Real estate is a complicated subject, especially if it’s not your area of expertise. With the various components that make up any real estate transaction, it’s easy to overlook important details. At a minimum, residential buyers are typically advised to have a property inspected and have a legal expert review their documents before they finalize a purchase.
Commercial property transactions are often more complex. There may be boundary issues, zoning ordinances, environmental questions, liability concerns, and tax considerations to sort out. Commercial property buyers also may be able to benefit from unique financing options, such as HVCRE and 1031 Exchanges.
As the real estate industry continues to evolve, there are new questions related to property ownership. For instance, a growing number of homeowners are using their residences for short-term rentals to earn extra income. But what about local zoning laws? Is it legal in every municipality to rent out a residence to vacationers?
The following real estate experts can offer you their insight and guidance regarding various aspects of dealing with real estate, and can help you plan ahead to enhance your property’s value. As always, working with the right professionals can save you time, money, and headaches.
Q: What type of deed should I require of my seller when acquiring real estate in Michigan?
A: In Michigan, three types of deeds are commonly used, each presenting varying degrees of recourse for the buyer:
The“strongest” deed and most protective of a buyer, it includes a warranty that the seller has clean title to the property and no encumbrance or lien exists. If one is discovered, you have the ability to pursue your seller.
Quit claim deed
The “weakest” deed and least protective of a buyer, it simply conveys any interest the seller may have in the real estate, without any ability for you to seek recourse for title issues.
A middle ground, it includes a limited warranty, covering the period of the seller’s ownership (not before).
It is wise to consider how to address unforeseen title issues and related liability when entering into initial negotiations with your seller. The purchase agreement is the appropriate/customary stage at which to confirm what type of deed will be delivered at closing.
Q: I’m thinking about buying a commercial property or acquiring one through a company acquisition. What do I need to consider?
A: There are four important aspects to purchasing commercial real estate:
Ownership/protection from liability
In most scenarios it makes sense to form an LLC to own the property, which will insulate and protect the operating company/members from liability.
Know what you’re buying. Review the title commitment for property encumbrances or rights others may have. Check zoning to see if you’re permitted to operate your business as you desire. Get the building inspected. Have a qualified HVAC inspector check all systems. Environmentally, confirm the property isn’t contaminated. Have the parcel surveyed. A lot of times neighbors encroach on the property line, so know the legal boundaries. It also helps eliminate certain exceptions on the title policy.
Title policies are pretty straightforward. However, endorsements broaden your coverage. With approximately 100 options, you need to determine which apply.
Traditional bank financing is most common. However, seller financing is also possible. Each scenario requires careful negotiation to ensure the company can meet the obligations.
Buying a commercial property can be overwhelming, if it’s not managed properly. As an experienced real estate attorney, Nicholas Chapie can help you be certain you’re not overlooking anything. Please contact him with any questions.
Q: What are the benefits of adding solar power to my commercial property?
A: Adding solar power to commercial real estate provides the building owner with a reliable source and levelized cost of electrical power for 30 years. Battery technology has improved dramatically in the past two years, making it affordable to offset time-of-use rates that utility companies charge commercial customers. Power Home Solar only uses Tier 1 suppliers. American-made solar panels, invertors, and Michigan-made solar racking systems provide customers with high-quality equipment that’s warrantied for 20 to 30 years.
Q: What’s the deal with short-term rentals?
A: Short-term rentals of residential real property are a hot button issue nationwide, and Michigan is no exception. Online platforms such as Airbnb, VRBO, and HomeAway have made it easy for homeowners to connect with guests seeking alternatives to hotels and traditional vacation rentals. The quick rise of short-term rentals has led to controversy due to the conflicting interests of the homeowners, who want to be able to generate income from their properties, and their neighbors, who are concerned about the potentially negative impact of transient occupants.
Several municipalities in Michigan have stepped in and attempted to regulate these types of rentals, but the regulations have been inconsistent, and the rules can vary drastically from municipality to municipality. In late 2018, the Michigan Court of Appeals issued an unpublished opinion upholding a municipality’s right to restrict short-term rentals. (See Concerned Property Owners of Garfield Township Inc. v Charter Township of Garfield, unpublished per curiam opinion of the Court of Appeals, issued October 25, 2018 [Docket No. 342831].)
In response, the Michigan Legislature has been considering amendments to the Zoning Enabling Act, which would prevent municipalities from prohibiting short-term rentals. If passed, Michigan would become one of several states with laws protecting the rights of homeowners to rent their homes as vacation rentals.
Q: What is HVCRE?
A: HVCRE is a term born out of the Great Recession in 2008, when banks suffered enormous losses in land, A&D, and construction loans. In 2010, the FDIC established a new category of high-risk bank loans called High Volatility Commercial Real Estate loans (HVCRE).
The FDIC defines an HVCRE loan “as a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property.” Therefore, any commercial real estate loan used to acquire, develop, and construct commercial, income-producing real property, where the future income or sale of such property will be used to repay such loan, is an HVCRE ADC loan.
However, there are exceptions. If a loan appears to be HVCRE, but falls into one of the following categories, it is disqualified:
- One to four family residential properties.
- A loan that qualifies as community development.
- Agricultural land.
- A loan that meets all of the following criteria:
- The borrower has contributed at least 15 percent of the as-complete value as equity in the form of cash.
- No distributions are allowed until refinanced into a permanent loan.
- The loan-to-value is less than or equal to the maximum supervisory loan-to-value limits.
Q: What are the benefits of a 1031 Exchange?
A: With property values as high as they are, and with it being a seller’s market, the advantage of executing a 1031 Exchange is excellent. The primary benefit is deferring taxes on the gain you would otherwise realize if you’re buying another property with these same funds. As long as you do a “like-kind exchange,” real property to real property, you essentially can move into the new property without having a taxable event today from the sale of the property you already own.
If the property you’re acquiring is priced higher, you’ll be able to defer all of the taxes; if it’s lower, you pay tax on the difference. For example, if you sell a $100,000 property and buy a $50,000 property, you’ll pay tax on the $50,000 gain; the amount you’re investing in the new property is deferred. Because you’re paying capital gains tax rates, it is preferred that long-term rates apply, which would be capped at 20 percent rather than having the short-term rates taxed as regular income.
A 1031 Exchange has some strict requirements which must be followed to defer the taxes. You need the proper documentation and you must use a qualified intermediary to handle the transaction. If you don’t follow the rules properly, your property sale becomes a taxable event.