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Performing due diligence before buying in an HOA community

An English proverb says: “measure twice, cut once.” This is an old carpenter’s way of saying you should perform adequate due diligence before taking action. This advice aptly applies to individuals looking to buy a home in an HOA community. Homeowner associations have been established through cooperation between the local municipalities and the real estate developers. Prior to the advent of HOAs, towns or cities would assess and collect property taxes from each homeowner and in exchange they would take care of the streets, parks, trash collection etc. Homeowners would also be bound by the provisions of the city’s code that regulate landscaping and the condition of the property.

In the 1960s real estate developers began to develop HOA communities. Since then HOA communities have exploded across the nation. Currently, more than 68 million Americans live in HOA communities – which is 53% of all households in the nation! In these types of communities, the Developer creates a non-profit corporation to manage the community and to take over many of the duties that were traditionally performed by cities. Before selling any homes, the Developer records Covenants, Conditions & Restrictions (CC&Rs). By purchasing a home in the community a person automatically becomes a member of the non-profit corporation and is automatically bound by the CC&Rs. The day-to-day operations of the HOA are run by the HOA Board of Directors. The HOA Board is made up of volunteers from the community.

HOAs have been given great power by state legislatures. Essentially, the HOA steps into the shoes of the city in many respects. For example, the HOA Board has the authority to collect monthly or quarterly assessments (i.e. taxes) and to regulate, penalize and fine homeowners for violating the CC&Rs and the other rules and regulations of the community. Because of its inherent power, the HOA will have a big impact, good or bad, on a homeowner’s life. But when buying a home, many people are so busy inspecting and performing their due diligence on the home itself, they spend little to no time conducting any due diligence on the HOA that will govern their life and the use of their property as long as they live in the community.

A wise buyer would spend some time making sure the community is a good fit for them before purchasing the home. There are three categories of recommended due diligence: 1) Community documents; 2) Financials; and 3) Litigation.

Community Documents
Prior to close of escrow a buyer receives a large stack of documents from the HOA which includes copies of the CC&Rs, Rules and Regulations, and Bylaws. These are often very lengthy and are filled with “legalese” so you may need an attorney to help you understand what you are getting into. For example, these documents indicate whether or not you can have a boat or an RV at your home, a basketball hoop or a swing set. They can even restrict what types of plants, trees or rocks you can have in your yard. They may require you to paint your house every so often or they may prevent you or your guests from parking on the street. You should become very familiar with the all the rules, requirements and restrictions in the community to make sure they are compatible with your lifestyle. If you violate any of these provisions, or if you fail to pay the dues and assessments, the Association my fine you and put a lien on your home. You should talk to members of the community to find out how the HOA Board interprets and enforces the rules and regulations of the community.

Financials
You should also review the financial information you receive from the HOA prior to close of escrow to understand the financial condition of the Association. The Association collects dues and assessments from its members and must budget and use those funds to take care of the common areas of the community. If you buy the home, you will be a member of the non-profit corporation that manages the community and you will benefit or be punished by how financially solvent the HOA is. For example, if you are looking to buy a home in a community with lots of amenities such as a clubhouse, swimming pools, tennis courts and parks, you want to make sure that the HOA has enough money in reserve to be able to repair and replace all of these things when they eventually wear out or break down. If not, the HOA would have to make a special assessment to cover these large expenses and each homeowner would have to pay their pro rata share, which could be quite large. Some communities pay a professional to prepare a formal Reserve Study. You should ask if the community has one. A Reserve Study evaluates the amenities and common areas and then recommends how much money the community should have in reserve to make sure it is able to repair and replace them over time. By reviewing the Reserve Study you can determine if the community has adequate funds in reserve. And if the community does not have a formal reserve study that says something about the community as well. Make sure you are comfortable with the financial condition of the Association before you purchase the home.

