Final IRS Repair Regulations Will Impact Many CRE Owners and Tenants

Note: The information below was summarized from an article published by Craig Miller, President of Cost Segregation Services, Inc. in the January 2015 issue of Properties magazine.

Final IRS Repair Regulations that became effective as of January 1, 2014 will impact every commercial real estate owner and commercial tenant that has acquired, constructed, improved or disposed of tangible personal property.

When making improvements to a building or building systems, the cost typically must be capitalized and depreciated over a significant period of time (i.e., 27.5 or 39 years).  However, if the cost can qualify to be expensed instead, then the owner or tenant can realize significant tax savings.

The new IRS regulations:
  • Authorize the write-off of the remaining tax basis of retired or demolished building components and, if handled correctly, will enable commercial property owners to avoid a potential future recapture tax upon the sale of the property;
  • Will result in most businesses having to file one or more Changes in Accounting Method for tax years beginning January 1, 2014, and result in taxpayers losing deductions of the proper forms are not filed with their 2014 tax return; and
  • Provide certain tests for determining whether an expenditure is a capital improvement that must be depreciated over time and certain safe harbors that would qualified an expenditure to be treated as an ordinary deductible expense.  If the expenditure would be considered a “betterment,” “adaptation” or “restoration,” as described in the regulations, then it is a capital improvement, unless the expense qualifies under one of the safe harbors. The safe harbors affect certain routine and ongoing maintenance and repairs, small taxpayers (revenues less than $10 million) and qualifying de minimis expenses.
As a lawyer and not a CPA, my summary of the new IRS regulations is an oversimplification and merely intended to make readers aware of the fact these regulations have been put in place and warrant their attention. Those who might be impacted by these regulations should consult with their CPA or tax advisor before filing their 2014 tax return.

*     *     * 
Craig’s article in Properties magazine provides much more detail than I can provide in a blog post, which by its nature is intended to be brief. Anyone who is or could be affected by the new IRS repair regulations should read Craig’s more detailed discussion in his article or contact him directly for information.


New Year, New Ohio Real Estate Legislation

CTI Commercial Title Update Reprinted with Permission from Linda M. Green, Esq., Underwriter, Chicago Title Insurance Co.

Happy New Year to all and to start the New Year we want to make you aware of two important bills that were passed by the Ohio legislature at the end of 2014.

Amended Substitute House Bill 201 requires lenders on both residential and commercial property to record a satisfaction of mortgage within 90 days from the receipt of funds sufficient to satisfy the mortgage debt.  If the mortgage is not satisfied within 90 days, the current owner of the property may provide the lender with a written notice of lender's failure to file a satisfaction. If after 15 days of the receipt of the notice the lender has still failed to record a mortgage satisfaction the owner may bring a civil action to recover reasonable attorney fees and costs incurred in filing the action plus damages of $100 for each day of lender's non-compliance, not to exceed $5,000 in damages.

Substitute House Bill 9 creates a statutory framework for a receiver to sell real property by private sale, private auction or public auction, including the sale of real property free and clear of all liens except for a lien for real estate taxes and assessments.  Before authorizing a receivership sale the court may require the receiver to provide evidence of the value of the property and market the property for sale.  The bill also provides that any receivership sale can be made only after the following have occurred:

    a.    An application is made by either the receiver or the first mortgage holder to sell the property and either the specific terms of the offer to purchase are disclosed or the procedure for the conduct of the sale is outlined.

    b.    10 days prior to the application, a written notice of the intent to sell is served on all parties having an interest in the property as determined by a preliminary judicial report or a commitment for an owner's policy of title insurance.

    c.    An opportunity for a hearing is given to all interested parties.

    d.    The court has issued a final appealable order of sale of the real property.

This is just a brief synopsis of these two bills.  If you would like any further information or copies of either of these bills please contact Linda Green at

 Chicago Title has been serving Ohio for over 50 years. Through their nationwide network, they provide title insurance, underwriting, escrow and closing services to every spectrum of the real estate industry. For more information, visit them at :

CBMS Loan Negotiation--Proactive Approach Could Save Time and Money

CMBS loans (loans that will be packaged with similar loans and securitized as commercial mortgage backed securities) continue to be popular despite their rigid structure and higher costs. Many commercial real estate owners like CMBS loans for their nonrecourse nature, absent the commission of certain ‘bad acts’ by the owner/guarantors, and will pay the extra costs to limit their exposure on the loans.


When considering a CMBS loan there are a few items to address early on in the process that could have significant impact on the costs for closing the loan. 


