A challenge occasionally faced by residential landlords is what to do if a tenant dies during the term of the lease and no one “steps in” to handle the tenant’s estate.  Landlords of low-income subsidized housing may be especially likely to encounter this scenario.  Many low-income tenants have not made a Will that would appoint an Executor and otherwise don’t have sufficient assets to entice a relative to take the necessary steps to “open an estate” and qualify to handle the deceased tenant’s affairs.

If rent is no longer being paid for the deceased tenant, some landlords may think that it is appropriate to dispose of the tenant’s personal belongings as they see fit and retake possession of the premises.  However, landlords in North Carolina should be aware that there is a proper way of handling the situation.

 

What to do if the property is left unoccupied

An initial question is whether anyone continues to occupy the leased premises.  If the premises are not occupied by a person, then the landlord may – if no estate has been opened, and the paid rental period has expired for at least 10 days – file an affidavit with the court that provides information about the tenant’s death and the items remaining in the premises. The landlord must send a copy of the affidavit to any contact person who the tenant listed (or, if none, must post notices about the affidavit).  After the affidavit is filed, the landlord can remove and store the tenant’s property and retake possession of the premises.  After 90 days, if no one has duly qualified to collect the tenant’s belongings, the landlord can then either give the items to a non-profit organization or sell the items.  Proceeds from selling the items can be applied to unpaid rents or other costs; however, a sale requires posting of certain notices.   The landlord must provide an accounting to the court with regard to any donation or sale of the items.

 

What to do if the property remains occupied

If any person occupies the premises after the tenant’s death (for example, a friend or relative is living in the property), a different issue is presented.  If the person was a co-tenant with the deceased tenant, the co-tenant can likely continue with the lease – and deal with the issue of what to do with the deceased tenant’s things.  However, assuming that the occupant has no right to continue renting the premises and needs to be removed, the proper procedure can be tricky.  Arguably, the person is a trespasser and could be locked out, with no recourse against the landlord.  But a more prudent path would be to file an eviction lawsuit to regain possession of the premises.  In light of the fact that North Carolina’s eviction procedures require a landlord-tenant relationship between the plaintiff and defendant to initiate “summary ejectment” proceedings, this raises a question about who to name as the defendant in the suit.  The occupant (who is not actually a tenant)?  The original tenant (who is dead)?  One solution is for the landlord to have a “public administrator” appointed as the representative of the tenant’s Estate and then sue the public administrator.  Ultimately, significant costs and headaches can be encountered, if this situation arises.  An experienced landlord-tenant attorney can help.

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About the Author

Elliot Fus has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations. He is an experienced litigator with major case experience in state and federal courts and in private arbitrations. Elliot has a broad range of experience with landlord-tenant law in contexts ranging from shopping centers to affordable housing complexes.

Land use regulation affects everyone in one manner or another.  Our homes, schools, businesses, roads and parks are all subject to local government regulation as to their location, construction and how they may be used.  In North Carolina, all city and county zoning and planning regulations derive their power from state law.  That is, if a city or county cannot find authority within state statutes to take a particular action, it may not do so unless and until the legislature grants such authority.

NC Zoning Regulations

The state of North Carolina grants zoning authority primarily under two sections of the General Statutes: Article 19 of Chapter 160A for cities; and Article 18 of Chapter 153A for counties.  These provisions were compiled into these chapters in 1973, and in the decades since then provisions have been added, amended and repealed to become what nearly everyone agrees is a very disorganized and often confusing compilation of regulations.  Local governments had difficulty determining how to validly adopt and administer ordinances based upon this hodgepodge of laws.  Developers were often similarly bewildered.

As early as 2015, efforts began to “reorganize, consolidate, clarify and modernize” statutes related to local land use planning and zoning regulations.  On July 11, 2019 Governor Cooper signed into law Session Law 2019-111, creating a new chapter of the General Statutes, Chapter 160D, containing 14 Articles and additional statutes clarifying and conforming statutes contained in other chapters of the General Statutes.  The former Chapters regulating local land use planning are repealed as of the effective date of the new law, January 1, 2021.

A New Chapter

As described in the North Carolina School of Government’s Legislative Reporting Service, here are some highlights of Chapter 160D:

