On July 27, 2017, the United Kingdom Financial Conduct Authority announced, without specifying a replacement, that it would phase-out the London Interbank Offer Rate (LIBOR) by the end of 2021. LIBOR, a rate measured by short-term borrowing among large banks, has for decades been the reference rate underlying trillions of dollars’ worth of global financial transactions. In real estate, LIBOR is common among floating rate loans, where interest on loan proceeds often accrues at LIBOR plus a spread. However, volatility during the 2007-08 financial crisis, manipulation scandals, and a scarcity of transactions on which LIBOR is based have hurt LIBOR’s relevance, hence the need for a replacement.
Following the acquisition or financing of a property, most parties to the transaction are happy to circulate the “Congratulations!” missives as soon as the closing has occurred – the seller has their proceeds, the buyer/borrower has their property and/or the loan funds, and the prior financing(s) have been paid off… but the champagne corks shouldn’t be popped quite yet. There is one crucial post-closing item that too often gets overlooked and, if not addressed, can cause headaches rivaling a hangover down the line – recording the satisfaction or discharge of mortgage.
California usury law is addressed in multiple places: the California Constitution, statutes, case law, and initiative measures. Due to the patchwork nature of this body of law, differing interpretations and ambiguity are commonplace. In one recent case currently on appeal, the Ninth Circuit has asked the California Supreme Court to clarify California law in order to resolve a split in the federal district courts around the obligation of lenders that are otherwise exempt from California usury limitations to disclose compound interest terms as part of a lending transaction. The determinations of the California Supreme Court are likely to impact existing and future commercial loans governed by California law.
On April 15, 2016, the IRS released a memorandum addressing the impact of so-called “bad boy” guarantees on the characterization of underlying partnership debt as recourse vs. nonrecourse under Section 752 of the Internal Revenue Code. “Bad boy” guarantees are principally used in nonrecourse real estate mortgage financing transactions, especially those utilizing commercial mortgage-backed securities or securitized financing, to protect a lender against certain bad acts that are either in the control of the borrower or are customarily viewed as events where liability should be shifted to the borrower and its principals (such as fraud, material misrepresentation, and environmental issues).
Reversing its position from guidance issued earlier this year, the IRS concluded that the “bad boy” guarantees considered generally do not cause the underlying partnership obligation to fail to qualify as a nonrecourse liability of the partnership until such time as one of the “bad boy” events actually occurs (causing the guaranteeing partner to become liable for the partnership debt).
Importantly, IRS indicated that the applicable tax analysis is ultimately dependent on all the relevant facts and circumstances. Therefore, taxpayers should carefully review their financing arrangements in the context of their overall transaction and applicable circumstances, even if the terms of such financing arrangements appear similar to the terms covered by the said memorandum.
Click here to access the full alert.
Recently, our colleague Steve Friedberg published an article in AreaDevelopment on “Data Center Development and Financing Strategies”. Co-authored by Gregory Burkart and Laca Wong-Hammond from Duff & Phelps, the article discusses industry-specific factors to consider when evaluating data center locations including power needs/costs, scalability, and security; and carefully analyzes financing strategies for these capital-intensive endeavors as well.
To access the article in full, click here.
The Financial Accounting Standards Board (FASB) is expected to finalize new lease accounting standards (“Standards”) within the coming months which will have very real consequences for owners and lessees alike. Under current accounting standards, a lease is classified as a “Capital Lease” or an “Operating Lease.” A capital lease is treated similarly to a loan; the asset is treated as being owned by the lessee and must be recorded as an asset on the lessee’s balance sheet. By contrast, an operating lease gives the lessee a right to use the owner’s asset without the requirement of including the lease on its balance sheet. The lessee never owns the asset and must return it to the owner after the lease ends. Most office building, retail, or other standard commercial leases are operating leases under the current standards.
The new Standards will, among other things, eliminate the above classification and instead classify most capital leases –including existing capital leases –as a “Type A Lease”, which will be accounted for in substantially the same manner as capital leases are accounted for under existing generally accepted accounting principals (GAAP), and most operating leases – including existing operating leases –as a “Type B Lease”, which will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will now be required to include lease obligations on their balance sheets increasing assets and liabilities. Shorter term leases, leases of 12 months or less, must also be included on balance sheet if, considering all relevant economic factors, the lessee is “reasonably certain” to exercise an option to extend the lease beyond 12 months. Continue Reading FASB Lease Accounting Changes
As a follow up to my colleague Allan Caggiano’s post here on the new 2016 ALTA/NSPS Land Title Survey Standards, the Planning & Zoning Resource Company (PZR) has recently circulated an important advisory on the practical effects of the new survey standards and the interaction between the surveyor and the zoning report that is typically provided by a third party like PZR. Continue Reading Important Changes Resulting from New ALTA/NSPS Land Title Survey Standards
Mintz Levin was a sponsor of IMN‘s 13th Annual Winter Forum on Real Estate Opportunity & Private Fund Investing held at the Montage resort in Laguna Beach. The IMN conference is the premier West Coast conference on real estate investing and is attended by the most influential voices in the real estate industry. Continue Reading Costs and Practicalities of Utilizing Alternative Sources of Capital for New Acquisitions, Refinancings & Development
On February 23, 2016, the 2016 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys will become effective (superseding the 2011 ALTA/ACSM standards).
An overview of the changes (courtesy of Chicago Title Insurance Company) can be found at this LINK, and include (among others): Continue Reading 2016 ALTA/NSPS (formerly ALTA/ACSM) Land Title Survey Standards
A sophisticated (and effective) wire-fraud scam targeting real estate (and other) transactions is on the rise, and mostly occurring in the United States.
Here’s a Wire Fraud Alert from Chicago Title explaining how the scam works.
The National Association of Realtors suggests following this guidance to avoid becoming a victim: Continue Reading Sophisticated Email Scams Targeting the Real Estate Industry