Litigation
Finally, you should check the local court records to see how litigious the community is. However, not all lawsuits are bad. Sometimes an association must file a lawsuit to collected dues and assessments from a homeowner that is not paying his or her fair share of the community expenses. But if a community is overly litigious it can negatively impact the community and its members. For example, the more times the HOA is sued, the more it will pay for insurance. And the higher cost of insurance is then passed on to its members. Also, excessive litigation may indicate poor communication and dispute resolution skills within the community. Prolonged litigation can also cause significant division and discord within the community. All lawsuits are public records so you can access them for free. You can also ask questions of community members to better understand the dynamics in the community.

Buying a home in an HOA community is a big decision. People are often drawn to HOA communities because of the wonderful amenities they offer such as pools, tennis courts and parks. But they often fail to perform adequate due diligence to make sure that the personality and culture of the community fits their lifestyle. Prospective buyers can avoid a lot of stress, frustration and cost by simply taking the time to perform a little due diligence on the community before deciding to purchase the home.

June 21st, 2017

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(Scottsdale, Arizona) Radix Law announced that two of its attorneys, partner Adam Buck and associate Amanda Salvione, have been selected as presenters for a seminar during the 2017 State Bar of Arizona Convention.

The three-day conference, to be held June 14 through June 16 at the Westin La Paloma in Tucson, is an annual reunion of State Bar of Arizona Members and features dozens of seminars, meetings and special events on a wide variety of legal topics. The theme of this year’s convention is Our Bar – Serving and Protecting the Public.

On Thursday, June 15, Radix Law attorneys Buck and Salvione will be featured speakers during a seminar titled Advanced Issues in Land Use: Navigating the Dangers of Deed Restrictions in Residential and Commercial Development. 

The seminar is presented by Real Property Law Section, of which Salvione is a co-chair for the seminar and is on the Executive Council.

Specifically, Buck and Salvione will teach attendees about the recent changes in community association and deed restriction law, drafting considerations, hot issues in deed-restriction litigation and unexpected ways that deed restrictions can derail land use.

Buck is a Certified Real Estate Specialist with nearly two decades of transactional and litigation experience in Arizona and Nevada. As a partner with Radix Law, Buck focuses on laws pertaining to business, real estate, homeowners association (HOA), employment, and commercial litigation.

“It’s very exciting to collaborate with our peers and discuss issues we are passionate about,” said Buck. “We are honored to be asked to present at this seminar in Tucson with some of the top lawyers in the state.”

Amanda Salvione’s practice focuses on real estate, business formation and structuring and finance law.

“Adam and I are thrilled to represent Radix Law at the State Bar of Arizona Convention, and are looking forward to sharing what we’ve discovered through our work, but more so to learn from others and take that knowledge back to our clients and ultimately, our community,” said Salvione.

Formed in 2008, Radix Law attorneys serve companies, individuals and families throughout Arizona in business and corporate law and related areas, ranging from taxation and asset protection to bankruptcy and estate planning. The firm leads the Valley of the Sun in estate planning and trust administration law.

June 13th, 2017

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PHOENIX – The Frutkin Law Firm has become the first Arizona practice to take advantage of the state bar’s trade name rule. It announced it will rebrand as Radix Law on Jan. 1 2017.

There is a long tradition in the practice of law: the name of a firm includes the surnames of the most prominent partners. As law has become such a big business over the past decade, the largest practices in the world are names of partners who have long since passed away.

This tradition was also required by the Arizona Bar until recently. Now, firms can ditch the commas in favor of a more universal trade name.

Radix, in Latin, means “root.” It can mean the root of a tree, the root of knowledge or the root of a number. While the firm’s attorneys come from all over the world, they have decided to be rooted in Arizona.

“Our new name reflects our values,” says Principal Jonathan Frutkin. “We are a business law firm that helps our clients pursue opportunities and fights for them when challenged – and we are rooted right here in Arizona. It is also an acknowledgement that we have grown from being a solo legal practice into a business law firm with almost a dozen lawyers.”

