The regulation of storm water from construction activities has the attention of enforcement agencies at the federal and state level.  The most recent example is the $625,000 fine paid by Ryland Group Inc. to the United States Environmental Protection Agency (EPA) for storm water violations at construction sites. Both the EPA and the Virginia Department of Conservation and Recreation (DCR) have published new regulations controlling storm water generated by construction activities.  Since DCR published a Storm Water General Permit for Construction Activities before the EPA finalized its regulations, construction sites in Virginia that obtain the state general permit have to comply with their permit, but not with EPA regulations.  EPA’s regulations will become effective in Virginia as they must be incorporated into the state general permit when it is renewed in 2014.  EPA is working on developing a turbidity standard that will limit the amount of suspended solids in discharge from construction sites.

DCR recently updated the Virginia regulations for storm water activities at construction sites that will limit the discharge of phosphorus from construction sites, including redevelopment sites that will have the same amount of impervious surface as the pre-development site.  These regulations impose stringent limits on the quantity of storm water discharged as well. They also spell out specific requirements for storm water prevention plans that are required of all permittees and are favorite targets for enforcement by both DCR and EPA.  Fortunately the regulations include liberal grandfathering requirements that, if followed, enable a company to postpone the need to comply with these requirements.
–Marina Liacouras Phillips

There are many risks associated with the acquisition of real property. Risks include the existence of liens on the property, the person or entity conveying the property not actually having authority to convey the property, previously granted use restrictions, errors in the legal description, and boundary descriptions that are inconsistent with areas actually being used or thought to be the boundaries of the property. The acquirer relies on the conveying party to disclose any issues, and for an examination of the public records to disclose everything. However, errors and oversights occur, and in some instances there are prior agreements that are not recorded, or are not correctly recorded, among the public records. To minimize the risks that may occur due to errors, oversights, and risks associated with unknown agreements, acquirers purchase title insurance.

Title insurance is a contract that obligates the insurer to indemnify the purchaser of the insurance (the “insured”) from loss incurred due to loss of use and enjoyment of the property occasioned by the existence of liens, defects and encumbrances that are not identified as being excluded from coverage. A standard coverage title policy will contain special and standard exceptions. Special exceptions are property specific and arise from matters discovered in an examination of public records (recorded liens, easements, leases, life estates, restrictions, etc.); the title policy, unless addressed with an endorsement, will exclude from coverage any loss occasioned by someone exercising a right pursuant to an identified easement, lease or other instrument. The standard exceptions contained in title policies are (1) unfiled mechanic’s and materialmen’s liens (the “M/L Exception”); (2) rights of claims of parties in possession of the property (or portion thereof) (the “Possession Exception”); (3) easements or claims of easements not shown in the public records (the “Easement Exception”); (4) any encroachment, encumbrance, violation, variation, or adverse circumstance that would be disclosed by an accurate and complete land survey of the property (the “Survey Exception”); and (5) taxes or assessments (the “Tax Exception”). Title policies that include standard exceptions exempt from coverage losses arising from unknown issues (e.g., someone claiming the right to drive through the middle of the property based on an unrecorded document or past actions that are not revealed by an examination of the public records), are the issues that the insured wants to be insured against.

To address these unknown risks, the insured, when purchasing title insurance, should consider obtaining an extended coverage title policy that minimizes the exceptions from coverage and offers affirmative coverage. Such coverage insures the insured against loss occasioned by defects ascertainable, but undiscovered or unreported, by an examination of the public records (e.g., land records, tax bills, and court records, etc.), and from defects that are not ascertainable from the public records (e.g., parties in possession, unfiled mechanic’s liens, encroachments, boundary line issues, and other matters that would be disclosed by an accurate survey).

