Winning Punitive Damages When Defendant Defaults

Lawsuits in real estate transfers can include breach of contract allegations, and also fraud allegations if the seller failed to properly disclose defects in the purchased residence.

The residential purchase agreement includes a separate form called Transfer Disclosure Statement (“TDS”). This form is required to disclose any known defects in a residential property containing up to four dwelling units. Civil Code section 1102 obligates the seller to disclose the condition of the property. The TDS is not a warranty, but it can be relied upon by the buyer as the basis for a lawsuit if the disclosures are incorrect and the correct information was within the personal knowledge of the seller through the exercise of ordinary care.

A violation of section 1102 is a form of fraud. E.g. Peake v. Underwood (2014) 227 Cal. App. 4th 428, 442 (violation of section 1102 is statutory fraud). Fraud brings with it potential recovery of punitive damages. Civil Code section 3294 permits punitive damages for oppression, fraud, or malice.  For section 3294 purposes, “fraud” means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.

Punitive damages are awarded “for the sake of example and by way of punishing the defendant.” Where the lawsuit is not contested because defendant has defaulted by failure to file an answer, it is still possible to recover punitive damages if you have clear and convincing evidence of fraud. But you must clear legal hurdles.

The Notice of Preservation of Right to Seek Punitive Damages against defendant must be served on the defaulting defendant. California Code of Civil Procedure 425.115. Your Notice must state the exact dollar amount you are going to ask the judge to award.

The 425.115 Notice must be served 10 days before you file your application for entry of default. After the ten days (plus five for service by mail), you are free to ask the judge to include the specified amount in the default judgment. Be prepared to prove it. If you are seeking punitive damages and would like to speak to an attorney, contact Schneiders & Associates, L.L.P. today to schedule an appointment.

 

Kathleen J. Smith is an experienced civil litigator. Kathi advises clients on and handles all types of civil litigation, including employment matters, wage and hour, business, real estate, trademark disputes, class action defense, trust and probate, and homeowners association disputes. Kathi is experienced in all types of dispute resolution, from mediation to arbitration to civil trial.

Top 3 Real Estate Tips for Small Businesses

By: Roy Schneider, Esq. 

The only real estate transaction most small businesses engage in is to enter into a lease for commercial space. Whether you are considering office, manufacturing or retail space, the following three tips will help you navigate the negotiation process so you can avoid costly mistakes.

“Base Rent” is Not the Only Rent You Will Pay

Most prospective tenants focus their negotiation efforts on the “base rent,” the fixed monthly amount you will pay under the lease agreement. You may have negotiated a terrific deal on the base rent, but the transaction may not be the best value once other charges are factored in. For example, many commercial lease agreements are “triple net,” meaning that the tenant must also pay for insurance, taxes and other operating expenses. When negotiating “triple net,” ensure you aren’t being charged for expenses that do not benefit your space, and that you are paying an amount that is in proportion to the space you utilize in the building. Another provision to watch for is tenant’s responsibility to also pay a pro rata share of increases in real estate taxes.

There’s No Such Thing as a “Form Lease”

Most commercial property owners and managers offer prospective tenants a pre-printed lease containing your name and various terms. They present these documents often with a rider, and adamantly explain that it is the landlord’s “typical form lease.” This, however, does not mean you cannot negotiate. Review every provision in the agreement, bearing in mind that all terms are open for discussion and negotiation. Pay particular attention to the specific needs of your business that are not addressed in the “form lease.”

Note the Notice Requirements

Your lease agreement may contain many provisions that require you to send notices to the landlord under various circumstances. For example, if you wish to renew or terminate your lease at the end of the term, you will likely owe a notice to the landlord to that effect, and it may be due much earlier than you think – sometimes up to a year or more. Prepare a summary of the key notice requirements contained in your lease agreement, along with the due dates, and add key dates to your calendar to ensure you comply with all notice requirements and do not forfeit any rights under your lease agreement.

