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Category Archives: Commercial Real Estate

Ohio Real Estate Law: Early occupancy by buyers under commercial and residential purchase contracts

Author By Christopher P. FinneyPosted on

Frequently we encounter situations in which a buyer under a purchase contract, be it commercial or residential, desires to take occupancy of real estate before the closing (i.e, the tender of the purchase price).

A buyer may want early occupancy for a host of reasons. For both commercial and residential buyers, they many times desire occupancy before their financing can be formally approved. This might be because a commercial buyer desires to move or “rig” his manufacturing equipment into a property by a certain date. Many times commercial and residential buyers want to modify the property in some signifiant way such as moving walls, re-doing a kitchen or changing the electrical panel.

It also may be because the seller can’t close because of a title problem, or some other seller performance issue.

Does it legally make sense to allow for early occupancy? Is this a good idea?

From the buyer’s perspective

From the buyer’s perspective, it’s sort of a no-risk proposition, in that it gets the use and occupancy of the property without paying for it. And, as is discussed below, it gives the buyer the full chance to the the property for a “test drive,” before buying.

However, if the buyer is making a costly move or expensive improvements to the property, it should consider the “what if” if the seller can’t or won’t ultimately close.

From the seller’s perspective

But many of the reasons it makes sense for a buyer to take early occupancy are the precise reasons why it might be a bad idea for the seller to permit it.

First, by giving the buyer the right to a “test drive,” he invariably finds things with the property that are either defective or less than optimal, and then the buyer demands repairs or modifications before agreeing to close.

The reality is that a buyer needs a place to operate his business; he needs a place to live. Depriving a buyer of possession until he tenders the purchase price is strong leverage to force a closing.

But if the closing can’t occur because the seller can’t perform, such as a title problem, it may be a way to “keep the buyer”under contract for a later closing once the seller’s performance problem is resolved.

Removing a buyer from the property if he doesn’t close

Then, after early occupancy is granted, there is the problem if some exigency arises that prevents the buyer from closing: The financing is never approved, the buyer dies, a divorce, the business goes bankrupt, or a dispute among business partners arises. Any of these things can result in the buyer not closing pursuant to the contract, whether there is a contractual obligation to close or not.  So then what?

If that happens, the seller will have to legally remove a buyer from the property.

In the case of a residential occupant, regardless of the lack of justification of a tenant staying in the property, the owner must go through a judicial “forcible entry and detainer,” or eviction action. This can last from two to six months to judicially recover possession (and extreme circumstances, longer). In the case of a commercial occupant, they can be removed unilaterally (i.e., without court involvement) by the owner under certain circumstances. This article addresses non-judicial commercial set outs.

Nightmare scenarios

In addition to fighting to get property back from an occupant, there are circumstances in which an occupant does so much damage to a property it  is a nightmare for the seller: Property modifications and property damage such as to carpeting, doors, walls, and the like. Simply recovering possession can be only half the “cost” of a bad choice of allowing early occupancy. And as a landlord I can tell you: You simply can’t imagine the way some tenants live: Pet damage, holes in walls and doors, and destroyed carpet, all occurring in relatively short periods of time.

Unpermitted early occupancy

We also have encountered a situation in which buyer have just taken it upon themselves to “move into” a property with no permission forth seller.  As unimaginable as it seems, it has happened. We once had an out-of-state manufacturing client with a factory north of Dayton. They had moved out of the property to their home plant in Minnesota. They had no more personnel on the ground in Ohio. The buyer was a local gun manufacturer. Their equipment was huge milling and drilling machines that took hundreds of thousands of dollars for “rigging” to move. Thus buyer not only had the audacity to move into the property before closing, and commenced his manufacturing and shipping operations, all without the seller’s permission, they actually posted photos of their new facility on their company web site!

Our seller client, asked us for options, and we advised them to just “lock out” the tenant and let them suffer the consequences.  Boy, did that get their attention. Within hours of them finding the doors locked, they quickly found a way to get the transaction closed, and paid our client rent for the early occupancy, but also a penalty and our attorneys fees.

Insurance issues

Even allowing a buyer to “move his stuff into the garage” before closing can cause these “early occupancy” problems.  But one scenario to consider is that once a tenant occupies a property, it is no longer “owner occupied” and the property and casualty protection that exists on homes and businesses may not cover tenant incidents and tenant property. In one fact pattern with which I am familiar, the house burned to the ground after the tenant moved his furniture into the garage. In such scenario, the personal property of the tenant simply was not insured. Who is going to cover those losses?

Written agreement

In any event, if a buyer is going to take early occupancy, the parties should memorialize their agreement in writing: (i) What happens if the closing is further delayed? (ii) Is the tenant allowed to modify the property? (iii) is there a security deposit against damage? (iv) Who is responsible for insuring against personal injury, wrongful death, damage to the property itself and damage to the buyer’s personal property during the period of early occupancy? These are just some of the issues the early occupancy agreement should address.

