New Survey Standards Take Effect On February 23, 2016


New ALTA/NSPS (fka AlTA/ACSM)*standards were adopted and take effect on this month on February 23rd.  The new standards replace ALTA/ACSM standards previously adopted in 2011.
Below is a link to a redline of the changes in the new 2016 survey standards compared to the 2011 standards:
http://www.nsps.us.com/resource/resmgr/ALTA_Standards/2016_Standards_REDLINE_20151.pdf
 


* The National Society of Professional Surveyors (NSPS) is the successor entity to the American Congress on Surveying and Mapping (ACSM).
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Bankruptcy Sale of Thistledown Racetrack Held not an “Arms-Length” Transaction

The “general rule with regard to determining value of real property (in order to calculate real estate taxes) is that the purchase price at a recent (within 3 years) “arms length sale” of the property between a willing buyer and willing seller is dispositive.  What better indication of value than the price someone is willing to pay and actually pays for the property? Of course, there are exceptions to every rule, but the recent decision of the Supreme Court of Ohio in Warrensville Hts. City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, Slip Opinion No. 2016-Ohio-78 is more clarification than exception.

In Warrensville Hts., the Board of Education of Warrensville Heights City School District (“Board of Education”) appealed from a decision of the Board of Tax Appeals (“BTA”) finding the tax year 2010 value of Thistledown Racetrack in Cuyahoga County to be $13,800,000, not the $43,000,000 purchase price at a bankruptcy sale six months after the tax-lien date. According to the BTA (affirmed by the Ohio Supreme Court), sales conducted under supervision of a court order are forced sales which are not indicative of true value.”

 The facts of this case are simple enough (the ruling, not so much, in spite of first impressions). The subject property is Thistledown Racetrack, a thoroughbred-racing facility on 128 acres of land, located in Cuyahoga County, aka the home of the Ohio Derby. In 2009, the owner of the property petitioned for Chapter 11 bankruptcy relief and received authority to sell the racetrack at auction. Harrah’s Ohio Acquisition Company, L.L.C. (“Harrah’s), submitted the best and highest offer, however, a condition to the sale did not occur, which prompted a second auction. At the second auction (in 2010), Harrah’s again submitted the winning bid to purchase Thistledown. The contract basically stated that in exchange for $43,000,000, Harrah’s would assume ownership of the real property as well as equipment, intellectual property and other items. The sale was contingent on Harrah’s ability to obtain Thistledown’s racing license from the racing commission (which would also enable Harrah’s to operate lucrative video lottery terminals). The bankruptcy court approved the sale and Harrah’s filed the deed in July, 2010, after it received the racing license.

For tax year 2010, the Cuyahoga County Fiscal Officer assigned a total value of $14,264,000 to Thistledown. The Board of Education filed a complaint with the board of revision (“BOR”), seeking an increase to the purchase price established at the first auction: $89,500,000. The property owner requested a reduction to $5,500,000, claiming most of the value was attributable to the personal property and racing license, not the real estate. The BOR retained the fiscal officer’s initial valuation of $14,264,000.

The Board of Education appealed to the BTA, requesting an increase to $43,000,000, the price Harrah’s paid for the property at the second auction, and Harrah’s requested a decrease to $13,800,000. The school board relied on the 2010 sale, arguing that the $43,000,000 sale price reflected the value of the real property. The property owner reiterated her prior testimony that the sale price reflected the purchase of other assets in addition to real property.

The BTA agreed with Harrah’s valuation of $13,800,000. The BTA rejected the 2010 sale price as evidence of value, explaining that “[a]lthough it is clear that the subject property sold recent to [the] tax lien date, we do not find the sale to have been arm’s-length because it was subject to the approval of a bankruptcy court.”

The Board of Education appealed to the Ohio Supreme Court and the court affirmed the BTA’s decision.

In its analysis, the Ohio Supreme Court first looked at the applicable statute to reiterate the “general rule” at the time:

“During the tax year at issue, former R.C. 5713.03 sets forth how real estate is to be valued for tax purposes: ‘In determining the true value of any tract, lot, or parcel of real estate under this section, if such tract, lot, or parcel has been the subject of an arm’s length sale between a willing seller and a willing buyer within a reasonable length of time, either before or after the tax lien date, the auditor shall consider the sale price of such tract, lot, or parcel to be the true value for taxation purposes’.”  (Note: Pursuant to Ohio Am. Sub H.B. 487 (H.B. 487) signed into law on June 11, 2012, the revised statutory language of R.C. 5713.03 now provides that an auditor "may" (vs. shall) consider the price of a recent sale as value.)