The Frutkin Law Firm was formed in 2007 and now has 11 attorneys with decades of experience. They serve companies, individuals and families throughout Arizona in business and corporate law and related areas, ranging from taxation and asset protection to bankruptcy and estate planning. Radix Law leads the Valley of the Sun in estate planning and trust administration law. Radix Law’s attorneys are respected sources in their field and contribute to local and national media.

About Radix

Radix Law, formerly The Frutkin Law Firm, was founded in 2007 by attorney Jonathan Frutkin with the goal of providing exceptional legal representation to clients throughout Arizona in business and corporate law and related areas. Radix helps businesses, individuals, and families in Phoenix and throughout Arizona with their corporate and business law, bankruptcy, taxation, asset protection, wills, trusts, and estates, and litigation needs. The firm is located at the Kierland Commons in Scottsdale. For more information, visit radixlaw.com

December 30th, 2016

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When entering into a commercial or residential real estate transaction, you want to have the advice and expertise of a trusted real estate lawyer.  At Radix Law, our real estate attorneys are experienced in all types of real estate matters, ranging from simple purchase agreements to complex development projects.  As one of the premier real estate firms in Scottsdale, Radix Law is well-suited to handle all of your commercial and residential real estate needs.

Real Estate Transactions

The purchase and sale of real estate is a complicated process, requiring a thorough understanding of state, local and federal laws and an in-depth knowledge of financing, mortgages and other financial matters.  At Radix Law, our team of real estate attorneys is highly skilled at handling a wide variety of commercial and residential real estate transactions.

We provide advice and assistance on real estate transactions of all sizes and types, from performing due diligence to helping with financing to ensuring that all necessary documents and paperwork are to close the deal. Our attorneys work collaboratively with clients on the following real estate matters:

  • Land development
  • Homeowners’ Association governing documents
  • Easements
  • Public reports
  • Promissory notes
  • Deeds of trust
  • Commercial and residential leases
  • Covenants, conditions & restrictions
  • Loan workouts
  • Development agreements
  • Commercial and residential lending

Whether you need assistance with the purchase of a single family home, the sale of a commercial property, an office or retail development, or construction of a commercial or industrial building, our lawyers will work with you to anticipate and address every legal issue that may arise during the process.

Real Estate Litigation

Disputes over the purchase, sale, financing, and leasing of real estate can arise in almost any context.  The real estate attorneys of Radix Law have extensive experience taking these matters to trial, where they aggressively represent their clients to protect their legal rights.  Our lawyers have appeared in both federal and state court in real estate matters, as well as before the Arizona Department of Real Estate and in private arbitration and mediation. Our experience includes:

  • Zoning and land use matters
  • Purchase and sale disputes
  • Commercial and residential lease issues
  • Partition actions
  • Commercial and residential lending disputes
  • Quiet title actions
  • Boundary litigation
  • Mortgage, tax lien and mechanic’s lien foreclosures
  • Property ownership disputes
  • Covenants, conditions & restrictions litigation

We represent all types of clients in real estate matters, including individual property owners, landlords, commercial tenants, developers, investors, brokers, contractors, property management companies, and homeowners’ associations and condominium associations.

Homeowners’ Association Law

A large number of property owners in Arizona live in communities of houses or condominiums that are run by a Homeowners’ Association (HOA).  Radix Law provides full-service legal counsel and advice to HOA communities and offers unique services to help the association run smoothly and to enhance the quality of life in the community itself.

We believe that when it comes to HOAs, “an ounce of prevention is worth a pound of cure.”  With smart planning and careful drafting of governing documents, much of the conflict that may arise in HOA communities can be avoided entirely.  Radix Law offers legal assistance designed to build and strengthen relationships in the community while maximizing compliance with covenants, conditions & restrictions (CC&R) and collection of assessments.  All of our legal services for HOAs are available on a flat fee basis, to give you more control over the association’s legal fees.

