Real Estate & Construction Law Monitor : Real Estate & Construction Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Development & Building

On January 12, 2012, New Jersey Governor Chris Christie signed into law the Urban Hope Act (“Act”), S3173/A4426, which allows private companies to construct, operate and manage up to twelve public schools in three under-performing public school districts in the State: the Newark School District, the Trenton School District and the Camden School District.  These “failing districts,” as such are defined in the Act as those in which a below average percentage of students scored at least in the partially proficient range on State assessments administered in the 2009-2010 school year, have been unable to convert, year after year, “increased State aid and other resources into improved student achievement, higher graduation rates, or greater student readiness for postsecondary education and gainful employment.”  Recognizing that although New Jersey’s per pupil public school expenditures are among the highest in the nation, many of the State students are nonetheless failing to achieve the core curriculum content standards, the New Jersey Legislature passed, and the Governor approved, the Act to “provide local boards of education, partners, students, and teachers with more and better options for addressing their failing schools.”

The Act offers one such option by allowing the identified school districts, on a limited pilot program basis, to partner with one or more nonprofit entities to create “renaissance schools.”  Under the Act, a “renaissance school project” (“RSP”) means “a newly-constructed school, or group of schools in a common campus setting, that provides an educational program for students enrolled in grades K through 12 or in a grade range less than K through 12, that is agreed to by the school district, and is operated and managed by a nonprofit entity in a renaissance school district.”  A “renaissance school district” (“RSD”) is “a failing district in which [RSPs] shall be established.”  Private or parochial schools are not eligible for RSP status under the Act.

Upon receiving local school district approval, nonprofit entities can apply, within three (3) years of the Act’s passage, to the state Commissioner of Education (“Commissioner”) to create up to four (4) RSPs in each RSD.  The nonprofit entity must demonstrate experience in operating a school in a “high-risk, low-income urban district.”  Similarly, “an entity retained by the nonprofit entity for the purpose of financing or constructing the [RSP] shall also have appropriate experience.”  In its application, the nonprofit entity is required to outline its goals, policies, and a financial plan.  In addition, the nonprofit entity must provide a description of the process employed by the RSD to find and partner with the chosen nonprofit entity to create a RSP; such process should be “open, fair and subject to public input and comment.”

Once the nonprofit entity obtains state approval, it can then enter into a contract with the RSD in which the RSP will be located, setting forth the terms and conditions for the RSP including the operation, management, and funding of the RSP.  The nonprofit entity is also required to file an organizational document with the Commissioner. 

The Act permits for-profit entities to construct a RSP.  RSPs may also be located on land owned by a for-profit entity.  Moreover, the nonprofit entity is authorized to retain for-profit entities to staff, operate, and manage the RSP.  Although RSPs shall be considered public schools under the Act, the nonprofit entity or any entity acting in cooperation with a RSP, including for-profit businesses, would not be subject to public bidding requirements for goods and services, as is otherwise required for public schools under the “Public School Contracts Law,” N.J.S.A. 18A:18A-1 et seq.  Further, any such contracts entered into would not be deemed public contracts or public works, except for the purposes of the “New Jersey Prevailing Wage Act,” N.J.S.A. 34:11-56.25 et seq., which the RSPs are subject to.  All costs of the RSP, including the costs of land acquisition, site remediation, site development, design, construction, and any other costs required to place into service the school facility or facilities constituting the RSP, are to be paid for by the nonprofit entity.  State funds may be used to pay for a lease, debt service, or mortgage for any facility constructed or otherwise acquired. 

Under provisions of the Act, RSPs may also be built on land owned by the New Jersey Schools Development Authority (“SDA”) or the RSD.  Ownership of the land on which the RSP is constructed determines which students are permitted to enroll at the RSP.  The Act also permits the SDA to convey the land by ground lease or fee simple title to either the RSD or the entity constructing the RSP, including to private developers, “for such consideration and on such terms as the [SDA] determines to be in the best interest of the State.”  The conveyance must contain a restriction that the land be used solely for a school or it shall revert to the SDA.  In the event the land is conveyed to a RSD, the RSD may enter into a sublease of the property with the entity.  Such a sublease must contain a similar use restriction and reverter provision, and be reviewed and approved by the Commissioner.

Moreover, if any board of education determines by resolution that any tract of land is no longer desirable or necessary for school purposes, it may authorize the conveyance of such a tract to a RSP, similarly conditioning the conveyance on the property’s continued use for school purposes by the RSP.

Under the provisions of the Act, the RSD will pay to the nonprofit entity operating a RSP an amount per pupil equal to 95% of the district’s per pupil expenditure.  The RSPs are required to meet the same testing and academic performance standards established by law and regulation for public students. The nonprofit entity may also establish additional testing and academic performance standards which, upon the Commissioner’s approval of the same, the RSP must meet as well.  The RSPs are subject to periodic reviews and assessments by the Commissioner, and the Commissioner has the right to review the RSP’s and the nonprofit entity’s records and facilities to ensure compliance with the RSP’s organizational document, and with State laws and regulations.  In addition, five (5) years following the date of the opening of the third RSP, or ten (10) years after the opening of the first RSP, whichever occurs first, an independent education researcher or research organization selected by the Commissioner will conduct a review of the efficacy of the RSPs.  The Act requires that the Commissioner report the results of the review to the Governor, the State Board of Education, and the Legislature, and the RSP program altered and/or expanded based on these results.

The Act received wide support from education organizations and the state’s largest teachers union, the New Jersey Education Association. Under the Act, educators in the RSPs will have the same qualification requirements, salary minimums and collective-bargaining powers as teachers in other public schools

The Urban Hope Act is one of several pieces of the administration’s overall effort to improve education.

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On September 23, 2011, New York Governor Andrew Cuomo signed into law Senate Bill 5203A and Assembly Bill 7358A, codified as the “Private Transfer Fee Obligation Act” in Article 15 of the New York Real Property Law. The new law imposes a ban on all new private transfer fees (“PTFs”), and provides notice, disclosure and remedy procedures for existing private transfer fee obligations. With the passage of this law, New York has joined the majority of states which have enacted legislation that completely bans, limits and/or requires the disclosure of PTFs.

In practice, PTFs have also been dubbed “Wall Street home resale fees,” “private transfer taxes,” “reconveyance fees,” “capital recovery fees,” “residential transfer fees,” and “transfer fee covenants.” These charges, whatever they may be called, usually amount to one percent (1%) or more of the sales price and are automatically inserted into the contract of sale on real property, to be paid by the seller to the original developer of the property or their designee, oftentimes a third party that holds no ownership interest in the property, every time the property is transferred for up to 99 years. They are usually buried within dozens or hundreds of pages of documents, or, in some instances, are found in a separate declaration affecting the property filed by the original developer. Prospective buyers and owners may not be aware of these fees until closing or, worse, when they try to sell the home years later and the fee shows up in a document obtained in connection with a title search of the property. The failure to pay the PTFs at closing typically results in a lien being imposed on the property.

Unlike traditional deed covenants, PTFs run with and burden the land without benefiting it. Although the fees may benefit a homeowners’ association, conservation land bank, non-profit organization, etc., they have been found to not be proportional or related to the purposes for which the fees were to be collected. Furthermore, PTFs are also used by builders and developers to provide themselves with an income stream long after a development is complete. The American Law Institute has described such PTFs as “unconscionable;” the U.S. Department of Housing and Urban Development has publicly opposed the use of PTFs, stating that “PTFs violate HUD’S regulations at 2 C.F.R. 203.41, which prohibit ‘legal restrictions on conveyance,’ defined to include limits on the amount of sales proceeds retainable by the seller.” In addition, the Federal Housing Finance Agency, determining that “such covenants are adverse to the liquidity and stability of the housing finance market and to financial safety and soundness,” has issued a proposed rule, published at 76 F.R. 6702 (Feb. 8, 2011), that would restrict the regulated entities – the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Federal Home Loan Banks – from investing in most mortgages on properties encumbered by PTFs.

Similarly, the New York State Legislature has determined that PTFs conflict with a preferred state public policy favoring “the marketability of real property and the transferability of interests in real property free of title defects or unreasonable restraints on alienation.” The legislature also declared that “a private transfer fee obligation shall not run with the title to property or otherwise bind subsequent owners of property under any common law or equitable principle.”


Real Property Law Section 472 defines a private transfer fee as “a fee, charge or any portion thereof, required by a private transfer fee obligation and payable, directly or indirectly, upon the transfer of an interest in real property, or payable for the right to make or accept such transfer, regardless of whether the fee or charge is a fixed amount or is determined as a percentage of the value of the property, the purchase price, or other consideration give for the transfer.” Expressly excluded from this definition are: (a) the purchase price of the real property being transferred; (b) any real estate broker commissions; (c) the interest, fees and charges associated with a loan secured by a mortgage against real property; (d) rent payable under a lease; (e) payments to holders of options to purchase and rights of first refusal or purchase; (f) any taxes, fees, assessments, etc. imposed by governmental authorities; (g) fees paid to homeowners’, condominium, cooperative, mobile home or property owners’ associations that use them to directly benefit owners of the encumbered property; (h) fees payable for the benefit of certain non-profit organizations; and (i) fees pertaining to the purchase or transfer of a club membership relating to real property owned by the member. “Transfer” means “the sale, gift, conveyance, assignment, inheritance, or other transfer of an ownership interest in real property located in [New York] state.” 

The Private Transfer Fee Obligation Act prohibits entering into or recording PTFs after its effective date, and declares all such new PTFs void and unenforceable, not running with the land, and not binding on subsequent purchasers. Anyone who records or enters into an agreement imposing a private transfer fee obligation in their favor after the effective date would be liable for any damages resulting from that obligation, including the PTFs, attorneys’ fees and other costs to quiet title. Notwithstanding this strict prohibition and repercussions, section 475 further underscores the significance of disclosing any  PTFs by requiring the seller to furnish to the buyer, prior to closing, a written statement memorializing their existence, describing the PTFs and referencing the new law.