The court then summarized R.C. 5713.04 (“[t]he price for which such real property would sell at auction or forced sale shall not be taken as the criterion of its value”)
and concluded that, “the BTA reasonably and lawfully determined that the sale price did not establish the property’s true value for two reasons…First, Thistledown Racetrack sold at auction [and]… Second, reliable and probative evidence in the record supports the finding that Thistledown sold at a forced sale within the meaning of R.C. 5713.04.”

At first glance, it appears that the court is establishing R.C. 5713.04 as a clear exception to R.C. 5713.03; however, upon further review, as well as a quick read of the decision of the Ohio Supreme Court in Olentangy Local Schools Bd. of Edn. v. Delaware Cty. Bd. of Revision, 141 Ohio St.3d 243, 2014-Ohio-4723, 23 N.E.3d 1086…, it is easy to surmise that R.C. 5713.04 is more clarification of, than exception to R.C. 5713.03.  The Olentangy Court specifically addressed this issue by asking itself:  “whether R.C. 5713.04 categorically prohibits reliance on an auction sale price as evidence of a property’s value, even when the sale satisfies former R.C. 5713.03’s requirements for a recent, arm’s-length transaction”; and answering in the affirmative, “in spite of R.C. 5713.04’s proscription, “the sale prices of parcels sold at auction are nevertheless the best evidence of value when all of the elements of an arm’s-length transaction are present.”

The court in Warrensville did pay homage to Olentangy by explaining: “In Olentangy…, we held that if the underlying transaction is an auction or forced sale, “the proponent of the sale price bears the burden to prove that the sale was nevertheless an arm’s length transaction between typically motivated parties and should therefore be regarded as the best evidence of the property’s value.”

The court in Olentangy, however provided more detailed guidance in determining what an “arms-length” transaction is. “Three factors are relevant to deciding whether a transaction occurred at arm’s length: whether the sale was voluntary; i.e., without compulsion or duress, whether the sale [took] place in an open market, and whether the buyer and seller act[ed] in their own self interest.”

In Olentangy (a residential foreclosure case), the auction sale was deemed arms length because of the following: “open-market elements”: the foreclosing lender listed the property on the open market for nine months before the auction; the auction was publicly advertised for a significant period of time, it was well attended, and there were multiple bidders for the property; the highest bid was 92 percent of the property’s final MLS list price; and the lender accepted this bid, although it had retained the right to reject it.


In contrast, according to the Warrensville court, the Thistledown sale was a “hurried sale by a debtor because of financial hardship or a creditor’s action.” In fact, “Harrah’s bought the racetrack at a bankruptcy sale … which authorizes sale of property … other than in the ordinary course of business.” “The bankruptcy court supervising the sale found ‘compelling circumstances’ to consummate the sale because there is substantial risk of depreciation of the value of Purchased Assets if the sale is not consummated quickly. Further, the transaction was not between typically motivated parties—the bankruptcy court approved the sale after finding that time was of the essence in order to maximize the value of the bankruptcy estate’s assets and that it was in the best interests of Magna Entertainment and its creditors and other parties in interest.”

Real Estate Law 101: Open-End Mortgages

The following article was prepared by Alex Jones, Law Clerk for Kohrman Jackson & Krantz LLP.

What it is?

Generally, an open-end mortgage is one that remains open after it has been delivered to the county recorder, and it permits the lender/mortgagee to make advances on the loan that are secured by the original mortgage, but only to the extent the total indebtedness does not exceed the maximum principal amount identified. An open-end mortgage acts as a lien on the property described in the mortgage.
 
For example, let’s say borrower takes out a loan for $100,000 that the lender secures with a mortgage, and borrower draws down $10,000 in principal under the loan at closing. With an open-end mortgage, the lender may loan the additional $90,000 in principal and continue to secure the full amount of the loan with the original mortgage.
 
