Showing posts with label legal trends. Show all posts
Showing posts with label legal trends. Show all posts

Sunday, March 21, 2021

How to Navigate Legal Structures in Real Estate

As the real estate market attempts to move past the COVID-19 pandemic and progress toward a “New Normal,” federal moratoriums have become a way of life in real estate. Navigating the legal landscape of a local market has always been part of creating wealth in real estate. Every real estate marketplace is subject to its own local laws, as well as its state law and federal law. At the highest level, real estate investment and development is a game of understanding the rules—the applicable laws, ordinances, building codes, etc., and knowing when you can bend them in your favor through variances, court cases and lobbying. Although much of this may seem a little nefarious, it need not be, as our legal system was designed to establish a certain set of default rules for real estate, with a mechanism to allow for change in the event that either some rules are inapplicable generally or inadequate for a given situation. That stated, below are some ways to capitalize, navigate or at least survive the laws of any real estate market:

1. Choose Your Market Wisely

The most effective way to navigate any real estate investment is by carefully choosing the market in which to invest. Location, location, location once again proves to be a sage cliché. Being aware of legal risks and rewards is just as important to the analysis of any property as its income numbers and  property condition. The location of a property will not only determine the set of laws that an investor must navigate, but it will also determine the prevailing legal sentiment around the property. This sentiment will effect the laws passed in a given market and have a bearing on how local courts will view real estate disputes like waste, nuisance, foreclosures, evictions, etc. Understanding the local view of these issues will allow investors to accurately estimate the legal costs and make an informed investment decision as a result.

2. Know The Laws That Affect The Property

Understanding the applicable laws influencing property can be the difference between a profitable investment and a poor acquisition. Legal frameworks like rent control, affordable housing zoning and industrial tax credits will all effect the viability of an investment. This is especially true with real estate development, as many jurisdictions have detailed, idiosyncratic new development requirements that protect the rights of both the developer and the community. These requirements may affect zoning, construction ordinances, restrictions on selling and transfer of the property and even property taxes. An intimate knowledge of these regulations is essential, even if the purchased property is not newly constructed, as an acquisition that is economic in some jurisdictions can be rendered uneconomic by the prevailing local new development requirements. Please also keep in mind that recently renovated buildings can be considered “newly developed” in some jurisdictions and subject to new development laws.

In addition to new development regulations, investors must be aware of other laws that could affect properties. Building ordinances, for example, affect all properties, not just those that are undergoing construction and renovation. These ordinances are also present at every level of legislation from the federal American Disabilities Act and FHA guidelines all the way down to the village building code. Properties that are not compliant with the requirements of the local building code are subject to fines and violations, both of which eat into investment profits. Much of the same can be said for zoning ordinances. In most jurisdictions, there is a mechanism to apply for a variance or appeal for both zoning laws and the building codes. Variances to zoning are more frequent than building code appeals, as building codes are driven by use and public safety concerns, whereas zoning is primarily driven by municipal planning and use. Understanding local building codes and zoning laws is essential to real estate profitability. To do avoid doing so is to raise the risk of an investment by exposing it to additional risk that can be easily mitigated. Attorneys, expeditors and knowledgeable contractors are effective allies in mitigating this area of legal exposure.

3. Understand The City/Town/Village Plan

Every municipality publishes a plan of development for its area. Much has been stated and written about the importance of the local plan. This document outlines the areas that the local government wishes to develop and the incentives that it will provide to stimulate such development. Often times unviable projects become realities, because they are either moved to or fortuitously located in a development zone. Understanding the presence of incentives is essential to obtaining an accurate estimation of value for a property. The local municipal planning document will assist with such a determination.

4. Hire Great Professionals

This point is mentioned in numerous articles on this blog and above, so it won’t be expanded in much detail here. If legal analysis and/or real estate planning is not a strength, it is important to hire professionals to ensure that the necessary information is readily available.

5. Remember That It’s Not Personal

Laws reflect the dominant ideology of an area. Every area has its own context, demographic and history, which leads to a prevailing sentiment of how real estate should be managed by default. In other words, real estate laws are a collection of the most popular ideas of how real estate should be run in an area. Most people aren’t anti-investment, nor are they against wealth per-se. Most voters, however, will vote to protect their interests and this takes different forms in different locales. In most instances, with notable exceptions, real estate laws are not enacted for personal reasons and, in the absence of extreme lobby power, there isn’t much any one investor can do to change the laws. The most viable course of action for most investors is to be aware of the legal scheme that affects a property, earnestly consider if the local laws work for the investor’s criteria and find viable ways to navigate the relevant laws.

