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Category Archives: Residential Real Estate

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.

 

Ohio Commercial Law: A pitfall of private lending — a borrower committing fraud

Author By Christopher P. FinneyPosted on

We’ve seen to over and over again, individual lenders “conned” by a borrower into making a supposedly secured loan, but in fact the same borrower has “pledged” the same collateral to multiple lenders for duplicate loans.  That means, of course, when it comes time to pay the money back, there is not enough cash to go around to the various lenders and someone is left holding the bag (or everyone is left holding the bag).

This blog entry explains the scam, and tells our readers how to carefully avoid it.

The scam

Here’s how the scam works: The borrower has control of an asset.  It might be a piece of real estate or a business.  Using that asset, he is able to convince the lender of his “bona fides.”

The borrower says: “If I had enough cash, I could complete the improvements on this property, and repay you your money with a good rate of interest.”  Or, “if I had enough money, I could  stock the shelves of this business, sell more inventory, and pay you a good return on your loaned funds.”

Wanting to help the fraudster, or, more likely, motivated by the greed of an above-market rate or return, the lender lends money.

But either trusting the borrower or trying to save money on legal fees and other expenses like an appraisal, the individual lender advances the cash in anticipation of great rewards when the property sells or the inventory turns, but the lender fails to properly document and  secure his loan.

Because nothing is recorded in terms of a security interest from the first lender, the borrower then goes to a second, a third and a fourth lender, promising the same high returns, and showing unsecured business assets (real estate, inventory, accounts receivable) as assets to stand behind the obligation.   These subsequent lenders are similarly fooled.

The out-of-town investor

I once had an investor from Chicago.  He was lured in to a scheme whereby his Cincinnati borrower was purchasing single family homes, and supposedly renovating them with the investor’s cash.  For simplicity and to save legal fees, the investor did not get a mortgage against the real estate and did not come to Cincinnati to check on the progress of the improvements.  He simply trusted what the Cincinnati borrower was telling him, and relied upon some phony cell phone photographs of the progress on the improvements.  And he wrote check after check after check to the borrower.

What was really happening was that the local borrower was taking my client’s cash for the purchase and improvement of property, but (a) the borrower was not in fact completing the improvements and (b) he had pledged the proceeds from the same properties to three other lenders.

The result

The result of these scams is entirely predictable: eventually the lenders want to be repaid, usually when the real property sells, the inventory “turns,” or the business is supposed to become profitable.

And each of the multiple lenders wants their cash more or less simultaneously.

Of course, there is no cash to pay these various lenders, or perhaps even one of them.  The lenders are left holding the bag.

Sure, the lenders can try to recover their investment through either litigation or — more likely — bankruptcy court.  But in all likelihood the borrower has no assets and the process will be a big, expensive mess.

A $1.3 billion version of the scam

We were recently reminded of this scam by this article from the Los Angeles Times.  There, a scammer conned “thousands of investors” out of more than $1.3 billion in a more complicated version of the same scam.

One wonders why someone did not ask for proper documentation and a first mortgage position in these supposed real estate investments and why someone did not blow the whistle on this guy earlier.  Of course, folks still are asking the same question about Bernie Madoff

How to avoid being scammed

First, “neither a borrower nor lender be” /1/ is not a bad admonition for individuals with cash to loan.  The lure of high rates of return may not be — likely are not — worth the risk.  Banks are in the business of lending money — and collecting it back.  And they are pretty good at it: Assessing the risk, securing the asset, obtaining guarantors for debt, assuring a proper down payment.  These folks have actuaries who assess the risk of certain kinds of lending and have the experience to avoid pitfalls that amateurs make.

Thus, as a general rule, if a borrower needs to borrow funds, tell him to go to a bank, which can spread the risk among many loans, assess the risks make prudent lending decision, and require appropriate down payments, guarantees, and security.  They also know to check for pre-existing liens and to properly document each loan.  They also don’t tolerate excuses for late payments that private lenders might.  They do this for a living.

But if you feel you must lend privately (or simply elect to do so), here are some pointers:

  • Do your best to prudently assess the risk the best that you are able,
  • Lend only against assets that can secure the repayment of the debt — real estate, jewelry, stocks or a lien on inventory and demand that the borrower post adequate security for the funds borrowed.
  • Think about getting third party guarantees for the funds loaned.
  • Make sure the borrower’s husband or wife are also guaranteeing the debt, as the easiest place to hide assets and income is in the name of the spouse of the borrower.
  • Whether through a real estate title examination or a “UCC lien search” for liens on personal property, ascertain whether there are existing liens that stand before yours.
  • Obtain a first lien position in those assets.  There are different ways under Ohio law to assure that you are in “first position” as to real estate, as to stocks, as to inventory and other personal property and special assets such as cars or jewelry.
  • Purchase a lender’s policy of title insurance for the loan amount.  In fact, make the borrower pay the cost of this insurance.
  • Properly document the loan, the security, and the guarantees.
  • Properly track loan payments and vigorously enforce the note and other lending covenants.

Using these techniques, a private lender can avoid the “multiple lenders” scam, and or at least — among all the others — be properly documented and secured in a first lien position against assets to pay the indebtedness.