Ohio’s Open End-Mortgage Statute

In Ohio, ORC § 5301.232 governs open-end mortgages, and lenders must be certain to comply with the requirements of the statute in order to reap the benefits of an open-end mortgage. Specifically, to comply with the Revised Code, in addition to the parties intending it to be an open-end mortgage, the mortgage must state at the beginning that it is an “open-end” mortgage and indicate the total amount of principal (exclusive of interest) that may be outstanding at any time.
 
Why Lenders Use them

Lenders use open-end mortgages to advance loan funds to borrowers while maintaining a first priority lien and without having to issue a new mortgage after each advance. However, this right is not absolute.  The right is contingent upon whether the lender has the option to advance future loans or the obligation to advance future loans – the distinction matters.
 
When the future loan advances are optional, an intervening third party loan or mechanics lien may take priority over future additional advances. If the original lender/mortgagee makes additional loan advances after having received notice of the subordinate mortgage loan or other lien, and it was not obligated to make the advance, then it loses its first priority lien with respect to those later advances However, when the lender/mortgagee has an obligation to make an additional advance on the mortgage, then its lien on the additional advances will relate back to the time the original mortgage was recorded and will take priority over any intervening third party loan, including a mechanic’s lien.
 
There is flexibility under Ohio law as to the contractual language needed to make an advance obligatory.  A contractual obligation to make an advance arises even if the advance is conditioned upon the occurrence or existence, or the failure to occur or exist, of any event or fact. The Ohio Supreme Court has explained that as long as the language requires the lender/mortgagee to advance a certain and definite sum in a particular manner then it will be deemed obligatory even if no advancement is ever actually made.  Thus, a properly drafted open-end mortgage can ensure a lender maintains its first priority lien.
 
Borrower’s Right to Limit Indebtedness; Notice requirements

A borrower/mortgagor can limit the amount of the indebtedness secured by the original mortgage to the amount then outstanding.  To do so, the borrower must serve a notice to that effect on the lender/mortgagee prior to recording the notice. The notice must reference the volume/page number or the recorder’s file number, and the borrower’s signature  must be notarized. 

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The above information is meant to provide a brief summary regarding open-end mortgages and is not intended to cover every issue that might arise in the context of an open-end mortgage.
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Tax Relief Extension Act of 2015

Putting valuable tax dollars back into the pockets of U.S. businesses for job creation and growth.

Re-printed with permission by author: Craig Miller, CPA, CGFM, MBA, Duffy+Duffy Cost Segregation Services, Inc.

 Long-Term Certainty through the Tax Extenders Bill: The U.S. House and Senate waited until just two weeks left in the calendar year [2015] to pass "The Protecting Americans from Tax Hikes Act of 2015".  The new law makes some temporary tax provisions important to commercial real estate a permanent fixture of tax law. Overall, the $622 billion dollar package of tax breaks extends 52 tax provisions for business and individuals, and also makes 22 provisions permanent, including the very business-friendly bonus depreciation, 15-year leasehold improvements, the research and development tax credit, the deduction of state and local sales taxes, and the $500,000 Sec. 179 expense limit.
These victories, coupled with what did not happen in Congress – such as a carried interest tax increase or the elimination of Section 1031 like-kind exchanges –provide the commercial real estate industry with remarkable certainty going into the new year. This tax legislation is a major victory for the commercial real estate industry.
These powerful incentive programs help businesses grow and successfully compete both in the U.S. and abroad. Business-friendly provisions such as the extension of Bonus Depreciation, the Sec. 179 expense election, and the Section 179D tax deduction for energy-efficient commercial buildings will be a massive help to companies across the nation. Extremely important among these is the permanent provision for 15-year qualified leasehold improvement depreciation. In addition, we have achieved longer-term extensions (five years) and a $3.5 billion allocation for New Markets Tax Credits. Many of our local businesses will also benefit by the act delaying the medical device tax.

Long-Term Financing: Using Depreciation as a Tax ShieldDepreciation is used by most businesses. An extremely important source of funds is cash flow added back from depreciation.  We frequently refer to depreciation as “a source of cash flow”. Proponents of bonus and accelerated depreciation argue that it is an important incentive to spur business investment and keep effective marginal tax rates on capital investment low. 

