Big business has made headlines in recent years for playing a role in solving community, national and global problems. Sometimes the corporations’ role is for social change. Sometimes, it is for humanitarian assistance. And, sometimes, it is to fill in the gaps where the government has fallen short.

There have been many instances of corporate involvement in all of these aspects over the last few years. 2 have recently caught my eye that are a bit out of the ordinary. The first, the Seattle City Council passed an ordinance levying a tax on large businesses in the amount of $275 per full time worker per year. The tax would be used to combat Seattle’s growing homeless problem. After pressure from 2 of Seattle’s largest employers, Amazon and Starbucks, as well of most of the Seattle business community, the Council repealed the tax just 1 month later. The opposition was to the “tax on jobs”. No one argued against the need to solve the homeless problem. Amazon and other companies shared concern about the problem and have contributed to programs on a charitable basis. Whether forced contribution to government programs to the effort is the answer was not the issue.

The other instance that caught my eye is Domino’s recent initiative to repair America’s infrastructure. The pizza chain announced last week that it would partner with American towns and cities to fix potholes. Initially, Domino’s has partnered with Bartonville, Texas, Milford, Delaware, Athens, Georgia and Burbank, California. Paved over potholes are then painted with the Domino’s logo and catch phrase, “Oh Yes We Did”. Is Domino’s solving a need that local governments can’t fund?

These are 2 new and unique approaches to long term corporate involvement in community issues. Historically, even recently, corporate involvement has been less direct, even when requested. It may have been in the form of influence. Calls for consumers for boycotts of companies that under pay employees, harm the environment or take unpopular stands politically have been going on for decades. Corporate boycotts could force companies to change policy or even pressure government officials by way of campaign donations or other methods. The corporate boycott works today as we have seen gun control advocates call for boycotts of advertisers of Fox News shows.

Along this same line of thought, corporations took a big stand to change policy following the Parkland shooting earlier this year when Dicks Sporting Goods stopped selling fire arms and Walmart changed its policies regarding fire arms and ammunition sales. These companies hope to send a message to customers and elected officials that new laws and regulations are necessary.

Robert Iger CEO of Disney and Elon Musk CEO of Tesla both resigned from presidential advisory commissions following President Trump’s withdrawal from the Paris Climate Accord, bringing the weight of their companies behind their objections to the new US climate policy. Could this corporate pressure have an effect on the policy? So far, it hasn’t. But, it could in the long term.

In Fort Lauderdale, about 25 years ago, Wayne Huizenga, then the owner and CEO of Blockbuster Video, recognized the city’s own homeless problem which the city had failed to combat. He organized the business community in Broward County to raise money to fund a homeless shelter in partnership with the County. This was the model of corporate involvement. It was charitable giving. Gather your friends, raise money and when possible, involve local government.

Things have changed. Maybe Seattle’s effort to tax business was not the best approach. But the target was correct. Corporations will get involved to help solve problems, clearly if there is something in return to them. Profit is one thing, publicity is another. Being a good corporate citizen is on the list, but that is likely far down the list. Corporate resources, financial and otherwise, far exceed governmental resources. For most necessary projects, government leaders should look to form Public Private Partnerships (PPPs) with local business to solve the problems the community faces. PPPs are successful in real estate developments and economic development and could be beneficial in this realm as well.

As for Domino’s and the pothole problem? Is it publicity stunt? Perhaps. But it is solving a problem in 4 cities. Maybe, down the road, more cities will be involved. This could be the 1st PPPPP (Public Private Pizza Pothole Partnership) ever seen!

When 2 parties sign a real estate contract, they generally do so with the expectation that the seller wants to sell and the buyer wants to buy. Basically, at the time that the contract is signed, both parties want to close. However, sometimes, things happen and one of the parties changes their mind and decides they don’t want to close. Now what?

There is no right or easy answer to this question. Who is attempting to terminate the contract and their reason for doing so are important factors in determining what to do. A common occurrence is when a buyer decides not to proceed at the end of the due diligence period. Most commercial real estate contracts and many residential contracts provide the buyer a time, following contract execution, to inspect the property and determine whether it is suitable for buyer’s use. Sometimes the inspection paragraph is broadly drafted and sometimes it is narrow in scope. At the end of the due diligence period, the buyer, if not satisfied, may provide notice of termination to the seller and the deposit is to be released to the buyer. Most of the time, this goes without a hitch.