Conclusion

In short, early occupancy is one of those things that might seem like a good idea a the time, but in retrospect it was unwise or even a nightmare. It should be undertaken only with open eyes and great caution by both parties, considering the “what if” if the closing never occurs, considering the insurance issues, considering potential property damages, and getting all aspects of the agreement in writing.

For assistance with your real estate needs, contact Isaac T. Heintz (513.943-6654) or Eli N. Krafte-Jacobs (513.797-2853).

 

Ohio Real Estate Law: Foreign execution and acknowledgement (notarization) of deeds and other recordable instruments

Author By Christopher P. FinneyPosted on

I got a great question from a client this past week. He had a seller who was located in Mexico for his job. The facility at which he worked was nowhere near a US Embassy or Consulate, and the drive to the Embassy or Consulate was somewhat dangerous.  How could he get a valid and proper signed and notarized deed back to Ohio for the closing?

I thought: What a great chance for a blog entry on foreign execution and acknowledgement of recordable instruments (deeds, mortgages, etc.) in Ohio! (How exciting is my life!)

Domestic execution

First, when I started my career in real estate law, most (not all) instruments required two witnesses and a notary public to sign in order for the instrument to be recordable in Ohio.  Since then, the requirement for two witnesses has been dispensed with, so all that is needed for an execution of a recordable instrument in Ohio is a signature of the owner and an acknowledgement (notarization) (there are lots of other requirements as to the form).

Execution and acknowledgement in other states

Then, O.R.C.  § 5301.06 provides:

All deeds, mortgages, powers of attorney, and other instruments of writing for the conveyance or encumbrance of lands, tenements, or hereditaments situated within this state, executed and acknowledged, or proved, in any other state, territory, or country in conformity with the laws of such state, territory, or country, or in conformity with the laws of this state, are as valid as if executed within this state.

So, for other states and territories of the United States, meeting the execution requirements in that state (usually just a signature and an out-of-state acknowledgement) is just as valid as one from Ohio.

Execution and acknowledgement in foreign countries

Further, the above-statute provides that an acknowledgement from another country is valid if made in conformity with the laws of the other country.

That means that the Ohio title attorney signing off on the instrument would need to know the law the other country, which they will not (and since it is written in their language, would be difficult to research and discern with the degree of certainty required to assure quality transfer of title).

In this instance, the Mexican notary required an expensive (relatively) translation of the instrument into Spanish before acknowledging that instrument, and the Ohio title attorney would not accept the dual-translations in the document for recording.  For these reasons, it was a becoming a disaster before the matter came to our firm.

That takes us to the second option for execution outside of the United States: O.R.C. § 147.51:

Notarial acts may be performed outside this state for use in this state with the same effect as if performed by a notary public of this state by the following persons authorized pursuant to the laws and regulations of other governments, in addition to any other persons authorized by the laws and regulations of this state:

(A) A notary public authorized to perform notarial acts in the place in which the act is performed;

(B) A judge, clerk, or deputy clerk of any court of record in the place in which the notarial act is performed;

(C) An officer of the foreign service of the United States, a consular agent, or any other person authorized by regulation of the United States department of state to perform notarial acts in the place in which the act is performed;

(D) A commissioned officer in active service with the armed forces of the United States and any other person authorized by regulation of the armed forces to perform notarial acts if the notarial act is performed for one of the following or for a dependent of one of the following:

(1) A member of the merchant marines of the United States;

(2) A member of the armed forces of the United States;

(3) Any other person serving with or accompanying the armed forces of the United States.

(E) Any other person authorized to perform notarial acts in the place in which the act is performed.

As a practical matter, I just tell clients to get themselves to a US Embassy or Consular office.  It is best to call in advance and make an appointment (a) to assure they perform these services at the office you intend to visit, (b) to assure a notary is present at the time you show up, and (c) to assure the Embassy or Consulate is open at that time.  Further, embassies and consulates are used to performing these services for American citizens and residents.  This procedure is blessed by Section (C), above.

Then, members of the Armed Forces and their families have the additional option of going to a military base and having “a commissioned officer in active service with the armed forces of the United States and any other person authorized by regulation of the armed forces to perform notarial acts” performing the acknowledgement.

How about the new electronic notary process?

So, I thought when the problem was presented to me, wouldn’t this be a perfect use of the e-notary law (O.R.C. § 147.591, et seq.)?

Well, no, it would not, as I would learn.

Although the e-notary situated in Ohio can perform valid acknowledgements remotely, including with signers sitting in other states, he has no authority to acknowledge an instrument for a principal sitting outside of the “territory of the United States” O.R.C. § 147.64 (C).  Well, that threw cold water on that idea!

Corporate and LLC signatures

If the owner of the property in question is a corporation or a limited liability company, it may be possible to sign a corporate resolution (not requiring a notary) authorizing someone in the US to sign and have acknowledged the recordable instrument, thus saving the need to drive to an Embassy or Consulate.

Conclusion

So, in short, if you are outside of the United States or its territories, and want to execute and properly notarize a real estate instrument for recording in Ohio, (a) have the documents emailed to you where you are, (b) print them out, (c) get thee to an Embassy or Consulate and (d) Fed Ex them back to the closing agent in Ohio (subject to an escrow agreement or such other assurances as your attorney advises). If you are in a country without diplomatic relations with the United States, you may be out of luck.