Entering into a lease for your space is not a simple task.  The length of the term, available options, and rights for additional space as it becomes available, capping rent increases and increases to common area expenses, as well as the terms and extent of personal guarantees are often overlooked by the small business owner.  The real estate attorneys at Schneider’s & Associates, L.L.P. can assist you in negotiating your next commercial lease to make sure you are as protected as possible.

Buying Property? Consider How to Hold Title

By: Ted Schneider, Esq.

You are purchasing a home, and the escrow officer asks, “How do you want to hold title to the property?” In the context of your overall home purchase, this may seem like a small, inconsequential detail; however, this decision is far from trivial. A property can be owned by the same people, yet the way title is held can drastically affect each owner’s rights during their lifetime and upon their death. Below is an overview of the common ways to hold title to real estate:

Tenancy in Common
Tenants in common are two or more owners, who may own equal or unequal percentages of the property as specified on the deed. Each cotenant is entitled to share in the possession of the entire property. Any co-owner may transfer his or her interest in the property to another individual. Upon a co-owner’s death, his or her interest in the property passes to the heirs or beneficiaries of that co-owner; the remaining co-owners retain his or her same percentage of ownership. Transferring property upon the death of a co-tenant requires a probate proceeding, unless the co-tenant had a properly prepared trust.

Tenancy in common is generally appropriate when the co-owners want to leave their share of the property to someone other than the other co-tenant(s), or want to own the property in unequal shares.

Joint Tenancy
Joint tenants are two or more owners who must own equal shares of the property. Upon a co-owner’s death, the decedent’s share of the property transfers to the surviving joint tenants, not his or her heirs or beneficiaries. Transferring property upon the death of a joint tenant does not require a probate proceeding, but will require certain forms to be filed and a new deed to be recorded. Any joint tenant may sever the joint tenancy at any time by recording a deed. For example, Paul Jones, joint tenant, could deed his interest to himself as Paul Jones, tenant in common, at any time, and the other owner of the property would never know. In such event, the parties are no longer joint tenants, but are now tenants in common.

Joint tenancy is generally favored when owners want the property to transfer automatically to the remaining co-owners upon death, and want to own the property in equal shares.

Community Property

When spouses acquire property, they can take title as community property. The spouses must own equal percentages of the property. Both spouses must consent to the transfer or mortgage of the property. Upon the death of one spouse, the decedent’s portion of the property passes to the surviving spouse unless otherwise devised by will or trust.

Living Trusts
The above methods of taking title apply to properties with multiple owners. However, even sole owners, for whom the above methods are inapplicable, face an important choice when purchasing property. Whether a sole owner, or multiple co-owners, everyone has the option of holding title through a trust, which avoids probate upon the owner’s death. Once your living trust is established, the property can be transferred to you, as trustee of the living trust. The trust document names the successor trustee, who will manage your affairs upon your death, and beneficiaries who will receive the property. With a living trust, the property can be transferred to your beneficiaries quickly and economically, by avoiding the probate courts altogether. Because you remain as trustee of your living trust during your lifetime, you retain sole control of your property.

How you hold title has lasting ramifications on you, your family and the co-owners of the property. Title transfers can affect property taxes, capital gains taxes and estate taxes. If the property is not titled in such a way that probate can be avoided, your heirs will be subject to a lengthy, costly, and very public probate court proceeding. By consulting an experienced real estate attorney at Schneiders & Associates, LLP, you can ensure your rights – and those of your loved ones – are protected.

Win Your Real Estate Lawsuit With Interlocutory Judgment

It’s not unusual for family relatives to co-own real estate: parents leave the family home to all their offspring as investment property, or siblings pool their inheritance from a deceased parent and purchase investment property. But then time passes, and eventually, there will be a sibling who does not wish to co-own property with her siblings any more. Or one of the co-owners is unable or unwilling to contribute financially to upkeep, taxes or other expenses.

Code of Civil Procedure section 872.720 (a) provides, “If the court finds that the plaintiff is entitled to partition, it shall make an interlocutory judgment that determines the interests of the parties in the property and orders the partition of the property and, unless it is to be later determined, the manner of partition.”

