Ohio Real Estate Tax “Avoidance”

Not paying taxes that are legally owed is often referred to as “tax evasion”, and has been, is and will always be illegal. Reducing one’s tax burden, legally, however, by taking advantage of applicable exemptions, credits…and other tax saving techniques authorized by law is not only legal, but smart. In other words, don’t pay the “tax man” any more than you have to.

Before you pay your next Ohio real estate tax bill, keep in mind the following:

I. Owner-Occupied 2.5% Credit

 If you reside in your own home in Ohio, you are due a 2.5% reduction on your property tax bill.  All you have to do is apply for this reduction. The reduction is often taken care of at the time of purchase of the real estate if the Real Property Conveyance Fee Statement of Value and Receipt (Form-DTE 100) is correctly filled out.  To receive the two and one-half percent (2 1/2 %) homestead tax reduction, you must own and occupy your home as your principal place of residence on January 1 of the year you file for the reduction. A homeowner and spouse are entitled to this tax reduction on only one home in Ohio.  

In Summit County it is estimated that over 30,000 eligible homeowners have not applied for the 2 1/2 % homestead tax reduction, and in Cuyahoga County, it is estimated that over 80,000 homeowners are eligible for the reduction but have not applied. Homeowners can check their tax bill to see if they are receiving the benefit; or call their county auditor or fiscal officer
II. Homestead Exemption
The Homestead Exemption allows senior citizens and (permanently and totally) disabled Ohio residents to reduce their property taxes by protecting some of the market value of their home from taxation. The exemption, which takes the form of a credit on property tax bills, allows qualifying homeowners to exempt $25,000 of the market value of their home from local property taxes. For example, through the Homestead Exemption, a home with a market value of $100,000 would be billed as if it is worth $75,000. The exact amount of savings will vary from location to location. But overall, across Ohio, qualified homeowners should save an average of about $400 per year.  
Note, however that a “qualifying income requirement” ($31,000/yr. or less) was recently added as a condition to receive this exemption. AS OF THE 2014 TAX YEAR: INDIVIDUALS WHO TURN 65 IN 2014 (and thereafter) OR WHO BECOME DISABLED AFTER JANUARY 1, 2013, WILL BE REQUIRED TO HAVE OHIO QUALIFYING INCOME ($31,000 OR LESS FOR THE 2015 TAX YEAR) IN ORDER TO RECEIVE HOMESTEAD EXEMPTION BASED UPON AGE OR DISABILITY.

To apply for the Homestead Exemption, complete the application form (DTE 105A) - Homestead Exemption Application Form for Senior Citizens, Disabled Persons, and Surviving Spouses. Then file it with your local county auditor. Applications for the Homestead Exemption open the first Monday in January, and must be received by your county auditor’s office no later than the first Monday in June.

III. Total Exemptions

Pursuant to Ohio Revised Code Chapter 5709, there are a number of types of property uses that are exempt from real estate taxes altogether. Included are: schools, churches, and colleges (ORC Sec. 5709.07); government and public property (ORC Sec. 5709.08); public recreational facilities used for athletic events (ORC Sec. 5709.081); property used for public or charitable purposes (ORC Sec 5709.12) and property used for nature preserves. While there is a form to apply for these exemptions, (http://www.tax.ohio.gov/portals/0/forms/real_property/DTE_DTE23_FI.pdf ), it is highly recommended that a tax attorney be consulted because the eligibility requirements can be complex, and the form is not a simple, “fill in the blank type form”.

