Thanksgiving Letter 2011

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When Your Title Company Is Gone

New Jersey Title Insurance Company recently ceased issuing policies in New York.  Washington Title Insurance Company has announced that it is relinquishing its license to issue title insurance policies in the State of New York.  The recent ceasing of business of title underwriters and the inevitable problems that will occur as a result further exemplifies the necessity of selecting an underwriter with substantial financial strength.

The concomitant complications of undercapitalized underwriters disappearing from the landscape, literally overnight, are overwhelming.  For starters, your client is sued by an alleged heir of a person in the back chain of title.  The company you selected to protect your client is gone, along with their claims department.  Both you and your client are on your own.

Slightly less drastic, your client wants to refinance, and use his original mortgage to consolidate with a new loan, and save the mortgage tax previously paid.  You discover that the mortgage was never recorded.  You think, no problem, we’ll just get a refund from the title company and proceed.  When it is disclosed that the title company that you directed your client to is gone, you immediately realize who is going to pay that mortgage tax.  You are.

As any experienced real estate practitioner knows, exceptions to title are routinely cleared by providing the seller’s title policy to the new title company.  This is possible only if both title companies are parties to the Mutual Indemnity Agreement, which several of the newer players in the title world are not.

The plethora of problems resulting from an out of business title insurance company also includes:

-failure to pay real estate taxes

-unrecorded deeds and mortgages

-unpaid transfer tax and mortgage tax

-large escrow deposits missing

Don’t get involved with referral malpractice; always use an underwriter with sufficient reserves and not a title underwriter of last resort.  Of course, it only makes sense to apply the same rules for the title agent you chose.

Foreclosure Workouts CLE – 5/19/2011 – A Resounding Success!

“Foreclosure Workouts” was the subject of last night’s 2 credit CLE at Traveler’s Rest in Ossining.  Rick Cowle, Esq., our featured speaker, educated our audience of  81 attorneys on bankruptcy, foreclosure and short sales.  In today’s market, this timely topic was certainly well received.  If you are interested in this topic, the material from the CLE is available by clicking here.  If you are interested in upcoming CLEs, please contact your sales representative at Judicial.

How Attorneys Can Make a Difference When It Comes to the Greening of Buildings

by Richard J. Sobelsohn, Esq., Attorney – Moses & Singer LLP, LEED Accredited Professional, Fellow – Institute of Green Professionals, Adjunct Professor of Law – Brooklyn Law School & New York Law School

When speaking of the role of the real estate attorney in transitioning the built environment to greater sustainability, one must understand why it is important for that counsel to fully understand what a green building is and what is now referred to as Sustainable Building Law. Because there are a myriad of unique issues relating to green buildings, sustainable building lawyers must be able to assist their clients to: allocate "green" risks and rewards when drafting real estate agreements, avoid litigation, mitigate climate change risk, and navigate the constantly evolving regulatory landscape. And although there is plenty of work today for attorneys in this space, only those with green building expertise will be prepared to meet this challenge and stay a step ahead of the curve for future opportunities.

The Moving Finish Line. When green building certification and rating systems began, and up until a little while ago, the goal of the parties in the sustainable building world was the awarding of certification for a property or a premises.¹ Because this field is relatively new, there are only a few lawsuits that have been filed specifically addressing sustainable building legal issues. In fact, the first widely discussed and reported case relating to Sustainable Building Law (Southern Builders v. Shaw Development²) dealt primarily with the failure of a property to obtain the requisite certification by a date certain.³

In the "original finish line" days, the players were the traditional ground-up or retrofit contractual parties, namely the property owner⁴, contractor, architect/engineer. But once the property or premises obtained its certification, the job was done and everyone celebrated and went on their merry way. However the world has changed, and now the finish line is moving and, in fact, there may not even be a finish line to speak of anymore.

