All entries filed under “Real Property Law”

Po-tay-toe, Po-tah-toe: Commercial vs Residential Transactions

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Authored By: Ryan A. Featherstone, Esq. rfeatherstone@dunlapmoran.com 

Does the following sound familiar?  You’ve been selling residential real estate for years, and you suddenly get a hot lead on a commercial property and you have the perfect buyer for it.  Or perhaps client calls and says he wants you to show him some commercial property.  You think to yourself, “I haven’t done commercial real estate deals before, but how different could it be?”  Answer: Very!

The distinctions between commercial real estate and residential real estate transactions are abundant, and go well beyond the scope of a blog article.  The below is meant to only highlight some of the more common differences and issues that may arise in commercial transactions versus residential transactions.  My recommendation is to always bring on an experienced commercial agent to work with you on the deal, or alternatively refer the matter to the commercial agent and take the referral fee.

                Valuation challenges:  Locating “comps” can be more difficult in commercial deals due to the uniqueness of many commercial properties as well as the differing uses by the commercial businesses/tenants.  Residential properties are much more uniform, with some exceptions, and the use is always consistent, i.e. it is a residence.  There are also different approaches to appraising commercial property: e.g. “CAP” rates, income versus cost versus sales approach.  The use of appraisers in determining value “pre-contract” is much more common in commercial deals.

               Zoning complexities:  Residential usage is a given in residential zoning districts.  However, this is not as certain in commercial property deals, where specific usage and intent of the client must be verified as an allowed use within the district.  As with residential property, there may be times when a certain usage or property attribute would violate current zoning laws.  A review of the zoning history is needed to determine if you have a “legally non-conforming” (i.e. “grandfathered”) use or property attribute (e.g. setbacks or base flood elevation), and to determine how a sale (or buyer’s intended plans thereafter) may affect such grandfathering.  This also needs to be verified in cases of planned redevelopment, as new improvements need to be built in compliance with current zoning laws.

                Due Diligence concerns:  The residential form contracts are very standardized, and allow for broad inspections during the defined inspection period with differing rights as to cancellation and repair requests.  In commercial deals, the contract is often attorney-prepared; and therefore, it may be heavily in favor of one party over the other.  Commercial properties and their use vary greatly; therefore, the due diligence required can also vary greatly.  Many different inspections may be required during this timeframe.  Residential properties typically involve general inspections, 4 point inspections, wind mitigation, and termite inspections.  Commercial properties often involve additional inspections, e.g., environmental inspections (i.e. Phase I and Phase II), asbestos, or engineering and architectural inspections.  Extra caution needs to be taken in inspecting commercial property.  It is not uncommon that a commercial property was used for the storage of hazardous substances; therefore, an environmental soil and groundwater inspection may be necessary.

                Financing:  Residential properties have several commonly known options: Conventional, FHA, VA, USDA, seller-financing, private financing.  Commercial properties have several other options, including: short term loans, interest-only, fixed rate, variable rate (tied to any number of indices), SBA loans (most common 7(a) and 504), business credit lines, equipment loans, blanket asset loans, cross-collateralization, or bridge loans.  Collateral other than the real estate will often be taken by the lender, including UCC liens on business assets (e.g. furniture, fixtures, and equipment, other tangible assets, inventory, receivables, bank accounts).  The client will also be required to sign an Assignment of Leases, Rents and Profits, assigning to the lender the rental income and other profits from the property in case of a default, along with a personal guaranty of the loan, as most often in commercial deals the purchaser/borrower is some form of business entity.

                Lease Matters:  In residential deals, usually the property is going to be owner-occupied, as a primary residence or second home.  However, in commercial property deals, more often the property is leased, and therefore additional considerations must be taken into account.  Careful review of the leases, rent roll, tenant estoppels, and confirmation of prepaid rents and deposits is always necessary to adequately review the profitability and cash flow of the property.  Ensuring the tenant signs an agreement subordinating the lease to the mortgage prior to closing is important.  This states that the lease is subordinate to the commercial mortgage (despite being prior in time to the mortgage), that the tenant shall not be disturbed by the lender as long as it is not in default of the lease, and that the tenant agrees to “attorn” to the lender and accept the lender as the new landlord in the case of a foreclosure or deed in lieu of foreclosure.