Moreover, PTFs entered into and/or recorded prior to the new law’s effective date of September 23, 2011, are not to be presumed valid and enforceable. The new law requires the receiver of the PTFs to give notice to subsequent buyers by recording, within six months of the law’s effective date, a document disclosing the existence of PTFs along with the additional information required under section 476, including the PTFs’ amounts and purposes. Failure to record would result in the agreement being unenforceable, and the real property could then be conveyed free and clear of the PTFs.

The Private Transfer Fee Obligation Act also sets up a mechanism by which an individual transferor can free the property of private transfer fee obligations currently burdening his real property. If a receiver of the PTFs does not provide a written statement of their payment within thirty (30) days of the written request asking for such a disclosure, then the transferor, after recording an affidavit describing its efforts to reach the receiver, may convey any interest in the real property to any transferee without paying the PTFs. From that point on, the real property would be free and clear of the PTFs.

Supported by the New York State Association of REALTORS, New York Taxpayers for Economic Justice, Inc., Consumers Union, Consumer Federation of America, and the Coalition to Stop Wall Street Home Resale Fees (formed by the National Association of Realtors and the American Land Title Association), among many others, Private Transfer Fee Obligation Act became effective immediately. 

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On Friday, September 23, 2011, New York Governor Andrew Cuomo signed into law Senate Bill 2373A and Assembly Bill 6870A. The bill authorizes the electronic recording (“e-recording”) of instruments affecting real property in the form of digitized images of original, executed paper instruments and of electronically executed instruments.

Modeled on the federal Uniform Electronic Transactions Act and following in the footsteps of NYSCEF which permits the filing and service of legal papers by electronic means with certain county clerks and with courts in certain types of cases, the new law, encapsulated in Real Property Section 291-i (“Validity of electronic recording”), “seeks to achieve similar efficiencies in the realm of real property conveyances by enabling county governments to modernize the manner in which real estate professional[s] and recording officers conduct their business together.”

Prior to the bills’ signing, the State’s Electronic Signatures and Records Act (“ESRA”), Article III of Chapter 57-A of the New York State Technology Law, already allowed instruments signed electronically to be received, accepted, recorded and stored by government entities in an electronic format. ESRA clarified that “signatures” made via electronic means are just as binding as hand-written signatures and that electronic records have the same legal force as those produced in other formats such as paper and microfilm.

ESRA, however, expressly did not apply “to any conveyance or any other instrument recordable under article 9 [‘Recording instruments affecting real property’] of the Real Property Law.” Real Property Section 291-i eliminates that limitation as it permits e-recording of instruments affecting real properties and confirms the validity of digitized paper documents, electronic records, electronic signatures and electronic notarization. The bills also update the pertinent definitions in Real Property Section 290. “Real property” includes “lands, tenements and hereditaments and chattels real, except a lease for a term not exceeding three years.” “Conveyance” includes:

"every written instrument, by which any estate or interest in real property is created, transferred, mortgaged or assigned, or by which he title to any real property may be affected, including an instrument in execution of a power, although the power be one of revocation only, and an instrument postponing or subordinating a mortgage lien; except a will, a lease of a term not exceeding three years, an executory contract for the sale or purchase of lands, and an instrument containing a power to convey real property as the agent or attorney for the owner of such property.”

“Recording” now also means “by an electronic process by which a record or instrument affecting real property, after delivery is incorporated into the public record.” An “[e]lectronic record” is “information evidencing any act, transaction, occurrence, event or other activity, produced or stored by electronic means and capable of being accurately reproduced in forms perceptible by human sensory capabilities,” whereas a “[d]igitized paper document” means “digitized image of a paper document that accurately depicts the information on the paper document in a format that cannot be altered without detection."

Section 291-i makes the e-recording option voluntary; once a county clerk opts to allow it, however, e-recording must be available to all filers. Participating recording officers are required to obey the rules and regulations of the state Office for Technology, the designated electronic facilitator under ESRA. Section 291-i also provides that where a law, rule or regulation requires, as a condition of recording, that an instrument be a signed and notarized paper original, the requirement is satisfied by a digitized paper document or an electronic record that had been electronically signed and notarized. Furthermore, the bill specifies that permissible software applications must have the capability of storing an image of the original paper documents but not permit additions, deletions or other changes to the digitized image unless such can be identified by a media trail.

Furthermore, the bills amend Real Property Section 317, which now provides that a digitized paper document or an electronic record will be considered “delivered” on the date and at the time such document or record is successfully transmitted to a recording officer. The recording officer must then record the instrument in the order it was received and immediately send an electronic or written notification of his or her receipt of the delivery stamp to the recording party. The delivery stamp, however, will be limited to the regular business hours maintained by the recording officer.

The justifications for Senate Bill 2372A cited by its author and proponent, New York State Senator Andrea Stewart-Cousins, mirror those listed in the statement of legislative intent in Chapter 314 of the Laws of 2002 which amended ESRA. They include reduction of the volume of paper documents coming into the recorders’ offices, considerable savings of money usually spent on personnel and postage for returning documents, as well as a more efficient and streamlined storage and retrieval system. The ultimate purpose of e-recording as permitted by Section 291-i is to “improve the recording process from the point of origin (e.g. title companies, banks, attorneys’ offices) to county clerks’ offices” which will “improve work flow, increase productivity, speed up the recording process and improve data accuracy.”

Supported by the New York State Association of County Clerks and the New York State Bar Association’s Real Property Law Section, among others, Real Property Section 291-i and the amended portions of Sections 290 and 317 will go into effect on September 22, 2012. 

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On Wednesday, September 14, 2011, Governor Christie signed into law amendments to the New Jersey Bulk Sale Law. Enacted as chapter 124 of the Public Laws of 2011, these amendments narrow the scope of N.J.S.A. 54:50-38, signed into law on June 28, 2007 by Governor Corzine, by exempting the sale, transfer or assignment of single- and two-family homes and of seasonal rental property from the bulk sale notification requirements.

The 2007 law expanded the scope of the 1966 New Jersey Sales and Use Tax Act which set forth bulk sale notification requirements designed to provide the N.J. Division of Taxation with notice of asset sales for the purpose of collecting any outstanding tax liabilities owed by a seller. The 1966 law did not, however, apply to commercial real estate transactions unless the transaction was part of the sale of business assets which included real estate, e.g., the sale of an existing hotel business.

The 2007 law dramatically changed the landscape of bulk sale notification requirements by compelling such notice to be a part of all transactions in which a bulk sale was made. Specifically, the pertinent sections of the law provided:  
 

"Whenever a person required to collect tax shall make a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall at least 10 days before taking possession of the subject of said sale, transfer or assignment, or paying therefor, notify the director by registered mail of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferrer or assignor, has represented to, or informed the purchaser, transferee or assignee that he owes any tax pursuant to this act, and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owing, and whether any such taxes are in fact owing.

Whenever the purchaser, transferee or assignee shall fail to give notice . . . or whenever the director shall inform the purchaser, transferee or assignee that a possible claim for such tax or taxes exists, any sums of money, property or choses in action, or other consideration, which the purchaser, transferee or assignee is required to transfer over to the seller, transferrer or assignor shall be subject to a first priority right and lien for any such taxes theretofore or thereafter determined to be due from the seller, transferrer or assignor to the State, and the purchaser, transferee or assignee is forbidden to transfer to the seller, transferrer or assignor any such sums of money, property or choses in action to the extent of the amount of the State's claim. For failure to comply with the provisions of this section the purchaser, transferee or assignee, . . . shall be personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller, transferrer or assignor, and such liability may be assessed and enforced in the same manner as the liability for tax under this act."

For purposes of the 2007 law: (i) “‘Business’ mean[t] any endeavor from which revenue or consideration is realized for the purpose of generating a profit or loss,” and (ii) “‘Business assets,’ tangible or intangible, include[d] . . . realty if the primary use of the realty [was] to support a business on its premises.” See N.J. Div. of Tax. Tech. Bull. 60 (July 3, 2008). On the contracting parties’ end, proper notification consisted of inserting a provision into the Contract of Sale that both parties would comply with the statute; the seller preparing and delivering to the purchaser the Asset Transfer Tax Declaration, in which seller was to disclose information that would assist the Director in estimating the gain on the transfer of asset(s) and the estimated tax on the gain; the purchaser preparing Form C-9600, which provided basic information regarding the sale, transfer, or assignment of property; and, finally, submitting both forms and a fully executed and complete purchaser agreement by registered mail to the Director at least ten business days prior to the date of closing.

The 2007 law made it apparent that, with the exception of building contractors who sold houses as inventory in the regular course of their business, single family residences used solely for that purpose, and other unique transactional situations, all real estate transactions required the statutory notification of a bulk sale.  The notice requirements attached to sales of vacant land owned by a business; single-family homes used to obtain rental income; single-family homes used as a home office, if expensed as such on the homeowner’s tax return to receive a tax benefit; and even transactions where the seller was a tax-exempt or non-profit organization.

(Case law also established that bulk sale notification requirements applied to deeds in lieu of foreclosure. For further discussion, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions - Part II).

The 2011 amendments take effect immediately and apply retroactively to sales, transfers and assignments on or after August 1, 2007.

