The Federal Housing Finance Authority (“FHFA“) is proposing new guidance on transfer fee covenants for Fannie Mae, Freddie Mac and the Federal Home Loan Banks, restricting such entities from dealing in mortgages on properties encumbered by such covenants. Typically, transfer fee covenants direct a specified percentage of the sale price on real estate encumbered by the covenant to an individual or entity, every time the property sells.  These covenants have recently become popular in a number of states as developers seek new sources of funding in the current economy – so popular in fact, that U.S. Congresswoman Maxine Waters and other are sponsoring legislation to ban these “Wall Street Resale Fees.”  The proposed FHFA guidance states that the covenants

[A]ppear adverse to liquidity, affordability and stability in the housing finance market and to financially safe and sound investments. 

Interested parties may submit comments on the proposed guidance directly to FHFA on or before October 15, 2010, via e-mail at regcomments@fhfa.gov  Include “Private Transfer Fee Covenants, (No. 2010-N-11)” in the subject line.  

pot plant eggrole's photostream flickr.jpgGovernor Ritter signed H.B. 1284 into law on June 7, 2010, which enacted the Colorado Medical Marijuana Code.  Among a host of other impacts, the Code will likely have the effect of concentrating medical marijuana production, and increasing medical marijuana businesses’ demand for commercial and industrial space to house grow operations and retail dispensaries.  Accordingly, landlords throughout the state are beginning to feel the effects of the law’s new requirements, as a market of new potential tenants emerges. 

This is coming at a time when the retail and industrial market is seeing high vacancy rates, thus making medical marijuana tenants a potentially appealing way for landlords to turn empty space into a rent-producing revenue stream. 

However, much confusion and ambiguity remains surrounding Colorado’s medical marijuana laws.  This is true both with respect to the ever-looming issue that marijuana remains illegal for any purpose under federal law, but also with respect to Colorado’s requirements themselves. 

As described in the Daily Camera, the City of Boulder’s efforts to get medical marijuana businesses within its borders to comply with its regulations is a telling example of the latter problem.    

Landlords dealing with medical marijuana tenants should always keep the federal prohibition on marijuana in mind in deciding whether to enter into leases with such tenants, and in structuring their relationships with such tenants if they do.  Under current Department of Justice policy, federal authorities should not focus their prosecution resources on “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”  Unfortunately, given the confusion at the state and local level, it may be some time before anyone knows what “clear and unambiguous compliance” with Colorado’s medical marijuana laws even means.

The ambiguities and confusion suggest that it would be prudent for landlord to be vigilant to ensure that they obtain timely information from their medical marijuana tenants.  Particularly in this field, it is important for landlords to have early notice if problems arise with respect to the licensing or legal status of their tenants.

Photo by eggrole (flickr).

2539334956_87cef7e457.jpgA question that all creditors wish they faced: what happens if a foreclosed property sells for more than the foreclosure purchase price?  Does the extra amount received need to be credited against the deficiency balance or does the creditor get to keep the “profit”?  The short answer is that Colorado law does not require a creditor to apply the profit realized from the subsequent sale against the deficiency balance — all so-called profits are the creditor’s to keep.  However, that does not mean creditors should simply bid low, sell high, and then pursue the debtor or guarantor for a large deficiency.

Any person sued on a deficiency can raise the defense that the creditor failed to bid its good faith estimate of the fair market value of the property (less amounts withheld for taxes, prior liens and holding costs).  For instance, lets say the creditor bids $500,000.00 of a $1,000,000.00 debt at the foreclosure sale, then, one month later, sells the property for $750,000.00.  A debtor sued on the resulting $500,000.00 deficiency will undoubtedly raise failure to bid fair market value as a defense and ask that the deficiency be reduced accordingly.  The result will be costly litigation and a possible reduction to the deficiency amount. 

Another factor that needs consideration is the ability of junior creditors to redeem.  Under Colorado law a junior creditor can redeem the foreclosed property from the senior creditor by paying the senior creditor the amount of the senior creditor’s bid, in cash.  If the senior creditor bids less than the property’s fair market value then a junior creditor, with available funds, has an incentive to redeem and realize the latent profit.  That leaves the senior creditor in the position of receiving less than fair market value for the property while also facing the prospect of a possible reduction to the deficiency.

The best practice is to bid close to the property’s most recently appraised value (taking into account any prior liens and applicable holding costs).  With an appraisal in hand, a creditor has the proof necessary to overcome most any claim that the bid was not a good faith estimate of the property’s fair market value.

Photo by respres (Flickr).

4074354188_a1981d42ec_s.jpgI attended the Colorado Real Estate Journal Industrial Owners & Managers Conference & Expo on Wednesday, September 15, 2010. 

There were several panels discussing various elements of the industrial real estate market in the Colorado Front Range.

  • The investment panel seemed to reach a consensus that new industrial development would not occur until the third or fourth quarter of 2011. 
  • They also noted that larger industrial properties are owned by public REITs, for which cash flow is important.  Some of those companies seem to be leasing for very low rates in order to maintain occupancy and cover operating expenses.
  • Ned White of Intergroup Architects led the engineering and design panel and noted that construction technology has improved so much that there is not a big difference between a fairly standard efficient building and a LEED certified building, except that the LEED certified building requires $50,000 to $75,000 additional cost (regardless of the size of the building) in order to process the paperwork to obtain the certification.
  • This same panel also noted that there is significant risk in the market of subcontractors defaulting during projects, resulting in delays and cost increases.  They suggested negotiating a final construction price with a pre-selected general contractor in order to balance price and strength of subcontractors, rather than using a “hard bid” approach to select a general contractor.
  • Two attorneys from our office, Tom Macdonald and Bill Kyriagis, spoke on legal aspects of medical marijuana facilities.  In summary, it is still against federal law to possess or sell marijuana, but the Justice Department has issued a memorandum that prosecution of owners or operators of medical marijuana facilities will not be a priority if the owners or operators comply with state and local law.  However, there is still a possibility that the property used for the medical marijuana facility could be subject to the broad federal forfeiture statute.  This is especially troublesome if the Justice Department’s priorities were to change.

There are still some challenges in the industrial market with lack of financing, low rents and relatively high construction costs.  It appears these could be in place for the next year or so.

 Photo by mrshife (flickr)

green-brick.jpgI recently attended a webinar in which Jacob Bart of Stroock & Stroock & Lavan LLP spoke about how the costs of going “green” can conflict with the provisions in many existing leases.  It is common for landlords to “pass through” operating expenses to their tenants, but those expenses are usually limited to non-capital expenditures.  However, any changes to make a building more energy efficient or to reduce carbon emissions will likely be capital in nature.  Therefore, it is difficult for a landlord to make those green changes because the landlord will not be reimbursed for the cost from the tenants.  One way to address this is to allow the landlord to pass through capital expenses if they result in a savings of operating expenses.  

But what if the new equipment is better for the environment, but won’t save much money?  I recently had a chance to speak with Lee Johnson and Michael Noyes from the Greenwood Village office of the accounting firm Clifton Gunderson LLP about a tax deduction for energy saving improvements in commercial buildings under Section 179D of the Internal Revenue Code.  This may provide an incentive for Landlord’s to make cost-saving capital improvements even if the landlord cannot pass them through to its tenants. 

As tenants desire green buildings, not only for cost savings, but also for prestige and marketing purposes, it will be interesting to see if there are changes in the traditional allocation in leases of capital and operating costs between landlord and tenant.