IV. Segregation Techniques

Remember, real estate taxes are supposed to tax …you guessed it, real estate and real property; not personal property. Basically, as a general rule, real property refers to land and things permanently attached to the land. Personal property generally refers to everything else: the items which are movable and not a part of the land (and that are intangible in nature). This is an over simplification, however, because the character of personal property can be altered. 
Property that is initially personal in nature becomes part of realty by being annexed to it. In certain cases, the intention or agreement of the parties (in a lease, for example) determines whether personal property retains its character as personal property. Additionally, complex tax code provisions and regulations will dictate (in terms of deductibility) what is personal vs. real property. Nonetheless, with certain items, there is no question. For example, a dining room table and chairs are definitely personal property in a residential context, and a commercial manufacturer’s plating equipment is definitely personal property in a commercial context.
The best time to recognize this difference, and segregate property accordingly is prior to purchase. In fact, the conveyance statement referred to earlier specifically calls for segregation. Segregating personal property value from real property value at this point will save conveyance fees on closing ($4/$1,000 of  real estate value), as well as real estate taxes after the purchase, as the auditor will likely value the property at its conveyed value. For complex commercial properties, a cost segregation study is strongly advised. A cost segregation study (CSS) is a strategic tax tool that allows owners to allocate building costs between real estate and personal property based on case law and IRS guidance using qualified construction engineers and estimators to perform the study. The result is to accelerate depreciation in the early years of a project’s life, producing deferred taxes and increasing cash flow during that period.  A company like Duffy+Duffy Cost Segregation Services can provide the analysis required.

V. Contest Your Valuation/Taxes


Note: The Board of Revision Will Only Accept Tax Year 2014 Complaints between January 1, 2015 and March 31, 2015.

To successfully challenge a property’s taxable value, you will need to establish at least one of the following facts:

·         The county tax assessor relied on information that is incorrect or incomplete. For example, the assessor may have assumed that your home contains 3,000 square feet of space when it actually has only 2,500 square feet.
·         The tax assessor set the taxable value of your property higher than the taxable values of similar properties in your community.
·         The tax assessor assumed that the current market value of your property is higher than it actually is.

If you are convinced that any of the above facts is true, consider first, conferring informally with your county auditor. Many counties set up an informal meeting process with official notification of the same. Even if this process is not officially set up, however, you can still contact the auditor. If you have convincing evidence that the tax assessor has overvalued your property, he/she may agree to change the value. In that case, you will not need to file a complaint. You can get contact information for your county tax assessor from the County Auditor's Association of Ohio.

One other factor to consider before deciding to file a complaint is whether the property was recently acquired through a transfer by deed.  If the transfer occurred within a couple of years of January 1 of the year for which you are considering filing the complaint, the board of revision usually presumes that the price paid for the property is the best evidence of fair market value of the property.  This presumption is a benefit to taxpayers if the price for the property was less than the value that the auditor assessed for the applicable year. Unfortunately, if the opposite is the case, expect to pay additional taxes soon. Also keep in mind that if you have evidence of a major casualty, the auditor will usually lower the value accordingly, based on this information, without need for a hearing.

If an informal adjustment is not made; definitely consider filing a complaint with the applicable county board of revision. An attorney is always advised, and sometimes required to initiate the action. Some attorneys will handle tax complaints on a contingency basis, or at least give you a good guestimate of fees. If successful, a lowered valuation (and accordingly, lower taxes) will usually outweigh the legal costs to challenge same.

The moral of today’s story?  “Don’t “leave money at the table”. Make sure you are getting the relief you are owed from statutory tax exemptions, and consider tax savings techniques that can save you even more. We need all the help we can get these days; especially from the “tax man”.

When Improvements Abut Property Lines: Consider a Maintenance Easement

When improvements abut property lines, landowners will inevitably encroach on the neighboring property when maintaining and repairing their own property.  Of course a landowner can always just ask for permission to have equipment, contractors etc. go onto the neighbor’s property while conducting the repairs, but that assumes the neighbor will be reasonable and accommodating. Even if a good relationship between neighbors exists today, it could change in the future or the property may change hands and the new neighbors may not be cooperative.

If the need to encroach on the neighbor’s property will occur on any regular basis, one solution is to enter into an easement agreement for purposes of maintenance. Such easements can be simple (3-4 pages) or complex (30+ pages) as needed, based upon the needs of the property owners and the value of the improvements that are affected, and are typically recorded and run with the land.  This would differ from a license agreement. License agreements are a less permanent solution, are typically not recorded, may be shorter in duration and are just between the parties to the license and their permitted assignees.  Easements, unlike licenses, are insurable under the property owner’s title policy

At a minimum, every easement needs to clearly identify the parameters of the easement. For example, when a parking lot abuts against a neighbor’s fence or driveway, a simple maintenance easement that’s runs approximately 10’ along each side of the property line may suffice.