The most basic extended coverage policy is one in which the standard exceptions have been removed or modified to take exception only for matters arising in the future. To get the standard exceptions removed or modified, the purchaser of title insurance will need to meet criteria established by the insurer for each standard exception. Generally, the insurer requires the following actions and information prior to its issuance of a title insurance policy without the standard exceptions:

1. In order for the M/L Exception to be removed, an indemnifying affidavit must be delivered to the insurer (signed by all existing or prior owners that owned the property during the period of time that a mechanic’s or materialmen’s lien could arise from) stating that (a) no work has occurred on, and no materials have been supplied in connection with, the property in the period of time that would permit a contractor or supplier to file a lien against the property, or (b) work has occurred during the designated period and that all bills have been paid in connection therewith.
2. In order for the Possession Exception to be removed, the current owner of the property must execute an affidavit attesting that no one other than the current owner is in possession of the property, and that the current owner has no knowledge of any facts that would give rise to someone claiming to have title to, or the right to possess, the property. If the insurer has reason to believe others have been in possession of the property, the insurer may require termination agreements to be signed by such prior occupants, or the insurer will take special exception to the specific issues identified.
3. In order for the Easement Exception to be removed, the current owner must deliver an affidavit attesting that its enjoyment of the property has been undisturbed, and that the current owner has no knowledge of any facts that would give rise to a claim of an easement over and across the property. If the insurer has reason to believe an unrecorded easement may exist on the property, based on old plats or other information, the insurer may require termination agreements or quitclaim deeds to be signed by the possible easement holders, and/or the insurer may take special exception for the rights of others to an easement as shown on a specifically identified plat.
4. In order for the Survey Exception to be removed, a recent survey of the property will need to be prepared, and it will need to contain a surveyor’s certificate that states (a) the surveyor has examined the property, (b) the survey depicts all buildings, structures, fences, improvements and encroachments, and (c) the property description is a complete and accurate description.
5. In regards to the Tax Exception, such exception will not be removed by the insurer, but, upon evidence (a review of the taxing records, and payment of taxes at closing) that all property taxes and assessments due and owing have been paid, the insurer will modify the exception to exclude from coverage losses arising from taxes and assessments not yet due and owing.

Beyond the basic extended coverage created by the removal of the standard exceptions, additional coverage against certain risks can be obtained with the addition of endorsements to the title policy. Endorsements modify the provisions of the title policy to provide coverage over specific risks.

There are dozens of standard endorsements. The most common standard endorsements issued in connection with commercial property are the Access Endorsement, Same As Survey Endorsement, Comprehensive Endorsement, Tax Parcel Endorsement, Contiguity Endorsement (if the property is comprised of multiple parcels), and Zoning Endorsement, all of which afford the insured with coverage for loss arising in connection with matters related to whether the specific property can be used as planned. The Access Endorsement, which will only be issued if a surveyor certifies to the insurer that the property does have a means of access, affords coverage to the insured if it is later determined that the property does not have access to a specifically identified street. The Same As Survey Endorsement, which requires a certified survey, protects the insured against losses resulting from inaccuracies in the survey obtained and relied upon. The Comprehensive Endorsement provides coverage from losses due to violations of recorded covenants and restrictions, and from encroachments of existing improvements across the boundary lines of the property. The Tax Parcel Endorsement insures against losses arising from any inaccuracy with the tax parcel identification number identified in the title policy as being applicable to the property. The Contiguity Endorsement, which requires a review of a survey, provides coverage from losses due to a subsequent determination that multiple parcels comprising the property are not contiguous to one another (i.e., there are gaps between the parcels, and such areas are owned by someone else). The Zoning Endorsement, if the improvements on the property are completed at the time the policy is issued, protects against losses suffered as a result of a court order or judgment that the improvements are in violation of the applicable zoning laws and ordinances. The alternative Zoning Endorsement, if the improvements are not yet constructed, insures against losses resulting from a determination that the contemplated use of the property is not permitted by the property’s identified zoning classification (e.g., the insurer and insured believe the property’s zoning classification permits an apartment building, and it is later determined that the zoning classification does not permit an apartment building).

In addition to the standard endorsements, an insurer has the ability to create non-standard, transaction-specific endorsements to address identified risks that may give rise to loss of use and/or title. For example, if the survey reveals that the property’s existing building encroaches across the property line by a few inches, the insured will want to have an endorsement to the policy that provides coverage against loss or damage suffered as a result of the forced removal of the building. Other examples include affirmative coverage endorsements that protect the insured against loss specifically due to (a) an illegible signature on an old document in the chain of title, (b) a vague or indefinite description of an easement burdening or benefitting the property, and (c) a quitclaim deed in the chain of title that, due to a drafting error, is ambiguous and may not effectively release all of the rights intended to be quitclaimed.

