Real Estate Archives - McCarthy Lebit - A Cleveland/Ohio Law Firm

2026 ALTA/NSPS Survey Standards: What Real Estate Businesses Need to Know

Alex M. Friedman — Thu, 02 Jul 2026 13:00:00 +0000

Land title surveys may not be the first thing that comes to mind when thinking about business risk, but for companies that acquire, finance, develop, or lease real property, they are a foundational part of every transaction. The American Land Title Association (ALTA) and the National Society of Professional Surveyors (NSPS) recently updated their Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys, effective February 23, 2026. These updates are not a complete overhaul, but they do introduce meaningful changes that affect how surveys are ordered, conducted, and relied upon in commercial real estate transactions.

The Standards Have Changed & Your Survey Requests Should Too

The 2026 standards supersede all prior versions as of their effective date. Any new survey ordered on or after February 23, 2026, must comply with the updated requirements. That sounds straightforward, but the practical implication is that standard survey request checklists, form contracts, and vendor instructions that reference the 2021 standards are now outdated. Businesses that routinely order surveys as part of acquisitions, financings, or development projects should revisit their templates and make sure they are specifying a “2026 ALTA/NSPS Land Title Survey,” not an older version.

The Biggest Change: A New Tool for Identifying Risk

The most significant update is the addition of Table A, Item 20. When included in a survey order, this new optional item requires the surveyor to prepare a summary table directly on the face of the survey identifying potential encroachments and other significant observed conditions. That includes encroachments over boundary lines, into easements or rights-of-way, and into setback areas, as well as situations where someone is using the property or accessing an adjacent parcel without the benefit of a recorded easement.

In the past, surveyors handled encroachments inconsistently. Some noted them, some did not. Some used one form of language, others used another. Title companies and counsel often had to hunt through the survey drawing themselves to piece together a picture of potential issues. Item 20 standardizes that process and puts the surveyor’s observations front and center in a format that buyers, lenders, and title insurers can actually use.

For commercial transactions in particular, this is a meaningful development. The surveyor is typically the only neutral party who physically visits the property, so their observations matter. Item 20 creates a reliable, standardized way to capture those observations and make them available to everyone at the table.

An important note: Item 20 is optional; it will not appear on every survey automatically. Businesses and their counsel should make a deliberate decision about whether to include it. In most commercial transactions, the answer should be yes.

Greater Transparency, More Detailed Surveys

Beyond Item 20, the 2026 standards require surveyors to be more transparent across the board. When discrepancies arise between recorded information and what was actually found in the field, between measured and record distances, or in how access or boundaries are established, surveyors must now explain those discrepancies with notes directly on the survey. That includes noting any verbal statements made by landowners or occupants about title or boundary issues. This additional layer of documentation surfaces potential issues earlier, reduces surprises at closing, and gives counsel and title insurers better information to work with.

Surveyors Now Bear More Research Responsibility

The 2026 standards also shift certain research responsibilities more squarely onto the surveyor. Under the prior standards, surveyors could rely on title insurers to provide descriptions of adjoining properties. That requirement has been removed. Surveyors are now responsible for obtaining that information themselves.

At the same time, the standards make clear that when a title commitment is not available, the surveyor and insurer may need to conduct additional research depending on state law. The practical takeaway for businesses is that providing complete, current title documentation to your surveyor at the outset of a project is more important than ever. Delays in getting that information to the surveyor translate directly into delays in completing the survey.

Aerial and Remote Imagery Is Now Formally Recognized

The 2026 standards replace the prior requirement that surveys be performed “on the ground” with language allowing fieldwork to be performed using “practices generally recognized as acceptable by the surveying profession.” That opens the door to aerial imagery, satellite data, photogrammetry, and other remote sensing technologies, but with an important guardrail. The surveyor must agree with the client in writing on what imagery will be used, discuss the accuracy and limitations of that approach with the insurer, lender, and client before work begins, and disclose the details on the face of the survey. For businesses, this means faster and potentially less costly surveys in some circumstances.

Coordination Between Surveyors and Title Companies Is Now a Formal Expectation

One theme running through the 2026 updates is closer coordination between surveyors and title insurers. Surveyors are now required to notify the title insurer if they discover recorded easements that were not listed in the title materials, so the insurer can determine whether those easements are still active and should be shown on the survey. The standards also clarify the circumstances under which an easement may be considered terminated, not just through a recorded release, but through other legal mechanisms as well.