The easement agreement must also contain a formal grant of the easement right and identify the purpose of the easement, such as “the nonexclusive right, privilege and easement upon, across over and through the portion of the easement promises that is located on the [neighbor’s] property for the maintenance and repair of improvements located on the [landowner’s] property”.   

Limitations on the easement would include not causing damage to the other’s property, or unreasonably impeding or impairing the neighbor’s use of its own property.

The easement term should also be addressed. Typically such easements would be perpetual unless the parties to the agreement mutually agree to terminate. However, if there are any circumstances in which either party might have legitimate reason to want the easement terminated earlier, then it should be addressed in the agreement. One example would be if the easement is unilateral, not reciprocal, and the landowner needing the easement agrees to pay for the easement right. If the landowner stops making the agreed upon payments, the easement agreement should address the neighboring landowner’s right to terminate the easement due to nonpayment.  

In complex situations, where there are costly improvements that are intertwined with other property owners’ improvements, the parties may want to include more extensive obligations to maintain improvements in good repair at a specified level of quality, and to indemnify the other for damages it may cause. One example of a more complex support and encroachment easement would be the reciprocal assess and easement agreement and other related maintenance easements between the City of Cleveland and Cuyahoga County regarding the Cleveland Convention Center, the City parks located on top of the Convention Center and the property lines that run between the parks, Public Auditorium, the medical mart, and parking garages. Copies of these easement agreements are recorded in the county property records and are public documents.

Whether the potential maintenance and support issues between neighboring properties are significant or simple, recording a reciprocal easement agreement may be the most viable lasting solution.

Assigning/Assuming the Benefits and Burdens of Rental Property

The purchase and sale of real property that is leased by one or more tenants presents a number of issues worth thinking about and planning for, before you “sign on the dotted line”. Usually, rental property is worth a premium because the owner receives…rents. Often, however, rental property can be a trap for the unwary who focus on the benefits, but not the burdens of income producing property.
Of course, when buying rental property, the best time to focus on these issues is…before you buy. Some sellers will allow potential buyers to review their leases before signing the purchase agreement. From the buyer’s perspective, this is preferable. Why spend the time and money on a contract, if, for example, your lease review uncovers that there is only one year left in the lease term of the anchor tenant, it is a down market, and the tenant has not renewed. Whether before the contract is signed, or during due diligence, the lease should be examined carefully for such items as: early tenant termination rights; inability to pass on to the tenant, real estate tax increases due to the sale of the property; landlord obligations to make tenant improvements upon renewal (or landlord obligations to make initial improvements for a recently signed-up tenant); rents that decrease after amortized improvements have burned off; caps on CAM increases; and poorly draft assignment/sublease provisions allowing the tenant, without landlord’s consent to assign the lease to an un-credit worthy assignee.
Assuming analysis of the lease demonstrates its benefits outweigh its burdens (and assuming the lease does not provide for its termination upon a sale), does anything further need to occur for the buyer to become the new landlord after the sale? Is a formal assignment of the lease from seller to buyer legally required?
As a general rule, the answer is no, and no.
In almost all cases, when the landlord sells his interest in real property, the purchaser takes subject to such lease, by operation of law. The lease is an encumbrance against the title that existed prior to the transfer, and consequently, it exists after the transfer.

So, if the lease automatically transfers with the property, by operation of law, and assignments are not required, why do lawyers prepare them? Is it just a ploy for attorneys to charge higher fees and complicate seemingly simple transactions? The answer, of course, is not at all.  It is usually when we try to simply, what is by nature complex, that unfortunate results ensue.
So why do we prepare assignment/assumption of lease agreements? First reason, as my Jewish grandmother used to say, is “it couldn’t hoit”. While typically, a landlord’s lease rights and obligations transfer to a buyer, without need for an assignment/assumption agreement, such an agreement provides certainty to the process. In limited circumstances, the buyer who wanted a “free and clear” property without leases might be able to argue the leases are not binding against the buyer (and prevail in a court of law) if he/she had no notice of the leases, same were not recorded, and that there were no visible signs of occupancy at the property. On the other hand, the buyer will have zero success trying to prove there was no notice of a lease if he/she signed an agreement assigning the lease to him/her.

