Can you use drones for commercial purposes in commercial and residential real estate ?

As of the writing of this blog post, no.

In official FAA terminology, a drone is known as a UAS -- an Unmanned Aircraft System.  The FAA is charged with charged with regulation and enforcement of all air traffic laws, but it was only very recently that it made any official legal pronouncements concerning UASs.

Despite a little early litigation, the FAA has recently announced, loudly and consistently, in numerous official statements and press releases, that it DOES consider a UAS to be an aircraft that is subject to their rules and regulations.

In March of 2014, the FAA went on a “mythbusting” mission to try and educate the public about common myths concerning drones.  Here is their press release, found at http://www.faa.gov/news/updates/?newsId=76381.

Since asserting jurisdiction over drones, however, the FAA has made it clear that recreational use of drones does NOT require any special permit or license.  However, there are limitations to the definition of exempt recreational use:

1. The unmanned aircraft must be flown solely for hobby or recreational use.  (If you pay someone to fly a model plane or drone, or pay a fee to watch it, that is commercial use and requires special permits from the FAA.)
2. The aircraft must not weigh more than 55 pounds.
3. The aircraft cannot interfere in any way with manned aircraft
4. The aircraft cannot be flown within five (5) miles of an airport unless prior notice given to both the airport operator and the air control tower.        
5. The aircraft must be operated “in accordance with a community based set of safety guidelines and within the programming of a nationwide community-based organization.”

For commercial use, however, a UAS may not be flown unless the operator has one of the following permits from the FAA:

1.         Certification of Airworthiness:  This is a full civil type of certification process that allows for not only commercial flight, but also manufacture and production.  It entails a very lengthy application, and a very long approval process.  It is used primarily by manufacturers.

2.         Certificate of Waiver or Authorization (“COA”):    This is given on a case by case basis, and it waives compliance with certain FAA regulatory requirements.  The FAA has traditionally given these to governmental entities for scientific research, or on an emergency basis for search and rescue operations.

3.         Special exemption from the FAA:    Where the applicant has demonstrated to the agency why the exemption is in the public interest, and how the flight would not adversely affect public safety.  This type of exemption was recently (9-25-14) granted to six (6) aerial photo and video production companies – took over two years, lots of lawyers and money, and probably some inside lobbying of the US Secretary of Transportation.

Bottom line:   Real estate brokers and agents may not use UAS / drones for commercial use as of this blog post. (At least, not without one of the 3 permitting processes above.)

To our knowledge, no such permit has ever been pursued or granted for real estate purposes. NRT / Coldwell Banker recently issued a nationwide advisory to all its agents to discontinue use of drones until further notice, and the National Association of Realtors® (NAR) has advised the same thing to all its members.

The enforcement mechanisms available for violation of these UAS regulations consist of verbal / informal warnings, formal warning / cease and desist letters, fines and civil penalties, and judicial enforcement.

There is, however, hope on the horizon.  In the FAA’s 2012 reauthorization legislation, Congress required the FAA to come up with a plan (i.e., rules) for “safe integration” of commercial / civil UAS use by September 30, 2015.   The agency is working on rules as of the writing of this post.  One FAA press release suggested they would publish a proposed rule for comment in November 2014, but have not seen anything yet.

NAR is also at the table with the FAA, pushing them to write rules which allow agents and brokers to fly or employ drones for their commercial use, without overly burdensome regulation.

However, according to recent FAA press releases, “safe integration will be incremental.” 

One comment (unofficial) from such press release, issued March 7, 2014, states “[o]nce enabled, we estimate roughly 7500 commercial sUAS [small UASs] would be viable at the end of five years.”    This comment suggests that the drone permitted floodgates are NOT going to suddenly open, with the skies buzzing with drones.  We expect a limited number of drone operators who do this professionally, for agents, for a fee. 

Stay tuned for more information on this topic as regulations and comment develop.

Estoppel Certificate

What is it ?

 In real estate the term usually means a certificate or form filled out by a tenant and delivered to the landlord (which is then delivered by landlord to a buyer or lender) which confirms and “nails down” certain things about the lease:

                1.            monthly rental amount

                2.            termination date of the lease
                3.            Any extensions granted in the lease ?
                4.            Amount of security deposit held by landlord
                5.            any rental prepaid to landlord ?
                6.            is the landlord in default under the lease ?  if so, how ?
                7.            Does Tenant claim any offsets against the rent owed ?