Using Surveys Responsibly Is Part of Managing Real Estate Risk

A survey is only as useful as the information you draw from it. The 2026 updates are designed to make surveys more informative, more consistent, and more transparent. That is good news for buyers, lenders, and counsel, but it also means there is more to pay attention to when a survey comes in. Businesses that treat surveys as a box to check, rather than a substantive risk management tool, may miss issues that the updated standards were specifically designed to surface.

Working with experienced real estate counsel to review your survey practices, update your standard form requests, and evaluate what you see in survey deliverables can help you get the most out of these changes, and avoid being caught off guard by them.

How We Can Help

If you have questions about how the 2026 ALTA/NSPS standards affect your real estate transactions, whether your current survey practices need to be updated, or how to structure your survey requests and vendor instructions going forward, now is a good time to address them. The standards are already in effect, and the transactions you are working on today are subject to them.

For more information, or to seek counsel from our Real Estate & Construction practice group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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LEGAL ADVISORY: Texas Federal Court Vacates FinCEN’s Residential Real Estate AML Rule – What This Means for Industry Participants

Adam L. Glassman — Tue, 31 Mar 2026 13:00:00 +0000

A federal district court in Texas recently set aside FinCEN’s Residential Real Estate Anti-Money Laundering Rule. The court found that FinCEN, a bureau of the U.S. Department of the Treasury, exceeded its authority under the Bank Secrecy Act and did not comply with required rulemaking procedures. As a result, enforcement of the rule has been halted.

What is the Residential Real Estate Rule?

FinCEN’s Residential Real Estate Rule took effect on December 1, 2025, with reporting obligations beginning March 1, 2026. The rule was designed to address money laundering risks in certain U.S. real estate transactions. It focused on non-financed residential purchases involving legal entities and trusts, particularly those structured as all-cash transactions.

To determine whether a transaction was reportable, parties were required to work through a step-by-step analysis. If certain elements were met, the transaction would have been subject to reporting. For transactions that met the reporting criteria, the rule required submission of detailed information to FinCEN, including:

Identity of the seller and buyer
Information about the transferee entity or trust
Beneficial ownership details
Individuals signing on behalf of the buyer
Property and transaction details, including purchase price and method of payment

The rule also established a hierarchy to determine which party was responsible for filing a report. Responsibility generally fell first on closing or settlement agents, followed by other participants such as settlement statement preparers and title professionals.

What does this mean going forward?

FinCEN has acknowledged the Texas ruling and stated that reporting parties are not currently required to submit real estate reports and will not face liability for failing to do so while the ruling remains in place; however, this may change quickly. An appeal or other regulatory action could revive reporting requirements with little notice.

Businesses and advisors involved in residential real estate transactions should continue to monitor developments and remain prepared to adjust their processes if needed. In the meantime, now is a good time to revisit internal procedures and consider how reporting obligations would be implemented if reinstated.

If you have any questions regarding these changes or to seek counsel from our Real Estate & Construction group, please reach out to request a consultation or call us at 216-696-1422.

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Ramifications of Right of First Offer or Right of First Refusal

Danielle G. Garson — Thu, 26 Jan 2023 15:36:44 +0000

Amidst all the economic havoc wrought by the global pandemic, the commercial real estate market has remained both profitable and highly competitive, attracting interest from business owners and both new and existing investors who view commercial real estate as a hedge against inflation. In this competitive climate, buyers and sellers cannot lose sight of significant legal provisions such as the Right of First Offer and Right of First Refusal often incorporated into commercial real estate transactions. Considering a Right of First Offer or Right of First Refusal can influence the price and accessibility of commercial real estate, effecting both advantages and potential drawbacks for buyers and sellers. These provisions are typically written into leases and business sale agreements and have severe implications in subsequent real estate transactions concerning properties encumbered by any such right. It is important to understand these concepts and be mindful of their presence in the context of a commercial transaction.

A Right of First Offer (“ROFO”) requires that the property owner (a “Seller”) give the holder of the ROFO (often the tenant) the first chance to buy the property before offering the property to a third party. The right holder has a specific amount of time to make an offer before the right expires. If the holder of the ROFO does not exercise their right to lease or purchase, the Seller can proceed in soliciting offers from third parties. The ROFO is a “first look” right often executed between the Seller and tenants, business partners, or other interested parties. However, simply holding a ROFO does not guarantee the sale of the property to the ROFO holder. The Seller is free to reject the offer and proceed with selling to a third party if an agreement cannot be made.