Code of Civil Procedure section 872.710 (b) states, “Except as provided in Section 872.730 [having to do with partnership property], partition as to concurrent interests in the property shall be as of right unless barred by a valid waiver.” (emphasis added) Parties’ interests are “concurrent” where the subject property is owned in undivided interests. [E.g. LEG Investments v. Boxler (2010) 183 Cal. App. 4th 484, 493(owner of undivided interest had absolute right to partition).]

Partition “in kind” is typically not feasible where the real estate is a single legal parcel. In that case, the court will find that partition “in kind” would be inequitable. The court has the power, in such circumstances, to order partition by sale. Code of Civil Procedure section 872.820 provides,

Notwithstanding Section 872.810, the court shall order that the property be sold and the proceeds be divided among the parties in accordance with their interests in the property as determined in the interlocutory judgment in the following situations:

(a)  The parties agree to such relief, by their pleadings or otherwise.

(b)  The court determines that, under the circumstances, sale and division of the proceeds would be more equitable than division of the property. For the purpose of making the determination, the court may appoint a referee and take into account his report.

In most real estate partition cases, it would be more equitable to sell the property than to order division. In one case we litigated, the subject property was a single residential parcel in Ventura County, and there were two residences on the parcel, which were rented out. The residences were different types, one being a small, low-rent residence and the other being a three-bedroom higher rent residence.

Courts have held that partition actions are subject to the Subdivision Map Act  Government Code section 66410.[E.g. Pratt v. Adams (1964) 229 Cal. App. 2d 602 (disallowing landowners’ attempt to circumvent Map Act by partition action because partition should not be used to defeat salutary purposes of Act).] The fact that the subject property was a single parcel meant it was more equitable to partition “by sale.”

Code of Civil Procedure section 873.240 states, “Where real property consists of more than one distinct lot or parcel, the property shall be divided by such lots or parcels without other internal division to the extent that it can be done without material injury to the rights of the parties.” Since the subject property in that case was one parcel consisting of two street addresses, dividing the property into thirds would have done material injury to the owners’ rights.

Code of Civil Procedure section 873.010 (a) provides, “The court shall appoint a referee to divide or sell the property as ordered by the court.” Section 873.040 (a) provides, “The court shall appoint as referee under this title any person or persons to whose appointment all parties have consented.” Plaintiff nominates a qualified individual to act as referee. Once the referee agrees to accept the appointment, the court will appoint the referee and the sale will occur.

We encourage you to contact the real estate attorneys at Schneiders & Associates, L.L.P. for more information or to schedule a consultation.

Forming an LLC to Purchase Real Estate

By: Ted Schneider, Esq.

Ownership of real property is a risky business. There are many ways in which users of real property can become injured, from tenants falling down stairs, injuries from construction equipment, or even an entire building collapsing from natural forces or faulty construction. Landowners often become defendants in lawsuits claiming damages from the use of their property.

Because of the inherent risks of owning real property, owners limit that risk by holding property in entities, such as LLCs, rather than their personal names. In this article, we will focus our attention on these critical considerations:

  • Entity selection strategies
  • Minimizing risk
  • Critical tax considerations based on choice of entity

ENTITY SELECTION STRATEGIES

Series LLC, Single member LLC, S-Corp, or C-Corp?

Series LLCs: Although series LLCs are flexible and hold promise, they have not yet been widely used in real estate transactions. Series LLC’s cannot be formed in California, but California recognizes series LLC’s formed in other states (e.g., Delaware).  However, California treats each unit of a master LLC as a separate entity for filing and tax purposes, essentially eliminating the utility of a series LLC in California. There are also uncertainties as to how series LLCs will be treated under federal tax law, questions about how bankruptcy courts will treat bankruptcy of one series of a series LLC, and how to protect security interests.

Single Member LLCs: Single member LLCs are often used for wholly owned subsidiaries. They have pass-through taxation, yet are treated as separate entities for liability purposes.

The primary concerns of an owner in structuring an LLC to purchase real estate include (a) creating the LLC in a jurisdiction that has the right balance of legal protection and accessibility; (b) choosing a management structure that provides fairness, protection, and expertise; and (C) documenting membership interests in ways that minimize asset protection and tax concerns.