Borrower Structure—CMBS loans rely on the mortgaged asset being held in a bankruptcy remote entity that meets specific criteria in how the borrower is structured and operated. A lender wants to protect the asset from being consolidated with the assets of other related entities that may become bankrupt.  The borrower should provide copies of its organizational documents earlier on in the process. Time is needed for lender and its counsel to review and provide comments on the documents and for the borrower and its counsel to revise as necessary. Sometimes, the ownership structure itself is a problem and new entities will need to be formed. If this process is delayed until later in the loan process, then extra fees will be incurred to pay for expedited processing of the new entities in time for closing.

Independent Managers/Springing Members—Depending on the size of the CMBS loan, the lender may require an independent manager be retained whose sole responsibility is to vote on whether the borrower should file for bankruptcy protection or not. Springing members are often required when the borrower is a single member LLC. If the sole member of an LLC were to cease to exist, it would trigger the automatic dissolution of the borrower entity. Under Delaware law, the LLC can provide in its operating agreement for a new member to ‘spring’ into place and keep the LLC in operation.  Since retaining an independent manager requires paying fees to a service provider for someone qualified to act in this role, a borrower would want to have this requirement waived whenever possible. If the loan is small enough, the borrower will likely be successful in obtaining a waiver. Regarding the need for a springing member, loan size again may dictate who can serve as the springing member. Some lenders will allow any individual associated with borrower to serve as the springing member, aka “special member.” Others require that the springing member be unaffiliated. The borrower would then incur additional fees to retain someone to act in that capacity; typically from the same service provider who provides the independent manager.

Governing Law—CMBS loan documents are typically governed by New York law, which then leads to the requirement for certain enforceability legal opinions from a New York attorney and also for the need of an agent located in New York to receive service of process on the borrower’s behalf. If the loan is small enough, and the borrower raises the issue with the lender, the governing law might be changed to the state where the property is located, eliminating the need for an additional legal opinion ($5,000+ saved) and an agent in New York for service of process ($1,000+ saved). At a minimum, many lenders will waive the need for the agent in New York on smaller loans.

Legal opinions—CMBS loans typically require more legal opinions in their financing opinion letters than local banks might require. The more complex the legal opinions, the more time required of the borrower’s counsel and therefore the higher the fee. Also, if the property is in a different state from where the borrower and its counsel are located, then a legal opinion from counsel in the real property state will also be required (add a few thousand more to the closing costs). Further, depending on loan size, ownership structure and the policies of a lender, additional legal opinions may be required, some of which can be quite expensive.  It’s important that the borrower confirm early in the loan process exactly what the lender will require. Some of the opinion letters may require extensive case law research to be conducted plus the retention of counsel in other states. Sufficient time needs to be provided for this.

Clearing/Lockbox Accounts—CMBS loans will also require some level of cash management to protect the lender’s security interest in the rents collected from tenants.  Selection of the bank to handle the clearing account (i.e., lockbox) can take some time.  Because an agreement will need to be negotiated among the lender, the clearing bank and borrower, negotiations often break down when the clearing bank wants changes that a CMBS lender is not able to give. This results in the borrower scrambling around to find a new bank who will sign the lockbox agreement. The paperwork needed to set up a bank account these days is not simple and it can take a couple days before the account is in place for closing.


Because of the above and other issues, negotiation of a CMBS requires a proactive approach by the borrower and its attorney. A failure to establish exactly what will be required or not early in the loan process can lead to delays in closing later and added costs to the borrower.


Real Estate Resolutions and Predictions for 2015

It is that time of the year again to ponder what is expected to happen next year and what we should resolve to do about it. One prediction that I suspect will hold true (even though it is sunny and 55 degrees in Cleveland today) is that it will snow again in Ohio this winter. Other predictions that I hope become true in 2015 are a victory by Ohio State over Alabama, an NBA title for Cleveland and a Super Bowl victory for Cincinnati.

Beyond sports dreams and weather expectations, since this is the Ohio Real Estate Blog, we have also uncovered the following real estate resolutions and predictions for 2015:

Commercial Real Estate Predictions

According to the National Association of Realtors [“NAR”]), the forecast looks pretty bright for commercial real estate in 2015 in the following sectors:

1.    Apartment Sector: The rental market is likely to remain a “landlord’s market” in 2015, with vacancy rates expected to stay below 5 percent in 2015. This will likely lead to demand pushing rents up even higher and keeping them above inflation.  Apartment rents are projected to increase 4.1 percent in 2015.

