Legal Scoop on Southwest Florida Real Estate

Legal Scoop on Southwest Florida Real Estate

Should I Form an LLC for My Beach Rental?

Posted in Condominium, Tax

SanibelLiving and practicing on Sanibel, I have many clients who come to us when they purchase a condominium or home for investment income. One of the questions that often arises is whether they should hold their investment real estate in a separate legal entity for tax and liability purposes.

Our recommendation for most clients is that they should consider the formation of a Florida limited liability company (LLC). A Florida limited liability company offers the liability protections most often associated with a corporation, while have the tax attributes of holding the property in your individual name.

In an LLC, each owner holds a “membership” interest, often described as “units” or “percentages” that define their individual ownership, much in the way that a corporation is owned by shares of stock. The LLC should have an Operating Agreement setting forth the terms and conditions (think of them as “rules”) of ownership. There are many options in deciding what should go into an Operating Agreement. You should discuss these options with your attorney when creating the LLC.

Protections of an LLC

The limited liability protections of an LLC mean that in the event of a catastrophic claim, your financial exposure is limited to the value of the assets held in the LLC’s name. For example, assume that a tenant holds a beach party and a guest falls off a balcony, suffering a significant loss. The guest can sue the property owner for failing to properly maintain the property. If the property is owned individually, all of the owner’s assets are at risk for the entire judgment.

If the property is held in a limited liability company, however, the owner’s risk of loss is limited to the value of the property. Thus, if a potential judgment is more than the owner’s equity in the property, the judgment holder could only attach assets of the limited liability company (the property itself, plus any other assets, such as furnishings, or cash in the company’s checking account). If the property is mortgaged, that may mean little actual value.

This does not mean, however, that the property owner should not insure the property. Nothing can replace properly insuring your investment real estate. In addition, we recommend to all of our clients that they carry personal liability umbrella policies that provide additional insurance over and above their property insurance.

It is, however, possible that a claim can exceed the limits of a person’s insurance coverage, or even be outside of the limited of insurance coverage. For those reasons, the LLC acts as a financial fortress to protect the owner’s liability exposure.

Tax Implications

The tax consequences of an LLC are beneficial and simple. The Internal Revenue Service treats the entity as a “disregarded entity,” meaning that the IRS does not care about the legal structure of the entity, and will tax the owners as if they owned it in their individual names. That means if you form a sole member (one owner) LLC, the gains and losses relating the rental of the property will be reported on your personal 1040 individual income tax return. If there are two or more owners, then the LLC will file a Form 1065, Partnership Return, passing the gains or losses to the partnership in proportion to their membership interests.

Many real estate investors find that a limited liability company provides them with peace of mind of knowing that they have limited their investment risk. Ask your attorney if an LLC is the correct structure for you.

Update: Condemnation of Underwater Mortgages

Posted in Eminent Domain

underwater-mortgage-small.jpgRecent weeks have seen several developments with the condemnation of underwater mortgages. As reported by the New Jersey Spotlight, two new New Jersey mayors are moving in different directions on the underwater mortgage issue. In Newark, Mayor Ras Baraka plans “to employ eminent domain to take mortgages from the banks if necessary,” according to the New Jersey Spotlight. Meanwhile, Irvington Mayor Tony Vauss opposes the use of eminent domain to acquire underwater mortgages. Mayor Vauss’ stance contradicts Irvington’s previous position. In March 2014, the Irvington Township Council had approved a resolution calling for the Township’s Planning Board to prepare a plan to acquire underwater mortgages.

Meanwhile, on the west coast, on October 1, the Budget Committee of the San Francisco Board of Supervisors approved a proposal introduced by Supervisor John Avalos to authorize the City of San Francisco to begin negotiations to form a joint powers agreement with the City of Richmond in order to undertake the condemnation of underwater mortgages, as reported by the San Francisco Examiner.