                Other Miscellaneous Matters:  Potential “impact Fees” should be reviewed for new development or redevelopment to determine if the property acquisition makes sense for the client.  These are often overlooked costs charged by local government to the property owner for offsetting costs of additional public services necessary for the development/redevelopment and other impacts to the surrounding area.  “Complex access issues,” are another common commercial property related issue, for example, an out parcel property in a larger strip center.  Does the out parcel have legal access and/or cross-easements over the strip center parcel?  Does the outparcel have its own assigned parking?  If not, easements will need to be negotiated, drafted and recorded.  “Common Area Maintenance” (i.e. CAM) must be determined prior to closing for an adequate review of all costs associated with ownership.  This may be passed onto the tenant(s) to pay in a net lease scenario, thus knowing what a potential tenant’s expectations are during due diligence is essential.  Finally, the “Commercial Real Estate Sales Commission Lien Act” which provides that in commercial deals, brokers have the right to impose a lien on the seller’s net proceeds (not the property itself) to protect the payment of their commissions.  This does not exist in residential deals.

If you ever find yourself deciding whether to take on a commercial real estate deal, it is always recommended to involve the services of a licensed Florida real estate attorney, and the services of an experienced commercial real estate agent, to help you navigate the murky waters of commercial real estate transactions.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.


Subsurface Rights - I Drink Your Milkshake?

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Authored By: Ryan A. Featherstone, Esq. rfeatherstone@dunlapmoran.com 

Most real estate professionals have had a transaction affected by these rights in some capacity, commonly referred to as oil, gas and mineral rights (“OGM”).  Florida courts have held that these rights are superior to the rights of the surface owner.  Some national developers/builders include the OGM reservation in their deeds, as a matter of course.  In certain areas of the state, OGM rights were reserved by and remain with the original families that developed the area, e.g. Barron Collier (Lee and Collier counties). These rights will be exceptions to title insurance coverage, and losses incurred as a result of enforcement of these rights are not covered by the standard title policies.  Coverage can sometimes be available by endorsement to the policy, but only if the right of entry is not reserved.  

Historically, the issue comes up from land that was at one time conveyed by the state, most commonly by the Trustees of the Internal Improvement Fund (“TIIF”).  Much of the state’s land came to it from the Depression, when owners had trouble paying their real estate taxes and thus lost their property to the state. It is noteworthy that when state and local government entities convey title into private hands, the OGM reservations are automatic, even if not specified in the deeds.  However, “since 1986, the rights of entry that accompany the OGM reservations were automatically lifted from both TIIF and State Board of Education deeds as to parcels of property that are, or ever have been, a contiguous tract of less than 20 acres in the aggregate under one ownership.”  Fund Concept Article Nov. 2019. This release of the right of entry is codified in Florida Statutes Section 270.11.

But what does this all really mean?  And how could it impact your future deals? 

For the most part, mortgage lenders, buyers, and title insurers focus on the right of entry relative to the OGM rights.  If the owner/holder of the OGM rights also holds a right of entry onto the land, obviously this could be significantly disruptive and potentially damaging to the land and property, not to mention its value and marketability.  If the right of entry has been released, then most of the time, the lenders, buyers and title insurers feel confident in moving forward without having to secure a release of the OGM rights, which may be impossible to get anyway.  The Florida form contracts state that OGM rights that include the right of entry are a title defect that has to be cured by the seller. Of course, this requires a title objection from the Buyer, so as a relevant aside, this is yet another reason why you should always close deals with an attorney and not a non-attorney title company.  There are several approaches and/or analyses that can be used to try and eliminate the right of entry depending on the facts, e.g. the Marketable Record Title Act, Ch. 712, Florida Statutes (MRTA) or requested releases from TIIF or the Department of Environmental Protection.

Now, is it possible there is a situation where the right of entry is released yet a neighboring property is used to excavate the subsurface materials a la Daniel Day Lewis in the movie “There Will Be Blood”?  Yes, of course, especially with today’s drilling technology.  But from a practical standpoint, the risk is fairly low, again, making the buyer, lender and title insurer comfortable with moving forward without the concern of damage to the property or negative impact on its marketability.  Additionally, zoning regulations may prevent extraction; however zoning laws can change so they should not be solely relied upon to resolve the issue. 

In a perfect world, OGM rights would be released on every property for which they are reserved.  But there is no guarantee the owner/holder would agree to the release (at a minimum without compensation) and in many cases it may be extremely difficult if not impossible to locate the owner/holder or heirs, resulting in expensive “quiet title” litigation or otherwise.  For residential properties, such lengths are usually not necessary as long as the right of entry has been released by instrument or by law.  However, for larger commercial projects or large acreage deals, the reservation itself could be concerning, requiring extra effort and expense to have the OGM rights released or sold prior to purchase or development.  And on those deals, where customized purchase and sale contracts are common, extra attention should be paid to ensure that the reservation of OGM rights (or at a minimum the right of entry) is in fact a title defect protecting the buyer’s deposit should they not be capable of being released.

Whenever working on a transaction where OGM rights have been reserved, it is bets to consult a licensed Florida real estate attorney for an analysis of the potential impacts this may have on your transaction to ensure your client is protected.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.


Avoid the Trap!