According to BEA.gov, on average, during the last 20 years, businesses raised about 40 % of their funds internally through retained earnings and depreciation. Since 1982, depreciation has provided 77 % of those internal funds.  




Bonus Depreciation: Accelerated and bonus Deprecation allows assets to be depreciated faster than their economic life. Accelerated depreciation and bonus depreciation is the largest corporate tax break, allowing companies to deduct the costs of assets faster than their value actually declines. The preference is the largest in the corporate tax code and is broadly enjoyed by most businesses.  Bonus Depreciation is extended through 2019. Businesses of all sizes will be able to depreciate 50 % of the cost of constructed personal property in commercial properties, in land improvements, and for equipment acquired and put in service during 2015, 2016 and 2017. Bonus depreciation will phase down to 40 % in 2018 and 30 % in 2019.

Section 179: The bill permanently extends small business expensing limitations and phase-out amounts, and makes permanent the rules allowing for certain qualified leasehold improvements to be eligible for expensing.  It increases the expensing limit to $500,000. Businesses exceeding a total of $2 million of purchases in qualifying equipment will have the Section 179 deduction phase-out dollar-for-dollar and completely eliminated above $2.5 million. Additionally, the Section 179 cap will be indexed to inflation in $10,000 increments in future years.

New R&D Tax Credit Eligibility: The new law will foster innovation and is expected to boost investment by incentivizing the development of cutting-edge technology with a permanent extension of both the Research and Development (R&D) Tax Credit. In addition to the permanent extension, for the first time businesses with less than $50 million in gross receipts will now be able to claim the credit against their Alternative Minimum Tax (AMT), thereby removing the single greatest barrier preventing companies from claiming the credit in the past. Secondly, the bill includes a provision that opens the credit up for start-ups, allowing businesses with gross receipts of less than $5 million a year to take the credit against their payroll taxes (capped at up to$250,000 per year) for up to five years.

Craig Miller is president of Duffy and Duffy, Cost Segregation Services, Inc. Duffy + Duffy is one of the leading Cost Segregation firms in the industry – performing studies based on case law and IRS guidance using CPA’s, and construction engineers and estimators. Cost Segregation allows commercial building owners to generate cash flow by accelerating depreciation deductions on their buildings and deferring taxes. For more information, contact Craig Miller, CPA, CGFM, MBA at 440-892-3339, or visit CostSegExperts.com

Information for this article was sourced through BEA.gov and Committee for a responsible Federal Budget

Broker Open Houses -- An Ounce of Prevention Is Worth a Pound of Cure

 A 2015 Ohio appellant court decision out of Lorain County serves as an important reminder of the duty of care owed by real estate brokers/agents and the expensive consequences that result when communication between a real estate agent and a homeowner is imprecise.
The case in question is Wheatley v. Howard Hanna Real Estate Servs., 2015-Ohio-2196 (9th Dist. Ct. of App., Lorain Cty.), which was decided on June 8, 2015.  The homeowner, Rhonda Wheatley, listed her home through Linda Shubeck, an agent with Howard Hanna. Mrs. Shubeck scheduled an open house that targeted other realtors. However, the advertising yard signs did not include a “brokers-only” designation and Mrs. Shubeck did not inform Mrs. Wheatley that members of the public may show up during the open house. In Mrs. Shubeck’s defense, she did caution Mrs. Wheatley to secure any valuables that were out in the open in the house. She also set up her information desk for the open house at a location where she could observe the foyer.
After the open house, Howard Hanna learned of several thefts that had occurred during other open house events.  This prompted Mrs. Shubeck to call Mrs. Wheatley, who discovered that almost all of her jewelry was missing, valued over $50,000.  She blamed it on a member of the public named “Sam” who  arrived during the open house, although to my knowledge, it was never proven that the jewelry was stole during the open house, let alone by “Sam” that she alleges.
Litigation followed and the jury found in favor of Howard Hanna and Mrs. Shubeck. Mrs. Wheatley appealed. The appellate court sided with the trial court and denied Mrs. Wheatley’s appeals.
No one disputed that Howard Hanna and Mrs. Shubeck owed Mrs. Wheatley a duty of care. The jury, in looking at the facts in this case, found that the defendants did not breach that duty.  While the open house was communicated to Mrs. Wheatley as a broker’s only event, she was present during the first part of the open house, saw that members of the public showed up (including the individual named “Sam,”) without objecting, and even felt comfortable enough with the situation at the time to leave the house while he and others were still there. Further, Mrs. Shubeck expressly advised Mrs. Wheatley to remove valuables from the open and walked through the house prior to anyone arriving to confirm that nothing valuable was plainly visible. When the alleged thief, “Sam,” arrived, Mrs. Shubeck accompanied him around the house while he toured it. Finally, while Mrs. Wheatley had put her jewelry in her safe, she didn’t bother to lock it, and further never advised her realtor of the existence of the safe.
As a result of all of the foregoing, the appellate court found that credible, competent evidence was offered to show that Howard Hanna and Mrs. Shubeck did not breach their duty to Mrs. Wheatley.
While the brokerage and its agent were vindicated in this case, I’m sure the expense in defending against this litigation was substantial.  What we can learn from this is to take better care in what is communicated to homeowners. If members of the public, while not specifically encouraged, will be permitted to remain and tour the home, then the homeowner should be advised of this. Furthermore, an agent may want to question a homeowner more closely regarding what valuables are present in the house so additional care can be taken to ensure they are secured.
As the old saying goes, “an ounce of prevention is worth a pound of cure.”
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Human v Machine-Handwritten vs. Word-Processed Assignment Provision Rules

