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Real Estate Q&A
Whether you’re on the buying or selling side of a real estate transaction, or you’re negotiating a lease, how do you know your interests are being considered? How do you know you’ve made the best deal possible? You may not have that confidence unless you’ve consulted with experienced real estate experts who can advise you appropriately. When you engage a real estate professional with the knowledge you require, you can ask questions, get the information you need, and make better decisions.
We all know the old adage “location, location, location” applies to residential real estate. Where the property is situated and what’s going on in the area can be the driving force in determining both the current and future value of a home. Contracts, financing, and even renovations can also be concerns.
Commercial property transactions are generally more complex. There can be terms to negotiate, purchase incentives to propose, the interests of multiple owners to satisfy, and tax benefits to maximize.
Experienced real estate professionals can assist you with the various aspects of property transactions. Working with someone who knows the market, can advise you on contracts or taxes, and can provide financing options may determine whether you really do get a good deal.
Q: What’s the advantage of using a 1031 Like-Kind Exchange, and how difficult is it to complete?
A: Internal Revenue Code (IRC) Section 1031 provides an exception that allows you to postpone paying tax on the gain on the sale of investment or business real property when you exchange your current property’s relinquished property (RP) for similar real property as part of a qualifying like-kind exchange. Except to the extent you have cash in your pocket or debt relief at the end of the exchange, the gain on the sale is tax-deferred, but it isn’t tax-free.
Deferring tax payment, typically at the long-term capital gains rate of 20 percent, allows those proceeds to be immediately reinvested in the replacement property. The process is relatively straightforward. Typically, a qualified intermediary (QI) is engaged to close the sale of the RP and hold the proceeds in escrow for the replacement property. Within 45 days of the sale, you must identify possible replacement properties. The QI then has until whichever comes first — 180 days or your tax return due date (with extensions) to purchase the property you select. At that closing, the QI wires back the funds to complete the exchange. Your basis in the replacement property will be a substituted basis, not cost basis, preserving the unrecognized gain for taxation when the replacement property is ultimately sold.
Senior Vice President, Commercial Group Manager
333 W. Fort St., 18th Floor
Detroit, MI 48226
Q: How does the due diligence process for a transfer of membership interest in a real estate LLC differ from a transaction in which the real property is conveyed to a purchaser?
A: In some ways, it does not. The most common ownership vehicle for real property is a limited liability company (LLC). In some instances, a real estate transaction involves a transfer of membership interest of the LLC, which owns the real property, instead of an outright transfer of the real property itself. As a purchaser (or someone representing a purchaser), you should insist on performing the same due diligence investigations that you would have performed if you were purchasing the property instead of acquiring the membership interests. This includes title and survey review, environmental investigations, property inspections, appraisal, and review of leases, contracts, and other agreements applicable to the property. With regard to the existing title policy, you should contact the title company to obtain the appropriate non-imputation endorsement(s). Also, keep in mind that certain environmental liability protections may not be available when purchasing membership interests, because the purchaser is only entitled to the protection previously obtained by the LLC.
In other ways, due diligence in a membership interest transfer transaction will be more complicated, as a purchaser should also perform due diligence with respect to the LLC in which the purchaser is acquiring membership interests. This includes review of the LLC’s formation documents, operating agreement, fi nancial records, contracts, tax returns, and an accounting of all members of the LLC.
Q: Are there any nuances under Michigan law that must be considered when transferring the membership interests in a real estate LLC?
A: Limited liability companies in Michigan are governed by the Michigan Limited Liability Act, MCL 450.4101 et seq. Pursuant to the LLC act, unless otherwise provided in the LLC’s operating agreement, the membership interests of an LLC are fully assignable (see Section 505(1)). Assignment of membership interests does not, in itself, entitle the assignee to participate in the management of the LLC or exercise any other rights of a member (see Section 505(2)). Instead, the assignment by itself only conveys a right to receive income generated by the LLC and attributable to the assigned interests (also known as a “profits interest”).