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Authored By: Scott W. Dunlap, Esq. sdunlap@dunlapmoran.com  

For those of you who already have the homestead tax exemption on your primary Florida residence, you may have recently received a yearly receipt card for the exemption renewal. 

As a reminder, the renewal card provides, in part, that your homestead exemption will be automatically renewed without any further action if the property is still the taxpayer’s primary residence.  Common examples of the property no longer qualifying as a primary residence include the renting of the property, property owner moving to another residence or to an assisted living facility, or the property owner benefitting from a residency-based exemption in another state (the “Trap”). 

The Trap, which was the subject of a recent Sarasota County lawsuit, relates to Section 196.031(5), Florida Statutes, which provides, in part, that a person who is receiving or claiming the benefit of an ad valorem tax exemption or tax credit in another state, where permanent residency is required as a basis for such exemption, is not entitled to the Florida homestead exemption.  This provision is a trap for the unwary, as the recent case in Sarasota County involved a couple from Ohio, who never even applied for such exemption on their Ohio home, and had no knowledge that the permanent residency-based exemption for their Ohio home even existed.  The Sarasota County Property Appraiser became aware of the fact, and revoked the Florida homestead exemption, and exacted various penalties, back taxes and interest.  The benefit that was received in Ohio was in the neighborhood of $500.00, but the back taxes, penalties, and the like collected in the lawsuit in Sarasota County, was in excess of $10,000.00!

The result in the above-referenced case was very harsh, and the court recognized this fact.  Based on the case and similar cases, the Florida Legislature is considering modifying the homestead statute to provide that the aggrieved person or family has a chance to demonstrate to the property appraiser that the person or family did not apply for the exemption or credit and that upon becoming aware, the person or family has relinquished the exemption or credit in the other state.  Said law may or may not pass.

In summary, if you are entitled to the homestead exemption, by all means timely apply for and claim this valuable Florida benefit.  However, if you later are no longer entitled to the exemption, you must notify the local property appraiser, as there are severe penalties that can apply if the homestead exemption is renewed but the property owner does not qualify for the continuance of the homestead exemption.   Note that not all counties mail a homestead renewal notice, so this may require the owner to be even more proactive.  And in particular if you are a new Florida resident, make doubly sure that you are not receiving any sort of homestead exemption or exemption based on permanent residency in your prior state of residency, so that you avoid the Trap.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.


The Often Overlooked Property Feature: The Tenant

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Authored By: Ryan A. Featherstone, Esq. rfeatherstone@dunlapmoran.com

We frequently handle closings that involve a lease or tenancy, and more often than not, we are not informed that the property is occupied by a tenant.  This can lead to numerous issues during the closing process.  With the exception of some foreclosure scenarios, any property that is sold with a tenant occupying the property is sold subject to the tenancy.  This could be whatever term remains under a lease, or it could be a month-to-month tenancy.  However, regardless of the situation, the simple fact that the property is changing ownership does not alone provide the buyer with any right to remove a tenant.

Paragraphs 6 and 18D of the FAR-BAR contracts address rented properties, and whenever a tenant is occupying a property and will remain for any period of time after closing, the box in paragraph 6 should be checked.  This should also be disclosed to prospective buyers by the seller in advance of any offers, and the MLS listing should reflect the property is currently occupied by a tenant. 

These paragraphs should be reviewed carefully.  Collectively, they obligate the seller to provide the following to a buyer: (1) copies of any lease(s) and (2) estoppel letters from the tenant(s), or a seller affidavit.  The buyer has expiring cancellation rights that commence from the delivery of each of these items, so for a seller, it is imperative to provide this information as timely as possible.  Estoppel letters from the tenant(s) are documents that specify the nature and duration of occupancy, rental rates, and advanced rent and security deposit amounts.  This is so the buyer can cross-reference the lease and other information provided by the seller with the information provided by the tenant(s), to ensure accuracy and have the opportunity to question any discrepancies.  Items like prorated rent and transferring of security deposits and prepaid rents must be correctly handled at closing, so dealing with discrepancies is crucial to an accurate closing.

But as with most things in real estate, what the contract states is merely the beginning.  The following is a discussion of some of the more common (and overlooked) issues when dealing with rented properties. 

If the ongoing tenancy is month-to-month, like in cases where a lease term has expired, and the buyer wants the tenant to continue to rent the property after closing, then the tenant needs to sign a new lease with the buyer.  If the buyer wants the tenant to vacate the premises, then the buyer/new owner should provide the tenant with a notice to vacate.  For month-to-month rentals, Florida law requires a fifteen (15) day notice be given to the tenant prior to the next rent payment being due.  If this notice is not given until the buyer closes the transaction, then there is no way to know if the tenant plans on “holding over” after the notice period expires, requiring an eviction be filed.  This is a risk to the buyer, and ideally the notice would be done before the closing takes place.

