Commercial leasing
1. What legislation and/or regulatory bodies are
responsible for regulating the relationship between landlord
and tenant in your jurisdiction?
Landlord and tenant law in the United States is
regulated predominantly by local statute, with variance from
jurisdiction to jurisdiction, but primary issues of concern are
governed by the terms of most lease agreements. Localities in
the US regulate commercial landlord and tenant relationships
much less heavily than in the residential context, where tenant
protections including rent control, habitability rules, tenant
right of first refusal on sale and others are common.
2. What is the effect of a tenant's insolvency in
your jurisdiction, and what remedies are available to
landlords?
As a general matter, bankruptcy in the US grants the
insolvent entity an automatic stay of collection and
enforcement proceedings against it, which interferes with the
ability of a landlord to evict a tenant or to seek monetary
damages. Debtors in bankruptcy can elect to assume, assume and
assign, or reject commercial leases. If the debtor assumes the
lease, the debtor continues to be responsible for performing
the lease obligations, and must cure all pre-petition defaults.
The debtor's rejection terminates a lease and gives the
landlord an unsecured claim for damages. If the debtor proposes
to assign the lease, the debtor must provide for prompt cure of
all defaults and include a showing of adequate assurance of
future performance. The debtor is required to perform all
post-petition lease obligations pending a decision to assume or
reject the lease and must make a decision within 60 days from
the date the petition is filed, or such extended date as the
court may allow on a showing of cause.
3. How might changes in accounting standards affect
the landlord/tenant relationship in your jurisdiction?
Generally, accounting standards in the US are fairly
stable in the landlord/tenant context. One area where changes
in accounting standards are likely to have an impact is in the
area of synthetic leasing. On January 17 2003 the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This
interpretation requires entities called "variable interest
entities," which are certain types of passive entities (often
called special purpose entities), to be consolidated by a
company if that company is subject to a majority of the risk of
loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both.
This interpretation, which is currently in place for new
synthetic leases and will apply to existing synthetic leases as
of June 15 2003, is already causing a reexamination of the
costs and benefits of synthetic leases for many companies.
4. How has recent statutory reform affected (or, how
will proposed future statutory reform affect) the lease renewal
process in your jurisdiction?
Recent statutory reform has not played a significant
role in the lease renewal process in the United States. The
lease renewal process in the US is driven primarily by economic
and contractual factors, like the recent downturn in
markets.
5. How does human rights legislation in your
jurisdiction affect the landlord/tenant relationship?
Human rights legislation generally bars discrimination
in the landlord/tenant context based on race, gender, national
origin and other protected classes. The Americans with
Disabilities Act, moreover, can impose on landlords, depending
upon the property, requirements related to accessibility and
other architectural features for individuals with
disabilities.
6. What is the effect of conditions restricting
tenants wishing to divest themselves of surplus properties
('alienation'), and how can those restrictions be satisfied or
circumvented?
Landlords have latitude in most jurisdictions to
control tenants' rights to sublease or assign their leases,
although tenants will often bargain for rights like
reasonability restrictions on landlord approval or no approval
required on certain types of divestments (like transfers to
affiliates or transfers where the prime lessee remains
financially obligated under the lease). It is common in most US
markets, moreover, for landlords to receive some or all of the
profits a tenant receives for divesting leased assets,
although, again, tenants in some markets have the ability to
narrow this requirement. There is no general right to return
property if no longer needed, although the law in many
jurisdictions imposes a default rule of mitigation of damages
upon lease abandonment.
Securitization of real estate assets
1. How significant is the real estate securitization
market in your jurisdiction?
Real estate finance is now an integral part of global
capital markets and was one of the healthiest segments of the
United States securities market in 2002. Commercial
mortgage-backed securities in particular are now a significant
part of US real estate debt and equity markets and are
supported by a broad array of institutional investors that hold
securitized real estate assets to diversify their portfolios.
According to Commercial Mortgage Alert, about $52.7 billion
worth of new commercial mortgage-backed securities were issued
in the United States in 2002, out of a global total of $95
billion, down from a record $62.5 billion in 2001, but still up
more than 300% from a decade before. There is also a strong
market in the US for single-family residential mortgage-backed
securities. In 2002 rating agency upgrades of single-family
residential mortgage-backed securities exceeded downgrades by
an almost 7:1 ratio.