Tax Lien Foreclosures

When Arizona property owners do not pay the property taxes on their homes, land or commercial buildings, the county can place a tax lien on it.  The counties then sell the property tax liens to investors at an annual auction in February.  If the property owner has not paid the taxes within three years of the sale, the investor can foreclose on the lien and obtain a title to the property.  Purchasing tax liens can be a lucrative investment, but it requires an understanding of the complicated process and the law that governs it.  If the foreclosure is not done in accordance with Arizona law, the investor may not be able to obtain title to the property.

At Radix Law, our real estate attorneys regularly represent investors in tax lien foreclosures across Arizona. We have successfully foreclosed on hundreds of tax liens on behalf of our clients in almost every county in Arizona, representing them from the initial step of filing a Notice of Intent to Foreclose to obtaining the Treasurer’s Deed to the property. Our attention to detail and in-depth understanding of the tax lien foreclosure process make us the ideal choice for anyone seeking to invest in property through tax lien foreclosures.

Real Estate Attorneys in Scottsdale, Arizona

Our team of real estate attorneys at Radix Law is skilled at handling a diverse array of real estate matters, from the initial purchase or sale of property to resolving disputes that may arise at any time.  We also have expertise in handling specialized real estate cases, including providing counsel for homeowners’ associations and managing all phases of tax lien foreclosures.  If you require the advice and assistance of a seasoned group of real estate attorneys, contact Radix Law today.

 

 

December 6th, 2016

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Attorney Amanda Salvione talks to New Channel 3 about what you need to disclose when selling a home that might be haunted.

November 15th, 2016

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Short selling real estate is often complicated and time consuming. There are many moving parts and the deal can unravel for a variety of reasons. One hidden landmine in short sale transactions is the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). FIRPTA requires that in real estate transactions where the seller is a foreign person (non-resident) the buyer must withhold 15% of the sales proceeds and pay it to the IRS. If the buyer fails to do so, the IRS can pursue the buyer for the seller’s tax liability. Although there are several exceptions to the tax withholding requirement, if none apply, the deal will fail. The most commonly used exception is the Certificate of Non-Foreign Status. As long as the seller represents that he or she is a U.S. resident, FIRPTA does not apply.  But if the seller is a foreign person the odds of the short sale falling apart increase exponentially. Why is that?

In a short sale transaction the bank approves the transaction based on it netting a certain amount of money. If the buyer withholds 15% of the sales price as required by law, the bank would receive much less than agreed. For example, if the house sold for $350,000, the buyer would be required to withhold $52,500 and pay it to the IRS. The reduced amount is generally unacceptable to the bank and the deal is rejected. Some sellers have even offered to pay the required FIRPTA withholding tax at close of escrow to make the short sale happen just to find out that the bank will not allow it. From the bank’s perspective, if the short selling property owner has access to that much additional cash, the bank should get it rather than the IRS and without bank approval the short sale will not happen.

There are two other potential exceptions that might allow the short sale to proceed. One is if the buyer intends to reside in the property for at least 50% of the time that the property will be in use during the first 24 months following closing and if the sales price is less than $300,000. If this is true, the transaction is exempt from the FIRPTA withholding requirements. But because many short sale buyers are investors this exemption is often unhelpful. The other exception is if the seller believes he or she will have no tax liability from the transaction, they may apply for a withholding certificate from the IRS which eliminates the FIRPTA tax withholding requirements. The IRS has 90 days to respond to the application and the short sale cannot close until the seller gets the certificate. But an additional 90 day delay can cause the buyer to walk away from the deal or it can cause the house to go to foreclosure.