“Estoppel” is a legal concept by which the written statement cannot later be controverted in court or otherwise.   A buyer is entitled to rely on an estoppel certificate, but be careful that it is not too old.  One should also make sure an estoppel certificate is signed by the true tenant, and not the landlord as the tenant’s “attorney in fact,” which is permitted by some leases.

Estoppel certificates are not required in the basic TREC form.  They are commonly called for in commercial contracts.  Be sure to obtain attorney help if modifying the TREC form for this. Just calling for the seller to deliver an estoppel certificate, without a specific form attached, or standards for the certificate, will lead to problems.

Estoppel certificates are a good due diligence tool if buying income producing property – but it is best to require their delivery during option period.

How to paper a real estate trade

     A property swap or trade can be simply defined as the trade or exchange of one tract of real property for another.    This trade can be even – property for property – or uneven, where one party pays additional cash or other compensation (e.g., a mortgage note) to even out the trade.   This additional cash or compensation is called “boot.”

How is it accomplished ? 

     1.         Let’s say Charles Kramer and Karl Hunter wish to trade homes.  Charles owns 202 Carlton and Karl owns 303 Stefani. 

     2.         We draft two (2) TREC Resale Contracts (this is for residential property in Texas -- your contract may vary for commercial or other jurisdictions), one for each home to be traded.  Charles selling 202 Carlton to Karl and Karl selling 303 Stefani to Charles. 

     3.         Price / para 3:   In each contract simply insert “See para. 11” or “See Addendum A” (if more room needed)

     4.         202 Carlton, para 11 or Addendum A:

“Buyer is purchasing the Property in consideration of Seller’s simultaneous purchase of Buyer’s property located at 303 Stefani, [city state and zip] (“Buyer’s Property”), as part of a simultaneous swap or exchange, between Seller and Buyer, of the Property and Buyer’s Property.   All of the terms and conditions of the sale / trade / exchange of Buyer’s Property to Seller, which are contained in another contract of even date herewith and attached hereto, are also incorporated herein by reference, and both contracts shall be deemed to be part of a single agreement.”

Add, if applicable:   “As part of the purchase price, Buyer is also paying the additional sum of $______________ as additional consideration to Seller, in addition to the sale and conveyance of Buyer’s Property.”

Add, if applicable:  “Such additional consideration shall be paid as set forth in para 4.”

 

     5.         303 Stefani, para 11 or Addendum A:   [same thing, just reversed]

“Buyer is purchasing the Property in consideration of Seller’s simultaneous purchase of Buyer’s property located at 202 Carlton, [city state and zip] (“Buyer’s Property”), as part of a simultaneous swap or exchange, between Seller and Buyer, of the Property and Buyer’s Property.   All of the terms and conditions of the sale / trade / exchange of Buyer’s Property to Seller, which are contained in another contract of even date herewith and attached hereto, are also incorporated herein by reference, and both contracts shall be deemed to be part of a single agreement.”

Add, if applicable:   “As part of the purchase price, Buyer is also paying the additional sum of $______________ as additional consideration to Seller, in addition to the sale and conveyance of Buyer’s Property.”

Add, if applicable:  “Such additional consideration shall be paid as set forth in para 4.”

 

     6.         Closing date, option period, and any and all other contingency deadlines should match EXACTLY.  In a trade, the fewer contingencies, the better.   If there are option and financing contingencies, consider adding the following in para. 11 or addendum A:

“If Buyer terminates this contract pursuant to any valid and unexpired right of termination hereunder, such termination shall also operate to terminate the other attached contract for the sale / trade / exchange of Buyer’s Property to Seller, and all earnest money, if any, shall be returned to each buyer under each such contract.”

 

     7.         Mortgages:    Each property should be delivered and conveyed free and clear of any mortgage of each seller / owner.  If there is boot coming in to the transaction and escrow, that may be enough to pay off the mortgage of the larger residence. 

             NOTE:  if the incoming boot is insufficient to payoff the mortgage, or it is an even exchange (no boot), then the seller of each property will and should be obligated to pay off their mortgage at closing with their own funds.  If they cannot, the swap cannot work (unless some sort of rare, dual mortgage assumption is to be arranged). 

 

     8.         Closing costs / title policy:   Each property should be title insured and probably the best allocation of these costs is to have each buyer pay all closing costs (including the title policy) required for their own, respective acquisition.   Some additional suggested language:

“Notwithstanding anything herein to the contrary, Buyer shall pay for all closing costs (except prorations, as set forth below) herein, including the owner’s policy of title insurance.”

 

     9.         Prorations:    this is typically a debit against the seller’s proceeds and a charge against Buyer’s closing costs – but in a swap, there may not be any “funds” going to Seller that can be deducted for prorations.  This may result in closing costs for such prorations being, literally, paid by Seller and disbursed to Buyer, at closing—all as shown on the closing statement. 