(Watch Your Language & Say What You Mean, Precisely or a Judge Will Tell You What You Meant #10)

While IBM’s Deep Blue beat Gary Kasparov in their series of chess matches in the late 90’s, in Love v. Beck Energy Corp., 2015-Ohio-1283 (7th Dist. Ct. of App., Noble Cty), the “human” wins. However, this outcome provided little solace to the defendants-appellants, who wanted to “harmonize” the hand written and word processed provisions in their favor.

The facts in this case were not in dispute. In 1988, Roy Mason, owner of 196 acres in Jefferson Township entered into three separate (but identical) oil and gas leases with Beck Energy. The first lease covered 65 acres, the second lease covered 59 acres and the third lease covered 72 acres. In December, 2002, the Loves acquired all 196 acres of Mr. Mason’s land subject to the leases. In December 2011, without first obtaining the Loves’ permission, Beck Energy assigned part interest in the leases to XTO Energy; namely, its deep drilling rights. In June 2013, the Loves filed a complaint against Beck Energy and XTO Energy seeking, among other things, to have the assignment of the deep drilling rights declared void.

The principal issue of the case is whether the terms of the contract (lease) required the Loves’ consent for Beck Energy to partially assign the lease (deep drilling rights) to XTO Energy. For the answer, we need to first look at the lease itself; particularly the assignment clauses found in paragraphs 13 and 21.

Paragraph 13, which is typed, provides that: “The Lessee shall have the right to assign and transfer the within lease in whole or in part, and Lessor waives notice of any assignment or transfer of the within lease. “ Paragraph 21 is handwritten and states: The Lessee agrees not to assign or transfer this lease without Lessor’s consent.

The plaintiffs argued that the language of paragraph 21 contains a clear restriction on assignment and, accordingly, controls. The defendants (XTO Energy and Beck Energy) both argued that paragraphs 13 and 21 must be “harmonized” with each other giving effect to the letter of the provisions as well as their intent. They asserted that paragraph 21 limits vs. eliminates paragraph 13. The defendants reasoned that paragraph 13 allows for partial assignments without consent while paragraph 21 prohibits a full assignment of the lease without consent. “They argued that the use of ‘this Lease’ in paragraph 21 without a reference to ‘in whole or in part,’ which is used in paragraph 13, means there is only a prohibition on a full assignment of the lease.”

After considering the parties’ arguments, the trial court found in the Loves’ favor. Such court concluded that the handwritten language controlled over the pre-printed language and thus, consent was needed for any assignments. The trial court further found that the consent to assign clause was not an unreasonable restraint on alienation, and that the contract’s 30 day notice of default requirement would have been a vain act and served no purpose (because the assignment had already occurred, and could not be cured within such 30 day period). The defendants then appealed the trial court’s ruling to the 7th District Court of Appeals.