With the morphing of green building rating systems, the looming deadlines for recertification, and new data collection and reporting requirements, organizations like the USGBC⁵ now have the right to decertify or, in the future, possibly reduce certification levels if a property no longer maintains the requisite points originally obtained for certification.⁶ This presents a whole new set of legal issues for an owner of a green certified property. Most of us understand the certification piece of the puzzle⁷ and how a property owner in its desire to be sustainable and marketable, chooses building certification as a goal. Recertification, however, brings us to the next step because it will involve the same parties originally in the picture⁸, but will also include energy monitoring and reduction-facilitation companies, janitorial service companies supplying products and services to the certified building, pest-control companies servicing the building, water meter and reduction-facilitation companies, HVAC service companies, Escos, energy or water meter reading companies, attorneys, and others. Since the point-structure of a rating system depends on all of these parties doing their jobs adequately, if any one or more of them drop the ball, the entire certification could be at risk. The sustainable building world is now much more complicated.

Similarly, if a property’s certification is at risk, those municipalities that require LEED certification (or another rating agency’s certification)⁹, for issuance of certificates of occupancy or other renovation permits or building licenses, could impose their own penalties on the property owner if the fail to comply with local law because their property loses certification or has the certification level required by the municipality downgraded Yet property owners continue to have the pressure to meet market demand and the market is pushing certification in a very big way.¹⁰ In fact, as in New York City¹¹ where recently enacted local laws require energy benchmarking, metering and monitoring of energy and potable water consumption, there will probably be many property owners who decide that since they have to pay a substantial amount of money to comply with these new laws, that for a little extra, they can obtain the coveted "certification" of their property.
So where does this leave our clients in the Green Building World if they need a well-versed Sustainable Building Law attorney? The answer is probably that they will find them in the new breed of "green lawyer" specialists out there, and who can implement the greening process for their clients in a way that other "non-green lawyers" cannot.

Why? When a property owner decides to build sustainable ground-up construction, have a major retrofit to an existing building, or if a tenant wishes to obtain certification for its commercial interiors, or if there are other clients wishing to go green in one way or another, there are certain issues those of us in the green space can spot without much effort. For example, if our client is having a property or premises built, the contract with the contractor and the contract with the design professionals (architect, engineer, others) should be explicit in spelling out which party(ies) bear(s) the risk for failing to achieve the desired goals of the property owner. Where as in the past we attorneys were mainly concerned about our client’s (especially when they were the property owners) getting what they paid for (namely a structure built to the specifications they desired and articulated in the plans and specifications by the architect and engineer), now we need to also focus on the tangential and continuing covenants and legal requirements that abound. ¹² These could include those which address obtaining building certification or recertification, meeting metering and monitoring requirements (which could be rating system driven or local municipality driven), meeting reporting requirements and others. Additionally, if a client discusses with their counsel their goal of obtaining certification, we would be remiss in our duties if we did not now address what may happen later after the property is certified. Ongoing property operations and maintenance is therefore a crucial element to the property maintaining its certification and the client seeking to keep the certification would need additional protection to get there.

So the transition to green does not have to be onerous, just facilitated by those who understand the green picture. We will be the ones counted upon for interpreting the new laws (federal, state and local), regulations, rating system changes¹³, tax credits, and other issues affecting green buildings and how all of these relate to our clients. It is not only interpreting the existing and upcoming laws for our clients, but we will also need to try to predict how a failure to comply with these laws may result in fines, penalties, the affect it may have on certificates of occupancy or even the issuance of permits by local building departments.
If our clients are involved in the "greening process" (either as a property owner, property manager, tenant, or as a provider of services or products to a green building), we as their counsel will need to apportion risk in the many contracts to be executed to get the building green or greener. This is especially true because some of our clients are holding themselves out as "green specialists" and there is a growing concern that the rising standard of care will subject those professionals to liability never envisioned before.¹⁴ Will they be held to a higher standard of care? Probably yes. And even when professional liability insurance products are introduced in the market to protect these sustainability experts, it is going to be up to us to continuously protect them in our drafting of contracts.

