is pervasive. This is the first of a series of blog posts describing different types of mortgage fraud and the flags that can help anyone involved in the real estate and financial sector identify them.

One fraud seen with increasing frequency is forged mortgage satisfactions. A major example of this type of fraud occurred in 2005 in Greenwich, Connecticut. A respected real estate developer owned a number of commercial properties. It turns out that to generate more cash flow, he was routinely forging mortgage satisfactions of mortgages encumbering properties he owned. He would go to a bank for a loan on one of his properties. A title search would be ordered. It would show no mortgage encumbering the property in some cases. In other cases, there would be a mortgage encumbering the property, but by the time a contin was run, it would have been satisfied. (A “contin” is a search run before closing to see if there are any changes since the date of the original search). No mortgages showed up because the developer signed and recorded forged releases. He would use a lost or stolen notary stamp for the acknowledgement of the purported signature of the bank officer. Continue reading

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Parking Arrangements in Construction Exchanges and for Other Purposes

In the last few posts, we looked at how parking arrangements are handled in reverse exchanges. Construction exchanges are in some ways very similar to reverse exchanges. Both involve a parking arrangement. In a construction exchange, however, the purpose of the parking arrangement is different.

IRC § 1031 allows for the cost of construction on replacement property to be counted as part of the purchase price of that property, but only to the extent that the improvements have been made to the property before the taxpayer acquires it. Once the taxpayer owns the replacement property, it is too late. Moreover, payment for bricks and mortar sitting at the construction site does not count for exchange purposes until those bricks and mortar have been attached to the ground. The cost of services performed for construction counts, but not the cost of services that have not yet been performed. In a construction exchange, the parking arrangement allows these improvements to be made while the property is in the hands of a friendly party. Continue reading

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