• Includes a new Definitions section, defining terms such as bona fide farm purposes, conditional zoning, etc.
• Clarifies the law regarding vested rights.
• Contains provisions governing the subject matter and procedure for adopting moratoria on development.
• Amends Conflicts of Interest laws as they apply to local elected and appointed officials.
• Amends the law regarding the exercise by cities of extraterritorial jurisdiction (ETJ) over zoning.
• Brings together provisions for the establishment and procedures for Planning Boards, Boards of Adjustment, Historic Preservation Boards and Appearance Commissions.
• Requires all members of appointed boards to take an oath of office.
• Establishes sunset provisions for substantial commencement of work following development approval.
• Provides for appeals of administrative decisions and includes timelines and procedures for such appeals.
• Includes Requirements and Procedures for Quasi-Judicial hearings for some land use decisions, such as appeals of administrative decisions, special use permits and variances.
• Restates requirements for Comprehensive Plans as a condition for enforcement and application of zoning ordinances. Allows for the adoption and use of narrower comprehensive plans to cover smaller geographic areas within a jurisdiction or to deal with subjects such as transportation and greenspace preservation.
• The procedures for adopting, amending or repealing Development Regulations are clarified, particularly with regard to notice requirements.
• Classifications of Zoning Districts are limited to the following: 1) conventional districts; 2) conditional districts; 3) farm-based districts; 4) overlay districts; and 5) special districts allowed by Charters.
• Allows administrative staff changes for minor modifications in conditional districts and for special use permits.
• Consolidates and clarifies Subdivision Regulation Ordinances.
• Chapter 160D also provides for regulation of particular kinds of land uses (e.g., adult businesses, agricultural uses, etc.), manufactured and modular homes, historic districts, environmental regulation, wireless telecommunication facilities, community appearance commissions, development agreements, solar collectors, and more.
• Articles under Chapter 160D also address Building Code Enforcement, Minimum Housing Codes, Open Space Acquisition and Community Development.

Compliance with the provisions of Chapter 160D will require nearly all counties and municipalities to adopt and/or amend their land development regulations as of the effective date of this legislation, January 1, 2021. Land developers may see changes prior to this date.  It is recommended that developers consult with county and municipal staff to stay current on local regulation changes.  Blanco Tackabery has attorneys who are skilled in this area to assist you.

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About the Author

Bowen C. Houff

Bo has been practicing law for over 30 years. His practice is concentrated primarily in the areas of municipal law, zoning and business litigation. He regularly represents Municipal councils Boards and committees as well as developers seeking rezoning of land, special and conditional use permits and favorable interpretations of zoning ordinances.

 

If you have some experience with contracts, you’ve likely heard the phrase “liquidated damages.” While this term might sound mysterious to many people, the concept is relatively easy to understand. Liquidated damages are basically an agreed-upon amount of money that a party to a contract will be required to pay in the event that the party breaches the contract.

Use of a liquidated damages provision can be effective at avoiding costly disputes over how much financial harm was caused by a breach of contract. However, these provisions are not always enforceable and should be crafted with care.

What’s the Problem?

The crux of a liquidated damages provision is that it is to be used in a situation where you can’t easily determine what “actual damages” would be caused by the breach. So, to avoid the difficult exercise of proving actual financial harm, the parties will stipulate to an amount that they think is reasonable.

For example, let’s say that a shopping center rents a space to a tenant to operate a business. The lease requires the tenant to be open for business every day. The parties understand that, if one tenant in the shopping center “goes dark” and is not operating, the shopping center as a whole will be less vibrant, have less customer traffic, and be less profitable. The parties also understand, however, that – if one business in the center violates the agreement by not continuously operating – it will be very difficult to establish exactly how much money was lost by the shopping center. Therefore, the parties agree to an amount of liquidated damages that will be imposed in the event that a tenant stops operating, so that the center is not required to provide evidence of its actual financial damages (which may be impossible to calculate).

The trick with liquidated damages provisions is that their enforceability is often subject to debate. If the liquidated damages are not reasonable, then a court may deem them to be an unenforceable “penalty.” As stated by North Carolina courts: “A stipulated sum is for liquidated damages only (1) where the damages which the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.”

Notably, in the context of the shopping center lease described above, a North Carolina appeals court recently upheld a liquidated damages provision that required the tenant to pay double rent for each day that its business was not operating. The tenant did not show that the amount was unreasonable, according to the court. But what if the provision called for triple rent? Quadruple rent? Perhaps the outcome would have been different.

Use These Provisions Carefully

Liquidated damages provisions appear in a variety of contexts, addressing issues that range from delays on construction projects to buyers backing out of real estate deals. These provisions can be very useful. But before inserting a liquidated damages provision in a contract, significant thought should be given to whether the provision is necessary and reasonable. If a party could easily determine its actual financial losses in the event of a breach, liquidated damages are probably inappropriate. Furthermore, the amount of liquidated damages should be carefully developed on a case-by-case basis. Otherwise, a seemingly favorable liquidated damages provision may wind up being the subject of litigation – and ultimately may not be enforceable.

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About the Author

Elliot Fus

Elliot has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations. He is an experienced litigator with major case experience in state and federal courts and in private arbitrations. Elliot also has a broad range of experience with landlord-tenant law and has assisted many of North Carolina’s premier shopping centers.

 

Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 7 of 7 common pitfalls I see businesses owners make.

 

Pitfall # 7 – Failure to Address Customer Relations

Written Contracts with Customers/Vendors — I cannot stress enough that the days of a handshake deal are gone. Businesses must have written purchase orders, invoices, contracts, leases and estimates to conduct business in today’s world.   Moreover, having it in writing avoids the stress, confusion and misunderstandings between the business and the customer when it comes time to deliver the goods or services and get paid. Business owners should have a business attorney draft sound business forms for use by the company. The cost of doing so is just a fraction of what it costs to defend a lawsuit produced by shoddy forms downloaded from a free internet site.