However, if the lease has not yet expired, then there must be an assignment of lease prepared and executed at or before closing.  This is essential for the buyer so that the buyer receives all the rights the seller had under the lease, most importantly, the right to receive the rent and evict the tenant in the case of non-payment of rent. 

Next, if the seller is using a rental agent for the collection of rents, and the buyer plans to continue renting the property after closing, does the buyer plan to use that same rental agent?  If not, then the rental management agreement needs careful review to determine what the termination provisions state, as many times lengthy notice must be provided to terminate the rental management agreement.  Additionally, even after termination, the rental agent may still be entitled to a commission if they were responsible for placing the tenant.  Conversely, if the buyer plans to continue using the rental agent after closing, a new agreement with the rental agent should be executed, or at a minimum, the pre-existing one with the seller should be assigned to the buyer.

Is the rental agent holding any security deposits or prepaid rents?  If so, then it needs to be confirmed that these will be transferred over by the agent to the account of the buyer after closing, and not disbursed to the seller.  This is especially important if the buyer does not plan to use the rental agent after closing.  Another question is whether the rental agent has disbursed any rents to the seller for the month of closing.  For example, if the closing occurs on the 15th of the month, presumably the rent has been paid by the tenant.  If the rental agent has disbursed the rent to the seller (less the rental agent’s commission), then appropriate prorating of the rent on the closing statement is necessary to ensure the buyer receives from the seller the rental credit from the date of closing through the end of the month. 

Next, if the buyer is obtaining a mortgage for the purchase of the property, what impact might the tenancy have on eligibility?  For example, most primary residence mortgages require that the buyer occupy the property as their residence shortly after closing.  Typically, there is an “Occupancy Affidavit” signed at closing by the buyer attesting, under oath, to the fact that the buyer will actually occupy the property no later than sixty (60) days after the closing.  Obviously, if the tenancy expires more than sixty (60) days after closing, the buyer would be lying when signing this affidavit.   Additionally, the rental usage could impact a buyer’s eligibility even for a second home loan.  When dealing with a rented property, these issues need to be addressed as soon as possible with the loan officer for the mortgage.

Another concern is related to insurance.  What impact might the rental have on homeowner’s insurance availability and rates?  If the tenancy expires after closing, the insurance companies will likely require the buyer to purchase a DP-3 policy (insurance for rental properties) versus an HO-3 policy (insurance for primary residences).  The coverage is different, as is the cost, with DP-3 policies typically being more expensive.  Once the buyer moves in, the policy can be converted to an HO-3 policy, but this is a hassle for the buyer and something that can cause delays to closing. 

An additional major concern, which currently is a hot topic with the advent of Airbnb and VRBO type services, is the legality of short-term rental usage of a property.  Many buyers are wooed into purchasing a property with the promise of substantial income from vacation/short-term rentals.  In most cases, the seller can provide legitimate evidence of the income-producing history.  However, zoning restrictions do not typically allow for short-term rentals in most local areas.  When this is explained, we often hear the response “but everyone in that area is doing it.”  This is where we should all hear our parents saying, “if all your friends were jumping off a bridge, would you jump too?”  Just because others are doing it, doesn’t make it right, or in this case, legal.  In fact, properties that are off the “barrier islands” cannot be rented for periods less than thirty (30) days.  The seller may have been renting the property for shorter periods, but not legally, and there can be no guarantee such use will continue, as governmental offices are cracking down on these violations.  Of course, this is a separate issue from whether the short-term rentals violate any applicable homeowners association or condo association rules against short-term rentals.

Lastly, note that a rented property will not be exempt from IRS reporting at closing.  Therefore, the seller will be receiving a 1099-S (Sale of Real Estate) at the closing table and should anticipate this prior to closing.  The seller should consult with the seller’s accountant relative to any capital gain taxes that might be due on the sale of a property that is subject to a tenancy.

Naturally, there are additional concerns with rental properties not covered here.  Whenever dealing with a property that is currently being rented and will remain so after closing, for whatever period of time, we recommend that you consult with a licensed Florida real estate attorney to discuss all of the potential pitfalls to you and your client that might be overlooked.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.


REAL ESTATE TAXES…..It’s That Time of Year Again

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Authored By: Scott W. Dunlap, Esq.

November is here, and hopefully cooler weather is on the way.  Thanksgiving is also approaching.  And of course, real estate tax bills have now been made available by the tax collectors in most Florida counties (as they say, “two out of three ain’t bad”).

 For any homeowners who have a mortgage loan, it may be the case that the mortgage lender is collecting real estate taxes and, therefore, will pay the 2019 real estate tax bill.  This will occur by the end of November, so that the maximum 4% early payment discount will be obtained.  Even if your lender is to pay the real estate tax bill, the borrower/homeowner is advised, of course, to double check with the tax collector in early December (usually one can double check on-line) to make sure the tax bill has been paid.