So, this is my take on how to navigate legal structures affecting a property. This a high-level view of this topic. This post definitely could have been substantially longer, but I am happy to discuss your comments below.

Friday, June 12, 2020

Social Justice Real Estate


I try my best on this blog to focus on the issues effecting the real estate market and offer a perspective uninfluenced by political factors. To the extent that social factors effect the real estate market, I am happy to address them, but I work diligently to ensure that this blog does not serve the dual purpose of promoting any particular political ideology. With that said, we are all contextual creatures and I, as an African-American male, cannot ignore the current outcry regarding police brutality against my fellow brothers and sisters.

Although the issue of police brutality against black and brown people is nothing new, it is refreshing to see all of the momentum that we are generating toward a solution. I am prayerful and hopeful that the demonstrations being made, the dialogues taking place and the changes that have begun are indicative of a new direction that our country is taking, toward working on resolving the clearly apparent and lingering racial biases found in our country. Police brutality is certainly an important issue that must be resolved, but is a symptom of an American history of racially stratified policies, both formal and informal, that have lasted for centuries and preserve advantages for those not of color. Given that the “complexity” of race relations in our country has developed over centuries, it is reasonable to expect that the solution to this issue, will not be a quick fix, but it absolutely necessary that every American commit to working toward a resolution of this issues. Until we heal our racial wound and deal with our checkered past, we cannot truly move forward as a nation.

What does this have to do with real estate?

Well, I’m glad that you asked that question. Real estate, in fact, has frequent been used to either preserve a status quo or to begin drastic change. From the mortgage redlining of the 50’s, 60’s and 70’s to racially restrictive land covenants, to blockbusting, to redistricting, to urban planning, to affordable housing programs, it is abundantly clear, real estate can influence the path of a society. The issues of the oft mentioned “inner city” are the result of urban planning, which has used zoning laws, covenants, variance hearings and other land use methods to ensure that some areas thrive and others flounder. These planning decisions had lasting effects, as communities were shaped by these decision, many of which have lasted for generations. 


Few issues are more political than land use and few are more hotly contested. Proposed major changes in zoning draw large numbers of reactions on both sides. Elections are won and lost over the location of new developments or the violation of the ubiquitous NIMBY. In fact, in most cities, big and small, there is no group more powerful and wealthy than the real estate lobby, which works to ensure that either status quo is maintained or that their notification of any changes is advanced as possible.


So if real estate can garner so much focus and convey so much influence, then the importance of acquiring as much of it as possible is clear. As Master P recently said, you have own blocks to create influence. In actuality, few things speak louder than the concerns of a collective of the largest landowners. If you are skeptical, look at how many of the largest campaign contributors of most local, mayoral and gubernatorial elections are directly tied to the real estate market. Also look at the amount of tax benefits, such as PILOTs and tax credits are given to large developers or businesses that intend to open headquarters in an area. Governments have in some instances taken land from smaller private landowners through eminent domain to ensure that such developments or headquaters are able to be built.

When it comes to real estate not much has changed from the days of feudalism—land equals influence, so if people of color want to be heard in a lasting way and establish generational change, one way to do so is to own land and/or to influence land policy. Real estate has always been a powerful tool for social change. If we do not mobilize and acquire, then we will continue to be at the mercy of the planning decisions of a group that does not share our interest. Diversity has many benefits, but it is important that we do everything that we can to secure our seat at the table, so our inclusion is a necessity and not a mere act of benevolence. 

Well that’s my take on social justice real estate. I’d love to hear your thoughts. Please comment below.

Thursday, February 23, 2017

Property Maintenance Laws and Lending


The fight against property blight is a battle that has been waged for many decades. Some areas of the nation, have struggled with abandoned properties and even abandoned neighborhoods since the shrinking of the nation’s industrial sector beginning in the 1970’s. Other areas became intimately acquainted with blight as a result of the wave of foreclosures that took place at the end of the first decade of the century. However it may have arrived, the real estate finance market is certainly now affected by the palpable concern of property blight and has had to adjust to attempts to mitigate its damaging effects. 

Why Worry About Blight?

To be clear, blight is a real issue that can lead to a number of undesirable effects. Abandoned properties that are poorly maintained cause safety issues. Poorly maintained building systems and structure will eventually fail at some point, causing unsafe buildings. Overgrown landscaping leads to health concerns. These health and safety concerns become a problem for neighboring properties, as neighbors must then focus on how to curb the spread of these issues onto their properties. More generally, well-maintained properties inspire a pride of ownership that carries over to neighboring property owners. The opposite is also true—abandoned and poorly maintained properties drain the neighborhood of pride of ownership and lead to less diligent maintenance throughout the neighborhood.