 Equally, if not more important, the assignment/assumption agreement presents a good vehicle to finalize issues such as indemnifications (e.g., buyer indemnifies seller for post-closing landlord obligations; seller indemnifies buyer for pre-closing landlord obligations), responsibility for outstanding leasehold improvements and obligations re: past due rents owed by tenants. The buyer can ensure that it is not “buying” any extraordinary landlord’s obligations such as the build out of a tenant’s space, by simply exempting same from the otherwise catch all language making buyer responsible to assume all landlord obligations under the lease.

The issue of security deposits can also be dealt with in the assignment/assumption agreement. Without an agreement as between buyer and seller, pursuant to Ohio law, the tenant may look to the original owner (seller) for return of its security deposit. The case of Tuteur v. P. & F. Enterprises (21 Ohio App 2nd 122 established this tenet of Ohio law in 1970. The result in Tuteur would be problematic for a seller (faced with having to return security deposits it no longer had) because security deposits are typically credited to the new buyer by the escrow agent at closing.

Many real estate investor/managers make a fine living off the benefits of rental real estate. However, many others (usually those who do not seek legal representation, or wait to consult an attorney until after everything is signed) unfortunately, find that the burdens can far outweigh the benefits. The assignment/assumption agreement is the perfect equalizer.

Sellers wanting to further insulate themselves from lease liability after a sale should be proactive when drafting/negotiating their leases and provide that the seller is automatically released from all liability under any leases, arising after the sale. When faced with this proposed language, tenants should negotiate for a qualification to the effect that such a release is effective, only on an express assumption by the new owner of the landlord's obligations under the lease, which brings us right back to the moral of this story:

When selling or buying rental real estate, insist upon an assignment/assumption agreement to ensure the benefits and burdens of rental real estate are fairly apportioned to buyer and seller, after the sale.

Featured Resource: ODNR--An Overview

As an attorney, I've come to appreciate over the years how our state government in Ohio is quite helpful when it comes to putting resources on the Internet. You just need to know where to look for it. Since this blog is about Ohio real estate law, I wanted to provide an overview of the legal/regulatory or generally helpful information you can access through the Ohio Department of Natural Resources (ODNR), just by selecting the 'Regulation' tab on their web site navigation bar and viewing the pages for the following 4 ODNR divisions:

This division regulates Ohio's oil and gas drilling operations, oil and gas production operations, brine disposal operations, solution mining operations and underground injection operations. Its staff inspects the drilling, restoration, and plugging of all oil and gas wells in the state.
In additional to having access to the various laws, regulations and permitting requirements, this division’s web pages provide searchable databases for well locations, other well data such as information on completion, permitting and production of the wells, and shale activity in the state.

This division oversees the development and restoration of mineral and fossil fuel extraction sites. It operates various programs to address the environmental and safety aspects of the coal and mineral mining industries. The division also restores abandoned mine land, enforces mining safety laws, and ensures the protection of citizens, land and water resources.

Program and support services include permitting, bonding, inspection, enforcement, mine safety rescue support and training, hydrology, soils, blasting, archaeology, engineering, design, information technology and administrative support.

The division's stated purposes include the following:
"The Permitting, Hydrology and Bonding section reviews all permit applications to mine industrial minerals and coal; it verifies all bonding and surety requirements; and manages permit records, databases, and permit related information.
The Field Inspection and Enforcement program enforces the laws regulating active mining activities to ensure the protection of citizens and conservation of environmental resources; and oversees land reclamation requirements to assure operators restore mine lands and waters to productive uses.
The Abandoned Mine Land program eliminates health and safety hazards and cleans up lands and waters damaged by coal mining that occurred prior to today’s stricter reclamation laws; including reclamation of underground mine openings, dangerous highwalls, dangerous mine subsidence, and cleanup of hazardous and/or polluted water impoundments, acid mine drainage, burning coal refuse, and others.
The Mine Safety program promotes safe mining practices for the protection of miners through services that include inspections at surface and underground mines, focused on accident prevention; examination and certification testing; mine rescue support; and safety training."

