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 !