Developments In Real Estate, Volume 19, 1

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VOLUME 19, Issue 1 Seth G. Weissman, Editor

A Boom or A Bust

In Atlanta’s Residential Real Estate Market by Seth G. Weissman Will the volatility in the stock market lead to a recession in 2019? While no one knows for sure, I predict that 2019 will be a good year for metro Atlanta residential real estate. While we will certainly have recessions in the future, I also predict that we will not see in most of our lifetimes a downturn like we saw in 2008 absent some earth shattering calamity. (Continued on p.2)

Ignore RESPA At Your Own Risk

by Seth G. Weissman

This is because there are both civil and criminal penalties for violating RESPA. It can also lead to the loss of your real estate license.What is a RESPA violation? RESPA or Real Estate Settlement and Procedures Act prohibits a real estate licensee from giving or receiving anything of value for the referral of settlement services business. Settlement services are those services that are a normal part of buying and selling a home. So, for example, mortgage lending, real estate closings, surveying, appraising and home inspecting (Continued on p.4)

ALSO IN THIS ISSUE Condo Buyouts Can be Good Opportunities for Patient Developers

(p.5)

Court of Appeals Case Results in Need for ModiďŹ ed HOA Documents (p.7) The Benefits to Developers of An Environmental Legal Assessment (SEE INSERT) Developments in Real Estate is a newsletter published by Weissman PC to provide information and quick tips on legal issues and trends in the real estate industry. The information contained herein is not intended as specific legal advise.

In Atlanta’s Residential Real Estate Market

(continued from p.1)

by Seth G. Weissman

What will the real estate market look like for 2019?

Will we see a dreaded downturn in metro Atlanta like we saw in the great recession of 2007–2012?

Here is what I expect to see in 2019: There is an undersupply rather than oversupply of housing in the metro Atlanta area. Net migration into our region remains strong and is still adding more than 50,000 net persons per year. All of those people will need housing.

New home construction is about half what it was prior to the great recession.

This control on inventory should help preserve demand. Affordable land remains hard to find and is not always easy to zone. This acts as a constraint to providing new housing. Construction costs remain high.

Interest rates will continue to rise in 2019, but not likely as much as they did in 2018. This, along with the high construction and land costs, will continue to make affordability an issue.

Millennials will continue to make up the largest segment of buyers next year, followed by Gen Xers and Baby Boomers. According to Forbes magazine, we are getting near the peak of Millennials turning 30. This bodes well for new household formation and home buying. The Millennials are the group that both builders and real estate licensees should be focusing on. The question is whether this millennial age cohort will buy as many houses as their parents did at their age? The answer is likely a mixed bag.

Housing preferences for Millennials will remain strong in close-in neighborhoods that are served by public transportation and are seen as having a younger, energetic urban vibe. Millennials grew up in the suburbs; they appear, more than previous generations, to want to change their lifestyle and live in walkable, urban locales.

“MILLENNIALS WILL CONTINUE TO MAKE UP THE LARGEST SEGMENT OF BUYERS NEXT YEAR...”

Apartment developers are betting that more of this group will rent rather than buy, filling up the multitude of new apartments that have been and will continue to be built in our urban core. While this is likely true, the number of Millennials is actually a larger age cohort than even the post-World War II Baby Boomer generation. The correct answer is that there will likely be both a lot of younger home buyers and younger renters.With affordability continuing to be an issue, look for Millennials to continue to pioneer and gentrify urban neighborhoods in older close-in neighborhoods that have not yet been discovered where housing is relatively more affordable.

For 2019, housing in more upscale areas will likely take longer to sell as the supply of buyers who can afford high prices and high interest rates will be reduced. Of course, quality housing in good school districts will always be at a premium and sell faster.

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DEVELOPMENTS IN REAL ESTATE

(continued from p.2)

Millennials appear to have greater confidence than previous generations that pioneering more marginal, economically disadvantaged neighborhoods will pay handsome returns over time as home prices in these neighborhoods can quickly escalate. So far, the bets that Millennials have made in these neighborhoods have paid off well financially.