Monday, January 9, 2017

Cooperatives

Welcome to another year at the Real Estate Think Tank. I enjoy writing about real estate and am thankful that I have this forum to share my thoughts on the subject. With that said, let’s get into Cooperatives.

A Cooperative, also known as a Real Estate Cooperative or Co-op, is a form of real estate ownership in which owners purchase shares in a corporate entity that owns a building. This entity is usually called an Apartment Corporation. Despite the name “Apartment Corporation,” a co-op can be both residential and commercial. Although residential co-ops, known as Housing Cooperatives, are more prevalent, commercial co-ops are not uncommon. 

In exchange for the purchase of shares in a co-op, each owner is given both an ownership interest in the Apartment Corporation, usually in the form of shares of stock, and a proprietary lease. The proprietary lease entitles each owner to occupy a certain portion of the building exclusively and confers most, if not all, of the rights of property ownership over the designated space, called an apartment.


Since the Apartment Corporation owns the building and not the owners, owners in a co-op are referred to as shareholders. Furthermore, shareholders do not technically own real estate or real property, but instead own shares, which are considered personal property. This distinction has certain legal ramifications that are noteworthy, but beyond the scope of this post. The ownership characteristics of a co-op, however, are also very interesting.

Monday, December 26, 2016

Condominiums

Condominium ownership is a form of real estate ownership that has unique characteristics. For those not well-versed in condominiums, here is a quick overview of their definition and purpose:

A condominium or condo allows a property, typically a multistory building, but not infrequently a large parcel of land, to be split into sections and owned by multiple owners. The unique aspect of condominium ownership is that it entitles an owner to ownership of a specific portion of a property and the space or “air” bounded by that portion. For example, through condominium ownership, one can convey the first floor of a three story building to one party, the second to another party and the third to yet another party. Interestingly, the units are frequently not required to be the same size, so one could create a two-unit condominium out of a three story building and convey the first floor to one party and the second and third floors to another party. A condominium is formed by recording a document, typically called a declaration in most jurisdictions, but also referred to by other names, such as a master deed, against the property. This document informs the public that the property is now a condominium, outlines the sizes of the units and common areas and provides other relevant information about the condominium.  Once a condominium is formed the property can no longer be sold as an undivided whole, unless the condominium regime is abandoned. The condominium regime will remain in effect until either the unit owners decide to abandon the condominium, the government dissolves the condominium, the property somehow loses the condominium status through the violation of local laws or the government condemns the property.

Wednesday, November 30, 2016

Easements

Easements are a common occurrence in real estate, but what are they really?

Essentially, an easement is the right to use a property granted by the owner of the property to a non-owner or class of non-owners. An easement is by no means the only way for a property owner to confer use to a non-owner, but unlike other forms used to grant usage rights, such as licenses and permits, easements are recorded against the title of the property over which they are granted and remain in effect despite the transfer of the land. The ability of an easement to survive the transfer of title is called “running with the land.”

Easements differ from leases, which also confer the usage rights of a property to non-owners and also run with the land, in that easements exist in perpetuity, whereas leases have a term with a termination date. As a result, in order to terminate or “extinguish” an easement, an affirmative action must be taken like merger or abandonment. A lease, however, automatically terminates upon the end of its term, without any further action by the parties to it.

There are different types of easements and easements are generally categorized in different ways. The first way that an easement can be categorized is based on to whom or what the rights of usage are granted. If the easement grants rights of usage to the owner or occupant of another property, it is called an easement appurtenant. In this instance, the property on which the easement is established is called the servient estate and the property that receives the right of usage is called the dominant estate.

Thursday, September 8, 2016

My How Local Lending Has Changed!

Today's banks are unabashedly international businesses which thrive on providing services and taking advantage of opportunities throughout the world. Long gone are the days of the local Savings and Loan as the provider of the community's mortgage needs. Instead, behemoths of consolidations dominate today's lending scene, thriving off of large economies of scale that make any potentially smaller competitors shutter. This change in the role of banking in the community, although the largely the product of intentional moves by the banking industry and Congress, is not without its effects on the real estate industry, particularly the residential market.

