News and Insights

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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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October 26th, 2015

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September 16th, 2015

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March 12th, 2015

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February 1st, 2015

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