Continue to look for condominiums, townhomes and apartments to be developed throughout the metro region, but particularly in prestigious areas like Buckhead and Midtown and in new mixed-use developments near town and city centers. Such mixed-use developments will continue to appeal to buyers looking for walkable places to live, shop, eat and work.

Older, smaller multi-family projects in desirable neighborhoods will also continue to be converted to affordable condominiums. Condominiums will continue to be a logical lifestyle choice for urban professionals and retirees who do not have the time for house and yard maintenance and repair.

Housing will likely take longer to sell in 2019 than in 2018. While this may seem like the inevitable return to a buyerʼs market, it is more likely just a return to a normal housing market where even great houses take two or three months to sell rather than one or two weeks.

The one wild card in all of this is that according to economist, Robert Shiller, the last six (6) years has represented the third largest housing boom in the United States in the modern era. The question that he indirectly raises is whether this means prices will take a tumble in the event of a downturn. Obviously, it would be disastrous if prices fell like they did in the great recession. However, when the inevitable downturn

arrives, I see little chance of major price reductions in residential housing. First, I think the reason prices increased as much as they did is that they fell as far as they did during the great recession. I think this is distorting what otherwise appears to be such a large price increase over the last sixyears. Second, as stated above, with the cost of land and construction being so high, there is little room for prices to fall too far.

What is more likely to occur in a downturn is a reduction in the construction of new homes and the sale of re-sale homes until conditions become more favorable. Third, we do not have the type of crazy underwriting in mortgage loans that we had in the great recession. This is what ultimately led the banks to take back huge numbers of house loans which should never have been originated. Put another way, real estate is not likely what is going to lead us into the next recession.

REALTORS® should continue to invest in educating themselves about housing in denser communities with community associations. For the adventurous, they should try to identify the “new” urban neighborhoods where Millennials are putting down roots and try to have greater visibility in the Millennial market.

As always, the hardest working REALTORS® will be rewarded the most and should have a good year for 2019.

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IGNORE RESPA At Your Own Risk

(continued from p.1)

As you make resolutions for the New Year, you may want to put complying with RESPA at the top of your list. are all settlement services. Real estate brokerage is also a settlement service but RESPA provides that referral fees paid by real estate brokers and agents to one another do not violate the law.

Letʼs look at some examples of what it means to take something of value for the referral of settlement services business. Letʼs say that a closing attorney tells you that she would be glad to pay for some of your marketting costs if you send her your real estate closing business. She is not included in any of the marketing material. She is simply paying for your marketing costs. Is this a RESPA violation?

Absolutely. It is a violation for the closing attorney to pay this money and for the real estate agent to receive it. What if the closing attorney pays for 100% of a marketing flyer and the name of the closing attorney appears on the bottom 1/8 of the page. Is this a violation? Absolutely.

Joint marketing agreements are allowed but only if each party pays for their respective portion of the marketing material. If the advertisement of the closing attorney only takes up 1/8 of the page, the closing attorney can only pay for 1/8 of the advertisement.

What if the closing attorney gives you

a gift card every time you close an expensive home at his firm? There is no discussion as to why these gifts are being made. It just evolves into a common practice. Is this a RESPA violation? Absolutely. The Consumer Financial Protection Bureau (CFPB), which enforces RESPA, would certainy find this to be payment for referring settlement services to the closing attorney. It is a violation for the closing attorney to pay it and for you to receive it.

What if the closing attorney handles all of your personal legal work for free or at a reduced rate in exchange for you sending your closing business to that attorneyʼs law firm. Is this a RESPA violation? Absolutely. It is a RESPA violation to receive anything of value for the referral of settlement services business. An attorney providing free legal work (or legal work at a reduced hourly rate) in exchange for you sending the closing attorney your closings is a RESPA violation.