Under the 2011 amendments, the bulk sale notification requirements of N.J.S.A. 54:50-38 will not apply to “the sale, transfer or assignment of a simple dwelling house if the seller, transferrer or assignor is an ‘individual,’ ‘estate,’ or ‘trust’ as those terms are used for the purposes of the ‘New Jersey Gross Income Tax Act,’ N.J.S. 54A:1-1 et seq.” A “simple dwelling house” is defined as a one-family or two-family dwelling unit and includes cooperatives and condominium units. Still subject to the law, however, are structures “containing more than two units of dwelling space or containing, according to the municipal property tax assessor, commercial property including, or in addition to the units of dwelling space.”

Furthermore, the 2011 amendments attempt to resolve the ambiguity of whether the bulk sale law applies to the sale of a residential property that is only being rented for a short period of time. The law as amended now also exempts the sale, transfer or assignment of a “seasonable rental unit” or “of a lease for the seasonable use or rental or real property” if the seller is an individual, estate or trust. For purposes of the law, a “seasonal rental unit” is a timeshare estate (N.J.S.A. 45:15-16.51) or “a dwelling unit rented for a term of not more than 125 consecutive days for residential purposes by a person having a permanent residence elsewhere.”

Again, the above exemptions extend only to sellers who are individuals, estates or trusts. “Business entities,” including but not limited to corporations or partnerships, must continue adhering to the 2007 bulk sale notification requirements.

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The 2011 Property Tax Environment is Ripe for Appeals and Represents a Real Opportunity for Significant Tax Reductions:

With measurable declines in the real estate market, evidenced by continued high vacancy and historically low rental rates, the pursuit of a real property tax appeal has never been more compelling. In fact, municipalities are again bracing themselves for what is expected to be another tsunami of tax appeal filings. Last year, unprecedented levels of appeals were filed and towns have been left scrambling since. Adjustments to assessment levels were largely in order for 2010 and will continue to be justified in the present tax year. Towns are aware that their property assessments are not in line with the current economic climate and declining property values. It is therefore expected that significant adjustments are either going to occur voluntarily, through compromise, or involuntarily, by virtue of the mandates of Tax Court judgments. Consequently, for those who take action, it is likely that a reduction in assessment and a resulting reduction in taxes will be achieved.

The only way to take advantage of the opportunity to realize significant tax savings and improve one’s bottom line is to pursue a timely filed tax appeal. The 2011 tax appeal filing deadline is April 1, 2011 so there is little time to waste.

The first step is for a property owner, or a tenant who is responsible for the payment of taxes, to review the Property Tax Assessment Notice, which will be mailed by towns to taxpayers, in the form of a postcard, in the next several weeks. This Notice identifies the property tax assessment imposed upon the property for 2011.

This assessment number can be deceptive, however, as it does not always indicate the true value of the property. Many taxpayers are falsely lulled into believing that their property assessment equals true value and is therefore correct. This error could be an expensive mistake.

Towns employ what is called an average or "equalization" ratio in order to convert the property tax assessment to true value (the so-called “equalization value”). Only by comparing the equalization value to the true value of the property can a property owner determine whether an appeal has merit. Taxpayers who take no action are thus often left paying an ever increasing tax bill.

Once the Property Tax Assessment Notice is received, a property owner should promptly schedule an appointment with an attorney to determine the merits of a possible appeal. By taking this simple but important step, a property owner can ensure that it is paying only its fair share of the municipal real property tax burden. This is where the involvement of an experienced attorney from Cole Schotz can be of tremendous help. Our experience and relationships with professional appraisers allows us to perform, at no cost to you, a preliminary analysis to determine if an appeal is warranted.

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The Financial Accounting Standards Board and the International Accounting Standards Board are proposing significant changes to real estate lease accounting. At the prodding of the Securities and Exchange Commission, the Boards are attempting to ensure that the assets and liabilities associated with leases are more accurately reflected on a company’s balance sheet, thereby creating more transparency of financial information and permitting easier comparability of balance sheets.

The Boards’ proposed new regulations would in effect treat all leases as an asset with respect to the use of the leased property for the lease term, and a liability with respect to the obligation to pay rent, thereby eliminating the classification of leases as either operating leases or finance leases.

The following are some of the highlights of the proposal:

1. Leases with a term greater than one year would be affected.
2. Rent for the entire lease term due under a lease would be discounted to present value using the tenant’s incremental borrowing rate and would be included on the tenant’s balance sheet as a liability.
3. A lease with a renewal option would be treated as if the renewal option will be exercised if it is likely that the tenant will exercise the renewal option.
4. Contingent rental agreements (i.e., percentage rent in a retail lease) would require the tenant to forecast its future sales and include on its balance sheet the percentage rent based on such sales forecast together with minimum rent payable during the lease term.

The effect of the proposed changes could significantly impact the leasing market. Tenants may be inclined to negotiate shorter lease terms (including foregoing renewal options) in order to avoid increasing their debt. Commercial condominiums may gain in popularity as prospective tenants turn to purchasing their space rather than leasing it. Percentage rent deals may disappear altogether as retailers will not want to carry increased debt on their balance sheet based on speculative sales forecasts. Potentially there will be more breached debt covenants on loan documents. Clearly, the balance sheets of companies with hundreds or thousands of lease locations will be adversely affected as their debt levels would increase significantly.

The Boards are still in the process of taking comments on their proposals and will soon resume discussions to develop new standards for landlord accounting. The tentative effective date for the revised accounting standards is the second quarter of 2011. We will continue to monitor the development of the new accounting standards as the comment process unfolds.
 

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Many property owners lose their right to challenge their real property tax assessment by ignoring the annual request by their local Tax Assessor to complete an Income and Expense Statement.  This request is authorized by N.J.S.A. 54:4-34 and is known as a Chapter 91 filing.  If you are served with a Chapter 91 request you must respond to same within the required time period otherwise the municipality can move to dismiss any subsequent tax appeal filed.

Unfortunately, many property owners either ignore the Chapter 91 request because they do not believe that they own income-producing property or they fail to complete the Income and Expense Statement properly.  A common misconception is that any income derived in order to be reportable must be between unrelated parties and must be an arms’ length transaction.  This is simply not correct.  Chapter 91 applies to all properties whether residential or commercial, whether owner occupied or tenanted, whether leased or totally vacant.  The test is not the amount of income derived but rather whether the property is capable of deriving income.  This means that if you have a vacant building and are served by the Tax Assessor with a Chapter 91 request you must still complete the Income and Expense Statement and return it to the Tax Assessor within the 45-day time period.  We suggest that you return the completed form by certified mail so that you have proof of compliance within the requisite time.

Another common misconception is that if you own two entities and one owns the property and another leases the property then there is no need to complete the Chapter 91 filing.  Simply because the two entities may be related or the rent being paid is not “market rate” and the transaction is not arms’ length does not serve as an exemption for completing a Chapter 91 request.

A further mistake that is often encountered is a property owner failing to include income from all sources.  Income derived from cell antennas, parking leases, ATM machines, food service concessions, bank kiosks and other relatively small service providers must be included on the Chapter 91 request.

In these difficult economic times, don’t lose your ability to reduce your real property taxes.  Complete and file your Chapter 91 response in a timely manner.
 

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Cole Schotz, along with professional appraisers from Integra Realty Resources, presented an informative seminar to clients and interested commercial property owners, managers and brokers titled "The Time to Fight City Hall is Now -- Why a Real Estate Tax Appeal Makes Sense" on March 3, 2010. The presenters covered the nuts and bolts of tax assessments, the appeal process, strategies to win on appeal, as well as a market-wide survey of current conditions and expectations, laying out a roadmap for action.

Because a property's tax burden can represent one of the more significant components of its operating costs, conducting an annual review of a property's assessment with your professionals: lawyers and appraisers alike, is critical to good management. Last year saw record filings with the tax court. This year, with the commercial real estate market continuing in recession, significant filings are again expected.

Despite this trend, the amount of qualified candidates filing appeals continues however to represent only a fraction of those who should be availing themselves of the tax appeal procedure. In a market where major sectors: Office, Retail, Industrial and Multifamily have experienced increased vacancy rates and greater demand for rent concessions and landlord work letters, the market values of these properties have decreased resulting in overassessments for real estate tax purposes.

Tax appeals must be filed by April 1, 2010.

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On February 9, 2010, Governor Christie signed an Executive Order immediately suspending the operation of the Council on Affordable Housing (“COAH”) and appointing a panel to study the issue of affordable housing and make recommendations to the Governor within 90 days. This comes at the heels of the Introduction of Legislation S:1 by State Senators Lesniak and Bateman to abolish COAH and the existing municipal affordable housing requirements. Instead, low and moderate income housing would be made a part of a municipality’s Master Plan. This is the first step in changing the way affordable housing is provided to New Jersey residents.

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The 2010 Property Tax Environment is Ripe for Appeals and Represents a Real Opportunity for Significant Tax:

With measurable declines in the real estate market, evidenced, by rising vacancy and falling rental rates, the pursuit of a real property tax appeal has never been more compelling. In fact, municipalities are already bracing themselves for what is expected to be a tsunami of tax appeal filings. Last year, unprecedented levels of appeals were filed and towns have been left scrambling since. Adjustments to assessment levels were largely in order for 2009 and will continue to be justified in the present tax year. Towns are aware that their property assessments are not in line with the current economic climate and declining property values. It is therefore expected that significant adjustments are either going to occur voluntarily, through compromise, or involuntarily, by virtue of the mandates of Tax Court judgments. Consequently, for those who take action, it is likely that a reduction in assessment and a resulting reduction in taxes will be achieved.

The only way to take advantage of the opportunity to realize significant tax savings and improve one’s bottom line is to pursue a timely filed tax appeal. The 2010 tax appeal filing deadline is April 1, 2010 so there is little time to waste.

The first step is for a property owner or a tenant, responsible for a majority of the property tax obligation, to review the Property Tax Assessment Notice (post card), which will be mailed to taxpayers by the towns in the next few weeks. This post card identifies the property tax assessment imposed upon the property for 2010.