Whether or not a specific standard or non-standard, transaction-specific endorsement should and can be obtained depends on the facts and circumstances of a particular transaction. The extended coverage afforded by endorsements shifts the risk of unknown defects to the insurer, and, because of the risk to the insurer, the ability to obtain extended coverage with endorsements is subject to the insurer’s underwriting criteria, and may require the payment of a higher premium. Compliance with underwriting criteria can take time. For example, the Zoning Endorsement, in either form, requires the payment of an additional premium and the delivery to the insurer of a “zoning letter” issued by the locality stating the property’s zoning classification, the permitted uses under the zoning classification, and whether or not, as of the date of the letter, the property is in compliance with applicable zoning laws and ordinances. It can take several weeks to obtain a zoning letter. Accordingly, it is advisable to identify what endorsements are necessary and desired as soon as possible, and request such endorsements from the insurer well in advance of the date that a title policy needs be in place and effective. This will allow time for the insurer and insured to agree on the most comprehensive and affordable extended coverage title policy that can be obtained to minimize the insured’s risk of loss when acquiring property. –Amy L. Harman

The District of Columbia Circuit Court of Appeals clarified the requirements for an appraisal of a conservation easement in its opinion in Commissioner of Internal Revenue Service v. Dorothy Jean Simmons issued on June 21, 2011.  The Internal Revenue Service (IRS) had challenged a Tax Court decision approving Ms. Simmons’ deductions in 2003 and 2004 for the donation of conservation easements on the facades of two buildings in an historic district in Washington, DC. The Court of Appeals upheld the Tax Court’s decision. 

The IRS argued an error by the Tax Court, claiming that the appraisals submitted to prove the fair market value of the easements did not comply with Treasury Regulation §1.170A-13(c)(3)(ii).  The Court of Appeals disagreed.  The Court upheld the appraiser’s use of the “before and after approach” to value the conservation easement and approved the items that the appraiser considered in making the valuation.  To determine the fair market value of the property without the easement, the appraiser reviewed sales of similar properties and identified some of them in the appraisals. To determine the fair market value of the property with the easement, the appraiser (1) spoke with and considered “the mindset of competent buyers and sellers” and the “considerations that they have actually had, or are likely to have” in buying or selling a property encumbered by this easement. Specific items the appraiser cited that would lower the value of the encumbered property include the easement requirements being more stringent than local historic preservation laws, the legal exposure to the grantor if the easement were breached, and the grantee’s right to approve any changes to the property.  –Marina Liacouras Phillips

In the first appellate decision to consider the issue, the Seventh Circuit held on May 11, 2011 that an IRS lien filed prior to the collection of rental income from property on which a bank had a prior mortgage lien did not trump the bank’s lien (Bloomfield State Bank v. U.S. 107 AFTR2d 2011 (May 11, 2011)).  The bank had recorded a mortgage against its borrower’s real estate three years before the borrower defaulted.  The IRS then filed its notice of lien pursuant to Internal Revenue Code Section 6323.  The bank obtained the appointment of a receiver who subsequently rented the property for the bank’s account.  The IRS argued that the rentals collected from the borrower were similar to accounts receivable and, therefore, did not arise until after the filing of the IRS’ notice of lien.  Under Internal Revenue Code Section 6323, an IRS lien is not valid against the holder of a security interest until the notice of lien has been filed.  One condition to having a security interest is that the property which is the subject of the security interest must be in existence.  Rejecting the government’s argument and reversing the lower court, the Seventh Circuit held that the real estate on which the bank had the lien was the property that needed to be in existence, not the rental income; the rental income was simply “proceeds” of such property.  The Seventh Circuit noted that the lower district courts and bankruptcy courts had reached “divergent” conclusions.  This case, however, should give lenders some comfort and help other Circuits that might address the issue.  –Barry W. Hunter

Some developers may still be able to amend their federal tax returns to retroactively claim Energy Efficient Home Tax Credits under Section 45L of the Internal Revenue Code as long as the return is amended before the expiration of the three year federal statute of limitations.

Section 45L provides a tax credit of $2,000 per dwelling unit to apartment, condominium and single-family residence developers of energy efficient buildings completed after August 8, 2005. The following types of projects may qualify for Section 45L credits:

• Apartment buildings
• Residential condominiums
• Production home developments
• Substantial reconstruction
• Rehabilitation

Other Criteria:

The dwelling unit must have been substantially completed after August 8, 2005 and before December 31, 2011.

The dwelling unit cannot be located in a building that exceeds three stories in height.