To fully understand why this issue is important, let’s look at the original risks encountered in the green building world. The days of the old liabilities of failing to substantially complete construction at all, or failing to deliver a specified certification level of a property by a date certain, may be a thing of the past. In those days, the potential damages were usually limited to the property. But the time of the new liabilities could be here before we know it. Our clients could be facing third party beneficiary liability and consequential damages that are far broader than we ever imagined. Think of the tenant who signs a lease where the landlord has a covenant to deliver and maintain a LEED Gold building and what would happen if the rating of the building is either not there at all when the premises are delivered to the tenant, at a lower level than promised, or is lost or downgraded during the term of the lease? If the tenant has a termination right or a reduced rent provision in its lease, the landlord is going to look to others to share in its losses.

Similarly, when there are local municipal consequences due to a decertification or downgrading of certification, what penalties may ensue? Certificates of occupancy could be revoked, building permits could be denied, and licenses could be at stake. How will this then affect the property owner? One thing is for sure, we are entering a brave new world that demands a higher level of expertise to dissect these issues and we as attorneys in the sustainable building world will be looked to as possessing it.

Like the LEED Rating system with its synergistic approach, all service providers and some product suppliers/manufacturers could not only have a part in making a property green, but also share in the risks if the property loses its green hue. In reality, because the finish line has no date certain, we who practice in this space will be relied upon to assist in the greening of all buildings for many years to come.

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¹ Certification by organizations such as U.S.G.B.C. (LEED) and GBI (GREEN GLOBES) (among others)
² 19-C-07-011405 in the Circuit Court for Sommerset County, Maryland, February 2007
³ Southern Builders involved a developer (Shaw Development) who contracted with a builder (Southern Builders) to construct a LEED Silver property to be certified by a date certain.  The deadline was never met and the ensuing lawsuit, first filed by Southern Builders against Shaw for failure to pay a portion of the contract price to construct a $7.5 million, 23-unit condominium, and then a counter-claim filed by Shaw against Southern Builders for failure to meet the contract deadline and the ensuing damages including without limitation the loss of $635,000 in tax credits).  Shaw eventually declared bankruptcy.
⁴ This could include a tenant if it sought certification for commercial interiors – see U.S.G.B.C. – G.B.C.I. Commercial Interior certification
⁵ U.S. Green Building Council
⁶ USGBC right to decertify properties if they fail to meet USGBC’s Minimum Program Requirements (the project must comply with environmental laws, be complete and permanent, must utilize a reasonable site boundary, must comply with minimum floor area requirements, must comply with minimum occupancy rates, must share whole-building energy and water usage data, and must comply with minimum building area to site area ratio)
⁷ Obtaining initial certification (either for the entire building or a commercial interior premises)
⁸ Property owner, contractor, design professionals
⁹ San Francisco requires new commercial construction over 25,000 square feet must achieve LEED Gold in 2012
¹⁰ See Pike Research - http://www.pikeresearch.com/research/energy-efficiency-retrofits-for-commercial-and-public-buildings
¹¹ Local laws 84, 85, 87 and 88
¹² Such as meeting local laws
¹³ U.S.G.B.C. LEED 2009, V3.0, for example
¹⁴ As with any specialist holding themselves out as one, courts will generally hold them to a higher standard of care than non-specialists.  See FDIC v O’Melveny and Myers, Ninth Circuit Court of Appeals, 969 F.2d 744 (9^th Cir. 1992) and Gulf Coast Investment Corporation v. Brown, the Court of Appeals of Texas, 821 S.W.2d 159 (1991)

Tax Test on Cancelled Debt

By Peter Brogan

With the tax deadline rapidly approaching and almost every other deal involving a short sale or modification a review of the tax implications for homeowners involved in those situations is appropriate.