In most instances, the parties intend to transfer both the profits interest and the membership rights, including voting; however, this isn’t accomplished by the assignment alone. Assignment of the membership rights requires admission of the purchaser as a member of the LLC, which unless otherwise provided in the LLC’s operating agreement, requires unanimous consent of members (see Section 506(1)). As a result, careful attention must be paid to ensure that the assignment documents include language appropriate to convey both the profits interest and membership rights. In addition, as a condition of purchase, the purchaser should insist on documentation that proves the existing members of the LLC will admit the purchaser as a full member of the LLC.
Kerr, Russell and Weber, PLC
Brandy L. Mathie
500 Woodward Ave., Ste. 2500
Detroit, MI 48226
Q: Does the transfer of real estate membership interests in an LLC trigger Michigan transfer tax obligations?
A: Sometimes. It depends on the percentage of ownership transferred and the assets held by the LLC. Michigan’s State Real Estate Transfer Act, MCL 207.521 et seq., imposes a transfer tax on the transfer of a controlling interest in an entity that holds real estate as its primary asset (see Section 523(c)). For an LLC, a “controlling interest” means more than 80 percent of the total interest in capital and profits of the LLC (see Section 522(a)). If 90 percent or more of the fair market value of the LLC’s assets is real property, the LLC is considered an entity that holds real estate as its primary asset (see Section 523(c)).
The state transfer tax is imposed on the total consideration of the real property in the amount of $3.75 for every $500 in value. The Michigan Department of Treasury updated the Real Estate Transfer Tax Valuation Affidavit form to include a mechanism by which a seller is obligated to pay the state transfer tax upon the transfer of a controlling interest. Once completed, the form must be filed with the register of deeds for the county where the property is located. Despite the updated form, at least one register of deeds has taken the position that the transfer tax wasn’t payable because there was no document to record — and, consequently, that individual refused to take the payment.
Kerr, Russell and Weber, PLC
500 Woodward Ave., Ste. 2500
Detroit, MI 48226
Q: Is a written contract required for the sale of real property in Michigan?
A: Yes. Under Michigan law, the contract for the sale of real property must be in writing. To be valid and enforceable, a real estate sales contract must contain sufficient elements of a contract to establish certainty and definiteness, as well as the identity of the parties involved. These elements include purchase price and/or other consideration, terms of the sale, time of performance, any specific deadlines, and the date of sale closing. Finally, the real estate contract must include a specific description of the real property being sold.
In Michigan, the transfer of the real property must be in the form of a deed, and the conveyance must be in writing and signed by the seller. Interestingly, Michigan law does not require the contract for the sale of real property to be signed by the purchaser.
Timothy M. Wittebort
Corporate Transactions and Organizational Structure
450 W. Fourth St.
Royal Oak, MI 48067
Q: Restaurants are gaining popularity as the new anchor tenants in many commercial real estate developments. What are some issues that can arise in negotiations between a sophisticated landlord and a tenant?
A: Issues can include the following:
It’s imperative that landlords thoroughly understand the capitalization structure of their restaurant tenants. In addition, as a precondition of restaurant financing, a lender will typically require lien rights to the restaurant collateral. However, the landlord can negotiate a number of items, including a waiver so the lender will not conduct an auction or fire sale on the premises, which can give the development a negative perception.
2. Franchisor riders
A restaurant franchisor will almost certainly require a landlord to grant the franchisor certain rights in the event of a franchisee/operator default. One right is the ability to take back the space and either operate the restaurant or assign the lease to another franchisee. Failure by the landlord to provide default notice to a franchisor can create liability.
3. Grease traps
In the past, grease trap repair and maintenance obligations were the tenant’s responsibility. As communal grease traps are becoming more common, however, landlords have become responsible for maintenance and repair, and typically pass that expense on to restaurant tenants on a pro-rata basis.
Whether you own a shopping center or you’re a restaurant tenant, it’s important to seek qualified legal advice when negotiating your lease interests.
38505 Woodward Ave., Ste. 100
Bloomfield Hills, MI 48304
Q: Can I benefit from the Qualified Opportunity Zone incentives added by tax reform?
A: The Tax Cuts and Jobs Act introduced opportunity zones as low-income census tracts that offer three new federal tax incentives designed to drive long-term private investment.