This assessment number is, however, deceptive, as it does not, without proper adjustment, tell the owner the true value at which the town has assessed the property. Many taxpayers are falsely lulled into believing that their property assessment equals true value and is therefore correct. This error could be an expensive mistake.

Towns employ what is called an average or ”equalization” ratio in order to convert the property tax assessment to the value (the so-called “equalization value”). Only by comparing this adjusted assessment number (“equalization value”) to the actual value of the property, may a proper analysis be undertaken to determine whether an appeal has merit. Taxpayers who take no action are thus often stuck with paying an ever-increasing tax bill.

Once the Property Tax Assessment card is reviewed, a property owner should therefore quickly move to schedule an appointment with an attorney experienced in this area in order to determine the merits of a possible appeal. By taking this simple, but important step, a property owner can ensure that it is paying only its fair share of the municipal real property tax burden. This is where the involvement of an experienced attorney can be of tremendous help. With our experience and relationships with professional appraisers, we are able to perform, at no cost to you, a preliminary analysis to determine if an appeal is warranted. If so, the preparation and filing of a tax appeal complaint will be recommended and pursued at your election.
 

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The creditors’ rights exclusion under a title insurance policy is intended to make clear that a title insurance policy does not provide protection for post-policy challenges to the insured title or to the validity, enforceability, or priority of the lien of the insured mortgage arising solely out of the insured transaction (not one in the past chain of title), whereby the transfer to the insured owner or lender of its interest in the land is determined to be a fraudulent transfer or conveyance, or a preferential transfer, under either state or federal law. With respect to the loan policy only, the creditors’ rights exclusion also confirms that no protection is provided to the insured lender if a challenge is made to the priority of the lien of the insured mortgage based on the bankruptcy doctrine of equitable subordination.

Over the past decade, the request by owners and lenders to delete the creditors’ rights exclusion under a title insurance policy has become standard practice. In 2004, ALTA adopted Endorsement Form 21, which insures against loss under an owner’s or loan policy because of the occurrence, on or before the date of the policy, of a fraudulent transfer or preference under federal bankruptcy law or state insolvency or creditors’ rights laws. It also confirms that the title insurer will pay all costs, expenses and attorneys’ fees to defend the insured against such claims. It expressly excludes coverage for such loss, however, if the insured knew that the transfer was fraudulent or was not a purchaser in good faith. The benefit of this endorsement is that it expressly provides affirmative coverage for creditors’ rights matters.

The ALTA 2006 Loan Policy does give some limited coverage with respect to preferences for the insured mortgage itself. Covered Risk, Section 13(a) of the ALTA 2006 Loan Policy insures against “The invalidity, unenforceability, lack of priority, or avoidance of the lien of the Insured Mortgage” resulting from a prior transfer constituting a fraudulent or preferential transfer, but does not cover that risk for the “transaction creating the lien of the Insured Mortgage.” Exclusion 6 of the ALTA 2006 Loan Policy makes it clear that it only applies to those creditors rights’ issues affecting “the transaction creating the lien of the Insured Mortgage” that are not stated in Covered Risk 13(b). Lender’s generally will not find comfort with this limited protection against creditor’s rights matters from prior transactions and require affirmative coverage against the invalidity, unenforceability, lack of priority, or avoidance of the lien of the insured mortgage. To fill the “gap” created by Covered Risk 13(a) and Exclusion 6, when available the title company will issue affirmative coverage under a Creditors’ Rights Endorsement with respect to the transaction.

Creditors’ rights coverage places additional risk on the title insurer and therefore an additional risk premium for the endorsement is required. Normally, in a deed-in-lieu transaction, reasonably equivalent value will have been given for the deed because the value of the property will have been established by appraisal (supplied to the title insurer) to be less than the amount of the outstanding mortgage debt. Where a creditors' rights issue has been identified because a transfer is being made without the transferor receiving reasonably equivalent value, the title insurer is required to conduct non-title-related due diligence with respect to underwriting the transaction, including an analysis of the transferor’s business and financial statements; its capitalization both before and after the transfer; the amount of secured and unsecured credit obtained by the transferor both before and after the transfer; and a determination of whether the delivery of the deed in lieu of foreclosure will render the borrower insolvent. If the title insurer is willing to issue creditors’ rights coverage in such a situation, it may need to charge a significant additional risk premium to cover the potential liability. In addition, the title company may require that an independent third party with a demonstrated and substantial net worth indemnify the title insurer for the costs of defending an action based on a creditors’ rights defense.

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Bulk Sale Notification Requirements Apply To Deed in Lieu of Foreclosure

Based upon the findings of the Tax Court in N.J. Hotel Holdings, Inc. v. Dir., Div. of Taxation, 15 N.J.Tax 428, 437 (Tax Ct. 1996), the New Jersey Division of Taxation is enforcing recent changes in the New Jersey bulk sales notification requirements contained in N.J.S.A. 54:50-38 on the basis that such requirements apply to deeds in lieu of foreclosure (“deeds in lieu”) of real estate accepted by lenders, regardless of the fact that no monetary consideration is being received by the lender. If N.J. Hotel Holdings, Inc. is upheld it will mean that a lender who fails to comply with the bulk sales notification requirements before accepting a deed in lieu will be deemed by statute to have assumed liability for payment of all of the borrower’s outstanding tax obligations to the State of New Jersey. (For a more general discussion of the new bulk sales requirements under N.J.S.A. 54:50-38, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions – Part 1)

N.J. Hotel Holdings, Inc. v. Director, Division of Taxation

The question before the Tax Court in N.J. Hotel Holdings, Inc. was whether statutory bulk sales notification applied to assets acquired by way of deeds in lieu. The court unequivocally answered in the affirmative:

In this case the court holds that a person who acquires assets by way of a deed in lieu of foreclosure and a bill of sale, and who fails to give notice to the [Director] under N.J.S.A. 54:32B-22(c), is liable for the sales and use tax liability of the person from whom the assets are acquired. [Note: the Tax Court’s analysis is equally applicable to N.J.S.A. 54:50-38 and it is unlikely the case can be distinguished on the basis of the new legislation].

In N.J. Hotel Holdings, Inc., a bank made loans to several entities, secured by mortgages, assignments, and security agreements on three hotels. Following a modification and transfer of the properties and related obligations, the new owners defaulted on their obligations to the bank. Pursuant to a subsequent foreclosure agreement, the bank acquired all of the hotel assets by way of deeds in lieu. Bulk sale notification of this acquisition was not provided to the Director. As a consequence, the Director deemed the bank liable for all taxes relating to the subject property due by the defaulting owner prior to, and following, the transfer. The arguments presented by the bank in appealing the assessments of the Director can be categorically summarized: (1) a deed in lieu is not a transfer within the meaning of the statute, (2) because the State would have not received payment upon foreclosure, it should not receive payment when transfer is made via a deed in lieu, and (3) because no cash is exchanged in a deed in lieu transaction, there was no escrow mechanism to ultimately comply with the statute.

The court spent minimal time, and found little difficulty, dismissing the claim that a deed in lieu was not a transfer within the meaning of the statute: “It is clear that N.J.S.A. 54:32B-22(c) is meant to extend beyond . . . simple sale for cash . . . and beyond the restrictive definitions of the bulk sales act.” In the present case, “the hotel assets were transferred to plaintiff in settlement of the foreclosure action.” This was evidence enough to satisfy the court that the statute should apply.

The court then goes on to address the contention that had the foreclosure been completed, the State would have no remaining lien on the property and, as a result, would have received none of the sales tax due by the transferor. The court thwarts this argument by citing the business decision rule, reminding the transferee that it was their choice to avoid foreclosure through this asset transfer mechanism, and it is in the public interest of the State to allow such independent decision-making:

The principle that a business decision will be given its tax effect according to what actually occurred promotes public interest in tax certainty and thereby conforms with general business expectations. Indeed, planning by individuals and businesses alike would be frustrated if courts failed to give predictable effect in formal legal documents . . . simply because of asserted ignorance of law. . . .

‘As a general proposition, the answer must be that it is for the taxpayer to make its business decisions in light of tax statutes rather than the other way around.’

Finally, the court focused its attention on whether the statute should be deemed inapplicable because no cash is transferred in a deed in lieu transaction, rendering a cash escrow impossible. The court viewed this as a practicality argument of little merit. The fact that a deed in lieu transaction involves other consideration rather than cash does not relieve the transferee of liability based solely on the structure of the transaction. According to the court, the value of the “choses in action, or other consideration[s]” were greater than the sales tax obligations of the transferor, thus rendering the existence of a cash escrow irrelevant when determining the applicability of the notification requirements. Although the bank cites the interpretation of out-of-state statutes by the courts of other jurisdictions, the court rejects these alternative interpretations on the grounds of differing public policy objectives.

Life After N.J. Hotel Holdings, Inc.

The practical consequences of the holding in N.J. Hotel Holdings, Inc. are significant.

The Division’s application of N.J. Hotel Holdings, Inc. in applying the rules to deeds in lieu, when coupled with N.J.S.A. 54:50-38 which applies the bulk sales rules to a wide array of real estate transactions, effectively gives the State of New Jersey a super priority lien for outstanding taxes if a lender, in accepting a deed in lieu, fails to comply with the notification requirements. This is due to the fact that the lender’s deemed assumption of a borrower’s outstanding tax liability to the State of New Jersey will force a lender, who has accepted a deed in lieu without complying, to first pay the State of New Jersey the outstanding tax liability before it allocates any amounts recovered from the property to the debt.