But things don’t always go smoothly here, even though the provision has been negotiated and is clearly spelled out in the contract. Sellers have waited through the due diligence period patiently (or not) and want to proceed to closing and object to the termination. I had a case where my buyer client requested several extensions of the due diligence period, purportedly to complete zoning review. When the buyer ultimately terminated the contract, seller objected arguing fraud because the buyer had never made application for approval and failure to give timely notice of termination. The due diligence provision was broad and allowed the buyer to terminate for any reason. But, seller refused to consent to the release of the $50,000 deposit. When no agreement could be reached, my buyer client sued for release of the deposit. The escrow agent placed the deposit in the court registry. We prevailed at summary judgment with the court finding that the seller had voluntarily executed each amendment extending due diligence and buyer’s notice of termination was timely. Seller had to release the deposit and pay buyer’s attorney’s fees. Whether the buyer had made application for the zoning approval was not relevant.

A buyer might also attempt to terminate a contract because of a failure to satisfy other contingencies such as financing or government approvals. From the buyer’s perspective, it is important that, regardless of how the contract is drafted, the buyer document its efforts to timely satisfy the contingencies and keep the seller advised of all its efforts. If buyer does not keep the seller informed and then is unable to satisfy a contingency, seller could have grounds to object to buyer’s attempt to terminate the contract and recover the deposit. If not expressly stated, buyer has an implied covenant of good faith which means that the buyer must use its best efforts to satisfy the contingencies. If the seller isn’t in the loop, the seller can also allege that the buyer has not reasonably attempted or used best efforts to do so.

Sellers, likewise, fail to close from time to time. Buyers’ remedies are usually clearly spelled out – specific performance being the most common. To assure that a buyer can pursue specific performance as a remedy, buyer must demonstrate that it was “ready, willing and able” to close on the closing date and seller failed to perform.

This can be illustrated in another case I had a few years ago. My client was a tenant under a commercial lease. Under the lease, the client had an option to purchase after the 3rd lease year if exercised between 120 and 60 days before the end of the 3rd lease year. The terms of the purchase were set forth in the lease and the option was to be exercised in writing to landlord by tenant preparing a contract, signing the contract and sending it to landlord. Closing was to occur 60 days thereafter. We prepared the contract and timely exercised the option. The landlord’s attorney responded that the option was not valid for a myriad of reasons and if we wanted to purchase the property, the price would be 2.5 times the option price. The shake down was on.

Though we spent the next 60 days arguing with the landlord’s attorney as to why the landlord was wrong about the validity of the option, we also prepared for the inevitable lawsuit by getting ready for closing. We ordered title and survey. We prepared closing documents. The client sent me the required deposit and I notified the landlord and the attorney that the deposit was being held in my trust account. Upon receipt of the title commitment, I sent a title objection letter. We prepared a closing statement and requested seller documents. The day before the closing, the client wired the net closing proceeds to my trust account.

On the scheduled closing date, I sent the buyer signed closing documents to the landlord’s attorney and advised that all closing proceeds were in my trust account ready to be delivered to landlord/seller upon receipt of the deed and other closing documents. In effect, I “tendered” the closing proceeds. Of course, the seller/landlord rejected our tender and refused to close. We filed a lawsuit for specific performance and, because we took all of these steps, won on summary judgment. After concluding that the option was valid (rejecting all arguments of the landlord), the court cited each step we took to confirm that buyer was ready, willing and able to close and ordered landlord to convey the property to my client. Landlord was also ordered to pay all of my client’s legal fees.

Disputes over closings occur. Attention to detail on both buyer’s and seller’s side is necessary to enforce the contract or to resolve the dispute without litigation. Luckily, I have only had a handful of these cases go to court over the years. Not every deal will close. In fact, most won’t. But no one wants to litigate. Detail starts in the contract and continues as you work through due diligence and prepare to close. If the transaction is not going to close, this attention to detail will help avoid the costs of litigation.

Sophisticated commercial tenants generally understand that the cost of leasing space is not limited to rent. Most retail and higher end office spaces are net leases and therefore, include a separate charge for Common Area Maintenance and Operating Expenses (CAM). CAM charges are the charges that the landlord incurs for running the common areas of the building, such as utilities, maintenance, taxes, insurance, security and the roof and structure. Depending on the tenant’s size and financial strength, care should be given to negotiating what is included in the definition of CAM and what is specifically excluded. I’ve written on this topic before (see post HERE).

Another factor in negotiating CAM from the tenant’s perspective is limiting the increase from year to year. Again, there are tools to help limit tenant’s exposure to significant increases to CAM charges (discussed in my previous post and also HERE). But once the CAM provisions have been negotiated and included in the lease, tenants can’t forget about them. If they do, tenants could be faced with improper CAM increases or charges.