 Homeowners who do not have a mortgage, or who do not escrow for real estate taxes, have a choice of when to pay real estate taxes.  Paying the tax bill in November will mean a 4% discount.  Paying by the end of the year will still earn a 3% discount.  Of course, paying the real estate taxes by the end of the year is important as well for the federal income tax deduction that is still available (although limited in amount).

 Keep in mind that if you closed your purchase recently, you may not receive the 2019 tax bill (i.e., your seller may receive instead), so you will need to pull the bill from your local tax collector’s website.

 For those owners who purchased or acquired their Florida, primary residence in 2019, those owners are reminded to presently apply for the homestead exemption even though the homestead exemption will not be valid until 2020.  In other words, don’t forget to apply and obtain the homestead exemption, as the benefits are:

  • Assessed value increases are limited to the lesser of 3%, or the annual CPI increase;
  • $25,000 or $50,000 of assessed value reduction for most portions of the real estate tax bill;
  • Maintaining the homestead exemption may also help to reduce potential liability as most judgments can’t attach to homestead property.

 In order to qualify for the homestead exemption for a particular residence, the owner, by January 1st of the applicable year, must be a Florida resident, and must own the home (or have the 98 year lease or be the beneficial owner through a trust for example), and the home must be the permanent/primary residence of the owner.  The owner must also apply for the homestead exemption, either on-line or in person at the Property Appraiser’s office, on or before March 1st of the year in which the homestead exemption is claimed.

 So, in summary, the advice is to make sure the real estate taxes for your home are paid in November or December.  And if you are entitled to claim the homestead exemption for a home purchased in 2019, apply now and don’t wait for cooler weather.

Happy Thanksgiving to all!

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.


Permit Me to Speak About "Permits"

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Authored By: Ryan A. Featherstone, Esq.

As real estate professionals, we have all had a transaction or two that have been affected by permit-related issues.  Whether it was an open permit, an expired permit, a failed inspection, or unpermitted work, permit-related issues can derail an otherwise smooth and successful transaction.  And now that all title insurance underwriters require the additional “municipal lien search“ prior to closing, dealing with permit issues is as common as dealing with title-related issues.  Luckily, however, the legislature has made some recent changes that will hopefully, in practice, make dealing with certain permit-related issues easier for all of us.

House Bill 447, effective July 1, 2019, resulted in some significant changes to the Florida Statutes.  For example, an open permit may now be closed by a local enforcement agency 6 years after it was issued without a final inspection if the local enforcement agency determines that no apparent safety hazard exists.  This will be tremendously helpful for those older permit issues that often come up, where currently time-consuming and often costly effort is required to get these permits scheduled for final inspections and closed out once and for all.  Additionally, under this Bill, we finally have a definition for the term “close” as it relates to open permits.  That definition is, “that all requirements of the permit have been satisfied.”  Next, this Bill states that if a permit has expired and the work has been substantially completed, the permit may be closed without obtaining a new permit, and the work required to close the permit may be done pursuant to the building code in effect for the original permit, unless the contractor is using a different material, design, or method of construction than that used under the original permit.  Furthermore, this Bill protects bona fide purchasers for value from fines, penalties, sanctions and fees due to an open permit that was applied for by a previous owner and was not closed.  Next, the local governing body can only charge one reasonable search fee for the research and time necessary to pull permit records on a property.  And finally, to help reduce the number of future open or expired permits, the Bill authorizes notice of a soon-to-expire permit to be sent to the property owner.  However, this is not a requirement; the statute states that the local government “may” send a written notice of expiration.

Another helpful recent legislative change, House Bill 1159, effective July 1, 2019, created Florida Statutes section 163.045 “Tree pruning, trimming, or removal on residential property”.  This law states that if a tree is a danger to persons or property as confirmed by a certified arborist or licensed landscape architect, then a permit to remove, prune or trim the tree is no longer necessary.  The law also states that the property owner cannot be required to replant a replacement tree.  Of course, when it comes to our beautiful Florida trees, this topic does have its critics.  Some argue that the law is not stringent enough on its requirements and could be easily subject to abuse, or perhaps result in a corrupt niche industry looking to profit from the removal of trees that are deemed “dangerous”.  From a practical standpoint though, this can be another tool in keeping a closing on track and on time.

Whenever dealing with any permit-related issue, as always, we recommend you consult with a Florida licensed real estate attorney.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.


Accessorizing Your Real Property!

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Authored By: Benjamin DeMarsh, Esq. and Ryan Featherstone, Esq.