     10.       Tax issues

                  A.        The tax basis in 202 Carlton becomes the basis in 303 Stefani, and vice-versa (they are likewise swapped).  

                  B.        Boot is taxable, and is taxed to the extent capital gains are triggered on the boot portion (under current law, if boot received, minus basis, is >$250K if single, >$500K for family)

                  C.        If no boot (e.g., an even exchange), this is a simultaneous exchange and may not be considered a sale or taxable event at that time.

                  D.        1031 process is not required – that is for a time-deferred transfer and not one where the exchange is simultaneous.

                  E.        This is a very complex area – tax counsel is STRONGLY recommended !

Understanding rollback taxes and ag exemptions

Rollback taxes can be defined as property taxes that are assessed due to the loss of an agricultural exemption on the property, for periods of time that PRECEDE the removal of that exemption. Only ag-exempt land can have rollbacks tax liability.  The rationale is that because the taxing authorities gave the landowner a huge tax break for many years for using the land as agricultural, then such taxing authorities should get to re-capture some prior years of lost tax revenue if and when that use changes.

 There are two types of ag exemptions:

1.            An exemption Texas Tax Code, Chapter 23, Subchapter C, for “true” ag land.

This type of exemption is less common.   To be eligible, “agriculture” must be the “primary occupation and primary source of income” for the landowner / applicant.

This is exemption is primarily intended for, and used by, true farmers or ranchers.  

The exemption is lost / removed if the land under the exemption is either sold or diverted to a non-agricultural use. The rollback period is THREE (3) years preceding the year in which the exemption was removed.

This exemption is sometimes referred to as the “1-D exemption”

2.            An exemption under Texas Tax Code, Chapter 23, Subchapter D, for “open space” Ag land.

This is the more common ag exemption.  The landowner does not have to be in the business of agriculture as their primary occupation, or at all.   Real estate investors use this exemption to keep their taxes / carrying costs low, while holding the land for investment purposes and eventual re-sale.   Usually the investor leases the land out to a farmer for crops or cattle or both, and that use permits the exemption to be earned.   Sometimes the tract is so large and the tax savings so large that the landowner will actually PAY the farmer to farm the land (payments are usually minimal).

Most ag leases are terminable on 30 days notice, but termination before crop harvest may have “crop damage” payments due from the landlord for loss of ability to harvest.

This exemption is lost / removed if the land under the exemption changes its use, whether by the current owner or a new owner.  Note that sale is not an automatic trigger – change of use is.

Sometimes partial sales and development of tracts within a large ag tract will cause the loss of the exemption on the entire tract, and owner may have to protest or re-apply.

The rollback period is FIVE (5) years preceding the year in which the exemption was removed.

This exemption is sometimes referred to as the “1-D-1 exemption”

_______________________ 

When selling ag-exempt land, there are several issues to consider.  Since rollbacks are going to be an expected liability, it is best to get them calculated prior to marketing the property.  Title companies can hire their tax services to do this, and some appraisal districts will do this as well.  

Then, account for this cost in the negotiations.  These rollback taxes can be paid by seller or buyer in the contract.  Look closely at this section of the contract and modify as needed. 

Should a seller terminate an ag lease ?  It depends.  If the purchaser intends to convert ag property to a different use, yes. 

But if the purchaser is an investor, and wants to hold the property for later sale, it may want the seller to keep the ag exemption in place and keep the taxes low .   It’s a good idea to discuss this issue with the purchaser, as they will be eventual owner of the ag land. 

And be careful about terminating before feasibility of purchaser has expired.  What if the purchaser walks on the deal ?  Then the lease is gone and the ag exemption may be lost. 

Are contracts freely assignable ?

Real estate contracts, like most other contracts, are generally assignable unless (i)  assignment is prohibited by the contract, (ii)  assignment would materially alter the duties of or increase the risk to the non-assigning party, particularly where the skill, character, or credit of the assigning party is important, or (iii) the assignment is prohibited by law or public policy.  Lancaster v. Greer, 572 S.W.2d 787, 789 (Tex. Civ. App. -- Tyler 1978, writ ref'd n.r.e.);  Zale Corp. v. Decorama, 470 S.W.2d 406, 408 (Tex. Civ. App. -- Waco 1971, writ ref'd n.r.e.).

 In our opinion, the character or credit of the buyer is usually important to a seller.  A buyer should not presume that they can freely assign, and they risk a lawsuit by a seller if they do so without written consent, either from the seller or in the contract.