You can also find on their web page a Mine Locator that provides an interactive map of underground and surface coal and mineral mines in Ohio

The ODNR Division of Geological Survey is the state's oldest natural resources agency, established by the state legislature in 1837 as the Geological Survey of Ohio.

Its mission is to "To provide geologic information and services needed for responsible management of Ohio's natural resources."

Topics include, to name just a few, an abandoned underground mine map, astrogeology (including a meteorite find map), Ohio seismic information, Lake Erie geology, and..... who knew ̶ Fossil Hunting in Ohio.

The Division of Soil and Water Resources was statutorily created in July 2010 through the merger of the Division of Soil and Water Conservation and the Division of Water. Its mission includes, among other things:
  • Providing administrative guidance, training, program development support and financial to Ohio's SWCDs, their board members and staff;
  • Regulating construction and repair of dams and levees; 
  • Implementing agricultural and non-point source water pollution control programs;  
  • Maintaining and distributing data on all water resources including ground water levels, stream flow, and precipitation;  
  • Supporting and assisting fund local development of watershed management and protection action plans;  
  • Implementing a comprehensive statewide soils information program; and
  • Maintaining standards for sediment control and stormwater management.
The web page for this division contains numerous mapping options including: a groundwater resources map, access to well water logs and technical assistance such as pipeline construction standards.

Real Estate 101-Purchase and Sale Agreements

            General Notes: The purchase/sale agreement is probably the most misunderstood, but most important document utilized in a real estate transaction. Some of the unwary mistakenly refer to the agreement as merely an “offer”, not understanding that if signed by (accepted by) the seller, it becomes a binding contract. Others, usually to justify not obtaining a lawyer, fool themselves into believing that they only signed a standard form with unenforceable “boilerplate” (one-sided, protective) language. Whether the agreement is contained on a “standard,” printed form, is replete with numerous protective provisions, or is entitled “offer to buy real estate and acceptance,” it will be held to be a binding, enforceable agreement to purchase/sell real estate with rights and obligations of the parties arising thereto (absent contract law-type defenses – i.e. no offer, acceptance, consideration; illegal; contrary to public policy).

            It is true that title cannot transfer without a deed and a closing. The closing however, merely carries out the provisions of the agreement. The agreement is of paramount importance as it creates the interest of the buyer to be conveyed by deed and determines the rights and obligations of the parties, some of which may remain in play well past the closing. While provisions concerning title, occupancy, possession, enjoyment and quantity of land conveyed will “merge” into the deed (in other words, be superseded by deed language regarding these issues), the bulk of the contract, and its representations, warranties and covenants will live on, post closing, absent language in the contract to the contrary.

            Types of Purchase and Sale Agreements: There are many different types of purchase/sale agreement forms in use. Real estate broker or legal stationary company “standard” forms are used in most residential and simple commercial deals. For sophisticated, commercial deals, most attorneys will open with their “Seller form template” or “Buyer form template”, depending, of course on who they represent, with such forms typically ranging from ten to fifty pages. The inherent problem is that there is little that is standard about a real estate transaction. Every purchase/sale is unique since there are different types of property, different buyers and sellers (with different motivations and levels of sophistication) and different potential liability in each transaction. This author, however, is not advocating abolishment of standard forms.

            The Attorney’s (Tailor’s) Role: Obviously, the attorney looking to change custom, and prepare twenty page contracts for small, “brokered” single family house deals will not generate a lot of business. The real estate attorney’s optimal role can be analogized to that of a clothing store tailor. If the off the rack suit (contract form) does not fit, you must alter it. On residential/simple commercial forms, inapplicable clauses can be crossed out and initialed by the parties, small insertions can be written in and initialed, and large insertions can be added by way of addendum. When larger, commercial forms are being used, the attorney on the other side will typically “redline” (by way of Microsoft “track changes” or similar software) the document to add, important, protective clauses to the document, and delete provisions which are thought to present too great a risk of unbudgeted-for expenses and potential liability. Usually, a number of renditions by both attorneys will be necessary until a more fairly balanced, negotiated agreement is settled upon.