Sarasota County plans to adopt a new ordinance (No. 2019-024) that amends the Sarasota County Unified Development Code and expands the ability of property owners to utilize accessory dwelling units in many residential areas of the County.  Accessory dwelling units, or “ADUs”, are smaller freestanding or connected dwelling units located on the same lot as a principal dwelling.  They are commonly known as granny flats, mother-in-law suites, or secondary suites.  ADUs have the potential to dramatically increase the supply of affordable housing within many residentially zoned areas in Sarasota County.

Across the country, many municipalities are taking steps to encourage the use of ADUs, and Sarasota County seems to be on the forefront of this trend.  The Sarasota County Board of County Commissioners unanimously voted to adopt this new ordinance governing ADUs in late September 2019. Sarasota County Residents can expect to see the new ordinance implemented as soon as this year.

The Unified Development Code will be amended as follows:

  1. Removes language limiting ADUs only in subdivisions created after October 27, 2003.  This is likely to be the most significant change, as it is mostly older housing that has the capability of adding ADUs due to less restrictive or no HOA rules existing in older subdivisions, as HOA restrictions against ADUs will preempt the ordinance. 
  2. Increases the allowable size of ADUs from 500 sq. feet to 750 sq. feet.
  3. Eliminates ADUs from building density calculations.
  4. Accessory dwelling units can now include a kitchen.  This is another significant change to the existing code, allowing the ADU to now be a fully functioning guest or rental suite.
  5. Maintains the prohibition of ADUs on the Barriers Islands, but adds a prohibition in cluster subdivisions.

Sarasota County’s adoption of this ordinance is not without critics.  Many argue that ADUs will decrease property values, affect homeowners’ homestead tax exemptions, and result in numerous covert rental operations (e.g. Airbnb).  Fortunately, the County has taken concrete steps to ensure that ADUs are not abused by investors and do not have a negative impact on existing homeowners.

There are several key requirements that all property owners should keep in mind before building their dream ADU:

  1. The owner must occupy either the accessory dwelling unit or the principal dwelling unit.  ADUs are not appropriate for investment property.  Part of the County’s goal is to increase the supply of affordable housing for young professionals, elderly, married couples without children, and to allow families to care for their aging relatives who want an alternative to a nursing home.  
  2. Rental restrictions applicable to all homes in Sarasota County will still apply to residences and their ADUs.  Same as for the principal structure, ADUs cannot be rented for periods less than 30 days at a time.
  3. Owners will need to ensure the ADU and principal structures do not exceed max building coverage requirements for the lot and setback requirements for the principal structure.
  4. The ADU needs to have same the height, finish and style of the principal structure.
  5. One parking space is required per ADU, which could be tandem parking, or shell or grass surfacing and cannot be street parking.

Dunlap Moran will be closely monitoring this development, and will be available to answer questions for any property owners considering building an ADU.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.


To Exchange or Not to Exchange - That is the Question

Authored By: Scott W. Dunlap, Esq.

Values of real estate have risen the last several years (thank goodness!).  Therefore, we have seen a return to the benefits of accomplishing a tax deferred exchange under Section 1031 of the Internal Revenue Code.  As a reminder, a 1031 Exchange is the sale of a property in which the taxable gain on the sale is “rolled” into a property or properties to be acquired.  Tax on the gain is, therefore, deferred.

 Here are a couple of basics of tax deferred exchanges, to keep in mind:

  • The property to be sold (in an exchange, the “relinquished property”), must have been held for productive use in a trade or business, or for investment purposes.  In plain English, this means that a taxpayer’s personal residence, whether primary, secondary, or vacation, typically does not work for purposes of the tax deferred exchange.
  • The property to be acquired (known as the “replacement property”), must be “like kind.” This does not mean that the uses of the relinquished property and replacement property must be the same; only that the replacement property must also be property held for trade or business or investment.  So, a vacant commercial parcel can be exchanged for a shopping center, for example.
  • Generally speaking, the taxpayer must exchange up in value, and up in debt, in order to avoid receiving cash or “boot.”  Any cash or boot received is presently taxable.
  • Time limits apply.  For instance, the replacement property must be properly identified within 45 days of closing the sale of the relinquished property; and the replacement property must be acquired by the lesser of 180 days from the date of sale, or the date the taxpayer actually files its tax return for the year of the sale.
  • Prior to the sale of the relinquished property, an appropriate agreement needs to be executed with a qualified intermediary, or a “QI.”  The QI will hold the exchange proceeds.  The taxpayer can’t take possession of the sale/exchange proceeds until the exchange is fully completed or otherwise ended.
  • Make sure to coordinate required paperwork with your attorney or QI, as most of the rules must be strictly followed in order for the exchange to work.

If the requirements for an exchange are met, remember that the 1031 Exchange is a tax deferral strategy, not a tax avoidance strategy.  Therefore, it is always a good idea to have your tax advisor or CPA run some scenarios as to present and possible future tax ramifications, so that the question of whether to exchange or not to exchange may be answered.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.