The dwelling unit must be used as a residence (i.e. occupied).

The dwelling unit must be certified in accordance with IRS guidance to have a projected level of annual heating and cooling consumption that meets the standards for a 50% reduction in energy usage as compared to 2004 energy standards. 

Eligible contractors include a party (i.e. an individual, trust, estate, partnership, association or a corporation) who owns and has a basis in the qualified energy efficient dwelling during its construction.

Section 45L credits can be carried back one year and carried forward twenty years, however for credits generated in 2010, the carry back period is four years.

Other Considerations:

The depreciable basis of the building in which the dwelling units are located must be reduced by the amount of the Section 45L tax credits. –Saundra R. Hirth

An earlier entry discussed the importance of succession planning for the ownership of cherished family real estate such as beach and river houses, mountain cabins, farms, hunting grounds or other family retreats.  Family limited liability companies (“LLCs”) have become the preferred vehicle for holding, transferring and managing family property. 

Limited Liability Companies.  An LLC is created by filing with the State Corporation Commission, and offers hybrid advantages of a corporation and a partnership.  Like a corporation, the LLC is a separate legal entity which shields its owners (known as “members”) from liabilities of the company.  Like a partnership, however, the entity can be governed more simply by a written contract amongst the members (an “operating agreement”), and there is no double taxation associated with an LLC;  the income tax consequences, gains and losses of the LLC are passed through to the individual members.

The operating agreement of a family LLC is crafted to address a number of succession planning issues.  By transferring property interests or ownership rights in the LLC, as opposed to deeding interests in real estate, one is in a position to make family members feel ownership rights in the property, without concern over their partition rights and creditors.  LLC owners have no right to seek partition, and the operating agreement can be drawn to severely limit the remedies available to creditors of a member.  Likewise, by restricting the right of a member to transfer membership rights, the LLC can be structured to avoid a situation where ownership passes to unwanted parties such as ex-spouses, parties unrelated by blood or marriage, or creditors.  Gifting or transferring ownership interests in an LLC is much simpler and less expensive than deeding fractional interests in real estate. 

Governance and Decision Making.  The LLC operating agreement should contain a structure for governance of the family property.  Put differently, the operating agreement designates those persons in authority, sets forth the procedures for decision making, and includes requirements and limitations on such powers as sale, assessing costs to family members, cutting timber or apportioning popular vacation dates for property use.

Some LLCs are managed by a simple democratic process.  These member-managed LLCs submit all questions of control, sale of property, use and other decisions to a majority vote.  For larger families, in which there are a number of members, the LLC can designate a board of managers to control the entity and the property it holds.  Thus, for example, a 15 or more member family LLC might appoint 3 to 5 managers to handle decisions critical to ongoing enjoyment, maintenance and stewardship of family property.  One manager appointed from each branch of a family makes for an equitable way to apportion control of the LLC.  Still other LLCs employ a corporate governance model, with a board of directors, and officers such as a president, vice president, secretary and treasurer. 

Although a board of managers or president is commonly given day-to-day operational control, and makes decisions concerning maintenance schedules, dates when various members of the family can use family property, the leasing of farming rights and the like, many families require a supermajority vote of the members of an LLC for big decisions.  So, for example, the decision to sell a family property, to cut timber, or to assess members of the LLC money for maintenance, big construction projects or other unusual expenses can be relegated to a 75% supermajority vote for approval by the LLC members.  The flexibility of the laws governing operating agreements makes tailoring the LLC to a particular family’s needs and goals possible. 

Estate and Gift Tax Planning.  From an estate planning perspective, the LLC is advantageous as well.  Mentioned above is the ease of transferring membership interests in an LLC as opposed to deeded property rights.  In addition, gifts of membership interests in the LLC during life or at death can qualify for discounted valuation under estate and gift tax laws, allowing a donor/decedent to transfer larger interests in the LLC with fewer estate and gift tax consequences. 