For assistance with your Ohio and Kentucky real estate closing needs, please contact Rick Turner (513.943.5661), Isaac Heintz (513.943.6654) or Eli Krafte-Jacobs (513.797.2853).

Cincinnati Council enacts sweeping residential rental regulations

Author By Finney Law FirmPosted on

In the past few months, Cincinnati City Council has passed new laws regulating residential landlord/tenant relationships, including requiring all landlords to file extensive rental registration forms with the City and a first of its kind law requiring landlords to accept alternative security deposit payments. These new laws change the dynamic and financial viability of residential rental property within the City limits.

Presented below is a summary of new laws contained in six different enactments by  City Council.

Rental Registration

New Section 874-6 of the Municipal code requires all landlords to register with the city and supply the following information for each rental unit within the city limits:

  1. Name, address, and telephone number of the owners;
  2. If owned by an entity, the name, address, and telephone number of a member or corporate officer;
  3. The name, address, and telephone number for “any and all persons in control of the property” who can be reached 24 hours a day, 7 days a week, 365 days a year;
  4. Street address and permanent parcel ID of each rental property;
  5. Monthly rent charged; and
  6. The number and size of each rental unit, including the number of bedrooms, bathrooms, and approximate square footage of each unit.

Landlords must update any changes in information on the form, any change in ownership, or any change in use, including if the property is vacant for sixty days or more.

There is a registration fee of up to $1 per unit to be charged every time a unit is registered or updated.

Failure to register is a Class D Civil offense ($750 fine [$1,500 if delinquent]). After receipt of notice of violation, each subsequent day is a separate violation punishable by a fine of $150 per day ($300 per day if delinquent).

The rental registration law goes into effect on May 13, 2020.

Read Chapter 874 here.

Late Fee Regulation

Chapter 871 of the Municipal Code has been amended to regulate late fees charged to residential tenants. Like the registration requirement, this change applies to all residential rental properties within Cincinnati.

Section 871-8 caps late fees at $50 or 5% of the monthly rent, whichever is greater.

Section 871-9 prohibits:

  1. interest on late fees;
  2. late fees on late fees; and
  3. late fees assessed against a tenant where the late rent that is owed is owed by a third party payer (CMHA or other rental assistance organizations).

The late fee regulation went into effect on January 28, 2020.

Security Deposit Regulations

The most sweeping change is the newly enacted security deposit regulation.

Sections 871-9 of the Cincinnati Municipal Code have been amended to require that all landlords provide a receipt to the tenant when the security deposit is paid (unless such payment is by the tenant’s personal check).

871-9 also now requires that landlords “who own and control more than twenty-five rental units” who require security deposits must offer to accept at least one of the following options in lieu of the required security deposit:

  1. Rental security insurance;
  2. Payment of the security deposit over at least six monthly installment payments due on the same day as the rent;
  3. Payment of a reduced security deposit no greater than 50% of the monthly rent charged for that unit.

Additionally, prior to entering into a rental agreement, the landlord must provide the tenant with a written notice of the available security deposit alternatives. The law also prohibits landlords from requiring any additional security should a tenant select an alternative security deposit arrangement.

The security deposit regulations take effect starting on April 14, 2020.

Notably, the security deposit regulations apply only to those landlords who own twenty-five or more units. So long as a distinct LLC or other entity owns less than twenty-five units total, that owner would not have to accept the alternative security deposits.

The municipal code does not provide any specific penalty for landlords who do not comply with the new security deposit provisions, but does provide that a tenant may bring a lawsuit to obtain an injunction to force a landlord to comply with the Cincinnati landlord tenant laws. The city solicitor could also sue for such an injunction.

Read the security deposit ordinance here.

Conclusion

We expect legal challenges to these new laws. If you have questions about how these new laws may affect you, contact us using this link.

If you have specific questions, contact Christopher P. Finney at 513.943.6655.

Ohio Tax Law: Ohio legislature taking up LLC transfer tax

Author By Finney Law FirmPosted on

As reported by Eye on Ohio,  State Representatives Doug Green (R. 66th House District), and Mike Skindell (D. 13th House District), have put forth Ohio House Bill 449 in late December, seeking to capture conveyance taxes when entities owning real estate, are sold. Read the bill and follow its status here.

What is a “Drop and swap?

Called a “membership interest transfer” or “drop and swap,” conveying the entity that owns real property rather than simply selling the real property directly, allows buyers to avoid reporting the transfer as a sale of real property, and the value placed on the property as part of the transaction. County auditors and school boards in particular have complained that these conveyances cost public entities tax revenues that would have been generated had the parties engaged in typical real estate transactions.

New legislation to capture drop and swap sales

The current proposal would require that whenever more than 50%  of the ownership interest of an entity owning real property (either directly or indirectly) is conveyed, that the conveyance be reported to the county auditor and the value of the real estate be determined and taxed as part of the sale.