Does it matter that the arrangement is understood rather than specifically discussed and agreed to? The answer here is no. It is a violation either way.

RESPA violations are serious.

Letʼs say that a closing attorney brings lunch to a brokerage office and offers to teach all real estate licensees in the office about RESPA regardless of whether they send closing business to the law firm. All agents are invited to attend. Is this a RESPA violation? The answer to this question is “no”.

Attendance is not conditioned on sending business to the law firm. As such, it is a lawful marketing activity rather than a violation of RESPA. The same would be true in providing a newsletter with helpful information in it.

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DEVELOPMENTS IN REAL ESTATE

As we start 2019, real estate licensees should redouble efforts to eliminate the risk of a claim.

Vendors should always be selected based on the quality of their service, not on what they are giving you.

THE BENEFITS TO DEVELOPERS Of An Environmental Legal Assessment

by Martin A. Shelton

In recent years, awareness of the need to investigate and address environmental issues on property under development has evolved to become commonplace.

Most developers know that you have to have a Phase I Environmental Assessment for any development project whether it involves an end use that is commercial, retail, industrial, mixed use, or residential. Indeed, a Phase I completed after 2013 is required by most lenders since it is the standard for meeting USEPAʼs “all appropriate inquiry” rule.

The Phase I investigation involves a review of any available prior reports on the site, historical land use and business records, aerial photographs, environmental databases, interviews of people familiar with the property, and a site inspection. If this documentary investigation raises concerns about known or suspected areas of contamination, the protocol calls for further on-site investigation, the Phase II. As part of the Phase II, samples are taken in and around the areas of known or suspected contamination to provide specific on-site data from the soil and groundwater. Once all the data is in, the question becomes what do you do with this information? (continued on reverse)

DEVELOPMENTS IN REAL ESTATE

NEITHER THE PHASE I OR PHASE II CAN PROVIDE A DEFINITIVE ANSWER AS TO WHETHER THE SITE POSES ANY RISK OF LEGAL LIABILITY.

THE BENEFITS TO DEVELOPERS Of An Environmental Legal Assessment (continued)

Environmental laws are based in strict liability, which means that once the contamination is demonstrated the liability attaches the current owner and every prior owner stretching back to when the contamination began. Moreover, liability under environmental statutes does not require either an intent to cause harm or proof of damages, only the showing that the contamination exists. For this reason, concerns about statutory liability focus on how much do you have to do to address the contamination and not whether you have to take action.

regulation while ignoring the larger question of the risk of potential environmental legal liability. Also, such advice can be influenced by the particular experience or investigative focus of the person who wrote the report such that some potential risks are not given sufficient concern. For these reasons, there is a growing trend among the most successful developers, including some national home builders, to require a legal risk assessment from environmental legal counsel before making the decision as to how to proceed.

Similarly, common law liability to adjacent property owners, to individuals for potential health impacts, or for failing to disclose environmental issues are not addressed by the Phase I and Phase II reports and conclusions. Consideration as to how these potential issues must be dealt with includes the knowledge and experience of typical examples of liability as well as the information in the Phase I and II reports.

The assistance of an experienced environmental attorney can be critical in properly assessing the potential liability.

In a legal risk assessment the attorney reviews the Phase I and Phase II data as well as all other pertinent information and provides an assessment of the risk of legal liability for the project. If the site has environmental issues that must be addressed, the question becomes is it worth the risk of potential liability to proceed. In some cases it is not. In other situations it is often possible that limited clean-up and/or entry into GeorgiaĘźs Brownfield Program can provide legal liability protection which will eliminate all risk of legal liability. These protections will pass on to the next owner and any lender as well. The legal liability assessment both defines the risk of liability and can help to demystify it.

The assessment can help to clarify how to address the environmental issues in a manner that is manageable and does not impact marketability.

Occasionally, some may rely on the environmental consultant working on the project to advise them as to whether the site has issues to be concerned about.