            Broker Note: Please note that brokers crossing out contract provisions and substituting new language may be crossing the line into “unauthorized practice of law.” Contract modification should not be attempted without advice of counsel.

            Required Elements for Enforceability: Even before the minutiae within the agreement form is analyzed and such issues as representation and warranty provisions are debated, covenants on how the property is to be operated between signing and closing are discussed and title and survey provisions are negotiated, you must ensure that your real estate contract will be enforceable. A real estate contract, like any contract is generally defined as a binding agreement or promise to do something. Basically, to be a valid, enforceable legal contract, five elements must be present:

1. Meeting of the Minds /Agreement.   Agreement occurs when one party to a contract makes an offer or promises to do something and the other party accepts.  For example, suppose a person offers to buy a property you have advertised by virtue of sending you a contract “containing the terms upon which they would be willing to buy”.  There is no contract until the offer is accepted and signed by both the buyer and the seller.  If the seller should choose to change any of the terms of the offer, a counteroffer has been created, which must then be accepted by the buyer to constitute an agreement.

2. Consideration.     Consideration is anything of value promised to another when making a contract.  It is a detriment incurred by the promisee and/or a benefit to the promisor. The money the buyer gives as a deposit and the terms for payment in the purchase agreement are valuable consideration on the part of the buyer; and the property, as well as the promise to deliver possession of the property upon receipt of the purchase price are valuable consideration on the part of the seller.  Payment, however, does not need to be in the form of money; it may be a trade of other real property or personal property, or a promise to perform an obligation.

3. Capacity.   Capacity means that one is legally able to enter into a contractual agreement.  As a general rule of law, minors, intoxicated persons, and mentally incompetent persons cannot legally enter into valid contracts.  If they do make themselves parties to contracts, the agreements are typically voidable.

4. Legality.  For a contract to be valid, it must be for a legal purpose.

5. Definiteness. The terms of the contract, especially basic terms such as price, legal description, and closing date must be reasonably certain. A court must be able to look at the agreement and determine the parties' obligations from within the “four corners of the document”.

6. Writing.  All contracts dealing with the purchase or sale of real property must be in writing for a contract to be enforceable.   (Note: contracts for the purchase or sale of personal property must be in writing if for more than $500).

Cautionary Note: Whether you are buying, or selling, the best time to consult an attorney is before the purchase agreement is signed. The disgruntled suit buyer can insist that the seller re-alter or accept the return of an ill-fitted suit. The disgruntled property buyer (or seller) however, is under no obligation to accept changes to the contract after it is signed.

Ohio Dept of Natural Resources: Recent Regulatory Notices, Rule Announcements and Updates

ODNR regulatory news:

NOTICE TO WELL OWNERS re: tubular goods (3/31/2015)—

The requirements of R.C. 1509.16 became effective March 31, 2015. The statute was enacted by Am. Sub. H.B. 59 of the 130th General Assembly. Well owners are required to file a disclosure form with the Division of Oil and Gas Resources Management that specifies the country of manufacture for tubular goods initially used in a production operation on or after March 31, 2015 unless that country cannot be determined. Tubular goods are defined as seamless or welded steel pipe used in drilling for oil and gas and include casing, tubing, drill pipe, couplings, and drill collars.

The division, in consultation with members of the oil and gas and steel industries, developed Form 15 that is to be used to report the total length of each tubular good used in wells drilled on and after March 31, 2015. Beginning in calendar year 2016, well owners must file the form with the division on or before March 31. On the form, the well owner must report the length of all casing, tubing, drill pipe and drill collars used in wells drilled in the previous calendar year and the country in which each of those goods was manufactured.