Also of interest, Albany Law School Professor Raymond H. Brescia has published an article entitled “The Price of Crisis: Eminent Domain, Local Governments, and the Value of Underwater Mortgages.”  Professor Brescia’s article takes an in-depth look at the proposal to condemn underwater mortgages. Significantly, he suggests that local governments condemning underwater mortgages “should likely have to pay” 60 percent of the outstanding principal balance of any particular mortgage in order to acquire the mortgage, citing U.S. Department of Housing and Urban Development statistics showing that the U.S. government is receiving 60 cents on the dollar for the sale of distressed mortgages. It is not clear from Professor Brescia’s article whether his valuation concept takes into account that at least one plan — proposed by the City of Richmond in conjunction with Mortgage Resolution Partners — involves the condemnation of performing loans. As indicated in our September 12, 2013 blog post on this topic, some commentators have suggested “the relevant value inquiry is . . .  the value of the income stream.”

As events develop, we will keep you informed. Stay tuned to our blog for further updates!

Should I Buy or Lease Commercial Property?

Posted in Leasing

iStock_000015122897XSmall.jpgWith property values consistently trending upward, many Florida business owners are deciding whether to purchase or lease commercial real property. Below are a few considerations to keep in mind before making your decision.

Cost of Borrowed Funds

While there has been a stream of positive news about the general health of the economy, the Federal Reserve has kept interest rates considerably low. Therefore, it is an attractive interest rate environment for commercial borrowers who are financing real property. Depending on the term of the loan and type of property, current rates range from 3.50% to 6.50%, while prime rate (a barometer for different types of interest rates and the rate which financial institutions lend to their most prominent and creditworthy customers) remains at 3.25%. To put this into perspective, prime rate was 8.25% in 2007. Lower interest rates obviously lower the monthly payment obligation, and can accommodate a move to a higher tier property.

Judged against lease terms, the comparison changes depending on whether the owner is leasing for use as retail or office space. The former is generally based on a percentage of gross sales generated at the site, the latter normally contains an “escalation clause” that annually increases the rent obligation by 2-3%. Additionally, a commercial tenant (particularly a retail tenant) is likely liable for the real property taxes, utilities, and other expenses, which negates some of the perceived advantage that leasing may have over ownership.

Thus, a lease payment may initially have a lower payment burden but over time could exceed the payment obligation of a loan.

Beyond the Financing

Real property acquisition is usually not an organization’s principal business; rather, it serves as the space to conduct its primary operations. The decision to purchase or lease should be considered with a view toward the company’s long term growth plans. A younger company, for instance, could quickly outgrow a building in the first five or ten years of its acquisition. Or, a company may need more flexibility, and thus responding to market shifts could be more challenging when owning real property rather than leasing. A company that is considering purchasing must also consider whether a commercial mortgage on its balance sheet will preclude future borrowing, such as a working capital line of credit, which many companies need for monthly expenses like payroll.

A company that leases has reduced autonomy with the leased space and is subject to the landlord’s future plans for the property; this can be problematic, for example, in retail businesses, where location and co-tenancy concerns are crucial. A tenant may establish a profitable retail business in favorable location and find a landlord unwilling to extend a lease at the end of the term. A tenant may also want to retrofit a space for its specific business; this involves negotiating the type of improvements in the premises, the amount the owner is willing to expend on the improvements (if any), and which party controls the construction.

Overall, an enterprise should consider the need for autonomy and mobility, the effect on cash flow, early termination penalties in leases, maintenance obligations, and the forecast for property values.

Tax Considerations

Without getting into the intricacies of the tax code, generally, lease payments and operating expenses (utilities, property taxes, and maintenance costs) are tax deductible for tenants. For owners, interest payments on the mortgage loan, building depreciation, and operating expenses are deductible. However, the tax code, generally, gives a commercial building a lifespan of thirty-nine years. For owners this means that building depreciation and capital improvements to the building are spread annually over the thirty-nine year lifespan. When deciding to purchase or lease, a cost analysis should be done on an after-tax basis, with future appreciation in the land being a major component in the analysis.

From a broad perspective, those are some of the primary factors companies should consider. However, every company, and its circumstances, is different; business owners should elicit guidance from a real estate attorney and other professionals to assist with the decision-making process.