In my practice, I am asked what to do about large CAM increases all the time. When I have been the one to have negotiated the lease, the process is usually simple and the same. There are 2 questions of concern. First is the reconciliation of the prior year’s CAM. That occurs because landlord has underestimated the actual operating costs for the building for the prior year and tenant is required to “true-up”. The second is the new charge for the coming year. If landlord under budgeted for the prior year, the new charge should factor in the short-fall plus a percentage increase for the coming year so that the tenant will not suffer sticker shock.

The review process is not complicated in a properly drafted and negotiated lease. Within a certain number of days following the end of the calendar year, the landlord should provide an operating statement showing the reconciliation including the original budget and the actual budget. The tenant will have a period of time to object and, if desired, audit landlord’s records to determine accuracy. If tenant’s audit finds a discrepancy over an agreed percentage, landlord pays the cost of the audit and sometimes, a penalty to tenant. If tenant still owes, tenant pays. Tenant also has the right to review the proposed budget. If there was an audit, the audit should give the tenant some insight as to the accuracy of the new budget.

If landlord fails to timely deliver the reconciliation, landlord waives its right to collect any shortfall. CAM, however, should be adjusted up or down, at any time during a calendar year. While tenants might look at this provision as giving a landlord too much discretion, it is better to make incremental changes during the year than to be faced with a large reconciliation at year end which must be paid in lump sum on 15 days’ notice. And, because tenant should have the right to audit, the payments can be recovered if found to be improper.

Sometimes, actually, often, I get leases that I did not review or negotiate. New clients or even existing clients who didn’t think they needed me or my partners to handle what they considered to be a “simple lease”. Recently, a firm client, who signed a lease before we represented him, was presented with a very large reconciliation. It came at the start of the 3rd calendar year of the lease. This was the first time the client had ever received a reconciliation. He should have received 2 reconciliations previously but apparently, the property manager “forgot” to send the prior reconciliations. As a result, there had never before been a true-up. In addition, the property manager had, for the prior 2 years not increased CAM because he “forgot” to bill the client. Now, the client had a large reconciliation and a large increase. The client had never questioned the property manager, but why would he? His rent increases were small and the CAM wasn’t changing. On the other hand, now he faces a very large bill.

How can the client be certain that the property manager isn’t attempting to recoup the lost CAM going back to the first year? The issue is sloppy record keeping.   By not presenting timely reconciliation statements, the lease provides that the true-up is waived for those first 2 years. Therefore, the landlord is only entitled to catch up for last year. But the sloppy property manager never even prepared a budget those first 2 years so there is no documentation to prove that the client underpaid last year or to prove that the reconciliation is only for last year and not a recovery of all lost CAM. The best that property manager and landlord can do is show us tax and insurance bills over the life of the lease to prove that non-controllable expenses.

In hindsight, I have explained to the client, the lease requires that the landlord provide a budget by December 1 of each year. That budget is to include a CAM estimate for the coming year. The estimate should prepare the client for what is to come in the reconciliation statement. Although these are landlord’s obligations, if the tenant does not keep its eyes open and be aware, a big surprise will come at some point. That surprise is likely to turn into a costly fight.

Last week, the House of Representatives passed, and the President signed, The Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155). The Act rolls back several provisions of The Dodd-Frank Act, the law that was enacted to regulate banks following the financial crisis to help assure that tax payers would not have to bail out banks again. With the economy continuing to strengthen, smaller banks have argued that the tight regulations imposed by Dodd-Frank have made it difficult to compete. Wall Street concurs and argues that loosening restrictions would generate growth in underserved areas allowing community banks and credit unions to free up capital to lend to smaller borrowers who might not otherwise qualify for loans from larger banks.

The Act removes stress test requirements for banks with assets of less than $250 billion. This provision alone should help consumers in rural areas because credit will free up for community banks and credit unions according to Redfin chief economist Nela Richardson. Lawrence Yin, NAR chief economist expects that there will be a rise in regional construction because small, local home builders will be more likely to obtain construction loans from community banks.

The Act is getting praise across the board from the real estate industry. But there is concern that the Act opens the door to the old practices that brought about the crises in 2008. The “Volcker Rule”, which prohibits financial firms from investing proprietary funds, was eliminated for banks with less than $10 billion in assets. This could cause banks to lose federally insured money on risky investments. Fannie Mae and Freddie Mac are now required to consider alternative credit scoring models. This could open the door to loans to borrowers who don’t have the ability to repay loans. Small banks are exempt from certain disclosure requirements. Redfin’s Richardson says that this could lead to racial inequality in lending.