Applying basic rules of contract construction/interpretation, the appellate court ruled that “the trial court correctly determined that no portion of the lease could be assigned without the Loves’ consent.”

This case fits squarely within our “Watch your language-Say what you mean, precisely, or a judge will tell you what you meant axiom. In fact, the court’s own words simply restate this principle: “When the language of a contract is clear and unambiguous, and not subject to multiple interpretations, the court will not consider extrinsic evidence, i.e., evidence outside the four corners of the document, to re-interpret the contract's terms. (Citing Shifrin v. Forest City Enterprises, Inc., 64 Ohio St.3d 635, 597 N.E.2d 499 (1992).

Of course the court will be the trier of fact as to whether or not a contract is “clear and unambiguous.” To assist in reaching its conclusion, the 7th District Court of Appeals cited numerous cases that have applied a classic yet seemingly simple rule of construction: “handwritten prevails over typed or pre-printed terms when there is a conflict between the two” or the two are inconsistent with each other.

The appellants had no problem with the classic rule of construction, just the court’s application of the same. They maintained that the two clauses of the contract (paragraphs 13 and 21) were not in conflict with each other, and that the court should apply a tandem rule of construction, namely that “when possible, a court's construction of a contract should attempt to harmonize all the provisions of the document rather than to produce conflict in them.”

The appellate court labeled XTO Energy and Beck Energy’s argument that “this Lease” language in paragraph 21 only means the entire lease and thereby harmonizes the two provisions, as creative, but not dispositive. The court deemed this a failing argument because “it is unlikely that a reasonable person reading paragraphs 13 and 21 would read the language in that manner.” In other words, the court “said what it meant” and declared itself reasonable.

What is the moral of this story? Watch your language and say what you mean, precisely, or a judge will tell you what you meant. If the parties truly intended that assignment of partial lease rights vs. the entire lease was permissible, without notice or consent to the landowner-landlord, the lease should have clearly stated so, in one provision.



Updates Regarding the NEORSD's Stormwater Management Program and Fees


On September 21, 2015, we published an article on this blog regarding the Ohio Supreme Court upholding the Northeast Ohio Regional Sewer District’s (NEORSD) stormwater management program. Since then, NEORSD has been posting updated information on their web site to respond to questions it receives about the stormwater program restart, fees, credits, cost sharing and more.
 
The following information is taken directly from NEORSD’s blog--
Stormwater billing will resume in the second half of 2016.  NEORSD will not back bill for the stormwater fees during the time its program was on hold. Anyone that had an approved credit from NEORSD prior to the program being halted will have that credit applied to their fees once billing resumes. A staff member from NEORSD should be contacting such parties to address the submission of a renewal form as a condition of the credit.
 
The types of parcels exempt for the stormwater fee are public roads and highways, public airport runways and taxiways, railroad rights-of-way, many city-owned properties, and public and not-for-profit cemeteries.

For a typical homeowner, the stormwater fee will range from $3.09/month, $5.15/month or $9.27/month, depending on the amount of impervious area per residence. Account holders that qualify for the Homestead program will pay a stormwater fee of $2.07/month. These fees may be further increased in following years and from year to year based on NEORSD’s funding needs to continue implementing its stormwater management program.

The rates for commercial properties will be determined based upon $5.15 per “Equivalent Residential Unit” (ERU). An ERU equals 3,000 square feet of impervious area. The total fee for a commercial property will depend on the amount of impervious area located on the property.  However, if a commercial property’s ERU totals more than 10 ERUs (i.e., more than 30,000 square feet of impervious area), that a declining block fee is applied that progressively lowers the per ERU charge for those in excess of 10 per parcel.

Some homeowners in the areas covered by NEORSD may qualify for Homestead, Affordability and Crisis Assistance Programs and should check with NEORSD for more information. There are other fee credits that may be available to residential and non-residential customers for stormwater control measures that are implemented on a property. NEORSD also offers a couple of savings programs for qualifying schools.

Any stormwater fee credit application or billing inquiry that was pending when the program was halted will be restarted by the NEORSD staff.

For more information, click here to access NEORSD’s FAQ on the Stormwater Program.
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