Community Association Managers Should Proceed Cautiously

Posted in Condominium, HOA

caution tapeIn reference to some new roles of community association managers authorized by House Bill 7037, which became effective on July 1, 2014, the website, flcamtest.com directs some wise words to Florida community association managers: “As a practical tip, just because you are a CAM and CAN do those task [sic], does not mean you SHOULD do those tasks.”

Required Notices

Community associations, including condominium, residential homeowners’, and cooperative associations, are required to provide written notice to owners who are delinquent in the payment of association assessments prior to filing a lien against the delinquent owner’s property, and prior to foreclosing on the lien. While the statutes previously required certain information to be included in such notices, they now include actual forms that must be used for the notices, as well as a form for the release of the liens.

New Authorized Tasks for CAMS

The new law authorizes community association managers (CAMs) to determine the number of days required for statutory notices, determine amounts due to the association, collect amounts due to the association before the filing of a civil action, complete forms related to the management of a community association that have been created by statute or by a state agency, and draft pre-arbitration demands, among other more standard tasks. Since the statutes now have created forms for pre-lien and pre-foreclosure notices, CAMs are authorized to complete and send these notices.

It’s Not Just a Form

While perhaps filling out a form provided by the statute may seem pretty simple, there can actually be many variables that go into the calculation of the total amounts which can be claimed by an association. It should be verified that any claimed interest and late fees were properly calculated and provided for in the governing documents, and the effect of any foreclosures on the property on the amounts that are claimed due. Prior to filing a lien, an association should have its legal counsel verify that the calculations were properly made. The law in this area is constantly changing and association managers are not expected or equipped to keep up with current case law.

There are also requirements in the statutes that the pre-lien notices are sent by certified mail, return receipt requested, to the owner at their last address on record with the association and at the subject unit or parcel, if that is not the last address of the owner. If the notice is not sent properly, it can be deemed invalid and, thus, could possibly invalidate the entire lien, costing the association time and further delaying the recoupment of funds.

Potential Risks to CAMs and Associations

The new law also allows the CAM to contract with the association to indemnify the CAM for damages to the association resulting from the CAM’s ordinary negligence.  While this language may put the association at risk by protecting the CAM should they make a mistake in carrying out their new roles, it also may not fully protect the association manager should they make a mistake that damages the association.  Having the association counsel continue to prepare pre-lien and pre-foreclosure notices will further remove the CAM from that potential risk.  The attorney handling the foreclosure suit may also prefer that the pre-suit notices are prepared by the attorney in order to prevent having the suit thrown out due to insufficient notice.

Debt Collection Protections

Finally, the association managers may not be required to comply with the Fair Debt Collection Practices Act (FDCPA) when sending collection demands. The purpose of the FDCPA is to protect the individual debtors from improper and harassing collections practices by third party debt-collectors by requiring certain disclosures and opportunities to dispute the claimed debt. The preparation of the pre-suit collections notices by association managers removes this protection.

Pre-Arbitration Demands

With regard to the preparation of pre-suit arbitration demands involving association disputes, an association manager puts itself and its association client at risk of jeopardizing or delaying an association’s case if the claims are not properly stated in the initial pre-arbitration notice. Very likely an association attorney will take over the arbitration case after the demand is sent, and the attorney may need the demand to be resent if the claim is not made in the proper and legally sufficient manner.

Think Before Acting

Prior to this new legislation, association attorneys were increasingly concerned that some CAM’s who were performing some of these tasks were venturing into the “unauthorized practice of law.” Now that these tasks are “authorized” by the legislature, a CAM should carefully consider whether he or she feels capable of properly performing them, both for the protection of the CAM and the association.

Imagine Courtesy of Eugene Zemlyanskiy on Flickr

Lee County Road Round-Up – Spotlight: Bonita Beach Road Update

Posted in Lee County Road Roundup

8293998585_d02b699ef7_q.jpgPhase III of the Bonita Beach Road widening project may be dead in the water, at least for now. The Bonita Springs City Council has voted to withhold contributing any funds toward the widening of Bonita Beach Road from four lanes to six lanes between Old 41 Road and U.S. 41, according to the News-Press

Lee County and the City of Bonita Springs share the cost of funding for certain projects. Without the support of the City of Bonita Springs, the widening project’s status is in question.