Membership interest transfers have come under increasing scrutiny as property owners perceive that these transfers distort the tax rolls and shift tax burden onto less sophisticated owners. Many property tax levies are for a fixed dollar amount (e.g. a levy to raise $10 Million). So that, as the value of one property increases, other owners pay a slightly smaller amount toward that fixed dollar tax, while the higher value property owner pays a slightly higher amount toward that fixed dollar tax. When one property is kept at a lower value via a membership interest transfer, those other owners continue to pay a higher amount toward that fixed dollar tax.

As news outlets such as Eye on Ohio report on this issue, public opinion is swaying in favor of taxing  these transfers.

As always, would be property investors should consider not only the current tax bill, but the likely tax bill after purchasing a property, and factor that into their purchase price.

Status of legislation

H.B 449 has been referred to the House Ways and Means Committee, on which sponsor Doug Green sits. At this time no hearings have been scheduled on the bill.

As we predicted nearly two years ago to the day, whether this particular bill goes into law or not, the effort to identify, value, and tax these conveyances will continue.

Upcoming tax presentation to REIA

This bill, and membership interest transfers generally, will be a part of our presentation with Hamilton County Dusty Rhodes to the Greater Cincinnati Real Estate Investors on February 6. Learn more about that event and how to sign up for a free ticket here.

Conclusion

The attorneys of Finney Law Firm have achieved literally hundreds of millions of dollars in property tax valuation reductions over the past 15 years.  Let us help you with your tax valuation challenge.  For more information on our property tax valuation practice contact Christopher P. Finney at 513.943-6656.

Has a sanitary sewer backup damaged your property?

Author By Julie M. GuginoPosted on

If you have a business or residential property in Hamilton County that experiences flooding that includes sewer effluent, you may have a claim for repairs to damage, and retrofitting your property to prevent future flooding.

Master settlement with US EPA

In 2002, the US EPA, the State of Ohio, and others brought suit against Hamilton County and City of Cincinnati alleging that overflows of MSD’s sanitary sewer system violated the Clean Water Act and related Ohio laws and regulations. They challenged the capacity and pollution problems with MSD’s sewer system, including sewage overflows from MSD’s sanitary sewers, overflows from combined storm water and sanitary sewer lines, deficiencies at wastewater treatment plants, and backups of sewage into homeowners’ basements.

On December 3, 2003, a final settlement was reached with the Board of Commissioners of Hamilton County and City of Cincinnati. The case was pending in the U.S. District Court in the Southern District of Ohio. Under the settlement, Metropolitan Sewer District of Greater Cincinnati (MSD) agreed to bring its aging sewer system into compliance with the Clean Water Act.

Consent Decree creates Sewer Backup Program 

In June 2004, the Court approved two consent decrees aimed at eliminating all sanitary sewer overflows. The Consent Decree established a comprehensive framework for the County and City to develop and implement a long-term plan for infrastructure improvements to address the capacity and pollution problems with MSD’s sewer system. The Consent Decree also required the County and City to implement programs to prevent basement backups, clean up backups when they occur, and reimburse residents for property damages for sewer backup events. This probram is referred to as the Sewer Back Up Program (“SBU”), formerly known as the Water in Basement Program, whereby aggrieved homeowners who have experienced backups to their Property emanating from MSD sewers can recover their damages.

Claims process

There are multiple steps in the MSD claims process.

  • First, a homeowner who has experienced a backup to their Property must report the same within 24 hours, either at (513) 352-4900 (24 hours/7 days a week) or online here.
  • Second, that homeowner should fully document with photos and videos the backup, as well as all entry points, including sewer drains at the Property.
  • Next, within 2 years of the date of the backup, a homeowner must complete and submit the Sewer Backup Claim Form available here.

MSD will conduct a technical evaluation and upon determination that MSD is responsible, assign the claim to a claims adjuster. Once the claims adjuster has completed its review, the proposed settlement is sent to MSD for legal review and once approved by MSD legal, a letter containing the settlement offer and release is sent to the Property owner, the Claimant. If the Claimant is in agreement with the settlement offer, he/she signs the release and returns it to MSD. If the claimant is not in agreement with the settlement offer, he or she may further discuss the amount with MSD or pursue the Review Process set forth by the Court, as set forth herein.

Review of decision by Federal Magistrate Judge

Claimants who are dissatisfied with MSD’s disposition of a claim under the SBU program may request review of the decision by the Magistrate Judge in Federal Court, whose decision is binding and not subject to any further judicial review. In accordance with the Consent Decree, Federal District Court case #C-1-02-107, the Claimant may file a Request for Review with the Federal Court in Cincinnati, Ohio. The Claimant should file that Request within 90 days with the Clerk’s Office of the Federal Court located in the Potter Stewart U.S. Courthouse, Room 103, 100 East 5th Street, Cincinnati, Ohio 45202. The Claimant may also call the court-appointed Ombudsman, the Legal Aid Society, at (513) 362-2801 for further information.