Normally, when any creditor cancels a debt the result is ordinary taxable income. So when a bank forgives a student loan or the unpaid balance on a credit card, those amounts are treated as taxable income by the IRS.  Notwithstanding, congress has carved out a few special rules for homeowners in distress.

A close look at the rules is critical. In order for a homeowner to qualify for special treatment, and avoid paying tax on the debt forgiven in a short sale the following test is essential to understand.

• The debt the lender cancelled must have been used by the homeowner “to buy, build or substantially improve your principal residence.”
• Focus on the words. Only your main residence qualifies. It can’t be a second home or an investment condo. Then look at the purpose of the loan. Only a qualifying purpose relieves the tax burden. The unpaid mortgage balance cancelled by your lender in a modification or short sale must have been used to acquire or build.
• Refinanced mortgage debt used to consolidate bills or pay college tuition doesn’t pass the test.
• Finally, keep in mind that debt cancellation relief is capped at $1,000,000 for individuals filing separately and $2,000,000 for married taxpayers.
• For further information see IRS Form 982 and Publication 4681.
• If you’ve had mortgage debt cancelled make sure you receive a 1099-C from the lender.

Business Update: SBA wants more lending in underserved communities

SBA wants more lending in underserved communities

BY ROHIT ARORA
Link to original Article

We knew that the credit crunch had taken its toll on small businesses between June 2009 and June 2010, but until recently we did not know how severe the drop in lending really was. Last week, the Small Business Administration (SBA) reported that the total value of outstanding loans to small businesses plunged by $43 billion, that’s 6.2 percent, during the aforementioned 12-month period. And that was a drop of $59 billion, or 8.3%, from June 2008.

The SBA based its assessment on data from the Federal Deposit Insurance Corp. (FDIC), which tracks lending by banks. Reduced demand — stemming from pessimism among small business owners, declining sales during the recession, fewer plans for expansion and capital investments — certainly played a role in the drop. However, lenders, particularly big banks, closed the spigot on lending, essentially cutting off small businesses from their sources of capital. Since they generally cannot sell stock or entice outside investors the way larger companies do, small businesses felt the sting of credit crunch particularly strongly.

"Small businesses are important to the national and local economy, but their existence depends on their ability to access credit,"the SBA found in its report. In a show of accountability, the agency counted itself among the organizations that slowed access to capital. While the SBA does not make direct loans, it insures qualifying bank loans against default, and both the number and the dollar value of loans backed by the agencys flagship 7(a) program plunged from 2007 to 2008 and again the following year.

With the help of government stimulus programs, the SBA put a series of measures in place to boost lending. SBA-backed loans rose in the 2010 fiscal year ending Sept. 30 to $12.6 billion — ahead of 2009’s figure, but shy of 2008’s total.

So what’s being done now?

The Small Business Jobs Act passed last fall and authorized the creation of a $30 billion fund run by the Treasury Department that offers affordable capital to banks with less than $10 billion in assets. The goal was/is to put capital into the hands of smaller lenders, such as community banks, which will provide access to the lending pool to small businesses owners.

Meanwhile, the SBA has developed two new programs that geared toward providing credit to businesses in underserved communities. The agency’s Small Loan Advantage will offer loans up to $250,000 to small companies. The initiative includes an 85 percent guarantee for loans up to $150,000 and a 75 percent guarantee for loans between $150,000 and $250,000.

The SBAs Community Advantage initiative seeks to increase the number of SBA 7(a) lenders that reach underserved communities and were not previously able to offer SBA loan. The program will also offer up to $250,000 with an 85 percent guarantee for loans up to $150,000 and a 75 percent guarantee for loans of more than $150,000. The Community Advantage program is available to community development financial institutions, certified development companies (CDCs), and non-profit micro lenders.

Both of these programs are good news for many New Jersey-based entrepreneurs. They will help firms such as Medical Transcribing Services, Inc., a minority-owned company based in Hammonton, NJ, which recently received $500,000 — at a prime plus one rate — through Biz2Credit.