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The Devil is in the Details

Ever heard that phrase?  Well, it couldn’t be more true than in real estate transactions, and a recent Florida case has reemphasized this idiom. 

The Fourth District Court of Appeal in the case of Florida Investment Group 100, LLC v. Lafont, 44 Fla. L. Weekly D1063 (Fla 4th DCA 2019) analyzed the financing contingency of the FAR-BAR “As Is” Residential Contract for the Sale and Purchase.  This particular financing paragraph stated that the transaction was contingent upon the Buyer obtaining “Loan Approval” for a conventional loan in the amount of $465,000 at a fixed interest rate and for a term of 30 years.  The contract gave the buyer 30 days to acquire such a Loan Approval.  Loan Approval is defined in the contract as an “approval of a loan meeting the Financing terms [of the contract].”

It is important to note that the buyer never received a Loan Approval meeting the Financing terms of the contract.  Instead, the buyer received a conditional approval from a lender for a loan that had completely different terms than stated in the contract.  Moreover, the buyer never informed the seller of the conditional approval, nor did she cancel the contract before the end of the Loan Approval Period.

Later, an appraisal was obtained that was insufficient to allow the buyer to obtain financing necessary for the purchase.  She attempted to cancel the contract, and then failed to close on the closing date.  The seller put forth a claim on the buyer’s earnest money deposit, and the buyer filed suit to recover the deposit.  The buyer claimed the contract allowed her to cancel under the following provision, “[i]f Loan Approval has been obtained, or deemed to have been obtained … and Buyer fails to close this Contract, the Deposit shall be paid to Seller unless failure to close is due to … (3) appraisal of the Property obtained by Buyer’s lender is insufficient to meet the terms of the Loan Approval.” 

The trial court agreed with the buyer.  However, on appeal, the appellate court reversed the decision.  The appellate court found that since Loan Approval had not been obtained nor had the buyer cancelled the contract prior to the end of the Loan Approval Period, the Loan Approval was “deemed to have been obtained.”  However, in such a situation, the court said a buyer cannot then rely on the insufficient appraisal excuse to justify buyer’s nonperformance.  “Deemed to have been obtained” is not obtained; rather, it is a “legal fiction,” as the court stated.  The court found that in such a case, “there was never a Loan Approval as defined in the contract that would allow this court to look at the ‘terms of the Loan Approval’ to decide whether an appraisal of the property was insufficient to meet its terms.” 

Furthermore, the court found it irrelevant that the appraisal of the property was insufficient to meet the terms of the conditional loan approval that the buyer did obtain, because that loan approval was on entirely different terms than were stated in the contract and therefore that did not constitute Loan Approval as defined in the contract. 

In summary, I see two important takeaways from this case: (1) be sure that borrowers are applying for loans on terms as defined in the financing contingency of the contract, and (2) be sure that they get a written Loan Approval on those terms during the Loan Approval Period (or as extended), especially if that Loan Approval remains conditioned upon an acceptable appraisal.

This should also be a reminder to the residential lenders out there that they should be reviewing the financing contingency sections of these contracts to ensure that the mortgage financing they are working on matches what is in the client’s contract; otherwise, the financing contingency needs to be amended by a fully executed addendum to the contract.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.

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FIRPTA…Say What?

So what the heck is this FIRPTA thing, and why do I keep hearing about it?  First things first: FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980, a federal law requiring the accurate reporting and remittance of U.S. capital gains taxes for foreign investors.  Ok great, so what does that mean for real estate transactions here in Florida?

According to the National Association of Realtors (NAR) 2018 Profile of International Transactions in the U.S. Residential Real Estate, 19% of all international residential property purchases in the U.S. occurred in Florida, the highest of all states.  Additionally, 61% of the properties sold by international sellers in the U.S. were in Florida, California, Texas, Arizona and New York.  As these stats show, Florida sees and will continue to see a significant amount of transactions involving foreign parties.

Prior to FIRPTA’s enactment in 1980, foreign sellers were often exempt from paying income tax on the sale of U.S. real property due to tax loopholes existing at the time.  Many times, these loopholes weren’t even available to U.S. citizens.  The enactment of FIRPTA, however, changed this and created the requirement for a tax withholding, at the time of the sale, to prevent foreign sellers from skipping town without paying their income taxes or filing the required income tax return.  If they fail to do either, the withholding is there to protect the U.S. government. 

In general, FIRPTA states that if the seller of U.S. real property is foreign, then 15% of the gross sales price must be withheld at closing and remitted to the IRS within 20 days of the closing, unless an exception applies (more info on that below).  This withheld/remitted amount is NOT the actual tax due on the sale, as the tax is not determined at the time of the closing, but rather at a later date.  Once the actual tax due is determined, the IRS retains the tax from the withheld/remitted funds, and any remainder is returned to the seller.  In most cases, the withheld/remitted amount more than covers the foreign seller’s actual income tax.  Simple enough concept.  However, identifying and analyzing FIRPTA’s application to any given transaction can be quite complicated.