While this advice is invaluable, it can sometimes focus only on avoiding or minimizing government

Although the legal risk assessment can both save a good project from unnecessary liability & help a developer decide if the site is right for them.

For example, in one instance the legal liability assessment helped a national builder identify a potential threat of environmental liability. From there the company was able to take the property through GeorgiaĘźs Brownfield Program to eliminate the liability risk.

Conversely, on another site, the legal liability assessment identified that the sellerĘźs environmental remediation work had insufficiently cleaned-up the soil on the site to below the level that requires notification to the regulatory agency. This left significant areas with contamination above the residential health-based limit, which in this instance was lower than the notification limit for substance of concern. There, the normal assessment did not consider that the property would be marketed for residential development. The site still had significant areas of impact since it had not been remediated to the most stringent residential standard (Type 1). This fact along with several hot-spots of contamination that had been largely ignored in the Phase I and Phase II reports led the developer to pass on the potential project, a decision that was informed by the legal liability risk assessment.

Whether the legal liability risk assessment supports moving forward with the project, dropping the project, or modifying it into a brownfield redevelopment, the legal liability risk assessment helps the decision-makers to understand the full risk for environmental liability and often provides solutions which had not yet been considered. If you are concerned that you may be facing some environmental liability, the surest path to certainty in the decision-making process is an environmental legal liability risk assessment.

DEVELOPMENTS IN REAL ESTATE

CONDO BUYOUTS

Can be Good Opportunities For Patient Developers

by Seth G. Weissman

With increasingly scarce land in prime locations in Atlanta commanding as much as $10,000,000 an acre, it is easy to understand why older, lower density condominium developments in desirable neighborhoods are attractive to developers as buyout opportunities and to brokers as sources of good real estate commissions. Here are some suggestions to make the buyout process a success.

Be Realistic in How Long It Will Take to Acquire All of the Units When it comes to condominium buyouts, the old adage “good things come to those who wait” often applies and it is best to take a long view. Unless you are willing to write huge checks, getting all owners to agree to sell their units can take years.

Those buyers who can accept buying less than all of the units and picking up the remaining units over time usually pay far less than buyers trying to buy all of the units at once. While the holding costs of owning most, but not all, of a condominium complex may seem daunting, many of these developments, particularly if some money is spent on renovation, can be operated profitably as apartments.

Do Not Expect the Condominium Owners to Think Like Business People A better-than-market offer to buy condominium units will normally be met with a large number of owners willing to sell. A few owners, however, will not be motivated by price and simply will not want to sell regardless of the terms of the offer. For some, the decision to sell their home is emotionally charged with owners making the frequent comment: “Where will I move? I donʼt want to have to pack up and start again. Still others are skeptical and suspicious of any offer that is made and their inclination is to reject it. The passage of time often allows those owners to move past their initial emotional responses and ultimately make more pragmatic decisions.

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CONDO BUYOUTS Can be Good Opportunities For Patient Developers (continued from p.5)

Do No Buy Unless You Can Control the Condominium Association The initial purchase of units should, hopefully, put you in charge of the condominium association. Control can be measured in different ways. Owning a majority of units will allow you to elect members to the Board of Directors. Being able to amend the condominium legal documents normally means acquiring units holding at least 2/3 of the voting interests in the Association and sometimes more. Since amending the legal documents is often necessary to eliminate leasing restrictions, this higher percentage of units is usually what most buyers shoot for.

Do Not Terminate the Condominium Regime Too Quickly In Georgia, a condominium regime can be terminated upon a vote of 80% of the voting interests in the Association plus their mortgagees. Once the condominium is terminated, all owners then become tenants in common. In other words, the owners who did not sell their units now become your business partners. This is generally a far less desirable result than continuing to operate the property as a condominium controlled by a buyer who is now the majority owner. This is because as a condominium, clear legal mechanisms are in place to require the minority owners to pay their required share of the common expenses of operating the condominium association. If a minority owner does not pay his or her required share, the condominium association can get a judgment against the owner and ultimately foreclose on the unit.