By contrast, the Right of First Refusal (“ROFR”) is a “last look” right that comes into play when a Seller receives an offer of purchase on its property. If the property is subject to a ROFR, the Seller must grant the holder of the ROFR the opportunity to purchase the property on the same terms and conditions offered by the third party. In this instance, the holder of the ROFR is compelled to make a purchase or leasing decision based on the terms previously negotiated by the third party. Assets with a ROFR attached can be more difficult to sell, because potential buyers may not want to go through the trouble of negotiating a deal that must be offered to another party first.

For sellers, the implications of an underlying ROFO or ROFR should be considered in advance when there is a desire or an effort to sell property. Failing to strictly comply with the terms of the ROFO and ROFR may render a seller liable for economic damages and cause other unforeseen consequences. If, for example, a Seller proceeds to enter into a purchase agreement with a third-party buyer to sell the property without strictly abiding by the ROFO or ROFR terms contained within a lease for that property, the Seller is exposing itself to liability from both its tenant and buyer. If the ROFR or ROFO holder elects to purchase the property, the Seller has now contractually agreed to sell the property to someone else and is faced with either breaching a contract or violating the ROFR/ROFO agreement. In practice, this often leads to a monetary settlement that can almost always be avoided with reasonable foresight and diligence.

On the flip side, buyers should also factor in the presence of a ROFO or ROFR in the due diligence phase of a transaction. This will not only alert a buyer to potential failures on the seller’s part to adhere to applicable ROFO or ROFR terms, allowing the buyer to then seek an appropriate remedy, but it will also put a buyer on notice of a continuing ROFO or ROFR that could be relevant in the future should said buyer ultimately assume any agreements with those provisions.

Remaining cognizant of ROFO and ROFR provisions is equally applicable in the context of commercial leasing. The implications of those provisions should not be overlooked by landlords and tenants given the similar liabilities that exist for ROFOs and ROFRs in relation to buying and selling real estate. Ultimately, it is beneficial to be proactive in approaching ROFOs and ROFRs, and whether you are a buyer, seller, landlord, or tenant, enlisting experienced legal counsel can help you avoid potential ROFO and ROFR pitfalls.

For more information or to seek counsel from our Real Estate & Construction group, please reach out to request a consultation or call us at 216-696-1422.

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Real Property Tax Reform Deals Blow to School Districts

Jack E. Moran — Thu, 21 Jul 2022 13:00:00 +0000

In April, Governor Mike DeWine signed House Bill 126 that will severally limit local school boards from participating in the real property tax appeal process. Beginning July 21, 2022, property owners will retain their existing rights to seek reductions in property tax values, but school boards and other interested third parties will be faced with an uphill battle to seek higher property valuations.

Taxes on real property in Ohio are based on the value of owned land and any improvements constructed thereon. These taxes are paid in arrears by the individuals or other legal entities that own that property. For example, property taxes that accrued in 2021 are now due and payable in 2022 (separated into two payments for the first and second half of year).

By and large, property taxes levied in Ohio go to fund local schools. Generally, schools obtain more funding when local property valuations are higher, and so schools have a particular interest in challenging property taxes to achieve higher valuations. Until the passage of HB 126, school boards have been empowered to more broadly file original complaints to challenge existing property values in an effort to generate more property tax revenues. However, that will soon change.

The new regime for challenging property valuations, as prescribed by HB 126 and which will be set forth in an amended Chapter 5715 of the Ohio Revised Code come July 21, 2022, amends the process by which school boards and other local governing bodies can raise challenges to existing valuations. Pursuant to these changes, the legislative authority of a subdivision, the mayor of a municipal corporation, or a third-party complainant (such as a school board) cannot not file an original complaint concerning property that the complainant does not own or lease unless both of the following conditions are met:

The property was sold in an arm’s length transaction; and
The legislative authority or school board complainant first adopts a resolution authorizing the filing of the original complaint at a public meeting after mailing notice to at least one of the record owners of the disputed property.

School boards and other interested parties will be precluded from filing counter-complaints unless an original complaint from the applicable property owner states an amount of overvaluation, undervaluation, discriminatory valuation, illegal valuation, or incorrect determination of at least $17,500 in taxable value.

In addition, HB 126 prohibits school boards and other interested parties from appealing a Board of Revision decision unless it concerns their own property. Property owners, on the other hand, will maintain their right to appeal a Board of Revision decision to either a Court of Common Pleas or the Board of Tax Appeals.

All told, this is a big win for Ohio property owners.