The result of the Act is that only the 10 biggest banks in the country remain subject to full federal oversight. House Minority Leader Nancy Pelosi (D-CA) says “it’s a bad bill under the guise of helping community banks”. Pelosi said that the Act will take us back to the pre-meltdown days.

The biggest critic of the Act and the biggest advocate of banking reform, Senator Elizabeth Warren (D-MA) said the bill would “bail out big banks again” and would increase the likelihood of taxpayer bailouts. Senator Warren argued that the Act exempts 2 dozen financial firms with assets from $50 billion to $250 billion from the strictest rules imposed by Dodd-Frank. These banks received billions of dollars in bailouts and should not have oversight relaxed says Senator Warren.  Although she supports helping community banks, Senator Warren believes the Act goes way too far.

However, the Congressional Budget Office report says that the relaxation of the regulations creates a “slightly greater risk” of another crash and bailout”. Currently, CBO says, we are at only a “small risk”. Barney Frank, one of the authors of Dodd-Frank says that there is “nothing” in the legislation that damages the regulations intended to curb risk taking by large banks. Those regulations were not weakened for the largest banks. While Frank believes the $50 billion threshold is too low and the $250 billion threshold is too high, the overall risk of harm caused by the new Act is low.

It might be too early to understand the overall effects of the new Act, but it appears that more money will be infused into real estate. If the Act is not the fore runner to further loosening of Dodd-Frank restrictions which allow reckless practices, then the Act could be a good thing. However, if it is used as a crack that Wall Street uses to burst through to fully de-regulate and return banks to the days of the Wild West, we need to be vigilant.

Investors in residential house flipping have made a big come back the last few years. Much of the popularity of this can be attributed to the many TV shows dedicated to renovation, repair, investment and flipping. I’ve written on this topic before (see post HERE). However, I did not focus on the other side of the transaction, the end buyer. There is risk that buyers of this type of property should be aware of and look for. These issues were prevalent in the foreclosure crisis and the bursting of the housing bubble in 2008-10. This is not to say that investors haven’t learned their lesson. But, some people are dishonest and greedy. Pay attention to these 6 potential risks.

  1. Financing – yours and your seller’s. Make sure that you are solely responsible for selecting your lender, completing your loan application and providing the lender with all requested documentation. The foreclosure crisis was caused, in part, by unscrupulous investors who falsified buyers’ loan applications without buyers’ knowledge, thus committing mortgage fraud. Also, look at the seller’s existing mortgage. This will show on your title commitment/report. Is it in the same name as the entity selling you the property? Is there only one mortgage? Is the mortgage for less than the purchase price? Any of these can be indicators of an earlier fraud. If you are paying cash, get an appraisal to assure that you aren’t over paying.
  2. Title – Review the title commitment carefully. Make sure that the seller owns the property. Look at the 24-month chain of title. Has there been an unusual amount of conveyances prior to the conveyance to the seller? Has the seller made other conveyances prior to your closing? Have all prior mortgages been satisfied? Do not allow the seller or the seller’s title company handling the title for you to close without allowing you AND your attorney to review before closing.
  3. Seasoning – Some Fannie Mae, Freddie Mac and FHA loans prohibit the sale of a property for a period of time (60-180 days) following the date of the mortgage. This would be in the seller’s existing mortgage. Make sure that all such provisions have expired.
  4. Redemption Rights – if seller purchased the property at foreclosure, make sure prior owners’ right of redemption has expired. In Florida, the right of redemption expires on sale, so if a certificate of title has been issued, there is no right of redemption.
  5. Permitting – make sure that all improvements made by the seller have been properly permitted and all permits have been properly closed and certificates of occupancy issued. This holds true for improvements made by prior owners.
  6. Other Issues Regarding Improvements – Inspect, inspect, inspect. Make sure all of seller’s improvements and repairs have been properly made. Although this goes with number 5 above, just because the work has been permitted and a certificate of occupancy issued (hopefully), you should assure the quality of the work. Warranties should be assigned and where possible, get warranties from the seller.

 

If all house flippers were like the ones on TV, none of this would be necessary and every house bought from a flipper would look like a celebrity’s mansion. But that is not the case. There are many good, even great flippers. But there are many poor and dishonest ones as well. Beware.

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