Commercial Real Estate Blog by Madison

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Commercial Real Estate Sales

FIRPTA Withholding Rates have been Increased to 15%

By Lee David Medinets, Esq., Chief Counsel, MCRES and Senior Counsel, Madison Exchange, LLC a/k/a Madison 1031 and their affiliates

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. Continue reading

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Let’s Go CFPB!

By Sam Shiel, Esq., Director of National Title Services and Senior Underwriting Counsel, Madison Title Agency

At the time of this writing, the Green Bay Packers are heading to the NFL playoffs with a record of 10-6. 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). But for those members of the CFPB purchasing a home in Florida, “fun” is hardly the word that comes to mind these days.

Since September 2, 2014, home purchasing members of the CFPB, along with all other Florida home purchasers, have been subject to an additional title charge of $3.28. Why? It is to pay for the multimillion-dollar collapse of an Orlando title company.

Back in 2007, a Florida law firm formed a title company by the name of KEL Title Insurance Group (KEL) headquartered in Orlando – much like the CFPB. The company had written in excess of 10,000 title insurance policies. However, in October 2012, KEL was ordered into receivership for purposes of rehabilitation by the Courts. The partners of the law firm have denied any wrongdoing, blaming KEL Title’s problems on a fraud scheme by an unidentified rogue agent in South Florida who allegedly fabricated sales and stole escrow money. While KEL is no longer writing new or renewal insurance coverage, the company’s existing policies are not cancelled by the rehabilitation order and will continue in the ordinary course of business.

The result. Just months after the takeover by the state, KEL policy claims are skyrocketing and its cash is nearly gone Claims soared as homeowners discovered flawed sales closings and bogus title insurance sales. When the state took over in 2012, KEL had claim liabilities of $12.8 million and cash of $2.7 million, according to state records.

The solution?…. Continue reading

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The Pervasiveness of Mortgage Fraud – Forged Documents

By Debra Smith, Associate General Counsel, Madison Title Agency

Mortgage fraud is pervasive. This is the first of a series of blogs 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. Continue reading

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Parking Arrangements in Construction Exchanges and for Other Purposes

By: Lee David Medinets, Esq., Chief Counsel, MCRES, Madison Exchange a/k/a Madison 1031, and affiliates

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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Parking Arrangements in Reverse Exchanges – Part 2

Lee David Medinets, Esq., Chief Counsel, MCRES, Madison Exchange a/k/a Madison 1031, and affiliates

In the last post, we began to examine the problem of what to do when a taxpayer needs to buy an IRC Section 1031 like-kind exchange replacement property before the relinquished property in that exchange can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from the common forward exchange where the relinquished property is sold first. The reverse exchange process creates a special problem in that the taxpayer cannot simultaneously own both the relinquished property and the replacement property. In a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold.

We also examined why traditional non-safe harbor reverse exchanges are expensive, risky and rare. On the other hand, traditional non-safe harbor exchanges have the substantial advantage that there is no theoretical limit to how long a potential replacement property could be parked. In order to inject some certainty into the reverse exchange process and in order to encourage reasonable time limits on that process, the IRS has offered an alternative by creating a safe harbor in Revenue Procedure 2000-37. Continue reading

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Parking Arrangements in Reverse Exchanges – Part 1

By Lee David Medinets, Esq., Chief Counsel, MCRES and Senior Counsel, Madison Exchange, LLC a/k/a Madison 1031 and their affiliates

IRC §1031 like-kind exchanges are popular, reliable, IRS-approved transactions that allow taxpayers to defer paying taxes on profits when property (usually real estate) that is held for productive use in trade or business or for investment is exchanged for like-kind property (e.g., real estate exchanged for real estate) that will also be held for productive use in trade or business or for investment.

In a typical IRC §1031 exchange, the taxpayer sells relinquished property through a qualified intermediary (a “QI”) and later acquires replacement property through the same QI. If the process is handled in accordance with Treasury Regulations, it is considered as if the taxpayer exchanged the relinquished property for the replacement property. This process is commonly referred to as a “forward” exchange because it proceeds in the normal direction – sell first, buy second. However, sometimes a taxpayer needs to buy the replacement property before the relinquished property can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from a forward exchange.