While traditionally the business community has sought laissez-faire policies, in this time of economic uncertainty, these government-supported incentives to small business development can and should be welcomed. This week, President Obama’s budget allotment for the SBA will be lowered in 2012. The government must carefully weigh the desire to cut deficits with cutting the funding desperately needed to help small businesses grow and create jobs.

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Rohit Arora, CEO and co-founder of Biz2Credit (www.biz2credit.com), is one of the country’s leading experts in small business finance.  He has extensive experience in financial services, as well as the issues facing small and medium businesses (SMBs) across the globe.

Rohit writes a column about small business financial issues for NewJerseyNewsroom.com and has been quoted by Reuters, American Banker, Crain’s NY Business, Computer World, the NY Post, and SBA Radio, among other media outlets.

Rohit oversees all strategic initiatives and the development of Biz2Credit’s web platform that matches 40,000 members with more than 200 lending institutions based on financial criteria that the small business owners provide.  Since its inception in 2007, Biz2Credit has facilitated nearly $400 million in funding for start-ups and small-to-medium sized businesses and handles over 3,000 new loan applications each month.

Previously, Rohit was part of the strategy practice for Deloitte Consulting. He also has worked at Goldman Sachs and Silkroute, a Singapore-based private equity fund.  The Indian native was an advisor to UN Council for Trade and Development in the area of small businesses and emerging markets.  He holds a MBA in International Finance from Columbia University and co-authored “Beyond Cost Reduction: The Risks and Rewards of Global Service Sourcing,” a research report funded by a grant awarded from the Alfred Sloan Foundation and the Chazen Institute of International Business at Columbia Business School.

Rohit is helping American-based businesses expand in India, where Biz2Credit operated the largest Small and Medium Business (SMB) focused credit marketplace.  He has been instrumental in bringing in major banks, credit rating agencies, and media partners to the platform.

* To schedule a media interview with Rohit Arora, contact John Mooney, Over The Moon PR,

(908) 663-2121, (908) 720-6057 cell, john@overthemoonpr.com

Thanksgiving Letter

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The Invisible Agent

Under RESPA, the only permitted payments to attorney agents by title companies is a reasonable fee for services actually rendered. By calling a title company and placing an order, an attorney is not rendering a service.

Facts: A is an attorney who, as a part of his legal representation of clients in residential real estate transactions, orders and reviews title insurance policies for his clients. A enters into a contract with B, a title company, to be an agent of B under a program set up by B. Under the agreement, A agrees to prepare and forward title insurance applications to B, to re-examine the preliminary title commitment for accuracy and if he chooses to attempt to clear exceptions to the title policy before closing, A agrees to assume liability for waiving certain exceptions to title, but never exercises this authority. B performs the necessary title search and examination work, determines insurability of title, prepares documents containing substantive information in title commitments, handles closings for As clients and issues title policies. A receives a fee from his client for legal services and an additional fee for his title agent "services" from the clients title insurance premium to B.

Comments: A and B are violating section 8 of RESPA. Here, As clients are being double billed because the work A performs as a "title agent" is that which he already performs for his client in his capacity as an attorney. For A to receive a separate payment as a title agent, A must perform necessary core title work and may not contract out the work. To receive additional compensation as a title agent for this transaction, A must provide his client with core title agent services for which he assumes liability, and which includes, at a minimum, the evaluation of the title search to determine insurability of the title, and the issuance of a title commitment where customary, the clearance of underwriting objections, and the actual issuance of the policy or policies on behalf of the title company. A may not be compensated for the mere re-examination of work performed by B. Here, A is not performing these services and may not be compensated as a title agent under section 8(c)(1)(B). Referral fees or splits of fees may not be disguised as title agent commissions when the core title agent work is not performed. Further, because B created the program and gave A the opportunity to collect fees (a thing of value) in exchange for the referral of settlement service business, it has violated section 8 of RESPA.