The attorneys in McCarthy Lebit’s Real Estate Law practice group are continuing to stay apprised of the developments relating to real property taxes in Ohio. To learn more about the latest developments or for any real estate related questions, please reach out to request a consultation, visit Adam or Jack’s bio for their contact information to reach out to them directly, or call us at 216-696-1422

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Challenges in Eminent Domain Litigation

David M. Cuppage — Thu, 16 Dec 2021 13:00:03 +0000

While Ohio has always considered the right of property to be a fundamental right, the state has a right to take private property for public use (i.e., the power of eminent domain). However, the United States and Ohio Constitutions limit the state’s eminent domain power by requiring a taking of private property to be for “public use” and by requiring “just compensation.” Appropriations can be either a full take or a partial take and can also involve compensation for the loss of personal property, relocation expenses and loss of good will. In some instances, the right to take can be challenged in court and in others involving appropriations for purposes of establishing a public roadway, the challenge must be brought by way of a separate injunction action. When the right to take is not contested, the issues to be determined in court revolve around one topic: just compensation. Experienced and seasoned legal counsel is required to assist a property owner in navigating the complexities of the appropriation process and in obtaining full and complete just compensation.

1.) Determining Compensation for a Full Appropriation of Property

When the state completely appropriates a landowner’s property, the test of “just compensation” is relatively simple—it is the “‘fair market value’ of the property” appropriated. Courts have repeatedly held that just compensation normally is to be measured by the market value of the property at the time of the taking. The fair market value of property is the price which would be agreed upon at a voluntary sale by an owner willing to sell to a purchaser willing to buy. In determining the amount of compensation, or the market value of the property taken, each case must be considered in the light of its own facts, and every element, every fact, every bit of information, that can fairly enter into the question of value, and which an ordinarily prudent business person would consider before forming judgment in making a purchase, should be considered. The rule of property valuation in a land appropriation proceeding is not what the property is worth for any particular use but what it is worth generally for any and all uses for which it might be suitable, including the most valuable uses to which it can reasonably and practically be adapted. Care must be taken in retaining the right expert witnesses when determining just compensation and this may include MAI appraisers and real estate agents and brokers.

2.) Determining Compensation for a Partial Appropriation of Property

When the state partially appropriates a landowner’s property and leaves a residue, the test of “just compensation” may become more complicated than that a full take. In a partial appropriation proceeding, the owner is entitled to not only compensation for the fair market value of the land taken, but also for damages, if any, to the residue. When land is partially appropriated, the value of the part taken is not the sole measure of the compensation or damages to be paid to the owner; but the incidental injury or benefit to the part not taken is also to be considered. When the part not taken is left in such shape or condition as to be in itself of less value than before, the owner is entitled to additional damages on that account. For example, in a proceeding brought by a municipality to condemn land for a street, the inquiry necessarily embraces not only an ascertainment of compensation to the landowner for the land taken, but damages to the residue of the abutting land of such owner. Determining compensation in appropriation proceeding “involve[s] an inquiry into the actual value of the land sought to be appropriated, irrespective of any benefits, and the diminished value of the remainder of the tract.

3.) Consideration for Damages to Property Not Appropriated

The general measure of damages to the residue (any “left over,” adjoining, or adjacent property not appropriated) is its diminution in value. In other words, [the difference in the value of the owner’s property with the appropriation and that without it is the rule of compensation. Thus, the formula for calculating residual damages is the difference between the fair market values of the remaining property before, and after, the taking. Damages to the remainder are calculated by deducting the fair market value of the property after the taking from the fair market value of the property prior to the taking. When ascertaining the post-appropriation fair market value of residual property, reference must be had to the immediate consequences, and the property owner may show any facts calculated to increase the damage to the residue of the tract. In determining both pre-and post-appropriation values, every element should be considered that can fairly enter into the question of value and that an ordinarily prudent businessperson would consider before forming judgment in making the purchase. Any element of damage that makes the residue less valuable in its separate state after its taking than it was as a part of the whole before the taking’ may properly be considered.

4.) Determining the Cost of Residual Damage

Where damage is caused to the residue of property remaining after a taking, the property owner may also be entitled to damages to cure the harm to the property. If, by the expenditure of money in an amount less than the difference between the before-and-after fair market value of the residue, the property owner could make improvements to such residue to restore the fair market value of the residue to that which it was before the improvement, then, evidence of such cost of cure would be admissible and, if proved, would limit the amount of damages to be assessed. The ‘cost of cure’ cannot be utilized to increase damages to the residue, but may be utilized to reduce such damages. As an example, the cost to cure analysis is appropriate where damages to the residue is caused due to a lack of access to and from an ingress/egress point as a result of an appropriation. In determining cost to cure, it is important to work with civil engineers and construction professionals to design and provide cost estimates to repair the damages caused by a partial appropriation.