A reverse exchange poses a special problem. The taxpayer cannot simultaneously own both the relinquished property and the replacement property. That would make it impossible to exchange one property for the other. Therefore, in a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold. Continue reading

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Railroad Easements… Marvin M. Brandt Revocable Trust v. United States – Part 2

By Terence Guerriere, Esq., Executive Vice President, Madison Commercial Real Estate Services

In my last post, I wrote about how three seemingly unrelated things led to me to think about railroad easements. First, I’d recently read Robert L. O’Connell’s biography of William Tecumseh Sherman. I also visited the High Line elevated park in Manhattan and I’m following a local property owners’ group battle to stop the taking of a public street to facilitate, in part, the establishment of a land conservancy. I explored how granting rail companies land in the 1860s, converting an old railway into a park and a neighborhood fight to stop the taking of property in connection with a planned conservancy led to a collision that resulted in a Supreme Court case.

But I left a cliffhanger…. and did not divulge the Supreme Court’s decision on the issue. Here’s the outcome. Continue reading

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Railroad Easements… A Controversy 130 Years in the Making

By Terence Guerriere, Esq., Executive Vice President, Madison Commercial Real Estate Services

Three seemingly unrelated things led to me to think about railroad easements and this post. First, I recently read Robert L. O’Connell’s biography of William Tecumseh Sherman. I also visited the High Line elevated park in Manhattan and I’m following a local property owners’ group battle to stop the taking of a public street to facilitate, in part, the establishment of a land conservancy. How are these related to a discussion of railroad easements?

From O’Connell’s book, I learned of Sherman’s significant role in the planning and construction of the first transcontinental railroad. Not only was General Sherman a Civil War hero, he also worked after the war to help his former soldiers gain employment building the railroads. This pro-railroad stance included supporting the federal government’s generous land grants to the railroad companies.

The High Line is a beautiful walking trail situated on a former abandoned elevated railroad line on Manhattan’s West Side. After years of debate, the establishment of this linear park has spurred significant development beneficial to those visiting the High Line and the city’s real estate developers.

The purchase of a former country club property by a private day school has led to seeking the discontinuance of a public street which dissects part of the property. The street also serves as an important access point to the neighborhood of private homes which surround the property. The school’s plan includes a land conservancy for part of the property but only if the school is granted permission to construct its multiple building campus.

How did granting rail companies land in the 1860s, converting an old railway into a park, and a neighborhood fighting to stop the taking of property in connection with a planned conservancy collide and result in a Supreme Court case? These three isolated items coalesced in my head to inspire thoughts of railway easements and why they have become so controversial. Continue reading

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Developing Across the River: NYC’s Expanding Markets

By: Mark Faham, Regional Business Director, Madison Commercial Real Estate Services

Riding the subway each day to work and to closings is always an interesting experience. I recently noticed a fascinating fact which I had overlooked all these years: the strong correlation between subway ride distance and residential development in NYC. In recent years, there has been a huge amount of development right outside Manhattan, only about 15 minutes from ‘the city’ by subway. As the shortage of housing and escalating prices for housing skyrocket in Manhattan, NYC developers are creating housing in neighboring boroughs near subway transportation. Continue reading

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As Shopping Trends Evolve, Retailers Find New Ways to Leverage Brick-and-Mortar Locations

By Daniel Kasten, CPA, Chief Financial Officer, Madison Commercial Real Estate Services

On the heels of the ICSC RECON Show in Las Vegas, the shopping center sector of the commercial real estate market is encouraged that retailers are finding new opportunities to leverage the value of storefronts with their customers’ online shopping experiences. Indeed, since the ubiquitous online connection has changed the way we make decisions about shopping, retailers are finding new ways to connect online shopping with brick-and-mortar stores.

There are several trends in which retailers are combining online sales with brick-and-mortar stores to offer customers an optimal shopping experience. Continue reading

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