1. A taxable gain from the sale of any property can be deferred until 2026, if rolled over and invested in a fund set up to invest in the zone.
2. If the gain remains invested in the fund for at least seven years (by 2026), only 85 percent of the original gain is taxed.
3. Any gain from the eventual sale of the fund investment is completely tax-free, if the investment has been held for 10 years.
To set up a qualified opportunity fund, organizers can self-certify by attaching the appropriate form (not yet released) to the initial tax return. There are significant benefits of investing in opportunity zones, but it’s important to carefully consider the economics of the underlying investment.
1500 W. Big Beaver Rd., 2nd Floor
Troy, Mi 48084
Q: How will the passage of Michigan’s recreational marijuana law affect landlord/tenant relationships?
A: There are potentially many challenges in the real estate market, one being an instance where a tenant requests an accommodation under Michigan state law in order to smoke or grow marijuana on the premises. This accommodation can quickly become problematic for landlords as well as other neighboring tenants, due to the nature of marijuana.
To solve this problem, a landlord could choose to prohibit tenants from growing or smoking marijuana on the premises. The landlord could cite concerns about resident safety, since the presence of marijuana plants may encourage criminal activity due to the plants’ value. Large marijuana grow operations also typically require excessive levels of electric power, as well as high humidity levels.
In order to minimize such issues, landlords are advised to stay away from boilerplate residential lease agreements and ban all forms of smoking on the property. Instead, permit the tenant to utilize other forms of marijuana, such as food products, oils, and lotions.
Tenants and Ganja-preneurs, be sure to thoroughly read through the lease, ask questions, and voice any apprehensions prior to signing.
Arghavan P. Di Rezze, Esq.
41850 W. 11 Mile Rd., Ste. 207A
Novi, MI 48375
Q: How many acres of land are available for industrial development in the aerotropolis, and what are the opportunities for corporate expansion in the region?
A: The aerotropolis region is over 130 square miles, encompassing four communities (Huron Township, Romulus, Taylor, and Van Buren Township) and parts of two counties (Washtenaw and Wayne). Within the region, approximately 6,000 acres of vacant land are zoned for industrial development and are currently on the market. However, if the right project comes along (and if you include vacant land parcels that aren’t necessarily on the market but are available for sale), this number grows exponentially. Needless to say, there’s plenty of opportunity for corporate expansion in the aerotropolis.
The sites range in size from a just few acres to nearly 1,000, and can accommodate new facilities between 20,000 and several million square feet. All sites are in close proximity to three major highways (I-75, I-94, I-275) and a short distance from Detroit Metropolitan Airport, Willow Run Airport, and the American Center for Mobility. Many of the sites are also accessible by rail.
The Detroit Region Aerotropolis Development Corp., in partnership with its public and private partners, provides a suite of services to growth-oriented companies to help facilitate their expansion projects, including but not limited to site identifi cation, economic development incentive approval, and public infrastructure subsidization.
11895 S. Wayne Rd., Ste. 101A
Romulus, MI 48174
Q: How important is it to work with a Realtor who thoroughly knows the area where I’m selling my home or buying a new one?
A: It’s crucial in making a solid decision for your immediate needs, as well as your long-term investment. Clients should always find an area expert, because local nuances affect home values. A Realtor with significant area knowledge can help you understand the factors behind home prices for the location — including past, current, and future projections.
Many buyers are aware a school district can affect home value, but so can development. Either one can create value or a market disadvantage. That’s where understanding the area is important, whether you’re buying or selling.
From a seller’s perspective, knowledge of the neighborhood can help you correctly price and market your home. A Realtor who’s familiar with the area often knows of homes being renovated or new construction on certain blocks. Both will increase neighborhood value.
As a buyer, you may find a good deal and consider remodeling to increase your new home’s value. An agent who has relationships with architects, designers, and builders can help you assess the feasibility and added costs. Ultimately, you don’t want your improvements to outprice the neighborhood, and a local expert will be instrumental in protecting your investment.
Renee Lossia Acho
210 S. Old Woodward Ave., Ste. 200
Birmingham, MI 48009