Launching Your Project Using Sophisticated Real Estate Development Strategies

© 2018 Lerch, Early & Brewer 1
Presented by:
Sharon Craig, Stephanie Smith, Alison Rind & Larry Lerman
Attorneys | Lerch, Early & Brewer
Launching Your Project Using
Sophisticated Real Estate
Development Strategies
Thursday, March 15, 2018
#restrategies
@lerchearly

Structuring Mixed-Use Projects
Launching Your Project Using Sophisticated Real Estate Development Strategies
Presented by
Sharon Nelson Craig

[Title of Presentation]
I. Why division of land and/or improvements is
necessary in a mixed-use project
• Division of the uses in the project, horizontally, vertically, or both,
so that the parcels can be separately owned, financed and
developed either by the Owner, the Owner and its joint venture
partners, or unrelated parties
• Cross easement agreements (REAs) are required for access,
ingress and egress, utilities, parking, etc.

II. Options for division of land/improvements
A. Horizontal subdivision of land
– Public process, including any amendments to record lot lines
– Can take a long time
– Creates 2 or more subdivided record lots, each of which is subject
to land use and zoning requirements on its own, such as setbacks,
building restriction lines, etc.

B. Condominiums
– Creature of state and local laws; recording of condo documents
against entire record lot
– May be horizontal division of land (i.e., land condo) and/or vertical
division of land and improvements (i.e., air rights condo)
– Layers of condominium regimes are typical in a mixed-use project
– Residential uses within condos are subject to consumer protection
laws
CONTINUED

C. Homeowners Associations
– Like condos, are typically creatures of state and local laws; requires
recording of HOA documents
– Difference between HOAs and condos is that the common areas/facilities
are not owned in common by the Owners; conveyed by the developer in
fee simple to the HOA for maintenance and operation of such common
areas/facilities
– Very heavy on restrictive covenants and architectural controls
CONTINUED

D. Air Rights Lots
– 3-dimensional parcels created within a single record lot reflecting
ownership interests in the underlying record lot AND the air above
– A condo regime may be established within an air rights lot
– Requires a reciprocal easement agreement
– Not permitted in some jurisdictions; in those, condominiums are
more common
CONTINUED

E. Ownership Units (Montgomery County, MD specific)
– Created by the County subdivision regulations to establish and document
different ownership interests in separate portions of an underlying record
lot; must use entire record lot
– Must be horizontal; REA is required by regulations
– Recent DPS treatment and review of ownership units has made them not
as attractive for use with existing development because of requirement
of professional certifications
CONTINUED

[Title of Presentation]Structuring Mixed-Use Projects

Tax Credit Financing 101 for
Development Projects
Presented by
Stephanie M. Smith

16
Overview of Federal Tax Incentive Programs
Low Income Housing Tax Credits (LIHTCs)
• Created by the Tax Reform Act of 1986
• Incentivizes individual and corporate investors through the use
of tax credits to invest in the development, acquisition, and
rehabilitation of affordable rental housing
Tax Credit Financing 101 for Development Projects
© 2018 Lerch, Early & Brewer

17
New Markets Tax Credits (NMTCs)
• Created under the Community Renewal Tax Relief Act
• Incentivizes community development and economic growth
through the use of tax credits that attract private investment to
distressed communities

18
Historic Tax Credits (HTCs)
• Created in 1976 under the Tax Reform Act
• Encourages private sector investment in the rehabilitation and
re-use of historic buildings

19
LIHTCs
Benefits:
• Cheap Money
• Offsets dollar-for-dollar tax liability
• Banks meet their CRA obligations
• Investors claim tax credits on their federal income tax returns

20
LIHTCs
Challenges:
• Complicated financial structure and time delays
• Federal funding has decreased, development costs have
increased
• 2017 tax reform makes buying tax credits less attractive

21
NMTCs
Benefits:
• Expansion of Business Purpose
• Community Development Entities (CDEs) sell tax credits, not state
agencies
• Investors use the funds to make debt or equity investments in
entities located in qualified low-income communities

22
NMTCs
Challenges:
• Expensive Transactional Costs
• Stringent Eligibility Requirements
• Complicated Deal Structure
• Very Competitive Application Process

23
Historic Tax Credits
Benefits:
• Banks provide direct financing for tax and regulatory
benefits
• Developers can carryover tax credits to reduce debt
financing for property rehabilitation

24
Historic Tax Credits
Challenges:
• Severe recapture risks of tax credits
• Underwriting risks due to inability to analyze project cash flow
• Great potential for project failure and reputational risks

25
Allocation Process for LIHTCs, NMTCs and HTCs
DMV State Agencies allocate LIHTCs:
• District of Columbia Department of Housing and Community
Development
• Maryland Department of Housing and Community Development
• Virginia Housing Development Authority

26
Certified Community Development Entities (CDEs) allocate
NMTCs:
• CDEs offer its investors in exchange for:
– Equity investments in the CDE and/or its subsidiaries; and
– To receive loans or investments from other CDEs that have
received NMTC allocations.