Although the single member LLC, properly formed and managed, protects the owner from liability arising out of a claim related to the real estate owned by the LLC, in many jurisdictions, including California, an owner’s membership interest in the single member LLC will be subject to attachment by creditors for liabilities of the owner arising outside the property owned by the LLC.  For example, if the owner is subject to a large monetary judgment for a business-dealing unrelated to the real estate in the LLC, the judgment creditor can take the membership interest (and the property owned by the LLC) in satisfaction of the judgment.  This result is avoided in multi-member LLC’s.  Further, some states still shield an owner of a single member LLC from that type of liability, and consultation with a legal advisor on that topic is recommended.

In addition, if an individual owns multiple properties, it is advisable to form separate LLC’s to hold each piece of property, to prevent cross-collateralization, or putting all of the real estate at risk from a claim arising out of only one of the properties.

Corporations: Corporations may be either “C” corporations or “S” corporations. Corporations are not used for real estate investments as frequently as LLCs, because of LLCs’ preferable tax characteristics. However, there are a number of situations in which corporations do hold real property, such as part of a portfolio of assets, including equipment, inventory, and other assets of an ongoing business operation, which assets are not as negatively affected by being held in a corporation. However, if the only asset to be held by the entity is real estate, a corporation is not the recommended vehicle.

MINIMIZING RISK WHEN PURCHASING REAL ESTATE WITH LLCS

In addition to forming an LLC as a basic form of protection, owners can increase that protection by using single purpose entities, seeking limitations on guarantees, considering use of a particular state’s law, purchasing adequate insurance, and carefully drafting the operating agreement.

An experienced business attorney at Schneiders & Associates, LLP can provide advice and assistance regarding the best practices mentioned above for minimizing risks.

CRITICAL TAX CONSIDERATIONS BASED ON CHOICE OF ENTITY

Partnerships (and LLC’s taxed as partnerships) and S corporations have pass-through taxation, which means that tax is assessed on the member, partner, or shareholder obtaining income, rather than on the entity itself. By contrast, C corporations are taxed first at the entity level and then, a second time, at the shareholder level. LLCs can elect to be taxed as corporations, but when holding real estate, an LLC should elect to be taxed as a partnership.

An S corporation must divide profits according to share ownership. By contrast, an LLC can divide profits in any way it chooses. Part of the flexibility of partnerships (including LLCs taxed as partnerships) is that they can set up different classes of owners with different benefits.

Members of an LLC may be able to deduct business losses on their individual income tax returns, which is a benefit of LLCs taxed as partnerships. However, deduction of losses is subject to various tax restrictions, such as risk of loss rules and passive loss limitations.

LLCs usually can be converted to other types of entities without tax consequences, in contrast to conversion of corporations.

In California, LLC’s are subject to a $800 franchise tax each year, just like a partnership or corporation.  However, LLC’s are also subject to an additional tax called a gross receipts tax.  This tax is calculated based upon the LLC’s annual gross revenues, and can be as much as $11,790 per year.

Forming an LLC to Purchase Real Estate is an expansive topic with many important considerations. While this article highlights critical considerations, this list is not exhaustive. For more information on forming an LLC to purchase real estate, contact an experienced business attorney at Schneiders & Associates, L.L.P.

Negotiating a Commercial Lease

By Roy Schneider, Esq. 

Negotiating a Commercial Lease? Be Sure to Address These Issues

When it comes time for your business to move into a new commercial space, make sure you consider the terms of your lease agreement from both business and legal perspectives.  While there are some common terms and clauses in many commercial leases, many landlords and property managers incorporate complicated and sometimes unusual terms and conditions.   As you review your commercial lease, pay special attention to the following issues, which can greatly affect your legal rights and obligations.