Lenders must notify the Director prior to accepting a deed in lieu for the real estate encumbered by the security instrument. This is so despite the fact that a lender could proceed to foreclosure without complying with bulk sales notification requirements. Failure to provide such notification under these statutory requirements will render the lender personally liable for all taxes, sales or otherwise, that may be due at the time of the transfer, as well as any taxes determined to be due later (for example, following an audit of the subject property). Once the lender has made the notification, if the Director requires an escrow for outstanding taxes then the lender will either have to secure the amount from the borrower, if the borrower in fact has any funds, or put up the escrow itself. Of course, a lender could foreclose and avoid the escrow, but foreclosure involves its own costs and expenses, therefore this is just one more part of the analysis to be made by the lender of the defaulting loan and the lender’s potential remedies. (For a discussion of how to comply with the new bulk sales requirements under N.J.S.A. 54:50-38, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions – Part 1)

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Introduction

Recent changes to the bulk sales notification requirements under New Jersey law have resulted in the application of these requirements to a wider array of real estate transactions and this means that New Jersey real estate attorneys must now, in the greater majority of cases, comply with New Jersey’s bulk sales notification requirements prior to, and as a condition of, closing. Failure to do so will mean that the purchaser is deemed by statute to have assumed liability for payment of all of the seller’s outstanding tax obligations to the State of New Jersey.

New Bulk Sale Notification Requirements

The New Jersey Sales and Use Tax Act, adopted in 1966, set forth bulk sale notification requirements designed to provide the New Jersey Division of Taxation with notice of asset sales for the purpose of collecting any outstanding tax liabilities owed by a seller. However, such bulk sales notification requirements were not applicable to commercial real estate transactions unless the transaction was part of the sale of business assets which included real estate, e.g., the sale of an existing hotel business.

On June 28, 2007, the landscape of bulk sales notification requirements changed dramatically when Governor Corzine signed into law N.J.S.A. 54:50-38, effective June 28, 2007 and operative August 1, 2007. This significantly expanded the scope of the notification requirements to include all transactions in which a bulk sale is made. The new section provides, in pertinent part:

Whenever a person required to collect tax shall make a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall at least 10 days before taking possession of the subject of said sale, transfer or assignment, or paying therefor, notify the director by registered mail of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferrer or assignor, has represented to, or informed the purchaser, transferee or assignee that he owes any tax pursuant to this act, and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owing, and whether any such taxes are in fact owing.

Whenever the purchaser, transferee or assignee shall fail to give notice . . . or whenever the director shall inform the purchaser, transferee or assignee that a possible claim for such tax or taxes exists, any sums of money, property or choses in action, or other consideration, which the purchaser, transferee or assignee is required to transfer over to the seller, transferrer or assignor shall be subject to a first priority right and lien for any such taxes theretofore or thereafter determined to be due from the seller, transferrer or assignor to the State, and the purchaser, transferee or assignee is forbidden to transfer to the seller, transferrer or assignor any such sums of money, property or choses in action to the extent of the amount of the State's claim. For failure to comply with the provisions of this section the purchaser, transferee or assignee, . . . shall be personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller, transferrer or assignor, and such liability may be assessed and enforced in the same manner as the liability for tax under this act.

For purposes of the new law: (i) “‘Business’ means any endeavor from which revenue or consideration is realized for the purpose of generating a profit or loss.” and (ii) “‘Business assets,’ tangible or intangible, include . . . realty if the primaryuse of the realty is to support a business on its premises.” See N.J. Div. of Tax. Tech. Bull. 60 (July 3, 2008).

The obvious consequence of this statutory expansion and the Division’s Technical Bulletin is the applicably of the notification requirements to a far larger class of real estate transactions. On its face, the new law must be presumed to encompass any real estate transaction where the purpose of the real property is to support a business of any type from which revenue (profit or loss) may be realized, and for which the sale is not in the “regular course of business.” This would likely include sales by “single purpose entities”, such as limited liability companies and limited partnerships, which are prevalent in recent real estate transactions, where the sole asset is the subject real property and the sole business is the leasing, operation and management of that property. It therefore seems, with the exception of large building contractors who make sales of single units as inventory in the regular course of their business, single family residencies used solely for that purpose, and other unique transactional situations, that all real estate transactions require statutory notification of sale.

Compliance

In order to comply with the new law and thereby avoid personal tax liability, all New Jersey real estate sale transactions, other than the sale of the seller’s personal residence, should be administered in the following manner:

1.         Contract of Sale. The contract of sale between the parties should include a provision that both seller and purchaser are required to fully comply with the statute. This provision should enumerate the various responsibilities of the parties including, but not limited to: (1) the seller providing the purchaser with all required documentation, (2) the purchaser filing all of the requisite notices with the Director of the Division of Taxation at least ten days prior to closing, (3) withholding from seller’s proceeds at closing of the amount set forth in the Director’s initial reply notification to the purchaser of the State’s claim to seller’s State tax debts owed, which amount will then be held in escrow by the purchaser’s attorney until the State makes a final determination as to the amount owed by the seller (alternatively, this provision may provide that the seller pay the claim directly to the State from the seller’s proceeds at closing rather than utilizing an escrow mechanism), (4) a requirement that the seller post any additional amounts as required to fund the escrow (if applicable), (5) a provision authorizing payment from the escrow account (or direct payment to the State) to satisfy the final determination of the Director, and (6) a provision indemnifying the purchaser from any outstanding liability that may exist following fiscal exhaustion of the escrow account (if applicable).

2.         Division of Taxation Filings (Seller). The seller must prepare and deliver to the purchaser the Asset Transfer Tax Declaration (Form TTD). This form requires the seller disclose information that will assist the Director in estimating the gain on the transfer of asset(s) and the estimated tax on the gain. Form TTD can be found at http://www.state.nj.us/treasury/taxation/pdf/ttdv1.pdf.

3.         Division of Taxation Filings (Purchaser). The purchaser must prepare a Notification of Sale, Transfer or Assignment in Bulk (Form C-9600). This form provides for basic information regarding the sale, transfer, or assignment of property, including the names of the parties, the scheduled date of sale, and the sale prices of the assets being sold, transferred, or assigned. Form C-9600 can be found at http://www.state.nj.us/treasury/taxation/pdf/other_forms/misc/c9600.pdf.

4.         Submission to the Division of Taxation. The purchaser must then submit Form TTD, Form C-9600, and the fully executed Purchaser Agreement including price, terms and conditions thereof by registered mail to the Director at least ten days prior to the date of closing.

5.         Director Notification. Within ten days following receipt of the documents, the Director will notify the purchaser/attorney/designee of any possible claim for State taxes and specify the amount to be escrowed (or paid directly to the State) by the purchaser at closing. This amount may include deficiencies (i.e. underpayments), delinquencies (i.e. unfiled returns), any audit assessment(s) (fixed or pending), and the tax gain from the transfer of the asset(s). The purchaser’s attorney may act as escrow. If no taxes are owed, the Director will issue a letter of clearance.

6.         Closing and Final Payments. After closing, any and all amounts owed to the State will be paid out of the escrow account (or paid directly to the State). When all final returns have been filed and all State taxes have been paid, the Director will issue a letter of clearance authorizing the release of any funds remaining in the escrow account (if an escrow mechanism has been used). Upon receipt of this letter, the purchaser is relieved of any further liability.

Conclusion

Real estate attorneys must be aware of the new statutory notification requirements and advise their clients accordingly.   Although it is relatively simple to adhere to the requirements set forth in the new statute, failure to do so could have drastic financial repercussions for clients engaged in applicable transactions. While the steps set forth above are a good starting point for compliance, it would be prudent for any individual engaged in real estate transactions that are not standard single-family residencies occupied by the seller to seek legal advice regarding compliance with these new notification requirements.Recent changes to the bulk sales notification requirements under New Jersey law have resulted in the application of these requirements to a wider array of real estate transactions and this means that New Jersey real estate attorneys must now, in the greater majority of cases, comply with New Jersey’s bulk sales notification requirements prior to, and as a condition of, closing. Failure to do so will mean that the purchaser is deemed by statute to have assumed liability for payment of all of the seller’s outstanding tax obligations to the State of New Jersey. 

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In the wake of the economic crisis and distress of the real estate markets, issues related to the foreclosure of mezzanine loans have become the subject of much discussion. A mezzanine loan put simply is a loan given to a business entity which is secured by the ownership interests in that business entity. In real estate transactions, the most frequent structure involves a pledge of the membership interests in a limited liability company. This limited liability structure is primarily the result of special purpose entity requirements imposed by commercial lenders to conform to securitized lending guidelines. Mezzanine loans provide an opportunity for an entity which owns commercial real estate to leverage its equity in instances in which the entity’s real estate lender does not allow subordinate mortgage financing.

As a result of the current economic climate and percipitous decline in real estate values, many mezzanine loans are now in default due to reduced cash flow or the inability to refinance the loans. Many mezzanine lenders assume that if they foreclosed on the ownership interests in the entity they could assume management control of the real estate asset including the right to dispose of the asset. That assumption is not necessarily correct.

If the foreclosure is contested, the lender must concern itself with the requirements of the applicable Uniform Commercial Code (“UCC”) and other applicable laws. Section 9-610 of the Uniform Commercial Code requires that a mezzanine foreclosure be conducted in a “commercially reasonable manner.” Every aspect of a disposition of collateral must be commercially reasonable. This requirement explicitly includes the method, manner, time, place and other terms of the disposition. However, the UCC does not define what type of sale is commercially reasonable.