Conclusion.  An LLC created by family members provides a convenient and tax-advantaged method by which to own, control, transfer and preserve cherished family real estate.  The entity protects family members from liabilities arising from ownership of family property, and the broad array of options available in structuring the governance and control of an LLC can be tailored to meet the needs of most families.  –Gregory R. Davis

Included in the 2011 legislation approved by the General Assembly of the Commonwealth of Virginia are amendments that modify the conservation easement tax credit application process.  The amendments (HB1820/SB1232) give the Tax Commissioner the authority, at his own discretion, to require the donor submit a second qualified appraisal of the property subject to the easement. This second qualified appraisal will be used by the Tax Commissioner to assist with the determination of the fair market value of the donation. Written notice of the need for a second qualified appraisal must be provided to the donor within 30 days of the filing of the application for conservation tax credits. The application cannot be deemed complete and will not be eligible for consideration for tax credits until the fair market value of the donation has been determined by the Tax Commissioner.  The amendments require that the Tax Commissioner make a final determination of the fair market value of the donation within 180 days of the notice that a second qualified appraisal is required.  The amendments add language that offer the donor the right to appeal any decision of the Department, including the decision that a second qualified appraisal is required, in accordance with the current provisions for requesting appeals regarding actions of the Tax Commissioner. 

The determination of the value of the property to be donated has become one of the most controversial elements of the application process.  Under the pre-existing statute, the Tax Commissioner was not required to make a final determination of the fair market value of the property at the time the tax credits were approved. He was only required to determine that the donor’s application was complete – that all the information supporting the request for credits had been submitted.  As a result, the Tax Commissioner could challenge the value of the property provided by the donor and the credits issued for it at a later time, such as when the income tax return applying the credits was filed by the donor.  The amendments imply that the Tax Commissioner must now make a fair market value determination before any application is deemed complete, but leave the process for establishing the fair market value to his discretion. 

The new changes leave several questions that have not been addressed by the legislation.  For example, if the Tax Commissioner does not ask for a second appraisal, will the Tax Commissioner now be bound by the value put on the application with the first appraisal?  Further, if the Tax Commissioner does ask for and receives a second appraisal from the donor but does not issue a final determination within 180 days, will the Tax Commissioner then be bound by the donor’s submission of the appraisals and, if so, by what value – the first appraisal, the second appraisal, or a combination or average of the two?  These and other questions should be addressed as the amendments are implemented.

Kaufman & Canoles attorneys have significant experience with all aspects involved in the conservation easement process – including the preparation of the documents and coordination of the studies, reports and appraisals necessary to receive approval of conservation easements and the representation of taxpayers who receive and use tax credits at the state level and/or the charitable donation deduction at the federal level. We follow changes in this program closely to provide our clients with the most current information and will track the modifications made to implement these new amendments.

Although these amendments have been approved by the General Assembly, as of March 15, 2011, they have not yet been signed by the Governor.
–Marina Liacouras Phillips & Elaina L. Blanks

Planning for long-term enjoyment of cherished real estate is increasingly important to families today.  Beach and river houses, mountain cabins, and farms which have long served as family vacation places, hunting grounds or retreats can be preserved for the use and enjoyment of future generations through careful legal planning. 

Planning Issues

Succession planning for real property involves management of several critical factors:  The partition right, control, and estate taxation. 

Partition.  Under Virginia law any party who owns a fractional interest in real estate has the right to seek partition of the property.  Partition means court-ordered division of the property such that a co-owner receives acreage which he or she can sell.  If an equal division of the property is not possible because of the characteristics of the property (if the property is a house, for example), a co-owner has the right to seek court-ordered sale of the property, and a division of the proceeds.  Thus the partition right allows a single family member to wreak havoc on a family which is otherwise content to hold and enjoy property. 

The partition right has a hidden consequence related to creditors’ rights.  A creditor of a co-owner has the right to attach the co-owner’s interest and then seek partition as a source of funds to pay the debt owed to the creditor.  Thus, a co-owner (heirs, devisees under a will) of a family property who incurs liabilities intentionally or unintentionally can upset hopes for continued family enjoyment of family property.  For example, let’s assume the four Smith sisters each inherit a one-fourth interest in a beach house that has been in their family for generations.  One of the sisters is heavily in debt and a creditor attaches her interest in the beach house. Obviously, partitioning a beach house into four tracts of property is not possible, so a forced sale by the creditor would be likely.