So, prior to entering into a short sale transaction, it is important to know whether or not the seller is a U.S. resident. If not, the short sale will likely be more complicated, time consuming and difficult and there is a much greater chance that the deal will fall apart. It should be noted however, that even if the seller is a U.S. resident at the beginning of the transaction, his or her status may change before close of escrow. I am familiar with a short sale transaction where the seller had a green card and was a U.S. resident when the short sale started. But the transaction took over a year to complete and during this time period, the seller moved out of the United States and lost his green card. When it came time to close escrow he was unable to sign the Certificate of Non-Foreign Status and because none of the exceptions applied there was nothing that could be done to save the deal. No one had told the seller of the importance of maintaining his U.S. residency throughout the short sale process. He certainly did not think it would destroy his short sale transaction, but it did. The house went to foreclosure and the real estate agents that worked so diligently on the transaction for nearly a year did not get paid a dime. So, before you spend a significant amount of time on a short sale transaction, make sure you have thoroughly analyzed the requirements of FIRPTA and know how to step around this hidden landmine.

November 14th, 2016

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“Sellers should disclose anything and everything they can think of,” says Adam Buck, a certified real estate specialist with the Frutkin Law Firm in Arizona. “Ironically, the more disclosures you make, the less important they might become to the buyer.

September 28th, 2016

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July 1st, 2016

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For the first time in four years, the Arizona Department of Health Services is opening applications for medical marijuana dispensary licenses this summer. Commercial landlords will have a golden opportunity to lease space to marijuana businesses, which have plenty of capital and a high demand for their product. But these businesses pose unique challenges to a commercial landlord.

The federal government regulates drugs through the Controlled Substances Act, which does not recognize the difference between medical and recreational use of marijuana. Under the CSA, it is illegal to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance. Marijuana is designated as a Class One Controlled Substance, just like heroin, and under federal law is not approved for sale or distribution in the State of Arizona. Marijuana production and distribution continue to be federal crimes even in Arizona, where in November of 2010, voters passed the Arizona Medical Marijuana Act (“AMMA”). This conflict between state and federal law has created significant amounts of litigation in practice areas ranging from real estate to bankruptcy. This is because an exemption from prosecution under state law does not obstruct the federal government’s ability to investigate and prosecute an individual for a violation of federal law.

Federal law has not been strictly enforced for several years. This has been due to temporary moratoriums on federal funding for enforcement as well as federal policies outlining conditions under which the federal government will not interfere with state marijuana legalization programs. Federal enforcement of what is otherwise the legal production, distribution and sale of marijuana at the state level has been a low priority. This qualified “hands off” approach may be comforting to those inclined to lease facilities to a marijuana business.

But there is a definite balancing act—does the landlord determine the risks of civil forfeiture of its property or other penalties are too great and choose not to engage in any cannabis related business, or does the landlord calculate that risk into the costs it charges to the marijuana entrepreneur? There are many factors that must go into this decision, with just a few discussed below.

First, most commercial mortgages prevent tenants from operating illegal businesses on a subject property. This can reduce the pool of potential lessors to the small minority of properties that carry no commercial bank loan. Also there are certain commercial landlords who for moral reasons will not consider leasing to a marijuana business. As a result, the industry’s demand is concentrated into a small percent of the otherwise available market. Some research shows that rents for a cannabis based business can be three to five times higher than market levels. In this regard, the commercial landlord can reap huge rewards. Another consideration is whether marijuana operations violate use restrictions in other leases, declarations or other recorded covenants that affect the property.

Because banks are federally regulated, and in spite of some recent easing of certain restrictions, most marijuana businesses still do not have access to financial services and tend to do business entirely in cash. A commercial landlord should expect to receive its rent and other charges in cash, and normal boilerplate lease language will need to be drafted to permit this mode of payment.
Also, water and energy bills will be large if a grow facility is involved. As a commercial landlord, the allocation of these costs must be considered as well as other costs unique to a marijuana business, such as security. Additionally, if there are common areas, issues such as ventilation, waste products and use of marijuana on-site must be addressed.

As a commercial landlord, it would be advisable that any lease relating to a cannabis related business contain clauses that specifying the selection of venue and applicable governing law. It is important to provide that interpretation of the lease and adjudication of the parties’ rights be limited to current state law, to avoid the argument that the lease should be considered void as against public policy or contrary to existing law.