In determining the cause of an SBU, MSD must exercise its good faith reasonable engineering judgment and consider the following non-exclusive factors: amount of precipitation, property SBU history, condition of the sewer system in the neighborhood, results of a visual inspection of the neighborhood to look for signs of overland flooding, neighborhood SBU history, capacity of nearby public sewer lines, and topography. United States v. Bd. of Hamilton County Comm’rs, 2014 U.S. Dist. LEXIS 157434, *17-18 (S.D. Ohio Nov. 6, 2014).

Damages that can be recovered

Damages arising from basement backups for which MSD is responsible are limited to documented real and personal property. Under the Consent Decree, “[d]amages will be paid for losses to real and personal property that can be documented” and “[c]laimants will be asked to submit copies of any documents that they may have that substantiate the existence and/or extent of their damages.” (Doc. 131, Exh. 8 at 2-3). United States v. Bd. of Hamilton County Comm’rs,2014 U.S. Dist. LEXIS 37601, *27 (S.D. Ohio Mar. 20, 2014).

The Claims Process will only reimburse for damages arising from basement backups caused by inadequate capacity in MSD’s Sewer System or that are the result of MSD’s negligent maintenance, destruction, operation or upkeep of the Sewer System. United States v. Bd. of Hamilton County Comm’rs, 2014 U.S. Dist. LEXIS 37601, *22-23 (S.D. Ohio Mar. 20, 2014). Claimants seeking a review of the denial of an SBU claim bear the burden of proof of showing that the backup of water into their property was due to inadequate capacity in MSD’s sewer system (a sewer discharge) and not overland flooding.

Inadequate capacity versus overland flooding

However, Courts have found that there is nothing in the language of the Consent Decree that limits recovery where the evidence shows damages were concurrently caused by a combination of overland flooding emanating from MSD’s Sewer System and overland flooding not emanating from MSD’s Sewer System. The language of the Consent Decree does not require that SBU be the sole or greater cause of the damages sustained, or that damages should be apportioned where damages are caused by both SBU and overland flooding not emanating from MSD’s Sewer System. Under the terms of the Consent Decree, homeowners “who incur damages as a result of the backup of wastewater into buildings due to inadequate capacity in MSD’s Sewer System (both the combined and the sanitary portions) can recover those damages. . . .” United States v. Bd. of Hamilton Cnty. Comm’rs, 2016 U.S. Dist. LEXIS 46858, *10-11 (S.D. Ohio Mar. 29, 2016).

The Court has found that language of Consent Decree excluding overland flooding “not emanating from MSD’s Sewer System” necessarily contemplates circumstances where overland flooding in fact “emanates” from MSD’s Sewer System. Thus, where the public sewer discharges from the cover of the manhole and flows over ground and into a building, the terms of the Consent Decree cover any subsequent claim for damages. Accordingly, the Consent Decreedoes not bar claims for overland flooding which emanates from MSD’s Sewer System. United States v. Bd. of Hamilton County Comm’rs, 2014 U.S. Dist. LEXIS 37601, *23-24 (S.D. Ohio Mar. 20, 2014) The fact that overland flooding may occur and ultimately contribute to the lack of sewer capacity — resulting in a sewer surcharge does not exclude sewer backup as one cause of the damages sustained. The language of the Consent Decree does not require that SBU be the sole or greater cause of the damages sustained, or that damages should be apportioned where they are caused by both SBU and overland flooding not emanating from MSD’s sewer system. United States v. Bd. of Hamilton Cty. Comm’rs, 2017 U.S. Dist. LEXIS 79177, *19-20 (S.D. Ohio May 23, 2017).

Conclusion

If you have experienced a Sewer Back Up and would like assistance with the claims process or review of your claim in federal court, please contact Julie Gugino at 513-943-5669.

Wealth and real estate investment

Author By Eli N. Krafte-JacobsPosted on

“The major fortunes in America have been made in land.”

John D. Rockefeller

Real estate investment is traditionally cited as one of the primary means that Americans have used to build wealth; a trend that continues to this day.  Whether it is the stability and comfort attained by the middle class or the luxuries enjoyed by the wealthy, with due diligence and hard work, real estate investment can help most Americans achieve their financial goals.  This post is part one of a series designed to provide useful and relevant information to both seasoned and green investors alike.

Types of Investments

The first step when diving into the market is determining what type of investment is most appropriate under the circumstances. While purchasing a personal residence is the most ubiquitous type of real estate investment, there are many opportunities to invest home ownership including: (i) holding rental properties, both commercial and residential; (ii) buying, renovating and selling properties; (iii) subdividing and developing raw land; or (iv) depositing money into real estate investment trusts.  There is no single avenue best suited for all investors, so it is important to gauge your options relative to your goals.

Relevant Persons/Parties

An ordinary purchase and sale requires only two parties, a buyer with cash and a seller with property.  Pragmatically, however, there can be a dozen or more parties to any transaction, which may include, but are not limited to: realtors/brokers, lenders, mortgage brokers, legal counsel, title companies and examiners, surveyors, environmental consultants, qualified intermediaries, accountants, tax professionals, etc.  Each party to a real estate deal is responsible for one or more roles in the process, but they must all work together seamlessly to complete the transaction in an efficient manner.