Copies of Form 15 can be found on the division's website at: http://oilandgas.ohiodnr.gov/industry/electronic-forms

Electronic submittal can be sent to: O&G.Tubulars@dnr.state.oh.us

Fax submittal can be sent to: 614-265-6910

Submittal by mail can be sent to:
Ohio Division of Oil and Gas Resources Management
2045 Morse Road-Building F-2
Columbus, OH 43229-6693

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ODNR's Division of Oil and Gas Resources Management is proposing new rules that address the design and construction of horizontal well sites. There will be a public hearing at the Ohio Department of Natural Resources, Building E-1 Assembly Center at 2045 Morse Road in Columbus, Ohio 43229 on April 23, 2015 starting at 10:00 a.m. At the hearing, any person affected by the proposed rule may present their comments orally or in writing. For more information about the proposed rule, or to view the proposed rule, click here. To sign up for future notifications about rule progress and opportunities for input, click here.

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State Updates Water Well Sealing Document (4/7/2015)
The State Coordinating Committee on Ground Water has updated the technical guidance document for sealing unused water wells.

In 2013, a workgroup was formed to re-write/edit the original document. This document is the product of the workgroup. The workgroup consisted of representatives from the drilling industry, the major grout manufacturers, and state agencies dealing with ground water. Monthly meetings were held for 13 months to revise the original 1996 technical guidance document. Some of the key changes include:

  • A table (Table 1) that lists different types of wells, the regulatory agency, if regulated, and the applicable regulation or guidance (page 2).
  • An appendix that contains associated links to the OAC or ORC (Appendix 2).
  • An emphasis on hiring or at least consulting a contractor before sealing a well. (Any well owner can seal their own well.)
  • The Preparation for Sealing section (pages 13-19) was expanded to include a table of possible concerns and the corresponding state or federal agency that may have information. A new Procedure Planning sub-section (pages 18-19) was created that lists all the items that should be in the plan before the well is sealed.
  • The cement-based grouts section (pages 20-26) was expanded to include a discussion on situations where bentonite grouts are not effective due to water quality conditions in the well to be sealed.
  • The General Sealing Procedures section (page 31) was expanded and the steps were numbered.
  • The specific well sealing procedures for dug wells and bucket auger wells were separated because ODH has different sealing procedures for these types of wells.

Use Real Estate Leases Effectively in Chapter 11 Situations

Reprinted with permission by author: Joel H. Schneider, Senior Vice President, Hilco Real Estate, LLC

Owner-occupied real estate can be an untapped source of balance-sheet value for bankrupt companies. Such real estate assets provide a potential catalyst for exiting bankruptcy successfully or a financial carrot to motivate prospective strategic or financial buyers.

Currently, real estate investors are clamoring for stabilized properties occupied by creditworthy tenants. The competition for income-producing real estate assets has caused capitalization rates to nosedive in recent years. Today, properties in many real estate categories, such as industrial, are priced at cap rates below the 2007 peak.
This article reviews two cases where bankrupt companies enhanced the value of their owner-occupied real estate. Through new lease agreements that included higher rents, reimbursement of expenses, and multiyear lease terms, substantial cash flow streams were created. The properties were then marketed via auctions to maximize recoveries, and sale proceeds were used to expedite the reorganization process, satisfy creditors, and/or hasten the successful sale of the go-forward enterprise.

A Reorganization
Giordano’s, the Chicago-based deep dish pizza retail chain, filed Chapter 11 bankruptcy in 2011 after defaulting on approximately $45.5 million in loans.
As part of the filing, the company listed 20 parcels of owned real estate associated with corporate and franchised restaurants. Of the 20 parcels, 10 were considered operationally significant to the go-forward business, including a high profile 139,000-square-foot mixed-use property that served as the company’s corporate headquarters and flagship restaurant location. One of the keys to this situation was to position the Giordano’s real estate to take advantage of a re-capitalized corporate balance sheet to encourage buyer interest in buildings occupied by a ”reconstituted” Giordano’s.
Hilco Real Estate worked with the debtor to restructure the company’s leases to make them more attractive and marketable, while concurrently crafting a plan to market the properties to the largest possible real estate investment market. Prior to the lease restructurings, initial bids for the real estate had yielded offers around $20 million. When the newly leased properties went to auction, 14 qualified bidders were at the table. After 13 hours of spirited and contentious bidding, the properties sold for more than $30 million. Proceeds from the real estate sale along with the sale of the operating business yielded nearly $66 million, which enabled the estate’s secured creditor to be paid in full.