2. What have the key real estate securitization
deals been in your jurisdiction over the last 12 months?
There were many significant securitizations in the US
mortgage-backed securities market in 2002. Among the largest
issuers were Credit Suisse First Boston, with $11.2 billion in
US mortgage-backed securities, Deutsche Bank with $10.6
billion, Lehman Brothers with $8.7 billion, Morgan Stanley with
$6.5 billion and JP Morgan Chase with $5.2 billion.
3. To what degree of detail (if at all) are the
parties obliged to disclose lease terms on a formal registry
(eg the land registry) in your jurisdiction?
Transactions in securitized instruments are governed
by state and federal securities laws. Sponsors must produce
detailed disclosure documents for investors that describe the
pooled loans. Since the arrangers of a securitized offering
induce third parties to purchase interests in the pooled loans
by relying on their disclosure documents, the consequences of
inaccurate statements are greater than in traditional lending.
Thus, there is a need for disclosure, including the use of
objective, formulaic scoring methods. Credit risks are not
prohibited, but evaluated for quantifiable and uniform
information that is acceptable to the marketplace. The
overriding concern is to ensure that the individual loans fall
within the parameters for the anticipated loan pool to be
packaged for resale in the securitized instruments market.
4. To what extent can uninsured risks or potential
legislation leading to rent reviews affect the sanctity of the
receivable?
Uninsured risks and potential legislation can impact
the economic value of real estate. For example, since September
11 2001 the risks imposed by the possibility of terrorism have
roiled the real estate capital market, although recent federal
legislation on terrorism insurance is expected to ease
insurers' reluctance to cover the risk. Similarly, the recent
sharp increase in mould-related claims has left many
large-scale residential owners facing unanticipated
liability.
5. How important a role do the rating agencies play
in securitization transactions in your jurisdiction?
The rating agencies are crucial to securitization
transactions because public trust in their research
capabilities and the accuracy of their ratings gives the
investor confidence and thereby makes the market more
attractive. After extensive analysis, rating agencies provide
investors with a consistent measurement of the likelihood that
the cashflow from the security's underlying mortgages will be
sufficient to meet the scheduled payments of principal and
interest to qualify for the specified credit rating. At the
highest ratings, the cashflows are expected to hold up even
under severe economic conditions.
Property outsourcing
1. How prevalent is property outsourcing in your
jurisdiction?
Property outsourcing became a buzzword in the early
1990s, and has remained prevalent in large US markets such as
Washington DC, New York, Los Angeles, Chicago and San
Francisco. During the stock market boom of the late 1990s,
property outsourcing provided a means for bricks and mortar
firms to raise cash for investment or to improve their balance
sheets, while new economy tech companies used outsourcing as a
way to acquire new office space while keeping overheads low and
staff streamlined. After the "tech wreck," property outsourcing
has become a common way for creditor landlords and investors in
distressed properties, who have little interest or experience
in property management, to handle this aspect of ownership.
2. What are the relative benefits of each of Private
Finance Initiatives (PFIs) and Public-Private Partnerships
(PPPs)?
Public-Private Partnerships and similar structures
play an increasingly important role in the redevelopment of
major US cities. These partnerships are structured in a variety
of ways. The best among them, however, combine the strengths of
the private sector in securing capital, in construction and
development, and in property management, with the strengths of
government in land assembly and disposition and overseeing the
regulatory process. Cities and states in the US are also
increasingly working with the private sector to finance and
construct infrastructure for development. And many
jurisdictions are taking an active role in supporting the
financing of urban redevelopment through techniques like
tax-increment financing and private activity bonds.
3. What lessons have been learned from both private
sector and public sector property outsourcing schemes in terms
of performance, service provision, financial benefits,
problems?
Although management companies must perform at a high
level of competence to retain a contract, they typically have
several buildings under management and can afford to lose a
building assignment more easily than an owner can afford to
lose tenants. With this in mind, choosing the correct property
manager is vital to the success of any property outsourcing
plan. Property owners should compare potential building service
contractors according to experience and reputation, attitude
and business plan, accountability, level of integrated
services, human resource practices, responsiveness, stability,
and price.
4. To what extent should the service provider extend
services to cover back office systems such as IT and HR?