The Process

The biggest roadblock to jumping into the real estate market is knowing where to begin.  The good news is that there is no correct answer per se.  For example, the first-time homeowner might find it beneficial to meet with one or more lenders prior to searching for a home in order to determine: (i) what is in the buyer’s price range; (ii) what kind of programs might be available as a first-time homeowner; and (iii) to have the sense of certainty that comes with a mortgage pre-approval.  On the other hand, the experienced investor may want to start by meeting with his or her financial and legal advisors to better understand how a new purchase might affect the investor’s bottom line.  Thereafter, for both the seasoned and the green investor, the process is relatively similar: (i) find a property and get it under contract; (ii) perform any remaining due diligence, which includes getting a title examination; and (iii) close on the purchase and sale.

Liability Shield

For those seeking to invest in property other than a personal residence, it is important to decide whether the use of a limited liability company (LLC)—or another vehicle with a liability shield—is appropriate or desirable under the circumstances.  The main reason for purchasing through an LLC is to ensure that personal assets are protected from any claims associated with investment property.  This protection is invaluable in the event someone brings a lawsuit against the investor, but it is valueless if the investor fails to follow certain formalities when creating and maintaining the LLC.  An investor should always speak with an attorney when establishing an LLC or if there are any concerns regarding the ongoing formalities.

Realizing a Return; Tax Consequences

The term “investment” is defined as the action or process of investing money for profit or material result, which begs the question, how does an investor obtain a profit or a material result?  There are two primary ways to turn a profit with real estate investment: rental cash flow and appreciated value.  Rental cash flow is exactly what is sounds like, cash paid to the investor/landlord by tenants of a rental property.  Appreciated value refers to the increased value due to the passage of time.  Additional means of turning a profit include: (i) the increase in resale value after improving the investment property (e.g., updating appliances, replacing a roof, etc.) and (ii) ancillary income from things such as vending or laundry machines, or parking facilities.  Additionally, as with any type of investment, it is essential to understand how taxation will impact the ability to realize a profit.

Advanced Transactions

The savvy investor looks for ways to increase his or her profit margin on a regular basis.  Two of the more prevalent means of doing this include: (i) engaging in 1031 or like-kind exchanges and (ii) purchasing via drop and swap transactions.  The 1031 exchange allows an investor to defer paying capital gains taxes following the sale of an investment property so long as the proceeds therefrom are reinvested in “like-kind property” within a certain period of time.  The drop and swap transaction, which can be performed alongside a 1031 exchange, allows the investor to shield the purchase price from publication, which would inhibit an automatic increase to the tax basis if the purchase price exceeds the auditor’s value of the property.

This introduction to real estate investment is just that, an introduction.  Stay tuned for an in-depth analysis of each section and, as always, be sure to contact a lawyer or tax professional when seeking legal or tax advice.

Ohio Commercial Litigation: Using text messages to defeat a “home defects” case

Author By Finney Law FirmPosted on

In a recent case, we defended a couple who were being sued by the buyers of their former home; alleging that my clients had engaged in fraud in completing the residential disclosure form. As has been discussed in previous blog posts here and here, Ohio law requires that the seller of residential property complete a disclosure form relating to potentially issues – chief among them water intrusion.

Our clients completed the disclosure form noting that they had experienced a water intrusion event when the sump pump failed; and that they hired a local water remediation firm for the clean-up.

Shortly after closing, Greater Cincinnati experienced record precipitation, and the basement flooded. The buyers filed suit claiming that the sellers had lied on the disclosure form.

Necessity of Justifiable Reliance

A claim for fraud requires that the plaintiff actually relied on the supposedly fraudulent misrepresentation, and that she was justified in so doing. This means that for instance, if the buyers were skeptical of the sellers’ disclosure form, or found their own evidence that contradicted the disclosure form, the buyers cannot be said to be “relying” or that their reliance is “justified.”

Additionally, in this instance our clients did disclose what they knew and therefore did not make any fraudulent misrepresentations at all. But simply disputing the allegations is not enough to win the day in court. We sought evidence to undercut all of the allegations.

 

Text Messages Undo the Buyers’ Claims

After the filing of the lawsuit, we conducted discovery, including requesting copies of text messages and emails between the buyers and their real estate agent. The text messages revealed that prior to even making an offer on the home, the buyers told their agent that they knew that water intrusion and mold was an issue. Indeed, the buyers “priced the risk into their offer.” In one text message the buyer stated: “A little concerned with the basement and flooding. They have had issues. Not sure it isn’t why these people are selling.” and “We love it. Just not for $300k . . . Especially with water damage . . . Don’t want to end up upside down or having to fix water damage etc.” And, true to their word, the buyers did not pay $300,000; they paid $275,000 for the home, pricing the potential cost of the anticipated water damage.

At one point the buyers asked their agent for a copy of the documents from the water remediation company the sellers had used. Unfortunately, the buyers’ agent never followed up and asked the sellers for those documents.