In order to explain the effect of big banks on the residential real estate market, one must understand the role of local banks prior to the expansion and consolidation of banks that led to the current situation. Until the 1980's, US mortgage lending was dominated by small local banks and Savings and Loan Associations (S&L's), local banking entities that engaged in lending and offering savings deposit accounts. Initially, S&L's were heavily regulated and restricted from offering consumer loans and investing deposits in most of the investment vehicles available in the market. The Savings and Loan model relied on a favorable treatment by the Federal Reserve to allow for an increased spread between the rate charged on mortgage lending and the rate offered on deposit accounts. S&L's also frequently managed underwriting risk with local market knowledge.

Wednesday, January 20, 2016

My Take On Tax Liens

Tax liens have always been of interest to me. As a teen, I would remember the infomercials advertising tax lien investments as the way to own tons of property for pennies on the dollar. Since my father was a contractor and property manager, I was introduced to real estate ownership at a young age and read my first book on tax liens in my late teens. At the time, I could not figure out why more people were not investing in tax liens. As an adult, real estate professional and attorney, I can now appreciate the risks/reward trade off that comes with this asset class. So, here is my take on tax liens.

Tax liens are a low cost way to obtain exposure to the real estate market. Although the supply and demand of tax liens is very much influenced by local events, tax liens will be around as long as there are municipalities in need of money and property owners who do not pay their taxes. Although cheap and available, investments in tax liens propose some unique risks and benefits.

One of the unique benefits of tax liens is that they initially offer passive income at high rates of return. Most tax liens are purchased via auction and most auctions employ one of two bidding methods--bidding up price or bidding down interest. Whether the price of the lien is bid up or the interest rate is bid down, the amount of back taxes owed does not increase and statutory penalty rates of interest typically offer an attractive return to purchasers that do not overbid. Moreover, upon the purchase of a tax lien, the municipality continues to serve as the collection agency for a statutorily mandated length of time, in most cases. This allows investors to collect on the purchased lien with minimal effort, for a period of time.

Sunday, October 4, 2015

Mortgage Backed Securities and Personal Bankruptcy

At long last, the end of the series!

Personal bankruptcy is usually filed by an individual for very different reasons than corporate bankruptcies. Whereas the primary motivation behind filing a business bankruptcy may be protection of the business or satisfaction of debts, personal bankruptcies are frequently filed for asset protection, in addition to satisfaction of debts.

The two sections of the bankruptcy code that apply to personal bankruptcies are chapter 7 and chapter 13. As with business bankruptcies, chapter 7 for personal bankruptcies is a process of liquidation and seeks include all non-exempt assets of the petitioner in the bankruptcy estate in order to liquidate them to pay off debts. Chapter 13, on the other hand, seeks to reorganize the debt of a petitioner pursuant to a payment plan, which typically last from 3 to 5 years.

Tuesday, March 3, 2015

Special Purpose Entity Bankruptcy Concerns for Mortgage-Backed Securities

Let us continue the bankruptcy theme begun in my last post and discuss the effects of Special Purpose Entity (SPE) bankruptcies and their effect on mortgage-backed securities. Obviously, most bond covenants designate the bankruptcy of a SPE an event of default and restrict the likelihood of its happening. In the unlikely event that such a bankruptcy does happen however, here is an overview of the process.

As a quick review, I would like to restate that mortgage-backed securities are the result of a process of securitization that takes place when a real estate lender sells a package of its loans to an entity, called and SPE. The SPE receives the money to purchase the loans from the sale of either securities, beneficial interests in the entity or trust certificates from a trust set-up to hold the loans. If securities or trust certificates are sold, they are called mortgage-backed securities (MBS). Through the securitization process, real estate lenders are provided with cash to originate more loans and investors are able to purchase MBS and invest in the real estate market without having to hold real property. If you question why one would want to invest in the real estate market at all, please see my earlier post, “Why I Choose Real Estate.”

Tuesday, February 24, 2015

Lender Bankruptcy and Mortgage-Backed Securitization

Mortgage-backed securitization is an essential part of the mortgage secondary market, as it provides both liquidity and expanded sources of funding for real estate lender. Securitization also allows for more widespread participation in the real estate market, since MBS bonds are an asset class that can be held by classes of investors that are restricted by law from retaining extended ownership in real property. More participation in the real estate secondary market, of course, translates to a more robust market with more available real estate funding and more real estate activity.

Despite its role in the market down-turn of 2007/2008, securitization of real estate assets has been and continues to be an important part of the U.S. real estate finance market. Securitization, however, heavily depends on a bankruptcy remote structure.