Property managers should be capable of providing
information and technology and human resources services to
clients. Property management has expanded into such areas as
copy center and mailroom operations, courier services,
energy systems, transportation services, records management,
and information technology services. Outsourcing allows
companies to transfer the purchase of non-performing assets
(such as office copy machines) to service contractors and large
outsourcing firms can take advantage of economies of scale.
However, some tenants might not need or feel comfortable
leaving strategic back office functions in the hands of its
property manager.
5. What has been the effect of Enron and the
accounting scandals on corporates considering off-balance sheet
property outsourcing?
Part of property outsourcing's attraction is that a
company can keep non-performing assets off the balance sheets.
Unless otherwise contractually arranged, a party obtains the
right to use the assets provided by a contractor as part of its
service agreement and does not assume the risk of ownership
with regard to those assets (ie it cannot claim depreciation).
As a result, the party obtains those assets through operating
leases, which are treated by FASB Statement No. 13 as
off-balance sheet items, rather than through direct ownership
or capital leases, which must be included in a company's
balance sheets. In response to recent accounting scandals, FASB
is currently considering Issue No. 01-08, "Determining Whether
an Arrangement Contains a Lease." Although FASB has not yet
reached a consensus on this issue, certain types of property
outsourcing arrangements, especially those involving sale
leasebacks, may encounter heightened scrutiny in the
future.
6. What is the future of property outsourcing for
the private sector?
Trends within the property outsourcing industry are
responsive to changes in tenant needs as laws and market
change. When vacancy rates are high, commercial property owners
are more likely to hire management companies that offer a
variety of back office services that will attract tenants. When
occupancy rates are high, property owners place greater weight
on outsourcing's balance sheet improvement and overhead
reduction attributes. Long term, property outsourcing in the
private sector will likely remain popular unless FASB or the
SEC revise the accounting treatment of operating leases, with
increasing emphasis on security and loss control expertise,
energy management expertise, and indoor air quality
expertise.
Financing of real estate transactions
1. What are the most common methods by which
purchasers finance high-value real estate transactions in your
jurisdiction?
There are many different methods for financing a
high-value real estate transaction and most such deals employ a
combination of techniques tailored to the specific conditions
of the property. Real estate owners often create special
purpose vehicles that hold title to a particular property,
usually consisting of only the assets of the mortgaged property
itself. This segregates the liabilities of one entity from the
liabilities of another and makes the owner "bankruptcy remote".
Methods of raising the large amounts of capital necessary to
finance high-value transactions include loan syndication and
securitization, which are both ways of pooling assets and risk
among many investing entities. In addition, some high-value
properties, including casinos, are financed through the
issuance of high-yield bonds.
2. To what extent does stamp duty (or the equivalent
in your jurisdiction) affect the cost and method of financing
real estate transactions?
In the United States, states and many localities tax
transfers of title and the recording of deeds, and a handful
also tax the recording of mortgages. In the mortgage context,
substantial recording taxes, up to 2.75% of the principal sum
secured in New York (as applied to newly advanced funds), for
example, often lead to unusual documentation structures. In New
York, existing mortgages are rarely released but rather are
assigned to a new lender who then records a new mortgage for
the new funds being advanced before consolidating the new and
old mortgages into a single lien via a consolidated mortgage
document. Similar deal structures have been common in straight
asset transfers, but many jurisdictions are moving to close
loopholes that have allowed parties to aviod these taxes.
3. To what degree of detail are the parties obliged
to disclose the terms of financing on a formal registry (eg the
land registry) in your jurisdiction?
The terms of financing need not be revealed on a
formal registry unless the financing involves a security, in
which case securities regulations must be followed. However, in
order to secure an interest in a property, states have
recording statutes in place, which determine priority among
interest holders depending on when an interest holder records
their interest to the appropriate authority. While recording
regimes vary in the US, the most common type of statute is the
so-called race notice, which gives priority to a subsequent
purchaser that lacks notice of a previous sale and records
first.
4. Is there any debate in your jurisdiction as to
who holds the legal title to a mortgaged property?