The first analysis under FIRPTA is to determine if you have a foreign seller.  Sellers can come in all shapes and sizes, from individuals, to Trusts, Corporations, LLCs, Estates, etc.  These can ALL be foreign sellers, and the analysis for each is different.  For example, for LLCs, most people think that if the LLC is a U.S. LLC, that there is no FIRPTA issue.  That is not always the case.  What if the LLC is a single-member LLC?  Unless another IRS entity tax election is made, the single-member LLC would default to being a “disregarded entity,” so you would then look to the individual member, not to the entity itself.  If the individual member is foreign, you have a foreign seller (and a FIRPTA issue), despite the LLC being a U.S. entity.  For another example, let’s say that an IRS entity tax election is made, such that the LLC has elected to be classified/taxed as a corporation, but one if its shareholders is foreign.  Typically, the analysis for corporations is simply whether it was created in the U.S.  If so, FIRPTA doesn’t apply.  However, while foreign persons can be shareholders of C-corporations, they cannot be shareholders of S-corporations.  So what if an error was made in the entity tax election, or what if the seller made a false S-corp election?  More documentation will be needed to determine if you have a foreign corporate-seller, e.g. the C-corp election acceptance letter from the IRS.  

So you have determined that the seller (individual, corporation, LLC, etc.) is foreign, now what?  Well, that depends on if the exception applies.  NOTE: this exception only applies to residential property and only applies if the buyer is an individual or individuals.  Assuming both, then you can move on to the analysis of whether the exception applies: 

    -          Exception Question 1:  Is the property selling for $300,000 or less?  If yes, proceed to Question 2, if not, FIRPTA withholding is required (see below for more information on how much).

    -          Exception Question 2:  If the property is selling for $300,000 or less, does the buyer have definite plans to reside and use the property for at least 50% of the time that the property is used by anyone during the first two 12-month periods following the closing? 

If both of the above questions are answered “yes,” then the exception applies, and the buyer may sign an affidavit stating these facts, and under these circumstances alone can FIRPTA withholding be legally avoided. 

But if the exception does not apply, you have to withhold, and the question then becomes what amount is withheld?  The Protecting Americans from Tax Hikes Act of 2015 made determining this even more complicated, believe it or not.  This law, effective February 16, 2016, created a tiered analysis for determining the withholding amount.  If the sales price is $300,000 or less, but fails to meet the usage requirement of Exception Question 2 above, then the withholding amount is 15%.  If the sales price is greater than $300,000, but no greater than $1 million, and the buyer meets the usage requirement of Exception Question 2 above, then the seller would qualify for withholding in the amount of 10%, instead of 15%.  However, if the sales price is greater than $1 million, then regardless of the buyer’s intended use, the withholding amount is 15%.  Confused yet? 

At this point, you’ve determined that you have a foreign seller, the exception doesn’t apply, and you’ve determined the amount of the withholding.  So what happens with the withheld funds?  Well, that is yet another analysis.  If the seller has applied for “reduced withholding” no later than the closing date, then the tax withholding may be escrowed until such time as the reduced withholding amount is determined.  That amount is eventually documented by a “withholding certificate” from the IRS to the seller or the seller’s accountant.  The withholding certificate will then be given to the escrow agent holding the funds, and the reduced amount provided for in the withholding certificate will be remitted to the IRS and the remainder will go back to the seller.  However, if the seller did not timely apply for the reduced withholding before closing, then the full withholding amount is remitted to the IRS no later than 20 days after closing.  Confused even more?  I’m sure you are! 

A relevant aside here regarding liability.  A little known fact about FIRPTA is that the liability for the correct handling of all of the foregoing falls on the shoulders of the buyerThe buyer could be subject to severe penalties, late fees and interest if there is a misstep.  From the IRS’s standpoint, this makes sense, as unlike the seller who has probably already left the country, the buyer, at a minimum, owns real property here.  In such a case, the buyer, and buyer’s property, is the best option for recourse for the IRS.  Seems unfair, yes, but that is the law.  Therefore, it is absolutely essential that you and your clients work with qualified professionals experienced in the complex FIRPTA withholding procedures.  Your best approach is to identify the issue (i.e. that you have a transaction involving a foreign seller/buyer) as soon as possible, and let the attorney/closing agent know right away. 

In all types of real estate transactions, especially those involving FIRPTA issues, be sure to contact a Florida licensed real estate attorney to discuss the issues presented here, along with any others that may come up specific to the transaction.

This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion.  The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.

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