Putting “and/or assigns” following the buyer’s name in the contract is the quick and dirty method to expressly permit the assignment of the contract by a buyer.  Is the Seller released after assignment ?  

Probably not unless the contract expressly says so. However it is not totally clear – a good assignment clause which makes this issue clear would be better.  In these instances, both assignor and assignee are probably jointly and severally liable to the seller.

When it is time to assign, an assignment of contract form can usually be provided by the title company or their counsel.   This form is signed only by original buyer (the “assignor”) and the new buyer (“assignee”). A copy is then provided to title company, all brokers, and the seller. The assignee generally / usually agrees to indemnify and hold the assignor harmless from breach of contract claims that arise from conduct post-assignment.    The assignor generally / usually agrees to indemnify and hold the assignee harmless from breach of contract claims that arise from conduct pre-assignment.

My buyer / seller died. Now what ?

A real estate contract does NOT terminate at the death of a party, and the estate of a party is bound by that contract if the other side wants to try and enforce that contract in a court of law – which would probably be a probate court.    The still living party would perhaps even have to OPEN a probate action on the estate of the other party to the contract.  

The reason that most deals “die” with the death of the party is the cost and trouble to do exactly this.  

And most folks do not see the sudden and unexpected death of a party as a default, and thus it is common and perhaps inherently fair to release the earnest money back to the buyer and for both sides to say “sorry, we tried.”

The title company, in releasing the earnest money, usually just wants some semblance of authority on behalf of the deceased party to sign a release.  So if the buyer died, then the title company would try to ascertain who the intestate “heirs” of that buyer are – often the spouse, or the kids if the person is single.   That heir or heirs would sign the release on behalf of the deceased buyer’s estate (no, they don’t need to probate the will unless perhaps we are talking about a huge commercial deal and huge earnest $$) and the seller would also, and we would be on our way.

If the deceased was the seller – same idea.   Heirs would be determined (title company will help with that) and they would sign the release and the buyer would also, and the earnest money would, in our perfect scenario, be returned to the buyer.

Could you have a situation where the death of the party is viewed as a “default” by the other party, for failure of their estate to close on the contract as written, and they want the earnest money ?  Perhaps, but death right before closing is rare enough.   Death right before closing coupled with unreasonable sellers is even rarer. 

Ha !!  I’m being tacky.   But I have a point of view, and its entirely personal.  I think if you die, the other side should give your heirs a break and not punish them financially for your sudden demise.   But not everyone has to feel that way.

  

Same-sex couples face challenges to co-own real estate

Presently the State of Texas does not recognize same-sex marriage.  Implicit in the current state of the law is the inability for a same sex couple, even one married legally in a state which recognizes such marriage, to obtain a divorce in a Texas court.

So if a same sex couple desires to hold title to Texas real estate, jointly, how do they deal with such real estate when they no longer wish to remain together ?    Unlike an opposite sex marriage, such couples cannot use a divorce court to divide assets of the marriage.  Unfortunately, some same sex couple just accept such limitations and have made little planning to deal with the potential problems of jointly owned real estate.

Some couples use a "joint tenancy" or "joint tenancy with right of survivorship" to jointly hold title to real estate -- but there are some limitations imposed by such ownership.   First, Texas law does not favor joint tenancies and construes any attempt to create them very strictly.  They must be created with the written agreement of both joint tenants, and clearly evidence their intent to create a joint tenancy where the survivor would take title to the whole of the jointly owned property.   Careful drafting must be used to ensure that a true joint tenancy, with survivorship qualities, is created.

Second, a joint tenancy only deals with one situation -- death.  It does not deal with the need of one  joint tenant to buy the other out, or to sell if the other owner does not desire to sell.  Without good real estate planning, the only recourse for two co-owners who cannot file for divorce in Texas is to file a partition lawsuit to ask a court of law to divide the jointly owned property -- or, in the case of a single family residence, which often cannot be truly and fairly divided, to order the property sold and the proceeds split.   Such lawsuits are expensive and slow.

The best solution currently available in Texas is for same-sex couples to take title in a well crafted limited liability company or limited partnership.  These vehicles can be drafted to contain buy-sell provisions, to allow one co-owner to trigger a buyout or sale of the other co-owner, to allow sale to third parties, to grant preferential rights to purchase the other co-owner's interest before sale to third parties, and dissolution of the partnership in the event of bankruptcy, death, or other events of "default" however defined by the agreement.  Holding title in a business partnership is perhaps the best way for same sex couples to jointly own real estate in Texas.