The law of the jurisdiction in which the business was formed, together with the organization documents of the business entity, control what rights a transferee of an ownership interest acquires. Many partnership agreements and operating agreements of limited liability companies limit the rights of a transferee of a partner or member’s interest to an assignment of economic rights including a right to share in the profits and losses. However, many partnership agreements and operating agreements of limited liability companies prohibit a transferee the right to participate in the management of the entity or to take actions which legally bind the entity. Many lenders are aware of this but don’t consider it a problem because the UCC, as adopted in most states, overrules such anti-assignment provisions, so that you can take assignment of economic rights notwithstanding a prohibition in the organizational document. However, the UCC as adopted in some jurisdictions would not protect the lender under the anti-assignment provisions. For example, Delaware, the governing law for many of these agreements, is different. Under Delaware’s UCC, as well as its Partnership Act, Limited Partnership Act and Limited Liability Company Act, if an entity’s organizational documents prohibit assignments of economic interests, the provisions in those documents will control. This means that you need to ascertain which state’s law will govern the assignment of the economic interests. The UCC contains mandatory choice of law rules governing the perfection and priority of security interests, which do not apply to the granting of an assignment of economic interests. Moreover, it is uncertain whether a choice of law clause contained in loan documents will be effective on this question, even though such clauses are generally enforceable. This is because it is doubtful that a lender and a borrower can dictate which law will apply to govern the relationship between the borrower and the entity in which the borrower is invested. Therefore, a lender may not be able to avoid the application of Delaware law, because the applicable law may well be determined by choice of law rules which generally require a rational nexus analysis as well as other factors many of which are outside of the control of a lender.

Whether a mezzanine loan can been foreclosed such that the foreclosing mezzanine lender can gain control of the real estate controlling entity and have proper authority to operate and transfer the assets is not always apparent from an examination of the applicable loan collateral documents, entity organizations or formation documents, public records and applicable laws. In addition to reviewing the laws of the jurisdiction governing the loan collateral documents to ensure the foreclosure is done properly and the organization or formation documents of the transferring entity to be certain that proper authority for the transfer exists, you need to have a thorough understanding of the applicable laws relating to real estate transfers by the particular type of entity. The foreclosing mezzanine lender should also determine if the foreclosure including the control and/or ownership of the entity owning the real estate will result in transfer tax or other tax consequences to the foreclosing mezzanine lender.

In light of these restrictions and impediments, title companies are reluctant to insure any real estate transaction involving a transfer of property by a conveyance from the foreclosing mezzanine lender and will scrutinize the loan collateral documents as well as the entities corporate governance documents and the laws of the jurisdiction of formation. Accordingly, great care must be exercised any time a foreclosing mezzanine lender attempts to exercise its rights under the mezzanine loan documents or agrees to accept an assignment or other transfer in lieu of foreclosure. And, if the mezzanine lender intends to insure the transfer it is recommended that the mezzanine lender get the title company involved early in the process to confirm the transfer is insurable and before any of the lender’s rights are compromised.
 

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In a recently decided New York case, 325 Schermerhorn LLC v. Nevins Realty Corp., decided April 27, 2009, Superior Court Kings County, New York, a purchaser under a contract of sale for real property was awarded the return of its $3.6 million contract deposit after the Kings County Supreme Court held the seller was in default for failing to remove a transit easement encumbering the property. The contract of sale provided that the properties were to be sold “free of all encumbrances” except as otherwise stated in the contract. Attached to one of the contracts at issue was a survey which indicated the footings of the building on the property rested on a subway roof. A subsequent title report identified the transit easement, and the purchaser objected to the easement and demanded it be removed from title. The seller argued that the purchaser was aware of the easement before the contract was signed and that the purchaser agreed under the contract to purchase the properties in their “as-is” condition. The buyer claimed that the seller was in default under the contract since the transit easement was an encumbrance that affected the marketability of title to the property.

The court defined the test of “marketability of title” as: “Whether there is an objection thereto such as would interfere with a sale or with the market value of the property… a purchaser ought not to be compelled to take property, the possession or title of which may be obliged to defend by litigation.” The court explained that “an easement is an encumbrance rendering title unmarketable with the same effect as mortgages, leases and the like” and declared that a purchaser need not accept title subject to an encumbrance if the contract specifies conveyance of title free of all encumbrances, even if there is no showing that the encumbrance actually diminished market value.

The court further noted that even if the purchaser knew of the easement, such knowledge did not defeat the entitlement to buy the property free and clear of it in accordance with the contract. The “as-is” provision in the contract was held to be a more general provision that conflicted with the specific title clause that required title be conveyed “free of all encumbrances”. The court declined to adopt an interpretation which would leave any provision without force and effect and held that the more specific provision would be controlling.

Courts often make a determination as to which provision will govern when there are conflicting provisions in a contract, often yielding to the more specific provision, as the court did in this case. Therefore, to prevent any ambiguity regarding the intent of the parties, the contract should clearly state which provisions will control in the event of any conflict.
 

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In a newly decided New Jersey Appellate Division case, Pansini Custom Design Associates LLC v. City of Ocean City, the court, made clear that application of the simpleton approach of merely averaging comparables or the results of competing appraisal reports, will not do. In Pansini, the court found that such an approach to valuation represents a shirking of the fact-finder's responsibility to reach a "reasoned, just and factually supported conclusion of value." The court went on to hold that relying upon such a "simple mathematical formula is an unacceptable methodology for fulfilling one's role as a fact-finder."

Moreover the Tax Court of New Jersey has also recognized that permitting the use of averaging would only serve to encourage appraisal experts to slant their conclusions to the extremes. It has been recognized that permitting averaging to be utilized would mean appraisers would "intentionally distort and skew the values to insure a high or low number without concern that the fact finder must resolve the issue with a careful analysis of data that may result in adoption of one appraisal figure over another.”

In the end, the analysis which must be conducted should instead include a careful assessment of sales data, making appropriate and reasoned adjustments to reflect a host of factors, including: the time of sale, location, amenities, physical characteristics, utility and desirability of the properties held up for comparison. Importantly, the Pansini decision also served to reinforce the well-settled principle that comparable sale data is only of value to a reasoned valuation analysis where the gross magnitude of necessary adjustments to the “comparables” do not serve to belie comparability.

Anytime valuation of real property is at issue, whether in connection with parties’ contractual arrangements, or a tax court or condemnation proceeding, it is incumbent upon parties and professionals alike to ensure that the ultimate value conclusions reached by their appraisal experts are based upon empirical data and observations of existing and surrounding conditions and not simply a mathematical exercise.

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Real estate developers in New Jersey often face a myriad of state and local regulations under which their development activities must comply. The Appellate Division issued a ruling in two lawsuits brought by builders associations against two New Jersey municipalities which should give developers some welcome relief.

In May 2003, Jackson Township passed an ordinance requiring a minimum of 10% to 40% of a parcel contemplated for development, depending on the zoning district in which it was located, be reserved as open space, with a minimum of 50% of such open space consisting of land which could be used for recreational use.

Jackson Township revised these requirements in 2006 by requiring all residential developments provide 12.5 acres of land per thousand projected residents of the development for recreational purposes subject to certain additional specified standards. If a developer could not satisfy these requirements, or if the planning board agreed to a developer’s request, a developer could make a cash contribution in lieu of compliance with these requirements by contributing to so-called “off-tract recreational improvements.” Further, a developer was required to pay its “fair share” for off-site open space and/or recreational land and improvements as a condition of subdivision or site plan approval.

The New Jersey Shore Builders Association challenged the enforceability of these ordinances. The trial court granted summary judgment in favor of the builders association, finding these ordinances to be ultra vires and unenforceable since the Municipal Land Use Law (MLUL) does not give municipalities the right to require on-site dedications of open space (with the exception of planned unit developments, planned unit residential developments and residential clusters) unless the municipality compensates the developer for the portion of the property set aside as open space.

In Egg Harbor Township, ordinances similar to the Jackson Township ordinances were already in place. Residential developers were required to set aside one-half of an acre for recreation and open space for each one thousand persons expected to reside in a proposed development. The Egg Harbor Planning Board had discretion to accept a cash payment in lieu of compliance with the recreational facilities and open space requirements if it determined that “both the area local to the development and Egg Harbor Township’s park and recreation needs would be better served by an agreed cash bequest to the designated parks and recreation budget.”

In addition, developers were required to install recreational facilities in all residential developments requiring those facilities, “on the land that has been set aside for recreational purposes” (such as playgrounds, tennis and basketball courts), based on the number of dwelling units in a development. In lieu of installing these facilities, a developer could, at its option, make a cash contribution to the Township’s parks and recreation budget.

In 2004, Egg Harbor Township passed a new ordinance giving the Township the option to require an off-tract assessment and revising the formula used for determining the recreational facilities in a residential development. Later that year, another new ordinance granted developers the option in designated zoning districts to post such assessments if the developer determined “that the on-site construction of active recreation facilities and/or provision of open space for passive recreation would result in a loss of potential dwelling units on the subject parcel.”

In like fashion to the Builders Association, The Builders League of South Jersey challenged enforcement of the Egg Harbor ordinances; however, the trial court in this action ruled completely contrary to the trial court in the Jackson Township case. The loser in each case appealed the trial court’s decision. The Appellate Division consolidated both appeals given the similarity of the issues in dispute.

In New Jersey, the MLUL is the basis upon which municipalities may control zoning, with the purpose of achieving certain goals that are specified in the statute, such as adequate open space. Both builders groups argued that the MLUL gave municipalities the authority to require dedications of common open space and recreational areas only when planned developments where the subject of the application, and did not provide for payments in lieu of set-asides. The Townships acknowledged this, but argued that the MLUL granted such authority by implication.

The court agreed with the builders groups that the MLUL, while conferring substantial powers to municipalities with regard to zoning, limited such power with respect to set-asides for recreational and open space purposes to planned developments only. The court’s ruling carefully distinguished this power under the MLUL from the more general power provided elsewhere in the MLUL allowing municipalities to impose requirements on developers to contribute toward the cost of off-site water, sewer, drainage and street improvements in lieu of on-site set-asides.
 

In light of this ruling, only time will tell whether the state legislature takes any action to close this loophole.