Stay tuned to our blog for further developments!

Florida Legislature Expands the Legal Work Permitted by Community Association Managers

Posted in Condominium, HOA

House Bill 7037, recently adopted this past legislative session, expands the permitted practices of community association managers.

The bill, effective July 1, 2014, enlarges community association managers’ powers, some of which include:

  • determining the number of days required for statutory notices;
  • determining the amounts due to the association;
  • collecting amounts due to the association before the filing of a civil action;
  • calculating the number of votes required for a quorum;
  • negotiating monetary or performance terms of a contract subject to approval by an association; and,
  • drafting pre-arbitration demands.

Some members of the legal community have expressed concern that these new powers could constitute the unauthorized practice of law.

Under the Florida constitution, the Florida Supreme Court has the exclusive authority to both define and regulate the unauthorized practice of law. What constitutes the unauthorized practice of law has been partly defined as “[g]iving legal advice and counsel to others as to their rights and obligations under the law and the preparation of legal instruments.” Also included in the definition are activities requiring the interpretation of statutes, administrative rules, and community association governing documents.

The Florida Supreme Court, in an Advisory Opinion (a nonbinding interpretation of the law) in 2002, stated that community association managers’ preparation of lien claims and determination of the requirements for properly noticing meetings would constitute the unauthorized practice of law—the former, an example of a legal instrument, and the latter inevitably requiring interpretation of a statute and association governing documents. Whether any provisions in the current bill will be challenged remains unclear.

Associations may view the bill as providing a reduction in expenses. However, errors in drafting, misinterpreting a statute or the association’s governing documents could sacrifice short term gains to long term legal costs in correcting an issue. The initial financial outlay for an attorney to prepare these documents can be negligible compared to the expenses incurred in bringing an association into compliance with the law.

Lee County Road Round-Up: Spotlight Homestead Road Update

Posted in Eminent Domain, Lee County Road Roundup

There have been some developments since the last blog post on the Homestead Road widening project. According to ABC7, funding from Lee County DOT is available for the project to proceed.

It is important to start planning now, as right-of-way acquisition may affect property owners along the segment of Homestead Road running from south of Sunset Boulevard to Alabama Road. If you are contacted by the Lee County Department of Transportation, you should contact an eminent domain attorney in order to assist you.

Stay tuned to our blog for further developments!

Habitat Women Build 2014

Posted in Uncategorized
2014 Women Build TNR Team

Pictured above (from left to right) Tyra Read, Max Dean and Nancy Ramos (Ramos Builders), and Shawnmarie Pitts (The News Press)

One of my favorite events I look forward to every year is the Habitat for Humanity of Lee and Hendry Counties Women Build. Women Build is Habitat for Humanity’s nationwide program to empower women to take action against poor housing conditions by recruiting, educating and inspiring women to build and advocate for simple, decent and affordable homes in their communities.

According to the Census Bureau, more than 16 million children are living in poverty. The good news is that since the program began in 1998, more than 2,100 homes have been built by women crews in the United States. For Habitat for Humanity of Lee and Hendry Counties, this is the fourth year it has participated in Women Build.

Beginning in March of each year, women form teams to raise the money needed to renovate the homes. The women also physically renovate the homes, which are completed so they can be delivered to the families in May for Mother’s Day. This year, my team was comprised of members of the Cape Coral Construction Industry Association. We not only met our goal for the funds we pledged to raise, we also volunteered on various days to work on the home located in Cape Coral. The home was then officially dedicated to a wonderful mother, Vanessa Saez (pictured below), on May 10, 2014, just one day prior to Mother’s Day. There was an official Blessing of the Home, as well, at the dedication. It was an amazing experience!

2014 Women Build Homeowner

Tyra Read and New Homeowner Vanessa Saez!