5.) Considerations for Relocation Expenses and Personal Property Losses

In addition to the appropriation, a property owner may be entitled to recover relocation and personal property expenses. The owner of the property is entitled to the following relocation expenses: The cost to move the person, family, business, farm, and personal property and the loss of tangible personal property with some limitations. Loss of good will is also compensable if it results from the taking and if the loss cannot be prevented by other reasonable means. Goodwill is the reputation of the business based on where the business is located, the performance of the business and any other characteristics that make a customer want to choose your business brand over that of another company. Loss of good will is limited to up to $10,000 and only if the whole business is taken. If the state does not approve a payment for which the owner applied for relocation and other benefits, the trier of fact, upon presentation of proof, in an appropriation case shall determine whether to award a payment for the expenses and the amount of any award. The owner shall have the burden of proof with respect to those expenses.

Key Takeaways on Eminent Domain Litigation

In most cases, preserving property ownership is not a very likely outcome, as both the United States Constitution and state laws provide a means by which the State can exercise eminent domain. Where property owners have the most leverage is compensation for that appropriation. Whether full or partial appropriation, challenging compensation for damage to residue, or recovering relocation expenses and personal property losses, property owners have options to protect their rights and should consult with professional legal counsel well-versed in eminent domain litigation before signing any compensation agreement. For more information or to seek counsel from our Litigation group, please reach out to request a consultation or call us at 216-696-1422. _____ This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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How the Lingering COVID-19 Pandemic Is Thwarting the Real Estate & Construction Market Recovery

Adam L. Glassman — Thu, 26 Aug 2021 11:13:26 +0000

There isn’t much that the COVID-19 pandemic hasn’t impacted, and the real estate market is no exception. In April, the National Association of Home Builders estimated that increased lumber prices had added nearly $36,000 to the price of the average new single-family home, and almost $13,000 to the market value of the average new multifamily home. The pandemic shut down production of necessary building supplies, cut off the regular supply chains, and led to a worker shortage that is still concerning the construction industry.

Initial Impact on Construction Industry

When COVID-19 first emerged as a national emergency, many construction sites shuttered operations as the county went into a lockdown. Although construction was later deemed essential work, allowing sites to re-open early on, the pandemic still took its toll and the industry lost nearly 1 million workers. After re-opening, the market boomed – despite projections that supply and labor demand would remain stagnant throughout the pandemic. In fact, the past year has seen record numbers of new construction, as well as surge in average consumer DIY home improvement projects. This unexpected demand placed heavy burdens on the supply chain, especially while production entities were impacted by COVID-19 protocols for worker safety.

For the residential real estate market, increased competition for homes raised sale prices and shifted the market to rely more heavily on new construction. In April, reports indicated that new construction represented 1 in 4 homes on the market – the biggest share of the market ever.

Fluctuation of Material Costs and Labor Availability

Earlier this summer, as COVID-19 precautions were loosened, some of the concerning figures regarding material cost increases began to improve. For example, lumber futures in July were down 70% from May, when they had peaked at $1,711.20 per thousand board feet. Other resources, however, continued to increase in cost. July figures for oriented strand board were more than 510% above the January 2020 level. Shortages have remained a major concern for contractors, 84% of whom reported experiencing at least one material shortage in the Q2 2021 U.S. Chamber of Commerce Commercial Index.

The pandemic had a drastic impact on construction labor, as well. But as of July, it appears that the market has bounced back. According to July unemployment figures, construction unemployment has continued to trend lower, with a 7.3% adjusted rate in July. This is down from the pandemic peak of 14.1% unemployment in the sector from April 2020.

Lingering Effects to the Real Estate Market

Even as certain material and labor issues are trending in the right direction, the culmination of COVID’s impact is still being felt in the real estate market. Lot values for single-family detached homes are now at a record high, approaching the adjusted levels of the housing boom of 2005-2006. Nationally, the median lot price is $53,000 – in the East North Central region, where Cleveland is located, the median value is $52,000. Lot prices like these, and the lingering construction cost increases due to supply-chain and labor issues, have delayed active homebuyers from committing to the deal. High demand has also kept prices high in the existing home market, with cost cited as the biggest obstacle for active homebuyers.

Key Takeaways Going Forward

With renewed concerns about the Delta variant of COVID, and heightened precautions resurfacing in some states and cities, it is possible that the construction industry will require more time to fully stabilize. Until supply-chain issues and labor concerns are more resolved, you can expect that the real estate market (especially the market for new builds) will continue to exhibit high prices and competition.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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The Feasibility of Converting Abandoned Office Spaces to Multifamily Housing

Danielle G. Garson — Thu, 12 Aug 2021 11:24:44 +0000

The COVID-19 pandemic resulted in many once-flourishing office spaces becoming unused and abandoned. This article will discuss the feasibility of converting some of these abandoned office spaces to multifamily housing.