2.    Office Sector: Vacancy rates are likely to fall from 15.7 percent to 15.6 percent in 2015, with rents expected to rise 3.3 percent next year.

3.     Industrial Sector: Vacancies are likely to rise from 8 percent to 8.4 percent next year, while annual rents are expected to rise 2.9 percent in 2015.

4.     Retail Sector: Vacancy rates are projected to drop from 9.7 percent this year to 9.5 percent in 2015. Average retail rents are likely to rise 2.5 percent next year.

Residential Real Estate Predictions

A review of predictions from the National Association of Realtors (“NAR”), the Mortgage Bankers’ Association, Freddie Mac economists, Trulia, Zillow and Forbes Magazine indicates:

1.         Mortgage Rates: Most of the experts expect the Federal Reserve to increase the federal funds rate by mid-year, with a rise in mortgage interest rates soon to follow. The predictors estimate mortgage rates to rise between 4.5 and 5 percent by the end of 2015.

2.   Home Prices:  Zillow predicts home prices will rise just 2.5% in 2015; Freddie Mac expects appreciation to drop to an average 3 percent in 2015 (continuing a slide from 9.3% in 2013, and 4.5% in 2014) while predicts an annual gain of 4%-5%.  Most experts agree that slowing price increases doesn’t mean that homes will become more affordable, because of the expected rise in interest rates and the fact that the rate of home price appreciation will be faster than the rate of increase in incomes next year. Ohio home values have gone up 5.4% over the past year and Zillow predicts they will rise 2.3% within the next year.
3.    Housing Starts: According to Freddie Mac, homebuilding is expected to ramp up in the new year, projected to rise between 16-20 percent from 2014. That will likely help total home sales to climb by about 5 percent, reaching the best sales pace in eight years.

4.        Rents: In 2015, demand for new households is expected to increase, but instead of buying many will rent, because they will not be able to afford a down payment. This factor is expected to increase demand for multi-family housing, which is projected to push rents up 3.5% in 2015.

5.       Multi-family Mortgage Originations: Mortgage originations for the multi-family sector have increased approximately 60 percent between 2011 and 2014. As mortgage rates begin to climb, and refinancings level off, a more modest 10-15% increase is projected for 2015.

While it appears the leading real estate indicators demonstrate a mixed bag of tricks for 2015, (at least re: housing) pundits have a straightforward explanation: the housing market has been shifting out of rapid recovery and into a more stable phase that economists are calling the new normal. In other words, according to a recent blog commentator, “It appears 2015 is the best time to fix your credit and start looking for a home you can settle into.”

Real Estate Resolutions

Whether or not you own commercial real estate, or your own home, following through with these resolutions could dramatically increase your bottom line:

1. Make additional mortgage payments. Making extra monthly payments can dramatically shorten the time until your mortgage will be paid in full. One example by shows that paying an extra one-twelfth of a 30 year, $852/month, $150,000 mortgage (at 5.5%)  or $71, each month increases the payment to $923, but shortens the term by five years and cuts the interest expense over the term of the loan by $30,789.

2.      Pay off a second mortgage.

3.      Refinance. While you always need to factor in closing costs, “points” (percentage points of the loan) and how long you expect to own the property, all of the forecasters show rates increasing in 2015. In other words, if you are waiting for rates to decrease further before you refinance, odds are you will have waited too long.

4.     Challenge your property tax assessment. If property prices have dropped in your neighborhood, you may want to consider appealing your real estate taxes since the tax is based on your property’s value.

5.            Take smart steps before you buy or sell. If you expect to buy in the near future, work on your credit score and engage a broker sooner vs. later to get a feel for the market. If you expect to sell in the near future, start the de-clutter process now. It is also time to stop deferring maintenance, and to start repairing major items that devalue your property.

Here is hoping all the good predictions come true, all the not so good predictions never materialize and all of our readers have a happy and healthy New Year.

Controversy surrounds the EPA's proposed new definition of "Waters of the United States" under the Clean Water Act

In April 2014 the Environmental Protection Agency (EPA) published a proposed new definition of “Waters of the United States” under the Clean Water Act (CWA) and sought public comments regarding their proposed rule.  The EPA’s stated purpose for proposing a new definition was to provide more clarity regarding what the CWA covers and does not cover.


Outside groups have rallied opposition against the proposed rule, arguing that the proposed definition does not narrow the scope of the CWA but instead expands the EPA and Army Corps of Engineers authority under the CWA. I’ve read the old and new definition (links to each are below) and fact sheets published by the EPA and an opposition group. Both make good points.  I challenge everyone to look at the information and decided for themselves whether the new definition is headed in the right direction.  Below are links to information to help in that review.