The Lease Commencement Date

 

 

Commercial leases typically will provide a rent commencement date, which may be the same as the lease commencement date. Or not. If the landlord is performing improvements to ready the space for your arrival, a specific date for the commencement of rent payments could become a problem if that date arrives and you do not yet have possession of the premises because the landlord’s contractors are still working in your space. Nobody wants to be on the hook for rent payments for a space that cannot yet be occupied. A better approach is to avoid including in the lease a specific date for commencement, and instead state that the commencement date will be the date the landlord actually delivers possession of the premises to you. Alternatively, you can negotiate a provision that triggers penalties for the landlord or additional benefits for you, should the property not be available to you on the anticipated rent commencement date due to the fault of landlord’s contractors.

Lease Renewals

 

 

Your initial lease term will likely be a period of three to five years, or perhaps longer. Instead, you may be able to negotiate a shorter initial term, with the option to extend at a later date.  This will afford you the right, but not the obligation to continue with the lease for an additional period of years.   Be sure that any notice required to terminate the lease or exercise your option to extend at the end of the initial lease term is clear and not subject to an unfavorable interpretation. Carefully calendar the dates on which to exercise your option to extend the lease.

Subletting and Assignment

If you are locked into a long-term lease, you will likely want to preserve some flexibility in the event you outgrow the space or need to vacate the premises for other reasons. Be careful to review the limitations and procedures applicable to requesting the landlord’s permission to assign or sublet the space. Assigning or subletting your leased space without complying with the exact terms required by the lease often will result in an un-curable default of the lease and give the landlord the right to terminate the lease.

Subordination and Non-disturbance Rights

What if the landlord fails to comply with the terms of the lease? If a lender forecloses on your landlord, your commercial lease agreement could be at risk because the landlord’s mortgage agreement can supersede your lease. If the property you are negotiating to rent is subject to claims that will be superior to your lease agreement, consider negotiating a “non-disturbance agreement” stating that if a superior rights holder forecloses the property, your lease agreement will be recognized and honored as long as you fulfill your obligations according to the lease.

These represent just a few of the myriad provisions in a standard commercial lease that require special attention and care in review.  If you are considering leasing commercial space for your business, please contact one of the expert real estate attorneys at Schneiders & Associates, L.L.P. to review your lease, make you aware of potential costs and pitfalls, and assist you with negotiations.

Common Area Expenses in Commercial Leases

By Theodore J. Schneider, Esq.

There are three primary different types of commercial leases: gross leases, modified gross leases and net leases.  One variation of the net lease is a “triple net” lease, in which the tenant is liable for a net amount of property taxes, insurance and common area maintenance relating to the property they are possessing.  Most of the time, additional fees in the form of common area maintenance expenses come up in the context of a triple net lease.  Landlords ask tenants to pay these fees so that tenants contribute to the cost of maintaining common areas such as entranceways, walkways, parking lots and elevators, as well as services enjoyed by the tenants such as janitors, security and landscapers.  These fees are in addition to a rental payment and can be substantial depending upon the situation.  These fees are typically charged on a pro rata basis, based upon the square footage of each tenant’s premises, as compared to the square footage of the project as a whole.

It is essential that a business owner be informed about the terms of the lease they are entering into, especially if these terms have the potential to cost them money.  As common area expenses can be a significant cost they are often controversial and hotly negotiated.  Most of the disagreements over these terms relate to the distinction between costs for the maintenance of common areas, and expenses that should be the landlord’s responsibility, such as significant upgrades to common area infrastructure or capital improvements.  Generally, the test is who will benefit most from the expense, the tenant or the landlord.  For example, it can be argued that tenants should not be paying for improvements that are being done to increase the overall value of the property because the landlord will be the primary beneficiary of these improvements.

When negotiating common area expenses, the business owner should inquire as to the purpose of the payments.  In some instances, the tenant is only responsible for increases in common area expenses over a defined base year.  Prospective tenants should also ask whether they will be able to review what the landlord is spending the money on at any given time, and whether the landlord is adding an administration or overhead fee for managing the common area.  Business owners should seek the advice of an attorney, who will be able to explain many of the options available to them.  For example, there might be an opportunity to ask for a cap on common area expenses, or a fixed rate.  Most importantly, tenants should be informed about their legal options in the event of a dispute.

If you are contemplating signing a commercial lease and you will be responsible for common area expenses, it is in your best interest to consult with a real estate attorney to ensure you understand your potential liability before signing on the dotted line.