The Problem

The COVID-19 pandemic was a difficult period for most Americans, but specifically for landlords and property owners. In the midst of the pandemic where many Americans began working from home, business owners and employees alike began to understand that some people are able to work productively and collaboratively without having to be together in the same office space. It was quickly realized that internet-based communication technologies allowed employees to continue to interact with other individuals, to host or attend meetings with other employees, to make or observe visual presentations; and to participate in work-related webinars. As such, the dramatic reduced demand for leased office space led to a reduction in the market value of many office buildings, which depend entirely on leasing revenue. This in turn led to a rise of office building insolvency and foreclosures. Especially vulnerable to these fates are aging and deteriorating office buildings, buildings located in overbuilt areas or neighborhoods with falling real estate values and rising vacancy rates, and buildings located far from public transit.

A Possible Solution

A recent trend has emerged in which some developers are opting to convert underused or vacant commercial office space into residential communities. In some instances, office buildings are being reconfigured as hybrid buildings, with a few floors dedicated to office space, a few as residential floors, with other retail or hospitality spaces occupying the ground floor, capitalizing on a consistent foot traffic of building residents. The hope is that by converting some of these buildings, property owners can maintain or recover an adequate source of revenue and property investors can preserve some profitability through even a modest return on their investment.

Advantages

There are some advantages to converting abandoned office space to multifamily housing units. Some of the more notable advantages are:

The converted building’s current onsite amenities such as fitness facilities, pools, or restaurants are lucrative property highlights that tenants tend to view highly favorably, and these amenities can often counterbalance tenant concerns about reduced living space.
Many office spaces are already located in highly walkable, accessible neighborhoods or are close to large business districts and transportation. This can be very attractive for new tenants eager to reduce or mitigate their commute as more business ease back into pre-COVID attendance practices.
By offering a more diverse mix of residential, commercial, and entertainment options through repurposing vacant office space, the formerly bustling office towers and blighted warehouse spaces that litter many Downtown, USA streets can experience revitalization from the commerce inspired by increased foot traffic and visible occupancy. These revitalizations of desolate office communities become celebrated stores of economic success for the area, which is a win-win for the developers, owners, and tenants.

Considerations

Though there are some notable advantages that come with repurposing office space into multifamily housing, there are also some important factors to consider before undertaking a building conversion:

Zoning. Commercial property can only be converted into a residential property if zoning ordinances allow it. Local governments have regulations dictating property distinctions and, in most cases, will distinguish specific areas for residential versus commercial land use. If you are looking to make the transition, an early analysis of local laws is essential. If the property is not zoned for residential use, it may be worth considering applying for a zoning variance or requesting a rezoning designation, neither of which is guaranteed and depends on local conditions. Zoning will be the basis for converting commercial property to residential use and is a necessary first step in the conversion process.
Building Code Constraints. There are specific requirements concerning fire and smoke protection, egress paths of travel, access to natural light and ventilation, and occupancy that are required for residential buildings. This means that developers who plan to convert these buildings must ensure that these buildings continue to adhere to any building codes. The property may require rewiring and a new layout to successfully create residential units. Upon completion of the work, a new certificate of occupancy will be needed.
Building modifications. With the conversion process, there are bound to be some issues resulting from geometrical differences between what works architecturally for an office building versus the unique needs of residential living. In addition, electrical and HVAC systems may require significant overhauls to accommodate the demand and capacity required by residential living and the nuanced technological amenities that have become standard expectations, such as units that are cable-ready.
Feasibility Studies. Residential rezoning of certain buildings may require additional feasibility studies for traffic, stormwater treatment, and other environmental impacts.

When In Doubt, Consult Professional Legal Counsel With Commercial Real Estate Law Experience

The considerations listed above may seem formidable and even insurmountable disadvantages, but owners and developers who have experienced and knowledgeable real estate counsel can navigate and overcome these challenges with relative ease.

McCarthy Lebit’s Real Estate and Construction practice is well suited to handle real estate transactions and development deals involving office, retail, warehouse, industrial and mixed-use properties. Our real estate attorneys can also counsel on condominium, multifamily, and residential development as the property transitions from developer to the property owner, manager or homeowner’s association.

Owners and developers interested in exploring a commercial office building hybrid or complete conversion are encouraged to reach out to book an appointment to speak with one of our Real Estate & Construction attorneys about property availability and financing options.