After signing the contract, the buyers hired an inspector and instructed him to conduct a mold test. For whatever reason, the inspector did not conduct a mold test, and the buyers did not follow up.

Summary Judgment

Armed with the buyers’ communications with their agent, and the disclosure form, we filed a motion for summary judgment. We argued that the disclosure form was accurate and put the buyers were on notice of water intrusion. Additionally we argued that the buyers’ communications with their agent proved that they were skeptical about the information the sellers provided (meaning they were not relying on the disclosure form) and priced the question into the purchase price.

The court agreed with our argument; “The [buyers’] personal notes and text messages with their real estate agent evince that they had ongoing, multiple concerns about water damage and mold based on the Disclosure Form and their own observations in inspecting the basement.” “Accordingly, the court finds that the [buyers] could not have justifiably relied on any fraudulent misrepresentation or concealment by the [sellers]. As such, their claim for fraud must fail, and summary judgment is appropriate as a matter of law.”

The Lessons

For attorneys defending these cases the lesson is clear, make ample use of discovery. Turn over every stone.

For the plaintiff’s attorney, ask more questions up front. Conduct your own “discovery” on your client, ask for those text messages before the defense attorney does. Don’t let your client waste your time litigating a bad claim.

For home sellers, make sure you complete the disclosure form to the best of your ability; knowing that there are brazen people out there who will file suit even though you disclosed issues and even when the are going to have to turn over the evidence that sinks their own case.

For buyers, remember in Ohio caveat emptor is the law. Make sure you get all the information you asked your agent to get you. Make sure your inspector conducts all of the inspections you asked for. And, when trouble arises in your new home (as it inevitably will) be honest with yourself about what you knew when you bought the house. Don’t bring lawsuits that are doomed to fail hoping the other side will roll over. Our civil litigation system only works when people do not abuse it.

Contact Christopher P. Finney at 513-943-6655 or using this form if you’ve sold a home and the buyer is now claiming that you did not disclose an issue.

Ohio Property Tax Valuation Reduction – Online auctions of bank owned property

Author By Finney Law FirmPosted on

We’ve heard it said a million times (and said it ourselves a million more), “the recent sale price of a piece of real estate is the best evidence of its value.” And the concept of sales price as value is so ingrained in our minds that we sometimes forget that this is just shorthand, that the actual language of the statute is what matters; and, ultimately, what must be proven before the board of revision or the board of tax appeals.

“In determining the true value of any tract, lot, or parcel of real estate under this section, if such tract, lot, or parcel has been the subject of an arm’s length sale between a willing seller and a willing buyer within a reasonable length of time, either before or after the tax lien date, the auditor may consider the sale price of such tract, lot, or parcel to be the true value for taxation purposes.” R.C. 5713.03

 

What is “Arm’s-Length”

What the actual language of the statute means is that the sale has to be arm’s-length: “A transaction between unrelated parties under no duress.” (Appraisal Institute). Boards of Revision and the Board of Tax Appeals look for the following factors when determining whether a sale price should be adopted as the true value:

  1. Buyer and Seller are typically motivated.
  2. Both parties are well informed or well advised and each is acting in his/her own best interest.
  3. A reasonable time is allowed for exposure in the open market.
  4. Payment is made in terms of case in U.S. dollars or financial arrangements comparable thereto and
  5. The price represents normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The Board of Revision

Recently Ohio’s Ninth District Court of Appeals upheld a decision by the Board of Tax Appeals to reverse the decision of the Summit County Board of Revision to adopt the online auction price as the true value.

In Green Local Schools Board of Education v. Manolakis, et al. 2019-Ohio-4250, the property owners initially filed a complaint with the Summit County Board of Revision seeking to lower the value of their home from $1,498,350.00 to $836,300 – the owners’ purchase price in an online auction. Before the Board of Revision, the owners explained that the property had been subject of a sheriff’s sale and that the foreclosing bank had purchased the property at that sale. A few months later, the bank placed the property for sale via an online auction site, hubzu. The owner’s put in a bid and won.

The Board of Revision accepted the owner’s testimony and adopted the sale price. However, the school board appealed to the Board of Tax Appeals and pointed to a lack of evidence supporting a finding that the auction was “arm’s-length.”

The Board of Tax Appeals

After the property owners prevailed at the Board of Revision, the local school board (which typically receive 60-70% of the property tax collections) filed an appeal arguing that the owners did not meet their burden to show that the sale was “arm’s-length.”

The owners testified at the Board of Revision that they had no relationship with the seller but were unable to provide any information about the bank’s motivation in selling. Notably, the owners were unable to show that the property had been marketed for sale other than via a sign in the yard of the property one week before the auction, or whether there was a minimum bid for the auction, or any other bidders.

Another problem for the owners is that they agreed to let the Board of Tax Appeals decide the case without putting on any additional evidence. So the owners forfeited the right to supplement the evidence to bolster their claim that the sale was arm’s-length.