27
HTCs are not allocated but financed by national banks:
• Under the powers granted by the National Bank Act,
national banks have authority to provide financing to
HTC projects in return for the tax credits.

Making a Ground Lease Financeable
Presented by
Alison W. Rind

29
What is a Ground Lease?
• Landlord holds fee title
• Usually tenant owns the improvements (but not always)
• Long term (usually 25-99 years)

30
Why use a ground lease?
• Owner may not want to sell land but wants tenant to
construct improvements
• Creates leasehold estate to support leasehold
financing for improvements
• Terms and conditions set forth in ground lease will
govern if financeable

31
Why use a ground lease? CONTINUED
Advantages:
• Due to market conditions or location, ground lease may be the
only way a tenant obtain its desired property
• Pad sites
• Tenants have broader control of the property

32
Advantages:
• Assignment
• Construction of improvements
• Use of property
• Financing is easier to obtain for construction projects

33
Disadvantages:
• Overall cost over term of the ground lease may exceed current
fair market value
• Easements or other restrictions imposed
• More complex lending vehicle than fee simple ownership
• Diminishing asset

34
Due Diligence
• Similar to purchase of fee simple interest
• Order Title and obtain title insurance
• Environmental Study
• Survey
• Construction Due Diligence
• Appraisal

35
Ownership of Improvements
• Landlord retains ownership in land
• During term, tenant will hold title to improvements
• Whether or not ownership reverts to landlord after term
ends is negotiable (usually reverts)

36
Ownership of Improvements CONTINUED
• Address how the improvements are delivered at end
of term
• Address insurance proceeds and condemnation
• Tenant will retain broad alteration rights without
landlord oversight

37
Structure
• Often triple net leases
• Rent and Adjustments

38
Structure CONTINUED
• Stage Rent
– Pre-construction
– Construction period
– Occupancy
• Look at use restrictions that may affect market rate

39
Use Restrictions
• Limit restrictions as much as possible given long term of lease
• Address continuous operations provisions to avoid default
• Zoning changes
• Long lead time for cure periods

40
Assignment and Subletting
• Flexibility
• Permitted Transfers
• Define standard vs consent rights
– Experience
– Reserves
– Creditworthiness

41
Due Diligence Provisions
• Term
• Recording a Memorandum of Lease may be taxable
• Term can be structured to conform with exemptions from tax
in Maryland Code
• Initial term of no more than 7 years
• Renewal options that are not automatic may be included

42
Due Diligence Provisions CONTINUED
• Tenant obligation to notify the landlord that
an option will not be exercised
• May run into issues with lender

43
Condemnation
• Total
• Partial
• Permanent or temporary taking
• Needs of leasehold mortgagee

44
Insurance
• Obligation to rebuild
• Abatement rights upon casualty
• Termination rights upon casualty
• Full replacement cost
• Rights to proceeds

45
Characteristics of Financeable Ground Lease
• Term must run significantly longer than term of the loan
• Subordination
• Alternative-Recognition Agreement or Non-Disturbance
Agreement with fee owner and fee mortgagee
• Priority of Lease over any financing

46
CONTINUED
• Lender’s right to either have lease assigned or new lease
prepared
• Tenant’s ability to mortgage improvements
• Tenant’s ability to collaterally assign the lease

47
• Rent needs to be predictable
• Notice and opportunity to cure lessee default
• Obligation of landlord to provide new lease to lender if lease
rejected in bankruptcy or upon termination
CONTINUED

48
• Rights of first refusal
• Assignability
• Use restrictions
CONTINUED

§1033 Involuntary Conversions
of Real Property
Presented by
Lawrence G. Lerman

I. What constitutes an Involuntary
Conversion?
§1033 Involuntary Conversions of Real Property

II. What constitutes Qualified Replacement
Property?
• Similar or related in service or use to taken property
• Like kind real property held for productive use in trade
business or investment
• Intent must be to replace taken property

III. What must be reinvested, how, and when?
• Entire Proceeds
• Earliest Date
• Latest Date
• No Qualified Intermediary or Assignment of Proceeds Required

IV. Mortgages
• The §1033 reinvestment must equal or exceed the actual
consideration received by the taxpayer – cash plus relief
of indebtedness
• Unlike a §1031 exchange the taxpayer need not
re-invest all its cash proceeds.

Thank you for your time!
Disclaimer: This content is for your information only and is not intended to constitute legal
advice. Please consult your attorney before acting on any information contained here.
For more information, visit us at lerchearly.com.

Stephanie Smith
Real Estate Attorney
T 301-907-2802
F 301-347-1791
smsmith@lerchearly.com
Contact Our Presenters
Sharon Craig
Real Estate Attorney
T 301-841-3836
F 301-347-3757
sncraig@lerchearly.com
Alison Rind
Commercial Lending Attorney
T 301-657-0750
F 301-347-1527
awrind@lerchearly.com
Larry Lerman
Commercial Lending Attorney
T 301-657-0163
F 301-347-1776
lglerman@lerchearly.com

Launching Your Project Using Sophisticated Real Estate Development Strategies

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