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On March 9, 2009, the New Jersey Supreme Court decided the case of Pagano Company v. 48 South Franklin Turnpike, LLC. At issue was “whether a purchaser of commercial property is liable for the real estate broker commissions due under the leases it acquired under a general assignment from the seller.” The decision provides useful guidance for the sellers, purchasers and brokers of commercial property.

The plaintiff, Pagano Company (Pagano), entered into an agreement with Heritage III Office Center (Heritage), pursuant to which commissions were payable to Pagano for each lease it procured, including renewals of such leases. Heritage subsequently entered into a contract to sell the property to 48 South Franklin Turnpike, LLC (Franklin). The contract included a fairly typical due diligence provision granting Franklin the right to inspect the books and records of the property. According to the Court’s decision, Franklin reviewed the leases pertaining to the property, but did not review or request a copy of the commission agreement between Heritage and Pagano. At the closing for the sale of the property, Heritage assigned to Franklin, and Franklin agreed to assume, all of Heritage’s obligations under the leases. The parties did not execute any specific assignment of the commission agreement.

At the time of the closing, three tenants procured by Pagano continued to occupy the property. Each pertinent lease expressly bound Heritage and its successors and assigns and contained a specific reference to Heritage’s commission obligations to Pagano. After acquiring title, Franklin refused to pay Pagano commissions that came due thereafter under the terms of the commission agreement.

In order to hold Franklin liable for the commissions, the Court required proof that Franklin had “affirmatively assumed” the obligation. In the absence of an express written assumption of the commission agreement by Franklin, the Court stated that the determination of whether an affirmative assumption had occurred required an analysis of the facts and circumstances surrounding the general assignment of leases and, in particular, the “documentary record” of the sale transaction. The Court reasoned that “[i]f, taken as a whole, the record signals that the assignee agreed to assume the obligation, he or she will be held to it despite the absence of a separate express promise to do so.”

In reversing an earlier New Jersey Appellate Division ruling, the Court held that Franklin had affirmatively assumed the obligation to pay the on-going commissions based on Franklin’s assumption of Heritage’s obligations under the leases, the fact that the leases were expressly binding upon successors and assigns of Heritage, and the clear reference in each lease to the obligation to pay a commission to Pagano pursuant to the terms of a separate agreement. The Court also emphasized that Franklin is a “sophisticated purchaser” that had a sufficient opportunity to request access to the commission agreement, but failed to do so.

Sellers, purchasers and brokers of commercial property should take guidance from this decision. 

For sellers, the Court made it clear that commission obligations are “personal” and do not “run with the land.” Therefore, if a seller’s intention is to transfer its commission obligations to a purchaser, it is imperative that it obtain an explicit written assumption of such obligations from the purchaser at the closing. 

For purchasers, a purchase agreement must contain appropriate seller representations concerning the presence or absence of commission agreements. Purchasers cannot take “a head in sand approach” to its due diligence investigation. If any reference is made to a broker and/or commission agreement, further investigation is necessary. The obligation to pay future commissions should be clearly addressed in a written agreement executed by both parties.

For brokers, a commission agreement should bind the owner, its successors and assigns. It should also obligate the owner to reference the existence (and preferably, the terms) of the owner’s commission obligations in any lease which gives rise to a payment obligation and require the lease to expressly state that the successors and assigns of the owner are similarly bound. Brokers should pursue the inclusion of “due on sale” clauses in commission agreements. Lastly, consideration should be given to recording any commission agreement in the land records of the County in which the subject property is located, although land owners generally object to giving brokers such a right.

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On February 17,2009, the American Recovery and Reinvestment Act of 2009 (the “Act”) was enacted. The Act is an approximately $787 billion stimulus package that is aimed at addressing the current economic challenges prevalent in the United States. The Act contains several business tax reduction provisions. The Act permits some taxpayers the ability to elect to defer cancellation-of-debt income when a taxpayer or a related party repurchases debt issued by the taxpayer.

Generally, under Section 108 of the Internal Revenue Code income resulting from the cancellation of indebtedness is realized at the time the debt is satisfied for less than its principal amount. The Act amended Section 108 by providing for a deferral and inclusion of income arising from indebtedness discharged by the reacquisition of a debt instrument. The Act provides in pertinent part “ At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument shall be includible in gross income ratably over the 5-taxable-year period beginning with (A) in the case of a reacquisition occurring in 2009, the fifth taxable year following the taxable year in which the reacquisition occurs, and (B) in the case of a reacquisition occurring in 2010, the fourth taxable year following the taxable year in which the reacquisition occurs.”

This amendment will make it easier for borrowers to restructure debt by deferring tax payments for either 5 or 4 years and then spreading out the tax payments related to cancellation of debt over the next 5 years.

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The Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”) was signed into law on October 3, 2008 to provide, in part, a rescue plan (or as some have called it, a “bailout”) for the U.S. financial markets. The Stabilization Act created a Troubled Asset Relief Program (“TARP”), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages issued prior to March 14, 2008. 

On February 17, 2009, President Barack Obama signed into law The American Recovery and Reinvestment Act of 2009 (the “Recovery and Reinvestment Act”), a $787 billion spending and tax relief program, which by any measure is the largest appropriations bill in U.S. history. The Recovery and Reinvestment Act is an emergent attempt to restore confidence in the faltering U.S. economy by, among other measures, preventing further systemic problems in the economy resulting from residential foreclosures and unemployment and creating job growth through public works projects, tax incentives and tax cuts for small businesses and individuals, and aid to states. 

It has been estimated that approximately $400 billion of commercial mortgages will mature in 2009, and another $800 billion will mature in 2010 and 2011 combined. The shutdown of the commercial mortgaged-backed securities (“CMBS”) market together with decreasing market values and the historic tightening of credit standards by banks provide an enormous obstacle to refinancing these commercial mortgages. Despite capital infusion from the U.S. Treasury by programs promulgated under the Stabilization Act, banks have increased reserves and are skeptical about making loans secured by commercial real estate.

One possible solution to jump start the CMBS market is the expansion of the Term Asset-Backed Securities Loan Facility (“TALF”) to newly originated secured loans on commercial real estate properties. TALF is a Federal Reserve credit facility which was established by the U.S. Treasury under the Federal Reserve Act and is part of TARP. The Federal Reserve created TALF to address certain credit needs of individuals and small businesses by supporting the issuance of asset-backed securities (“ABS”) collateralized by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and the recent addition of securities backed by commercial mortgage loans.Pursuant to the Financial Stability Plan which was unveiled by the U.S. Treasury on February 10, 2009, the Federal Reserve plans to expand TALF to $1 trillion from the $200 billion which was originally committed. If approved, the $1 trillion credit facility would be available to eligible owners of certain AAA-rated ABS collateralized by the aforementioned asset classes, including new commercial mortgage loans. 

TALF loans are non-recourse secured by eligible ABS collateral and will have three (3) year terms. TALF loans will either be at a fixed or floating interest rate as elected by the borrower, and may be prepaid in whole or in part during the loan term without penalty. Substitution of collateral during the loan term generally will not be allowed. Borrowers are required to pay the Federal Reserve an administrative fee equal to 5 basis points of the loan amount upon closing of the loan. Unless extended by the Federal Reserve Board, TALF will cease making new loans on December 31, 2009.

An important aspect of TALF for its borrowers is the loans are not subject to mark-to-market or re-margining requirements. These two risk factors have caused turmoil in the CMBS market as investors worried about volatility in CMBS and a return to wider spreads face increased prospects of a loss on their investments.

TALF will commence operations on March 17, 2009, the initial subscription date, and the loans will be funded March 25, 2009. TALF loans will be funded monthly through December 2009, or longer if the Federal Reserve extends the facility. The subscription dates will be the first Tuesday of every month. 

TALF loan will not be available for CMBS in the March funding. However, The U.S. Treasury and the Federal Reserve anticipate that TALF will accept ABS collateralized by new commercial mortgage loans for the April funding. In addition, specifics regarding eligibility criteria for CMBS collateral, including the type and investment-grade rating category are not yet available. Once the specifics regarding TALF lending initiative for CMBS is available, we will provide an update.

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A maturity default occurs when the borrower under a mortgage loan fails to pay the lender the balloon payment, or principal balance, when due at the maturity of the loan. This term, which has not seen widespread use in recent years, seems to be on everyone’s lips in real estate and banking circles.

While you can have a maturity default on a loan which was already in default for failure to pay debt service or breach of covenant, it is now not uncommon to see loans which were fully performing up to the maturity date, but the borrower is unable to pay off the loan at maturity. This is the type of maturity default addressed in this article.

Few borrowers have the financial resources to pay off a substantial balloon payment on a commercial mortgage with their own funds. The traditional source of repayment is through a refinancing loan, either from the same lender or a new lender. Many borrowers facing maturity are now finding that refinancing loans are unavailable. CMBS is moribund. Large banks and other traditional lenders have no liquidity as a result of the credit freeze. Other lenders are not making loans because of the uncertainty of the value of real estate assets in the current market. There is some mortgage money out there, particularly from regional and local banks, which have lower lending limits. But wherever capital is available, the rules for real estate lending have changed dramatically. The name of the game now is lower leverage and skin in the game. It is not uncommon to see lenders offering terms which include 60% to 65% loan to value; 1.30% to 1.35% debt service coverage; and partial, if not full, recourse. With higher equity requirements and lower real estate values, many borrowers cannot come up with the cash now required to refinance.