Control.  When property passes from generation to generation and the ownership interests become fractional, decision making regarding the property becomes difficult.  No law establishes that a majority vote of numerous co-owners is sufficient to sell, convey, lease, harvest timber on or otherwise control real estate in Virginia.  Thus unanimity is required for any decision amongst co-owners, no matter how numerous.  Here again, the law allows a single family member or faction to handcuff the remaining owners.  Owners who cannot be found or contacted or owners who simply will not cooperate present barriers to efficient use and control of real estate.  Let’s look at our beach house scenario again and assume that three of the Smith sisters want to sell the beach house but one sister does not. In lieu of documentation providing otherwise, the fourth sister has a strict veto power over sale of the beach house.

Additionally, numerous co-owners of property present a situation in which property is sometimes referred to as “heir” property, where the property is owned by so many diverse, disagreeable or unknown individuals that use, sale or division of the property is impossible. The value, use and enjoyment of real estate is destroyed in that scenario. 

Estate Taxation.  Large valuable real estate holdings are subject to estate tax like other assets of a decedent.  Historically, families have struggled to pass valuable land to subsequent generations without the necessity of selling the land to pay estate taxes.  In wealthier families, gifting property during life is a common strategy in reducing the size of taxable estates.  One of the challenges of gifting land from generation to generation is finding a convenient way to transfer interests in the property, without executing numerous deeds over many years, or allowing co-owners to subsequently transfer or encumber the property. 

Available Planning Tools

A number of options exist which offer advantages to families planning for succession of real property to subsequent generations: 

• Family Limited Partnerships
• Family Corporations
• Trusts
• Family Limited Liability Companies

Trusts, partnerships and corporations all offer advantages which can solve the succession planning and tax issues referenced above.  One of the most current and popular options, however, is a family limited liability company (“LLC”).  Family LLCs are created with an operating agreement governing the voting powers of LLC owners (called “members”), restrictions on the transfer of members’ interests in the LLC (which thwart creditors’ claims), and a governance structure which makes it simpler to decide on such issues as use, sale, timbering and management of family property. –Gregory R. Davis

The new 2011 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys (the “2011 Standards”), which have been approved by the National Society of Professional Surveyors, the American Land Title Association (ALTA) and the American Congress on Surveying and Mapping (ACSM), will take effect February 23, 2011.   The new 2011 Standards replace the currently effective 2005 standards.  As of February 23, 2011, all previous versions of the Standard Detail Requirements for ALTA/ACSM Land Title Surveys are superseded by the 2011 Standards.  Click here to view a complete copy of the revised 2011 Standards available free of charge on-line on the ACSM website.[1]

Additionally, two other documents, which are also available free of charge at the ACSM website, are excellent resources and quick references to facilitate a review of operative changes in the 2011 Standards.  The first is the: “Summary of Significant Changes from the 2005 Standards to the 2011 Standards.”  This document lists a detailed summary of specific revisions, inclusive of changes to standard Table A. 

The second is an incredibly useful tool in the form of a redlined mark-up of the 2011 Standards.  “New Standards with red highlights showing which clauses within those Standards are substantially new or are otherwise significantly modified from the 2005 version” reflects detailed redline addition of revised terms, inclusive of changes to standard Table A.

The new emphasis placed upon minimum fieldwork requirements for compliant plats under Section 5, and the requirements for preparation of a plat or map to specifically reflect the results of fieldwork data and its relationship to Record Documents per Section 6, are particularly noteworthy.  Presumably, the results of the newer and more stringent precision in field data, the stated bias against creation of new legal descriptions, and the express reference to the “prudent surveyor” standard of care will all combine to produce more uniform, accurate and detailed surveys.

Heightened requirements on empirical data and related surveyor certifications should produce new processes and protocols in the title insurance industry.  Removal of a standard “survey exception” will presumably require a review of surveys, plats and maps satisfying the minimum requirements of the 2011 Standards.  In the context of title insurance coverages, Covered Risk 2(c) in the 2006 ALTA Policy forms would presumably require a “survey reading” of a 2011 Standards compliant plat by the underwriter in order to obtain a deletion of the otherwise applicable standard survey exception.   Moreover, endorsement coverages for the ALTA 9 series, ALTA 17-06, ALTA 17.1-06, ALTA 19-06 and ALTA 19.1-06, among other special endorsements, would all also presumably require additional new underwriting of a 2011 Standards compliant survey.  The standard policy terms and conditions do not expressly adopt the ALTA/ACSM standards; however, they have been the practical benchmark for underwriting purposes for decades. 