The real estate attorneys at Schneiders & Associates, L.L.P. are expert in interpreting and negotiating commercial leases, and would be happy to guide any prospective tenants through the process.

Overview of the Ways to Hold Title to Property

 

By Roy Schneider, Esq.

You are purchasing a home, and the escrow officer asks, “How do you want to hold title to the property?” In the context of your overall home purchase, this may seem like a small, inconsequential detail; however nothing could be further from the truth. A property can be owned by the same people, yet the manner in which title is held can drastically affect each owner’s rights during their lifetime and upon their death. Below is an overview of the common ways to hold title to real estate:

 

Tenancy in Common

Tenants in common are two or more owners, who may own equal or unequal percentages of the property as specified on the deed. Any co-owner may transfer his or her interest in the property to another individual. Upon a co-owner’s death, his or her interest in the property passes to the heirs or beneficiaries of that co-owner; the remaining co-owners retain their same percentage of ownership. Transferring property upon the death of a co-tenant requires a probate proceeding or another post-death transfer.

Tenancy in common is generally appropriate when the co-owners want to leave their share of the property to someone other than the other co-tenants, or want to own the property in unequal shares.

Joint Tenancy

Joint tenants are two or more owners who must own equal shares of the property. Upon a co-owner’s death, the decedent’s share of the property transfers to the surviving joint tenants, not to his or her heirs or beneficiaries. Transferring property upon the death of a joint tenant does not require a probate proceeding, but will require certain forms to be filed and a new deed to be recorded.

Joint tenancy is generally favored when owners want the property to transfer automatically to the remaining co-owners upon death, and want to own the property in equal shares.

Community Property

Community property exists for married couples or registered domestic partners, and only exists in some states.  With community property, the surviving spouse receives a “step-up in basis” when the first spouse dies. This means that the basis value of the property is raised to the fair market value on the date of death of the first spouse. This can be a huge advantage to couples who may have bought their property for a much lower value than present values.

Holding property as community property does not guarantee the property to be distributed to the surviving spouse or partner however. A person can transfer their half of community property to someone else. To avoid that, property can be held as “Community Property With Right of Survivorship”, which not only allows for a step-up in basis, but also acts like a joint tenancy with an automatic right of survivorship between spouses or partners.

Community property is only accumulated after the date of marriage, therefore all property acquired after marriage is presumed to be community property in California. All property acquired by a spouse before marriage is the separate property of that spouse. If a spouse owning separate property wants to keep it as separate property, a Prenuptial Agreement would be best. The Prenuptial Agreement can set forth the couple’s property and what will stay separate property during, or after, the marriage. Alternatively, a couple can execute a Marital Property Agreement, which transmutes property from separate property to community property.  Either way, a written agreement with the property details, signed by both spouses, is the best way to make sure that the couple’s property is treated correctly.

Living Trusts

The above methods of taking title apply to properties with multiple owners. However, even sole owners, for whom the above methods are inapplicable, face an important choice when purchasing property. Whether a sole owner, or multiple co-owners, everyone has the option of holding title through a living trust, which avoids probate upon the property owner’s death. Once your living trust is established, the property can be transferred to you, as trustee of the living trust. The trust document names the successor trustee, who will manage your affairs upon your death, and beneficiaries who will receive the property. With a living trust, the property can be transferred to your beneficiaries quickly and economically, by avoiding the probate courts altogether. Because you remain as trustee of your living trust during your lifetime, you retain sole control of your property.

Use of LLCs for Property

Holding title to a property within a Limited Liability Company can provide an extra layer of liability protection for the owners. When combined with proper insurance, such an entity can prove very beneficial for property owners with multiple assets.

LLCs can be especially helpful for non-married persons owning property together for other reasons. The LLC Operating Agreement can set forth a sort of “tenancy agreement” for the parties, including agreements concerning paying for repairs, choosing to do maintenance, and determining what happens if one of the owners passes away. These agreements – whether within an LLC or just a written agreement between owners – are very advantageous, as they can avoid arguments between the owners and can save time and money down the road.