Borrowers in these circumstances do have options. The number one option is to negotiate a restructuring and extension of the loan with the existing lender. The lender will not be happy to hear that the borrower is looking to extend the loan. After all, the borrower contracted to pay off the loan at maturity. This will not, however, come as a surprise to the lender, who is now spending most of his time dealing with defaulted loans. A number of factors may cause the lender to favorably consider a restructuring and extension. This has been a fully performing loan, unlike many others, and ideally the property is generating sufficient net operating income to continue to pay debt service as well as leasing costs and capital expenditures. The lender wants to avoid a maturity default, which will require him to take a substantial write-down of the loan. In a real estate market with increasing supply and decreasing demand, the lender doesn’t want the property stigmatized as “in foreclosure” or “REO property”. The number of foreclosures is at an all time high, and in New Jersey an uncontested foreclosure may take 12 – 16 months. The lender really doesn’t want to take the property back. He has lots of other properties he has taken back or will be forced to take back, and there are not a lot of buyers out there. He knows that you can manage your own building better than third party management hired by the lender. Finally, with several trillion dollars of commercial mortgage maturities occurring over the next few years, he knows that things are likely to get worse.

If the lender is inclined to extend the loan, he will squeeze the borrower to put some skin in the game with additional equity to pay down the loan and a partial guarantee. The borrower should count to ten and think carefully before responding. If the original loan was made five years ago at 75% of the then value of the property, current value may not exceed the loan balance. The borrower must understand that, at this point, he has no equity in his building, other than emotional equity. Emotional equity has no value and should not be a factor in what is in reality a new investment decision. The borrower has nothing tangible to lose, but the lender has a lot to lose and knows that he will likely take a substantial haircut if he has to take back the building. The borrower should resist any guarantee, and offer to put up equity so that he does have skin in the game, but insist that the lender forgive some substantial portion of principal. Here is where the negotiation gets interesting. Every deal is different, and not all lenders can or will write down principal as part of a restructuring and extension, but some have and many more will. Other factors to be negotiated include interest rate, amortization, reserves, fees and term. If you are going for the extension, you want five years. Don’t count on the credit markets returning to normal, or real estate values recovering, in a year or two.

Some borrowers are interested in negotiating a payoff of their maturing mortgages at a substantial discount. Many lenders today would be happy to sell defaulted mortgages at a substantial discount, and are doing so. The amount of any discount will depend upon the lender’s perception of the value of the property, NOI, rent roll, condition of the property and other factors. Discounts usually require immediate payment in cash. If the borrower doesn’t have the ready cash, and wants the lender to agree to a discount and then give the borrower time to come up with the money, it is a harder sell but by no means impossible. Many lenders are anxious to be taken out, and will give the borrower a forbearance period during which the lender will agree to accept a specified amount in satisfaction of the mortgage debt. 

For the reasons given above, lenders are under siege. This is good news and bad news. The good news is that a borrower may well be able to get relief. The bad news is that it may not be the relief the borrower is looking for. Lenders may be inclined to do the minimum needed to avoid the impending maturity default, and then sweep the problem under the rug. They are likely to offer an extension of six months or so, charge the borrower a fee and increase the interest rate. Remember, things are likely to get worse, and this is only postponing the inevitable. It is in the interests of both parties to deal with reality, and many lenders are beginning to see the light.

What if your mortgage is maturing in a year or two or even three? If you have a performing loan, it is not too early to talk to your lender about extending the loan. Some lenders will understand that this makes sense. Unfortunately, in most circumstances, it may prove difficult to get the lender’s attention.

As always, a borrower should do his homework, understand his options and the lender’s options, and put together the best possible negotiating team.

 

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The location of a retailer’s warehouse distribution facility is critical to its ability to meet market demands and to operate efficiently and profitably. Two areas which may not necessarily jump to the forefront of the site selection analysis, are the impact of title and incentives. Business incentives are often critical to a company’s bottom line, while the condition of title can have a more subtle, but often detrimental impact on a location. 

While the benefit of business incentives can be easily calculated into a project, the condition of title can have economic consequences which cannot always be anticipated. A review of title and survey may uncover rights of way, underground and aboveground pipelines for fuel and other combustible products, railroad easements and other encumbrances which may impact the timing of construction and hence on-time delivery of the space. Landlords do not typically consider the impact of these encumbrances, particularly as they relate to access and operations of a tenant. The location of pipelines in an industrial area, predominantly those that carry fuel, as well as obsolete railroad lines, can affect the location of buildings, docks and tractor trailer parking areas and the manner in which product is loaded onto tractor trailers.   Excessive idle time burns fuel unnecessarily and results in increased operational costs. In addition, it is critical to ensure uninterrupted access to a distribution facility seven days a week, 24-hours a day.

Delays and additional development costs are typically the adverse consequences of these types of encumbrances. It is important to analyze the impact of such encumbrances early in the development process. Frequently, removal of the encumbrances, or renegotiation of certain easements requires third parties unrelated to the transaction. Addressing the issues early may avoid costly delays and a prospective tenant may be able to shift the risk and burden to the landlord.

Governmental incentives present another possible benefit. Many governmental agencies offer incentives to entice businesses to locate in their jurisdiction. Such incentives typically offer some combination of tax credits, grants, low cost financing, income tax credits and property tax abatements, which can result in significant savings.

A common incentive is a job creation tax credit which is a refundable tax credit based on income tax withholdings from new jobs created at the facility. Another common incentive is job training grants which are made available to compensate the tenant for a portion of its training costs. In both cases, the tenant will be required to forecast the number of new jobs it will create over a period of time (typically the first three years) and disclose the anticipated salaries it will pay. It is important to note that the forecast must be realistic, because some governmental agencies will require the tenant to pay back all or a portion of the credits if its projections are not met.

Other common incentives include development loans for new building construction, building acquisition, acquisition of machinery and equipment, and other project costs (these loans are at rates and for terms more favorable than conventional financing); property tax abatements; and tax increment financing. The tax programs can result in a significant reduction, or a full abatement of real estate taxes for the project for some period of time, typically ten to fifteen years. However, the process to obtain them may be very time consuming. Often the landlord has already negotiated a real estate tax abatement, and it is important to ensure that the tenant obtains the benefit of that agreement in the lease.

Once the tenant determines what incentives are available, the tenant must either secure governmental approval of the grant of the incentives before signing the lease, or negotiate a contingency and termination right if the incentive is not obtained by a date certain. It is important to make sure the governmental agency knows that approval of the incentive is critical to the project.

Although there are many economic and non-economic factors that should be considered in the site selection process, by addressing the issues referenced above early in the development of its warehouse distribution facility, a tenant will increase the odds that it will have a successful project.

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Eligibility details for the Homeowner Affordability and Stability Plan (the "Plan") are now available on the U.S. Department of the Treasury website (www.treasury.gov). The Plan is part of President Barack Obama Administration's efforts to stabilize the housing market and assist certain responsible homeowners that are at risk of foreclosure due to the current recession and declining property values. The Plan has two primary programs - the refinancing of existing conforming mortgages owned or guaranteed by Freddie Mac and Fannie Mae into low fixed mortgage loans and incentives for mortgage lenders to modify existing first mortgages for eligible homeowners that are struggling to make their current mortgage payments. 

Under the refinancing initiative, the Plan will provide refinancing into a 30 or 15 year mortgage loan, at low mortgage fixed rates currently available in the market for 4 to 5 million homeowners who have conforming mortgages owned or guaranteed by Freddie Mac and Fannie Mae that under current rules do not have access to such low mortgage rates. You should contact your mortgage lender to confirm if your mortgage is owned or has been securitized by Freddie Mac or Fannie Mae. Mortgage lenders will start taking applications for the program after March 4, 2009. 

Under the mortgage loan modification initiative, the Plan provides incentives for mortgage lenders to modify first mortgage loans for borrowers that are at risk of foreclosure regardless of who owns or services the mortgage. To qualify for a mortgage modification the borrower must occupy the house as its primary residence; the monthly mortgage payment must exceed 31% of the borrower's monthly gross income; and the loan is not large enough to exceed current Freddie Mac and Fannie Mae loan limits.

If you think that you may be eligible for the refinancing or loan modification programs under the Plan, you should collect the information that you will need to provide to your mortgage lender. This information may include among other information:

• Gross monthly income information including recent pay stubs.
• Recent income tax returns.
• Second mortgage (including HLOC) information.
• Credit card payment and balance information.
• Student loans, car loans and other loan information.

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Once upon a time
and not so long ago
a developer named Murray
had a little bit of dough

So he contracted for some land
in a town without a code
so any building he could build
any place could run a road

He called up big box stores
said "hey guys I got some land
all I need is a quick lease
could you give my deal a hand"

They said "Hey we're your team
your lease we'll even use
cause no big box wants a landlord
to sing the Landlord blues

"Exclusives we won't need
why should we make a fuss
none of our competitors
come close to hurting us"

Murray said "why thanks
because you're all so kind
I'll give you two more options
of which I will remind"

Big box said to Murray
Murray you're so great
that your admin fee of seven
to that we'll now add eight"

Murray said "how fair
your deal is heaven sent
to show that I'm no slouch
you may assign without consent"

Oh the love and oh the joy
oh how it filled the air
a tenant and a landlord
how each they did so care

Some waste is at the site
how much would Murray pay?
Environmental folks all said
we’ll look the other way

So water’s got some spills
drink elsewhere if you thirst
After all, as we all know,
development comes first

A lender called up Murray
asked how much could it lend
The amount it did not matter
for it always would extend

And interest, that’s not needed
we know you have to live
And if you cannot pay us
we always will forgive

In two weeks came a closing
of lease and also land
this deal t'was sent from heaven
so wondrous and so grand

Murray he was joyous
So full was Murray’s cup
the alarm clock went off loudly
and poor Murray, he woke up

He shook and then he trembled
began to yell and scream
this deal so fair and speedy
was only Murray's dream

Then cried poor sobbing Murray
so sad and oh so blue
had we love and understanding
this dream it would come true

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