As the new 2011 Standards are implemented, the ripple effect will additionally beget a broad range of timely practical issues worthy of consideration:

(i)  With regards to loan defaults, asset recovery, and related matters in the current economic environment, new survey standards must be considered.  In the context of foreclosures and deed-in-lieu transactions, lenders/loan servicers/trustees, etc. will need to consider how the newer standards may impact a prospective disposition of distressed property.  Updated survey data would presumably require compliance with the new standards; and, existing mortgagee coverage with exceptions under the older standards may not be adequate for survey related matters;

(ii)  In the commercial real estate transaction context, it remains to be seen how the new procedures and commensurate expense of satisfying underwriting conditions will affect the timing and costs of CRE transactions.  Presumably commercial lenders,  mortgage bankers, conduit lenders, etc. will adopt objective underwriting criteria that mirror the new minimum standards and detail in the 2011 Standards; and,

(iii)  It remains to be seen how the new minimum standards and detail will affect local planning, zoning, subdivision and related requirements and procedures.  An argument can be made that the 2011 Standards mandate a level of detail and certification that is harmonious with many current local ordinance requirements for planning, subdivision, rezoning, Plan or Development and/or Site Plan review, etc.

Under Section 7 of the 2011 Standards, the new requirements provide significant limitations upon a surveyor’s ability to deviate from the mandatory form certification, confirming compliance with the 2011 Standards.  A deviation is permitted only if required under applicable federal, state and/or local laws, rules, regulations, etc.  Pursuant to Section 3(B), the surveyor must complete the survey in compliance with the requirements of the 2011 Standards, and the applicable requirements of federal, state and local statutes, administrative rules, regulations and/or ordinances that set out standards regulating the practice of surveying within a subject jurisdiction.   In Virginia, reference should also be made to the provisions of Va. Code §54.1-400, et seq.; 18VAC10-20; and, 18VAC10-20-370, et seq., as well as the locality’s planning, zoning, and subdivision ordinances for minimum plat requirements and detail.

The new 2011 Standards hold great promise for better, more complete, more precise, and more accurate surveys.  It is essential that lenders, title insurers, attorneys and others, who order, use and rely upon surveys become familiar with the new 2011 Standards.
–E. Duffy Myrtetus

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[1] Multiple electronic versions are available in a .PDF format.  Note that the website includes a “Statement of Copyright” as to the new 2011 Standards.

When structuring a historic tax credit transaction, tax practitioners regularly compile and apply IRS rules, regulations and court decisions. Practitioners and other members of the tax credit community are keenly interested in the outcome of two recent key cases.

In Historic Boardwalk Hall LLC vs. Commissioner, the Tax Court squarely addressed the tax consequences of the structure commonly used in tax credit transactions, ruling that a partnership formed to invest in the rehabilitation of the East Hall of the Atlantic City, New Jersey convention center was not a sham lacking economic substance.  The decision is the first indication that the Tax Court will not disturb federal tax credit transactions that involve government and tax-exempt entities.  While the tax credit community breathed a sigh of relief with the Tax Court’s decision, practitioners are cautiously optimistic given that (a) the IRS could distinguish future cases from the Historic Boardwalk decision since the decision was not based on new rules imposing a statutory test for economic substance not taking tax benefits into account and (b) it is not clear that the IRS raised an issue regarding the tax exempt use of the property, therefore the IRS may still challenge government/non-profit participation in federal historic tax credit transactions.  Moreover, the IRS is likely to appeal the Tax Court’s decision.

On a related note, in January 2011, the Fourth Circuit Court of Appeals heard oral arguments in the IRS’s appeal of the Tax Court’s December 2009 ruling in Virginia Tax Credit Fund 2001 vs. Commissioner in which the Tax Court appeared to bless the structure of Virginia’s allocated state historic tax credit, regardless of the size of the investor’s ownership interest or the length of time the investor remains in the tax credit partnership.  A decision in favor of the IRS would be a blow to Virginia’s historic tax credit program as well as other state historic tax programs in which the credits can be allocated disproportionately to the tax credit investor regardless of the size of the investor’s ownership interest in the tax credit partnership.  The Commonwealth of Virginia filed an amicus brief in support of the taxpayer.

Saundra Hirth is a partner in Kaufman & Canoles’ tax credit and real estate finance practice groups.  Ms. Hirth can be reached at (804) 771-5721 or srhirth@kaufcan.com.
–Saundra R. Hirth