Chapter 21 Legal Issues in Development Introduction Real estate development is the most comprehensive area of real estate involving nearly every aspect of real estate acquisition gov t regulation approval financial analysis financing design construction legal entities marketing brokerage sales contracts and tax real estate law is involved in every aspect Developers are like the conductor of an orchestra Big picture 40 000 feet most of the time always in mind Details dive to 1 000 feet can t stay there Selecting and leading the team musicians is key Most risky of all the real estate disciplines Major capital investment w long lead times before cash flows in Tremendous uncertainty time gov t markets economy Often recourse personal liability High risk high return IRR 20 Slide 2 Ch 18 Slide 2 Conception acquisition Identifying opportunities very competitive skate to where the puck is going to be Wayne Gretzky Market analysis and economics feasibility Don t fall in love with your own ideas do the work Often a rework of a failed project e g apartments on partially completed condo project entitlement title and other issues Preliminary design and analysis Concept what and why Acquisition and construction budget Financing debt and equity Sales leasing projections All flow into pro forma projections of financial performance Slide 3 Ch 18 Slide 3 Miscellaneous issues Interstate Land Sales Full Disclosure Act to protect consumers from fraudulent sales of undeveloped lots and condos 100 lots condo units Registration CFPB and Property Report 7 day right to cancel Failure to comply gives buyer right to later rescind the purchase Project approvals by FHA VA and Fannie Freddie critically important to ability of buyers to get loans e g non owner occupied proximity to RR tracks or other negative impacts etc Impact fees payments or exactions required by gov t as condition to approval of development such as water sewers roads parks fire police etc May or may not be lawful Slide 4 Ch 18 Slide 4 Upton v Town of Hopkinton Facts Subdivision approval conditioned on payment for offsite road improvements notice the process time involved Issue Does the condition have the required rational nexus Nollan and proportionality to be a lawful exaction Holding Yes Rationale Required payment addresses a need necessitated by and reasonably related to the proposed development nexus and is proportional to development s share of need impact benefit Rule of law Impact fees may only be required to the extent they bear a rational nexus to the needs created by the project Nollan fees must be a proportional share of the total cost which is reasonably related to the need created by the project and benefit to the project Consider 21 1 Impact Fee Ordinance apply the two prong test required nexus Slide 5 and proportionality Cf impact fees to rebuild infrastructure post Katrina held unlawful Ch 18 Slide 5 Deed restrictions Due diligence includes review of title and land use restrictions private covenants deed restriction and public zoning etc White v Metro Dade County Facts Tennis facilities constructed and operated by commercial operator and used each year for professional tennis tournament on land with a condition in the deed limiting use to a public park type of interest Issue Was condition violated Holding Yes Rationale Neither do tennis facilities nor commercial operator violate restriction however tournament deprives the public of access use for extended periods and violates restriction Rule of law Deed restriction for public park prohibits uses which deprive the public of access use for extended periods Slide 6 Ch 18 Slide 6 Capital syndications Real estate doesn t happen without lots of capital Two forms equity owner and debt lender Return of on equity cash flows from operations sale Return of on debt loan payments including principal and interest Debt capital financing obtained from lenders Short term debt commercial banks Long term debt institutional lenders and CMBS Equity capital financing often involves syndication Process of raising equity capital from investors Syndicator developer active solicits investment from unit purchasers investors passive Forms partnership corp limited liability company REIT Slide 7 Ch 18 Slide 7 Partnerships Tied to identity of general partners adding removing death all affect partnership consent terminates and forms new partnership Pass through taxation no income tax paid at entity level Profits losses pass through to partners on their individual tax returns K 1 Maximum flexibility in allocation of tax benefits burdens General partnership express or implied common law One class of partners general partners or GPs GPs active and have power to bind the partnership apparent authority GPs are personally liable to partnership creditors cf LLP Limited partnership only express Articles of Ltd Partnership Two classes of partners general partner s and ltd partner s Only GPs are active have power to act bind and again personally liable Ltd partners are passive silent with liability limited to investment Often GPs are syndicators developers and ltd partners are investors Limited liability partnership only express limits GP liability Slide 8 Ch 18 Slide 8 Implied partnership Byker v Mannes Facts Parties owned several real estate investments sharing equally in control profits losses and personally guaranteeing related debts investments fail and one owner sues seeking reimbursement from the other for share of losses Issue Did they have an implied partnership thereby rendering each partner liable Holding Yes Rationale The parties acted as co owners of a business for profit and therefore for his share of losses formed a partnership Rule of law A partnership is formed when two or more persons associate to carry on as co owners a business for profit whether or not they intend to form a legal partnership You buy a house with a friend to share during college Recall general partners have power to bind the partnership partners and are Slide 9 personally liable Ch 18 Slide 9 Corporations Separate legal person with associated rights obligations make contracts own property pay taxes sue be sued etc Continuity of entity not tied to shareholders cf partnerships Per state statute no implied corporations Articles of Incorporation birth certificate Corp Inc etc Bylaws operation of entity Directors officers active and have power to bind Shareholders passive and no power except for electing directors Shareholders