How you hold title has lasting ramifications on you, your family and the co-owners of the property. Title transfers can affect property taxes, capital gains taxes and estate taxes. If the property is not titled in such a way that probate can be avoided, your heirs will be subject to a lengthy, costly, and very public probate court proceeding. By consulting an experienced real estate attorney, you can ensure your rights – and those of your loved ones – are fully protected.

The Risks of Tenant-in-Common Investments

By Roy Schneider, Esq.

Historically, tenant in common (TIC) projects were owned by a relatively small group of investors who knew each other, such as long-time friends, business partners or family members. Strategies to maximize tax savings and preserve equity typically guided investors to this type of structure, rather than creating a limited liability company or partnership to own the property.

In the late 1990s, real estate sales in the form of tax-deferred 1031 exchanges created a new industry. Promoters began soliciting and pooling funds from investors to purchase real estate. Participation in the pool helped investors find replacement property to guarantee their capital gains tax deferment continued.

In 2002, the IRS clarified when this type of pooling is considered a partnership interest as opposed to a TIC interest, a critical distinction for investors using funds from a 1031 exchange transaction. Following that, investments in TIC interests grew considerably due to the numerous advantages. For those who needed a place to invest their 1031 exchange funds quickly, TIC interests provide a relatively simple way to ensure the funds are spent within 180 days of the sale of the previous property, without the hassle of researching, investigating, negotiating and financing a property in less than six months. TIC investors do not have to burden themselves with the day-to-day management of their investment property. Finally, TIC investors can pool their resources to purchase fractional shares of investment-grade property which would otherwise be out of reach.

With all of its advantages, the TIC interest also carries its share of risks. For example, many TIC promoters charged fees that were excessive, or sold the property to the investors for more than it was worth. If property values decline or purchase loans mature, it may be difficult to refinance, forcing the property into foreclosure and taking the entire investment with it.

Other promoters failed to maintain reserve funds separate for each property. If a promoter filed for bankruptcy and did not properly use the reserve funds, TIC investors were left with no recourse and were forced to cover the reserves out of their own pockets or risk losing their investment.

Further risks are caused by the investors themselves and the nature of their relationship to one another – or lack thereof. Owners of TIC typically do not know each other. Decisions regarding TIC governance often require unanimous agreement by all owners, and just one objection can grind the action to a halt. When owners don’t know each other, or are spread across many states, it can be difficult to communicate and obtain a unanimous agreement.

Despite the risks, TIC interests can still be a good place to park your money – but you must be a cautious, diligent purchaser. Visit the property, seek information from sources other than the promoter, and thoroughly evaluate the past and projected financial data. Ask questions and seek the advice of your professional advisors. 

The real estate attorneys at Schneiders & Associates, L.L.P. are available to assist you in the review of proposed investments in TIC projects.

New Lease Rules

Effective July 1, 2013, commercial leases and rental agreements will need to contain a statement by the landlord as to whether the commercial property being leased or rented has undergone an inspection by a Certified Access Specialist. If the property has undergone such an inspection, the disclosure must state whether the property has or has not been determined to meet all applicable statutory construction-related accessibility standards. Civ. Code, § 1938In addition, commencing July 1, 2013, owners of certain commercial buildings are required to disclose to tenants and prospective tenants energy consumption information relating to the building, thus further implementing the Energy Star Benchmarking requirements promulgated as part of AB 1103 and subsequently, AB 531. Specifically commencing July 1, 2013, any commercial building with total gross floor area measuring in excess of 50,000 square feet must disclose energy benchmarking data to tenants leasing the entire building. Commencing on January 1, 2014, this requirement is expanded to include buildings with a total gross floor area measuring in excess of 10,000 square feet, and commencing on July 1, 2014, this requirement is further expanded to include buildings with a total gross floor area measuring at least 5,000 square feet.

Whether you are a landlord or prospective tenant, it is important to make sure your lease not only provides the benefits and protections you require, but that it is fully compliant with all statutes and regulations.  If you would like a review of your lease or assistance in negotiating its terms, contact the real estate attorneys at Schneiders & Associates, L.L.P.