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Ohio Enacts Senate Bill 57: Real Estate Property Tax Relief

Adam L. Glassman — Tue, 04 May 2021 09:56:16 +0000

To address ongoing concerns of property devaluation as a result of the COVID-19 pandemic, the Ohio legislature enacted Senate Bill 57 (“SB 57”). This legislation gives real property taxpayers in Ohio the opportunity to file special COVID related complaints for the 2020 tax year if the pandemic led to a decrease in a property’s value.

For only a 30-day period beginning July 26, 2021 (the date SB 57 becomes effective) and ending August 25, 2021, taxpayers can file a COVID complaint with their local Board of Revision to have a property’s latest tax valuation be computed as of October 1, 2020 rather than January 1, 2020.

Under normal circumstances a taxpayer can only file a property tax valuation complaint once during a property’s three-year valuation period, however, SB 57 eliminates that limitation for taxpayers wanting to file a COVID complaint. SB 57 also permits a property’s tenant to file a COVID complaint, provided the subject property is used for commercial purposes, the tenant is obligated to pay all real property taxes levied against the property, and the lease allows – or the property’s owner otherwise authorizes – the tenant to file such a tax valuation complaint.

Any property owner or tenant (if applicable) in Ohio may have a COVID complaint considered by a county Board of Revision if the complaint is timely filed and it demonstrates, with particularity, how COVID or a related order caused a property’s value to decrease. Merely alleging a general decline in economic or market conditions in the area or region of the subject property is not sufficient to meet the strict burden set forth in SB 57 for a COVID complaint. If a taxpayer cannot satisfy the legislation’s requirements, the reviewing Board of Revision will dismiss the complaint accordingly.

Due to the limited window for filing a COVID complaint, taxpayers are encouraged to start assessing whether a property tax reevaluation is warranted. The attorneys at McCarthy Lebit are available to assist with this process, or to discuss any questions or needs that your business may have.

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Don’t Be Surprised – QOZs Are Not Like Traditional Real Estate Investments

David A. Lum — Wed, 11 Mar 2020 12:28:02 +0000

Qualified Opportunity Zones (QOZs) were created to drive economic investment and job creation in distressed areas so as to spur economic growth. The tax incentives given to invest in QOZs include: (1) deferral and reduction of capital gains tax, and (2) a possible tax exemption on the growth of the QOZ investment–both of which constitute powerful tax benefits to the investor. Though QOZ investments must be located within a properly designated Opportunity Zone, the investments are not limited to real estate, which gives investors flexibility in structuring their specific QOZ deal.

However, there are very specific and complex rules that must be followed in order to qualify for the QOZ tax benefits.

Due to the potential deferral of tax on capital gains and because they are often tied to real estate, QOZ investments may be confused with §1031 Like-Kind Exchanges which allow a taxpayer to sell a piece of investment real property and defer tax on the capital gains if the sale proceeds are timely re-invested in “like-kind” real property. Like QOZs, §1031 transactions are subject to very precise rules. The §1031 tax deferral allows a real estate investor’s investment to grow from one property to the next without the investor immediately paying capital gain tax along the way. In a §1031 transaction, the investment must be in real estate but can be, and usually is, structured as a very low risk passive investment for the investor-landlord (e.g., via a triple-net lease under which the tenant pays all taxes, maintenance, and insurance on the property, in addition to rent).

Though there are similarities between QOZ deals and §1031 transactions, they are not the same. For example, a QOZ business investment must be an “active” trade or business. A §1031 transaction, on the other hand, can qualify for its intended tax benefits if the investor-landlord swaps one passive triple-net leased property for another. That type of passive real estate investment cannot qualify for QOZ benefits, though, because standard triple net leases, by themselves, do not qualify as an active trade or business. Afterall, the intent behind QOZs is to spur economic development and job growth, not to reward passive portfolio income with additional tax benefits.

Despite potential roadblocks, the tax benefits of QOZ investments have caused many real estate investors to try and fit a typical triple net real estate deal into the QOZ framework. Creative advisors are pushed to find ways to structure the deal to qualify as a QOZ investment that still achieves the investor’s desired economic outcome. The overarching idea to keep in mind is that the investment should be an active trade or business, not just a passive investment, and that the investor should have some risk.

The recently issued IRS regulations have indicated that triple net leases, in and of themselves, will not qualify as a QOZ investment. That is because in a triple net lease all the risk is pushed onto the tenant – obviously desirable from an economic standpoint for the landlord-investor, but not considered an active trade or business from the IRS’ perspective.