The Board of Tax Appeals, looking only at what was before the Board of Revision found that there was not enough evidence in the record to show that the sale was arm’s-length. And, once the sale price was disregarded, the only evidence of value was the auditor’s original value. So the Board of Tax Appeals reinstated the auditor’s value $1,498,350.00.

The Court of Appeals affirmed the decision of the Board of Tax Appeals, finding that “we cannot say that the BTA was unreasonable in concluding that the evidence of value presented by Mr. and Mrs. Manolakis to the BOR was not sufficient.”

The Lesson

Don’t take the Board of Revision process lightly. This is a serious endeavor – particularly when you are seeking a substantial  reduction in value. Remember, when you bring a challenge to the Board of Revision it is your burden to prove that your proposed value is right and that the auditor’s value is wrong. Bring everything you can think of to prove your case. And if there is an appeal, take the opportunity to bring in additional evidence to bolster your case.

Your Case

Finney Law Firm has represented commercial and residential property owners (and one school board) before the Boards of Revision throughout Ohio and before the Ohio Board of Tax Appeals in property tax valuation challenges.

Every case should be evaluated based on its own unique set of circumstances. The time to file a challenge begins January 1 of each year and ends March 31. If you have questions about the value of your property, or if you recently purchased property at a price less than the auditor’s value, we can help. More information about the property tax valuation process is available here.

Contact Christopher P. Finney at 513-943-6655 or contact us here.

Ohio Real Estate Law: Avoid creating “clouds” on title to your own real estate

Author By Christopher P. FinneyPosted on

The Ohio standard for “marketable title”

The standard for real estate title is, without putting too fine a point on it, pristine.  This is true not only in Ohio, but but in every state.

Indeed, one really could put a fine point on it.  Nearly any title defect can be a “cloud” on title that impairs its marketability.

Some minor title defects are OK

As is addressed here, some title defects can be “papered over” with title insurance; others are made acceptable under the marketable title act or standards and customs that allow title attorneys and title insurance companies to ignore minor defects.  Both of these solutions can allow a transaction to close.

But the standard in title is, essentially, perfection.  A buyer is not going to buy, a lender is not going accept a mortgage to secure a loan, and a title insurance company is not going to insure matters that are a “cloud” to title to real estate.

An unreleased Land Installment Contact “clouds” title

I recently helped a client who had “sold” their home on Land Installment Contract.  After three years of payments, the buyer was to pay the balance of the Land Installment Contract, a “balloon payment,” and then get a deed conveying title to the property.  Unfortunately, the buyer defaulted and moved out of the property at the end of the term.

[Is the buyer liable for monetary damages in such circumstance?  Probably.  But the cost to pursue those claims many times exceeds the recovery.  Many sellers are wise to just pack their bags and move on to the next opportunity.]

The seller was able to quickly re-sell the property to another buyer, but the recorded land installment contract constituted a “cloud” on title, making title unmarketable.  When the closing was set to occur, the title insurance company for the lender and buyer refused to pass on the title.

How do you clear title “clouds”

There are two ways to clear a “cloud” of this type: (a) buyer and seller jointly execute a notarized document in recordable form voluntarily terminating the Land Installment Contract or (b) a signature of a Common Pleas Court Judge in an appropriate proceeding extinguishing the Land Installment Contract and then the passage of an additional 30 days to avoid an appeal of that decision (or the exhaustion of appellate rights all the way through the Ohio Supreme Court).

Other than these two alternate steps, there is no “shortcut” to clear and marketable title to defeat a Land Installment Contract that is of record.

And the judicial proceedings could take 12 to 36 months, or even longer, to clear the title problems.

Many title problems can only be addressed in the same way: Either the party who has a colorable claim must sign a recordable instrument releasing the claim or a Judge, after appropriate due process of judicial proceedings, signs an Order wiping away the title claim.  This can be an extended and expensive undertaking.

How can an owner avoid the fate of a “clouded” title?

How can a seller avoid the fate of an impaired title?

First, buy property only after a title examination and with a proper owner’s policy of title insurance.

Second, once you own property that has clear title, don’t sign and record a Land Installment Contract clouding the title.  (Or, get a significant enough up-front down payment make it worth the while of judicially extinguishing the buyer’s interest at a later date if he defaults.)

Similarly, granting voluntary but poorly-thought-through covenants, easements, mortgages and other instruments can foul one’s real estate title and make the title either unmarketable or less valuable than otherwise might be the case.

Involuntary “clouds”

This blog entry addresses problems that an owner causes by his own signature.  But other title problems can arise from, for example, mechanics liens arising from unpaid claims of a contractor on real property, defects that existed when an owner took title to property, and affidavits that another party places of record unilaterally declaring an interest in your land.  These, too, may require one of the two steps noted above to clear, but they are not as easily avoided as ones created by the owner’s own hand.

Conclusion

The essential message of this blog entry is that title is a delicate thing, and can be “clouded” or impaired easily.  Thus, don’t voluntarily sign documents — even if they might initially seem like a good idea — that will constitute a cloud on title, at least not without careful consideration.  Cautiously think through the impact of documents that you voluntarily elect to place of record.

 

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