Public comments closed on November 14, 2014. More than 18,000 comments were submitted to the EPA. Reviewing all such comments will not be a simple task. It will be interesting to see what effect all those comments will have on the final rule.


It is a Good Time to Borrow Again

“Low” is the operative word of the day.

According to the US Energy Information Administration, U.S. weekly regular gasoline retail prices averaged $2.78/gallon (gal) on December 1, the lowest since October 4, 2010. U.S. regular gasoline retail prices are projected to continue declining for the remainder of the year, and average $2.60/gal in 2015.

But wait, there’s more. Mortgage rates are below 4% again, hovering around their lowest level since June 2013.They started the year a little over 4.5 percent. A 15-year-loan is now averaging 3.1 percent as opposed to 3.9 percent for a 30-year loan, according to today’s averages

And that’s not all. The Federal National Mortgage Association (“FNMA” or “Fannie Mae”), as of December 13, 2014, and Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) as of March 23, 2015 will back loans with 3 percent down payments for first-time home buyers. Fannie Mae, Freddie Mac, the National Association of Realtors (“NAR”) and other groups believe the “3% Down Payment Mortgages” could provide a boost to first time home buyers with good credit, but little cash. Industry surveys have shown that 40-45% of those who rent, do so because they cannot afford a down payment.

Critics are concerned that the program will just create more mortgage availability for customers who are more likely to default. In a recent press release, Federal Housing Finance Agency Director Mel Watt disagreed with the critics, stating that the program “provides a responsible approach to improving access to credit while ensuring safe and sound lending practices.”

Among the safeguards and other requirements to qualify for a 3% Down Payment Loan are:

“First Time Home Buyer” (Not having owned a home in the last 3 years)

·         “Primary Residence” (Not for vacation homes or investment property)

·         Minimum Credit Scores (FannieMae-620; Freddie Mac- 660)

·         Documentation of income, assets and employment

·         Credit Counseling

·         Private Mortgage Insurance (but may be canceled once mortgage balance drops below 80% of home’s value)

Whether or not the 3% Down Payment Loan opens the flood gates for first time home buyers, or clutters foreclosure dockets, one thing is clear: It is good time to borrow again. We may not see gasoline prices and mortgage rates this low and incentives this high again, without a time-traveling DeLorean.

Limitations on Bringing Federal Civil Penalty Claims: Federal Agencies Subject to a Stricter Reading

A decision issued last year by the U.S. Supreme Court has ramifications that affect property owners. The case, Gabelli v. Securities and Exchange Commission, No. 11-1274 (“Gabelli”), involved an enforcement action filed by the SEC against two investment advisers for actions that allegedly took place more than five years earlier.  28 U.S.C. Section 2462 applies a 5 year statute of limitations to most federal civil penalties enforcement cases, including the SEC. Because most federal environmental statutes do not contain a statute of limitations clause, they are subject to Section 2462 as well. 

Not surprisingly, disagreements arise as to when the clock starts running on the 5 year statute of limitations. Section 2462 provides that the statute of limitations starts running when the action accrues. However, governmental agencies in the past, including the EPA, have argued that they can’t be expected to know about the actions of the defendants until they uncover the alleged violations during an inspection or investigation, and therefore the 5 years statute of limitations should start running only upon discovery of the alleged conduct, not when it occurred. This is often called the “discovery rule.” 

In the Gabelli case, the SEC argued, and the court of appeals agreed, that the discovery rule should be read into Section 2462 because of the allegations that form the basis of the SEC claims against the defendants were sounded in fraud.  The US Supreme court disagreed, holding that the discovery rule doesn’t apply to civil penalty claims that fall under Section 2462. The court distinguished its decision from fraud actions brought by an injured plaintiff (i.e., not a governmental agency) where the discovery rule might apply. 

This ruling pulls the rug out from under the EPA and other federal agencies that have relied on the discovery rule in the past. Landowners should obtain some protection from the narrower reading of the statute of limitations that the EPA and other federal agencies will have to observe. 

In recent months, as a result of the Supreme Court’s ruling, I’ve encountered purchase agreements where the seller wants to limit all of its environmental representations and warranties to the past 5 years. This is overreach on the part of sellers and buyers need to be aware.  This ruling does not impact private party actions, criminal actions or actions by state or local agencies (Ohio EPA penalty or administrative actions are subject to a more liberal statute of limitations). 

Overall, the effect of the Gabelli decision is good for property owners but needs to be kept in perspective.