Three primary approaches to mortgage law prevail in
the United States: the lien theory, the title theory and the
intermediate theory. The majority of states, including New
York, Massachusetts and Florida, have adopted a lien theory,
which views a mortgage as giving a lien on mortgaged property
to the mortgagee while leaving title with the mortgagor until a
valid foreclosure. Some states, such as California, Maryland
and Texas have held to the original title theory, whereby the
mortgagee holds legal title to, and the right to possession of,
the property until the mortgage is satisfied or foreclosed. A
few other states follow an intermediate theory, whereby the
mortgagor has the right to possession only until default and
that the mortgagee has the right to possession after a
default.
Conveyancing issues
1. What are the various forms of property ownership
in your jurisdiction?
Property ownership in the United States encompasses a
vast array of interests. Statutes often recognize any interest
in or claim to real estate whether entitling to present or
future possession and enjoyment, and whether vested or
contingent. In primary US markets such as New York, Washington
DC, Chicago, Los Angeles, and San Francisco, ownership
interests range from traditional direct ownership in fee
simple, to stock interest in a property's equity, to life
estates. Hybrid ownership forms such as cooperative
arrangements have become commonplace in residential markets
over the past twenty years, while in commercial markets mineral
and air estates are often distinct from the surface estate. In
dense cities such as New York, the development rights to real
property are frequently purchased and sold separate from the
underlying property itself and ground leases are a common
development feature.
2. Other than the general principles of contract law
governing agreements between vendor and purchaser, what other
statutory governance, regulations or guidelines exist to
protect the parties to a property transaction?
Property transactions in the United States are subject
to a web of legal protections, including implied covenants,
required disclosures and statutory title insurance requirements
in many jurisdictions, as well as a complex regime of recording
to make priorities of title transparent. In most primary US
markets, for example, bona fide purchasers who record their
deeds are afforded protection from prior or subsequent claims
on the property. And many jurisdictions provide that property
vendors who purport to convey property without being in actual
possession must forfeit the land to the buyer if the vendor
comes into possession of the property at a future date.
3. Is the practice of the vendor wanting to take
advantage of development uplift prevalent in your jurisdiction?
How do lawyers usually achieve this?
A number of substantial urban uplift programs have
been undertaken in the largest US real estate markets in recent
years, and the recently enacted New Markets Tax Credit Program
will target billions of dollars worth of tax credit enhanced
equity to core urban markets in coming years. Lawyers can help
developers in a number of ways. Lawyers assist developers by
working with local lawmakers to identify targeted areas. Once a
need for uplift has been identified, lawyers often play a major
role in the developer's dialogue with government to design an
appropriate development incentive package, including tax
abatements, public financing, and reduced property acquisition
costs. Lawyers can also enable current property owners in
uplift areas to raise potential development capital by
capturing existing property appreciation, either through
refinancing or sale and leaseback transactions. Lawyers can
also help existing developer landlords benefit from uplift's
positive economic externalities by drafting floating rate or
percentage lease clauses in commercial documents or rent
elevation reservation provisions in residential leases.
4. How significance is e-conveyancing in your
jurisdiction? What rules and regulations govern the
e-conveyancing process?
The Internet, while an invaluable marketing tool for
real estate professionals, has not taken a preeminent place in
the conveyancing process in the US. A recent study by the
National Association of Realtors indicates that the Internet
has not triggered a significant amount of online real property
purchases, or an increase in online "for sale by owner"
listings. E-conveyancing, however, is likely to be increasingly
relevant in major US markets. The 2000 Electronic Signatures in
Global and International Commerce Act removed much of the
uncertainty that previously surrounded contracts entered into
online, providing that Internet agreements carry the same force
and effect as their traditional paper counterparts. Since that
time a few online brokers have managed to penetrate the real
estate markets in a few large US markets.
5. How has the legislation and recent case law in
your jurisdiction addressed the issue of adverse
possession?
Adverse possession, long-established in the United
States to discourage abandonment and promote property use, has
increasingly been targeted at core urban markets. For example,
it is increasingly common for homeless persons to stake a claim
to vacant or abandoned buildings. Cities like New York, which
have a considerable number of vacant buildings, continue to
struggle with how to handle this issue. In San Francisco,
housing rights groups have successfully entered adverse
possession claims for property in potential uplift
neighborhoods, and the practice of the routine eviction of
homeless persons discovered in vacant buildings is being
reconsidered in order to allow the homeless to present their
claims in court.
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