Our firm knows each of these methods and can help you implement them properly them.

Conclusion

You have worked hard and invested carefully to accumulate the assets you have.  But others don’t have that same success, that same diligence and that same honesty.  There are millions of fraudsters out there glad to take your cash today on the promise of paying you tomorrow.  And they have neither the intention or the ability to fulfill that promise.

Use a Finney Law Firm transactional attorney — Isaac Heintz (513-943-6654), Eli Kraft-Jacobs (513-797-2853), Rick Turner (513-943-5661), Chris Finney (513-943-6655) or Kevin Hopper (513-943-6650) — to make certain that you are properly secured in for the money you are lending.

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/1/ From the web site “LiteraryDevices.Net“:

This is a line spoken by Polonius in Act-I, Scene-III of William Shakespeare’s play, Hamlet. The character Polonius counsels his son Laertes before he embarks on his visit to Paris. He says, “Neither a borrower nor a lender be; / For loan oft loses both itself and friend.”

It means do not lend or borrow money from a friend, because if you do so, you will lose both your friend and your money. If you lend, he will avoid paying back, and if you borrow you will fall out of your savings, as you turn into a spendthrift, and face humiliation.

It”s amazing this same advice applies more than 400 years after this noted author’s death.

Ohio Real Estate Law: Creating a Private Tow Zone

Author By Julie M. GuginoPosted on

Ohio statutes provide that no person, without privilege to do so, shall knowingly enter or remain on the land of another or recklessly enter or remain on the land of another, where notice against unauthorized access is given by actual communication to the offender or by posting in a manner reasonably calculated to come to the attention of potential intruders or by way of fencing manifestly designed to restrict access.

Trespass is prohibited under Ohio law and subject to both criminal penalties and fines as well as subjecting the trespasser to a civil action in trespass. If individuals are trespassing on your Property by parking vehicles on the same, Ohio law sets forth the steps necessary to establish a tow zone on your private property.

O.R.C. §4513.601 provides that an owner of private property may establish a private tow-away zone on their property if the owner posts on the property a sign at least eighteen inches by twenty-four inches, that is visible from all entrances to the property and includes all of the following information:

(a) A statement that the property is a tow-away zone;

(b) A description of persons authorized to park on the property. If the property is a residential property, the owner of the private property may include on the sign a statement that only tenants and guests may park in the private tow-away zone, subject to the terms of the property owner. If the property is a commercial property, the owner of the private property may include on the sign a statement that only customers may park in the private tow-away zone. In all cases, if it is not apparent which persons may park in the private tow-away zone, the owner of the private property shall include on the sign the address of the property on which the private tow-away zone is located or the name of the business that is located on the property designated as a private tow-away zone.

(c) If the private tow-away zone is not enforceable at all times, the times during which the parking restrictions are enforced;

(d) The telephone number and the address of the place from which a towed vehicle may be recovered at any time during the day or night;

(e) A statement that the failure to recover a towed vehicle may result in the loss of title to the vehicle as provided in division (B) of section 4505.101 of the Revised Code.

Some other points of the statute:

  • In addition, the towing service utilized by the owner must ensure the vehicle is located within 25 linear miles of the Property, is well-lighted and is within a reasonable distance of a regularly scheduled route of one or more modes of public transportation.
  • If a vehicle is parked on private property that is established as a private tow-away zone without the consent of the owner of the private property or in violation of any posted parking condition, the owner may cause the removal of the vehicle by a towing service.
  • The vehicle owner and the operator of the vehicle are considered to have consented to the removal and storage of the vehicle, to the payment of the applicable fees and to the right of a towing service to obtain title to the vehicle if it remains unclaimed.
  • No towing service shall remove a vehicle from a private tow-away zone except pursuant to a written contract for the removal of vehicles entered into with the owner of the private property on which the private tow-away zone is located.
  • Additional requirements for the tow company exist within the statute.

If you’d like our assistance with a real property issue,please use our secure contact page, or call us at 513-943-6650.

 

Ohio Real Estate Law: Finney Law Firm wins yet another “Point-of-Sale Inspections” class action

Author By Christopher P. FinneyPosted on

In May, Finney Law Firm notched its fourth in a series of wins in class actions against point-of-sale inspection ordinances in Ohio and Kentucky.  Previous judgments or settlements have been achieved against Covington, Kentucky, Oakwood, Ohio and Portsmouth, Ohio.  Each Ohio case was co-counseled with attorney Maurice Thompson and the non-profit law firm the 1851 Center for Constitutional Law.

It seems to have become a trend for municipalities to enact ordinances that mandate municipal inspections of rental properties (interior and exterior) either before a new tenant moves in or annually and pre-sale.  Very simply, all of these ordinances are unconstitutional searches of property under the Fourth Amendment to the United States Constitution.

Maurice Thompson of the 1851 Center has proficiently developed and pursued this line of cases and the legal theory underlying each case.

Our suits have succeeded in each instance in obtaining injunctive relief against the impermissible enactment, and the class action recovers the illegally-obtained inspection fees for the property owners affected.

For more information on our public interest litigation practice, contact Christopher P. Finney at 513-943-6655.

 

 

 

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