Commercial Real Estate Blog by Madison

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Financial Due Diligence

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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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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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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The Shrinking Due Diligence Window in Commercial Real Estate Purchases

By: Arnon Wiener, Esq., CEO, Real Diligence and LeaseProbe

The revival of the real estate market is presenting new opportunities for commercial real estate owners and investors across the U.S.. Improved lending conditions and the increase of capital availability are driving market growth on its forward momentum. After hunkering down to wait out the storm of the recession, the commercial real estate market is resurging with an influx of deals.

This is good news for real estate owners and investors. However there is a consequence to the increasing demand for properties: fierce competition. While competition is beneficial to the marketplace, investors should be aware of a secondary effect which may have a negative repercussion on the decision making process; namely the shrinking due diligence window. Continue reading

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Maximize Your Pre Due Diligence Success – Three Questions to Ask when Assessing a Potential Commercial Real Estate Acquisition

By: Arnon Wiener, Esq., CEO, Real Diligence and LeaseProbe

Is there a method for CRE investors to better utilize the time spent on the preliminary assessment? How can a CRE investor prioritize the process to focus resources on the most worthwhile properties?

Deal assessment includes many steps and areas of responsibility. During the beginning stages of investigation, a potential buyer is probably not interested in reviewing every single detail. He would not want to incur the expense of a comprehensive due diligence analysis and review simply to weed out the properties that do not appear to be successful.

An excellent solution is to conduct Pre Due Diligence. With a pre due diligence review, the buyer can cover key areas of consideration while incurring a limited expense. Here are three key questions to ask. Continue reading

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Confirming the Facts with Tenant Estoppel Certificates

By Elliot Zaks, Principal, Madison Commercial Real Estate Services

Each tenant estoppel certificate constitutes one or two pages within the hundreds of pages of closing documents of any commercial real estate transaction. Estoppel Certificates can easily be overlooked in the flurry of paperwork preceding a transaction. However, the tenant estoppel certificates are a valuable source of information which should be reviewed carefully by potential buyers or lenders.

Each estoppel certificate is a representation by a party signing the certificate to the addressee of the certificate. Signing the estoppel certificate establishes certain facts which the signing party may not later contradict, dispute or recant. In the landlord- tenant relationship, the tenant estoppel certificate is used to confirm the current status of the tenant and landlord’s rights and obligations under an existing lease.

A tenant estoppel certificate is generally used when a commercial property owner is seeking to sell or refinance the property. Tenant estoppel certificates are commonly used to clarify the tenant’s understanding of the lease agreement to potential lenders or buyers.

Here is why Estoppel Certificates are of value to both the buyer and the lender.
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The Importance of Protecting Leasehold Ownership Interests

By: Keren Peters Atkinson, Chief Marketing Officer, Madison Commercial Real Estate Services

There are several types of ownership interest in real estate. While the most common is fee simple interest, leasehold interest is also seen often in certain situations and states and with certain types of property. Each type of ownership interest has its benefits and purposes. However, one thing they share in common is a need to protect the purchaser’s investment in the property. Here is why it’s important to protect an investment, regardless of whether the ownership is fee simple or leasehold.

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Two Most Common Mistakes to Avoid When Using Argus Models

By: Arnon Wiener, Esq., Chief Executive Officer, Real Diligence and LeaseProbe

In a financial due diligence review for a real estate acquisition, facts are king. The more detailed information the buyer can gather and analyze, the more he can be confident that he is making a value added acquisition. Argus models are powerful tools used for cash flow projection, transaction analysis and asset valuation. When used correctly, Argus models can optimize the value of your commercial real estate acquisition.

Aside from their standard use in financial due diligence, Argus models can also potentially be utilized as a business tool. A well-structured and comprehensive Argus model can be invaluable to investors considering a potential transaction. There are some potential uses for Argus models which are commonly overlooked by real estate investors. If modeled properly, these uses can provide deep insight into the potential NOI of a commercial property.

In this regard, there are two common mistakes made in using Argus models which should be avoided. Continue reading

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The Effect of Mineral Rights on Title, Part 2

By: Eliezer Shaffren, Esq., Counsel, Madison Title Agency

Oil and gas leases can help to increase property value as well as the value of the surrounding area properties. The landowners receive an initial signing bonus, along with royalties from extracted gas. The lease also has the ability to generate revenue for the state, which benefits the local economy. The last post’s discussion on mineral rights outlined the various ways in which drilling companies can obtain access to mineral rights.

Landowners should be aware, however, that granting mineral rights can adversely affect title to the property.
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