Women Build truly shows what women can accomplish (what some may believe is impossible) by swinging hammers, paint brushes and caulk guns, as well as by raising the funds needed to renovate the homes.

Bottom line: I am blessed to be able to participate in Women Build and help families achieve the dream of owning a home. I encourage anyone interested in participating in Women Build to contact Habitat for Humanity of Lee and Hendry Counties at 239-652-1677 or www.habitat4humanity.org/women-build or Cape Coral Construction Industry Association at 239-772-0027 or www.cccia.org. My team with Cape Coral Construction Industry Association has begun compiling a list of members for next year’s team and we would love for you to be involved.

Primer on Real Estate Commissions

Posted in Real Estate

With the uptick in real estate activity it is helpful to recap the two primary ways that a licensed sales agent is entitled to a commission from the sale of real estate.

Contract

Most agents have their clients execute a listing agreement, which primarily comes in two forms and entitles the agent to a commission in different contexts.

Generally, the exclusive right to sell agreement entitles an agent to a commission irrespective of who sells the property. For instance, an owner who executes an exclusive right to sell agreement and consummates a sale to a buyer without the aid of the agent is still obligated to pay the commission. Intuitively, an owner might think that once the contract expires without the agent procuring a buyer, the agent’s right to a commission is extinguished. However, most exclusive right to sell agreements contain “protection period” provisions that extend the agent’s right to a commission for a certain number of months after expiration of the agreement. These provisions trigger the agent’s right to a commission if a sale is consummated with a buyer whom the agent or seller communicated with (regarding the property) while the listing agreement was in effect.

The second type of agreement is the exclusive agency agreement. Contrary to the exclusive right to sell agreement, this contract simply means the owner will not enlist another agent to sell the property. These agreements normally do not entitle the agent to a commission unless the agent procures a ready, willing and able buyer. Thus, an owner who consummates a sale without the agent’s aid is not obligated to pay the agent a commission.

Doctrine of Procuring Cause

In the absence of an agreement, agents may rely on the procuring cause doctrine, which Florida courts recognize when the agent brings the parties together and the sale is consummated from continuous negotiations inaugurated by the agent. Invariably, the doctrine is a fact intensive inquiry into the circumstances of the sale. A court will look to various factors to determine whether the doctrine applies:

  1. Is there any agreement between the parties? If so, is it in writing?
  2. An exclusive right to sell agreement is normally dispositive of an agent’s right to commission. However, merely titling the agreement with that caption is insufficient; the agreement must contain language delineating the agent’s right to a commission regardless of who consummates the sale.
  3. In situations where the agreement does not contain a “protection period,” the length of time between the expiration of the agreement and the sale.
  4. A break in continuity of events leading to the sale indicating that the agent’s involvement may be questionable.
  5. A breach by the agent of the listing agreement.

Bottom line:  Disputes regarding real estate commissions can be avoided by a well drafted listing agreement. Realtors and property owners would be well served to elicit guidance from a real estate attorney to review listing agreements to ensure they align with the parties’ intentions.

Update: Condemnation of Underwater Mortgages

Posted in Eminent Domain

underwater-mortgage-small.jpgSince our last update at the beginning of this year, Irvington, New Jersey has taken a small step toward the use of eminent domain to acquire underwater mortgages. In late March 2014, the Council of the Township of Irvington, in a 6 to 1 vote, approved a resolution calling for the Township’s Planning Board to “identify properties ‘in potential foreclosure that may be designated as areas in need of redevelopment,’” according to Eunice Lee’s article in The Star Ledger.

The Township’s resolution authorized “the [P]lanning [B]oard to prepare a redevelopment plan targeting 199 ‘underwater’ mortgages held by private investment groups, with the goal of acquiring them and offering better deals to the borrowers,” as reported by Joseph Tyrrell in the NJ Spotlight.

According to The Star Ledger, “Irvington would pay the mortgage holders’ fair market value and then restructure mortgages into lower principal payments that are more favorable for homeowners.” While the Township of Irvington has not yet actually begun condemning underwater mortgages, it has taken a small step in that direction with its resolution.

Stay tuned to our blog for further updates!

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