One way to try and capture the economic value of a triple net lease, but still leave some risk with the landlord, might be to gross-up the project’s rent but have the landlord pay for some or all of the typical triple net pass-through items. For example, rather than charging tenants $15 per square foot triple net, charge them $22 per square foot and have the landlord-investor pay for taxes, maintenance and insurance. That way the landlord-investor has the risk/reward if those triple net costs are higher or lower than the $7 increase in rent.

In addition, to further bolster the concept that the landlord investor is in an active trade or business, consider creating a consulting / strategic advisory role for the landlord in the tenant’s business. If these roles are legitimate and structured the right way, they may be sufficient to demonstrate the QOZ investment is not a typical passive real estate investment and is truly an active trade or business that is spurring economic growth and development within the QOZ.

Unfortunately, QOZs are still new and have yet to face significant IRS scrutiny such that reliable guidance is available to demonstrate the IRS’s position on these (and other) ideas. Investors weighing their options between a §1031 transaction and a QOZ project should consult with competent advisors to make sure they get the right deal with the proper economic structure that maximizes the associated tax benefits.

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Am I Covered? Understanding Your Insurance Policy’s Coverage Before Construction

McCarthy Lebit — Wed, 04 Sep 2019 13:03:14 +0000

Note: Updated, August 27, 2019

When something goes wrong during a construction project, the first thing most project owners and general contractors ask is, “Am I covered?”

Construction insurance coverage is generally meant to protect parties involved from unexpected losses due to fire, theft, natural disasters, etc. With increasing media coverage of weather events including tornadoes and floods, a lot of attention has been focused on coverage for such disasters.

However, a much more common and controversial insurance issue results from what can be called human error, which usually manifests itself in the form of faulty workmanship or defects in materials. Surprising to many people is the fact that most commercial general liability (CGL) policies do not cover faulty workmanship or related defects. That’s why general contractors often purchase additional policies to provide added coverage or request special clauses, such as the products-completed operations-hazard (PCOH) clause, which covers damages “arising out of completed operations”.

A recent Ohio Supreme Court decision, however, has cast doubt on the degree of confidence that these special clauses can create and highlights the need for businesses to thoroughly review their policies with their insurance agent/broker and legal counsel to ensure they are covered in any situation.

In the recent case (Ohio N. Univ. v. Charles Constr. Servs., Inc.), Ohio Northern University filed a lawsuit against general contractor Charles Construction for water damage at its new luxury hotel and conference center claiming defective work by the general contractor and its subcontractors. Charles Construction submitted a claim to its insurance company believing that it was covered as a result of its PCOH clause. Charles Construction had paid an additional premium for the clause, which included terms that specifically applied to work performed by subcontractors.

The insurance company refused to pay the claim and asked the court to issue a ruling that it did not have to defend or indemnify Charles Construction under the CGL policy. The Supreme Court agreed the insurer did not have to indemnify the GC based on a single definition contained within the policy. According to the Court, the CGL policy, by its term, only was triggered by an “occurrence.” The CGL policy defined an “occurrence” as: “An accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Relying on a previous well-known decision, the Court explained that an “accident” involves a fortuity. Faulty workmanship, according to the Court, did not constitute a fortuity. The Court went on to explain that, “CGL policies are not intended to protect owners from ordinary ‘business risks” that are normal, frequent or predictable consequences of doing business that the insured can manage.” So, despite the fact that Charles Construction paid additional money for the PCOH clause to cover claims against its subcontractors, it still was not covered against the supposed faulty workmanship of its subcontractors.

The implications of this decision for the construction industry may be far-reaching, as general contractors with CGL policies like the one in Ohio N. Univ. v. Charles Constr. Servs., Inc. can expect that claims of faulty workmanship will not be covered. To ensure better protection, general contractors need to ask their agents/brokers to explicitly include an endorsement or separate policy that covers defective workmanship.

Definitions should be carefully considered in all insurance policies, whether they are related to construction or not. Consider, for example, a typical cyber insurance policy. Due to the increased incidence of hacking, many companies today purchase special riders that they believe will completely cover them in the event of a computer hack. Depending on the wording of the policy, however, the insurance company may only pay to fix the problem but not cover the loss of income incurred while the computer system was down or the damage to the company’s relationships with its valued customers as a result of the hack.

When dealing with insurance, there is never 100% certainty of how a court will rule in a specific case. Definitions can be interpreted differently and outcomes can vary dramatically depending on the state where the case is decided. You can help mitigate this uncertainty, however, by involving legal counsel in the review of pertinent insurance policies and analysis of other previous relevant cases.

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