Be Sure That the Units You Buy Work as Rentals What is often surprising to many developers interested in a condominium buyout is that units purchased in bulk often work quite well as rentals. Older, and functionally obsolescent units often sell at depressed prices that are less than replacement cost. Investing $10,000 to $25,000 a unit can transform older units into ones that can command significantly higher rental income. Even if there is never an ultimate buyout of 100% of the units, the project still generates significant cash flow and if the remainder of the units can be acquired on a five to ten year horizon, there can be the added plus of a possible sale of the entire development for a huge windfall.

Conclusion Condominium buy-out opportunities are your classic deals with hair on them. However, most land deals these days have some obstacles associated with them. For the patient, these opportunities can pay off handsomely.

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DEVELOPMENTS IN REAL ESTATE

COURT OF APPEALS

Case Results In Need For Modified HOA Documents

by Seth G. Weissman

The Georgia Court of Appeals recently struck down a couple of common provisions appearing in many Declarations of Covenants, Conditions and Restrictions for homeowners associations (which are not subject to the Georgia Property Owners Association Act).

Almost all new homeowners associations are not subject to this elective law because it requires developers to pay assessments on unsold lots and homes.

The first provision the court struck down is a late fee provision allowing a homeowners association to collect a 10% late fee on past due assessments. The defendant argued in the case of Northside Bank v.

Mountainbrook of Bartow County Homeowners Association, Inc. that such a provision is an unenforceable penalty provision and the Georgia Court of Appeals agreed. For the provision to withstand judicial scrutiny, it will likely need to be rewritten as a liquidated damages provision. This is one of those arbitrary areas of the law in Georgia where courts

will generally not enforce provisions which they deem a penalty, but will enforce an equivalent provision characterized as a liquidated damages clause. Therefore, providing that if an owner is late in paying an assessment, “the owner shall pay the HOA liquidated damages of 10% of the assessment, it being agreed that the same is a reasonable pre-estimate of the sellerʼs actual damages and not a penalty”, is probably lawful whereas a mere late fee provision is not.

Similarly, the court interpreted a late fee provision allowing the HOA to charge interest at the maximum legal rate narrowly. The HOA claimed that this provision entitled it to collect interest at a rate of 18%. The Court of Appeals limited the amount the HOA could collect to 7%. Rather than specifying that interest on unpaid assessments accrues at the maximum legal rate, most lawyers drafting HOA documents are now simply writing into their covenants the specific interest rate that owners will pay (i.e., such as 12%) if the owner is delinquent in paying his or her assessments.

CONTRIBUTORS Seth G. Weissman Editor Seth Weissman represents developers, builders, investors and real estate brokers. He is co-author of The Red Book on Real Estate Contracts in Georgia, Secrets of Winning the Real Estate Negotiation Game, and Zoning and Land Use Law in Georgia. The Red Book is a highly regarded legal reference used by real estate brokers and agents. As general counsel to Georgia REALTORS®, Seth drafts the standard real estate forms used by REALTORS® throughout Georgia.

In addition to a law degree, Seth has a masterʼs degree in city and regional planning and is a Professor of City Planning in the College of Architecture at the Georgia Institute of Technology. Seth has used this additional knowledge to draft the legal documents for complex real estate developments, including vertical and horizontal mixed-use developments, residential condominiums, office condominiums, master planned communities, senior communities and themed developments. As a result, he is considered a leading authority on new urbanism.

You may reach Seth at seth@weissman.law or at 404-926-4505.

Martin A. Shelton Contributor Martin A. Shelton, a partner who works with the commercial real estate and litigation practice groups, brings over 20 years of experience in environmental and land use law. He focuses his practice on trial and appellate litigation of environmental claims for both plaintiffs and defendants; counseling clients on addressing environmental issues arising in real estate transactions, ownership, and development; as well as compliance and permitting under environmental laws and regulations.

Contact him at martins@weissman.law or at 404-926-4564.

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