To be fair, a landlord might expect a savvy tenant to address what would happen in the unlikely but potentially catastrophic event of federal intervention. It might indeed be fair to expect a negotiated provision for an early termination event permitting the tenant to cancel the lease without any further financial obligation, if the federal government attempted seizure or other intervention.

Suffice it to say that assuming a commercial landlord determines it wants to both assume the risks and enjoy a possible lucrative lease with a marijuana business, simple boilerplate leases are simply not sufficient. Both the tenant and landlord have to navigate carefully through this changing landscape.

May 4th, 2016

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It is part of the American Dream to own a home. But along with home ownership comes the obligation to pay property taxes. The government collects property taxes to pay for, among other things, maintenance of roads, street lighting, community landscaping, parks and city code enforcement. But starting in approximately 1960, local governments began teaming up with private developers to create homeowner associations. Today, more than 66 million people in the United States live in homeowners associations, condominium communities, cooperatives and other planned communities and the number grows each year. By statute, state legislatures have given certain governmental powers to HOAs. A homeowners association operates much like a local city government. The community elects a board of directors to represent them. The Board then makes decisions for the community. The community is governed by Covenants, Conditions and Restrictions (CC&Rs) which allow the Board to collect dues and assessments. These dues and assessments are then used by the HOA to maintain roads, street lighting, community landscaping, parks and for CC&R enforcement. In a very real sense an HOA community is a localized form of government that collects taxes and is responsible for community maintenance.

So, in creating HOA communities, local governments have transferred the responsibility to maintain roads, street lighting, community landscaping, parks and code enforcement to the HOAs. But the government continues to collect property taxes from those in HOA communities at the same rate as those that don’t live in HOA communities. The proliferation of HOAs has resulted in a cost savings to local governments in two ways. First, by requiring developers to build “public improvements” such as parks and then passing the cost of maintenance of the improvements to the homeowners; and secondly, by HOAs being responsible for the cost of maintaining infrastructures that would normally be maintained by the municipality.

So, if homeowners in HOA communities already pay dues and assessments to their association for maintenance of roads, parks and other amenities, then why are they required to pay property taxes? Aren’t they getting taxed twice for the same services? That’s what many homeowners believe and their complaints have been heard at the Federal level. Two U.S. Congressional Representatives are co-sponsoring a bill to provide a special federal tax deduction for owners of property in homeowners associations. On March 3, 2016 U.S. Representatives Anna G. Eshoo (D-CA) and Mike Thompson (D-CA) introduced the bill “Helping our Middle-Income Earners (HOME) Act.” If passed, H.R. 4696 would allow homeowners in community associations who earn $115,000 or less in annual income to deduct up to $5,000 of their community association fees and assessments from their federal tax liability.

According to the sponsors, “[t]he HOME Act recognizes that millions of middle class homeowners are struggling to keep up with rising household expenses like child care, college tuition, health care, mortgage and community assessments” and the bill goes “a long way by providing relief from this tax burden on millions of middle class families.”

Although no companion bill has been introduced in the Senate, the bill has attracted the attention and has gained the support of the Community Association Institute, a national organization that advocates on behalf of HOA communities. “CAI applauds Rep. Eshoo for her efforts to make homeownership more affordable and for recognizing the inequity of double-taxation faced by homeowners in America’s community associations,” said CAI Chief Executive Officer Thomas M. Skiba, CAE. “We look forward to working with Reps. Eshoo and Thompson to ensure this legislation is a net gain for the more than 66 million Americans who live in community associations,” Skiba added.  The HOME Act would lighten the financial burden of homeowners and make homeownership more affordable and attainable for more families.

There is no denying that there is some taxation inequity for homeowners living in HOA communities. But H.R. 4696 still has a long way to go. It was recently referred to the House Committee on Ways and Means and only time will tell if the bill will gain enough support to pass. But there are over 66 million hard-working homeowners that are hoping it gets traction.

March 30th, 2016

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