A Sale Scenario
The degree of interest in acquiring a bankrupt company, either by a strategic buyer such as a competitor or a financial buyer such as a private equity firm, is often influenced by real estate. In many cases, the potential acquirer plans to maintain operations in the buildings, but does not want to be in the real estate business or simply does not want to use additional capital to buy the buildings.

By structuring new leases based on go-forward tenancy in the building, a valuable asset for the estate is created, which enables the debtor or the acquirer to offer a fully leased building to the investment marketplace.
Based in suburban Chicago, Qualteq was a market leader in manufacturing plastic credit and gift cards for companies such as American Express, Visa, and MasterCard. The owner’s personal financial difficulties forced Qualteq into Chapter 11 in 2013. The bankruptcy trustee and his financial advisers first stabilized the company, then sold the business to Brazil-based Valid S.A. through a Bankruptcy Code Section 363 bankruptcy sale. However, Valid had no interest in purchasing the four buildings Qualteq occupied.

Working in tandem with the bankruptcy trustee and advisers, Hilco structured new, five-year leases on each of the four buildings with Valid as the tenant, based on the strong balance sheet that was created with Valid’s purchase, enabling Qualteq to continue operations in their current facilities.

Prior to the finalization of the new leases and with no certain commitment from Valid to remain as a tenant, there was no immediate interest from the real estate investment community for four potentially vacant industrial buildings. Once the new leases were finalized, the leased buildings were then put through a sale process by Hilco, which garnered significant interest from third-party investors. Stalking horse bidders were obtained for each property, followed by an auction. Hilco estimated the four buildings, on an empty basis, were valued at approximately $10.5 to $12.5 million. When the gavel came down, the auction resulted in total sales of almost $19 million for the four fully occupied buildings.
Utilizing the real estate as a vehicle to enhance value further ensured that the estate achieved maximum value of the Qualteq business/assets and helped to secure a successful transaction with Valid. Furthermore, the added value created by selling buildings occupied by a quality credit tenant resulted in sufficient proceeds to fully pay all mortgage holders.

Whether a company in Chapter 11 reorganizes and exits from bankruptcy on its own or is acquired by a strategic or financial buyer, the real estate occupied by the business can be transformed into a value enhancer. By recasting leases with a strong tenant and aggressively marketing the properties, a significant amount of incremental cash can be generated to benefit the bankruptcy estate in a reorganization and/or a going-concern sale. In bankruptcy, debtors and creditors should regard companies’ real estate as a value-creation tool, not an illiquid liability.

Joel H. Schneider is senior vice president, dispositions, for Hilco Real Estate, LLC, a unit of Hilco Global. You can contact Joel at jschneider@hilcoglobal.com.

Hilco Real Estate (www.hilcorealestate.com) advises and executes strategies to help both healthy and distressed clients maximize the value of their real estate assets. Their extensive property valuation knowledge, lease renegotiation experience and innovative sales strategies are leveraged by substantial access to capital, a vast network of tenants/landlords and motivated buyers/sellers. Services include real estate lease repositioning and advisory solutions; extensive real estate disposition services through an expert brokerage team as well as high-performance accelerated property auctions-live, online, sealed bid; a sale/leaseback advisory practice with unique deal structuring; and, real estate investments including acquisition deals for vacant, value-add, or stable income-producing properties as well as joint venture transactions. Hilco Real Estate is part of Northbrook, Illinois based Hilco Global (www.hilcoglobal.com), a world-wide leading authority on maximizing the value of business assets by delivering valuation, monetization and advisory solutions to an international marketplace. Hilco Global operates more than twenty specialized business units offering services that include asset valuation and appraisal, retail and industrial inventory acquisition and disposition, real estate and strategic capital equity investments.