Customer Service/Satisfaction — At the same time, “the customer is always right” has not gone out of style. There are so many options for customers in today’s marketplace. A savvy business owner will make sure the company’s employees are well groomed, pleasant, enjoying their job, able to address a customer’s issue, and make the buying experience a positive one the customer will repeat.

Monitor Internet/Social Media — From a reputational risk standpoint, the pervasive use of the internet and social media has created new challenges for business owners. Sites that offer customers the opportunity to evaluate a company’s performance or products should be monitored so any derogatory or unflattering information can be noted, addressed, and responded to, if appropriate. Word of mouth now has the potential to reach hundreds, if not thousands of potential customers.

Privacy Policy — Having a privacy policy is not just good business, it is legally required for any company that collects information about its customers. The law requires disclosures to customers about how the business uses the information it collects from them and whether it shares that information with affiliates or third parties. Customers have a legal right to know how a company uses its information, and the company is required to publically disclose its privacy policy.

Protect Customer Data — Cyber security should be a consideration for any company in today’s business environment. All businesses are at risk of being hacked and having customer, employee, and other sensitive data compromised. Businesses should consult with an information technology specialist that can recommend safeguards to put into place to provide maximum protection of customer data. In addition, businesses may want to consult with their insurance provider to see if their general liability policies cover cyber-attacks, and if not purchase separate cyber insurance to protect against the damage that can be done by a hacker.

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About the Author

Ashley Rusher

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.

 

If you have some experience with contracts, you’ve likely heard the phrase “liquidated damages.” While this term might sound mysterious to many people, the concept is relatively easy to understand. Liquidated damages are basically an agreed-upon amount of money that a party to a contract will be required to pay in the event that the party breaches the contract.

Use of a liquidated damages provision can be effective at avoiding costly disputes over how much financial harm was caused by a breach of contract. However, these provisions are not always enforceable and should be crafted with care.

What’s the Problem?

The crux of a liquidated damages provision is that it is to be used in a situation where you can’t easily determine what “actual damages” would be caused by the breach. So, to avoid the difficult exercise of proving actual financial harm, the parties will stipulate to an amount that they think is reasonable.

For example, let’s say that a shopping center rents a space to a tenant to operate a business. The lease requires the tenant to be open for business every day. The parties understand that, if one tenant in the shopping center “goes dark” and is not operating, the shopping center as a whole will be less vibrant, have less customer traffic, and be less profitable. The parties also understand, however, that – if one business in the center violates the agreement by not continuously operating – it will be very difficult to establish exactly how much money was lost by the shopping center. Therefore, the parties agree to an amount of liquidated damages that will be imposed in the event that a tenant stops operating, so that the center is not required to provide evidence of its actual financial damages (which may be impossible to calculate).

The trick with liquidated damages provisions is that their enforceability is often subject to debate. If the liquidated damages are not reasonable, then a court may deem them to be an unenforceable “penalty.” As stated by North Carolina courts: “A stipulated sum is for liquidated damages only (1) where the damages which the parties might reasonably anticipate are difficult to ascertain because of their indefiniteness or uncertainty and (2) where the amount stipulated is either a reasonable estimate of the damages which would probably be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.”

Notably, in the context of the shopping center lease described above, a North Carolina appeals court recently upheld a liquidated damages provision that required the tenant to pay double rent for each day that its business was not operating. The tenant did not show that the amount was unreasonable, according to the court. But what if the provision called for triple rent? Quadruple rent? Perhaps the outcome would have been different.

Use These Provisions Carefully

Liquidated damages provisions appear in a variety of contexts, addressing issues that range from delays on construction projects to buyers backing out of real estate deals. These provisions can be very useful. But before inserting a liquidated damages provision in a contract, significant thought should be given to whether the provision is necessary and reasonable. If a party could easily determine its actual financial losses in the event of a breach, liquidated damages are probably inappropriate. Furthermore, the amount of liquidated damages should be carefully developed on a case-by-case basis. Otherwise, a seemingly favorable liquidated damages provision may wind up being the subject of litigation – and ultimately may not be enforceable.

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About the Author

Elliot Fus

Elliot has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations. He is an experienced litigator with major case experience in state and federal courts and in private arbitrations. Elliot also has a broad range of experience with landlord-tenant law and has assisted many of North Carolina’s premier shopping centers.

 

Imagine that you are a landlord and your tenant vacates the leased property in the middle of the lease period and stops paying rent.  You might assume that you have an iron-clad legal case against the tenant for breaching the lease.  However, if an allegation of “constructive eviction” arises, things might not be so simple.

Constructive eviction is a concept which means that, when the premises are intolerably bad due to the fault of the landlord, the tenant will be allowed to vacate without being responsible for breaking the lease.  In other words, the conditions are so bad that the landlord is effectively forcing the tenant to leave.  Or stated another way, the landlord is “evicting” the tenant by failing to provide decent premises, even if the landlord has not actually asked for the tenant to vacate (and, in fact, wants to the tenant to stay).

Untenable Conditions

Under North Carolina law, constructive eviction occurs when a landlord “breaches a duty under the lease which renders the premises untenable.”  Although the North Carolina courts have not defined the term “untenable,” presumably this term means that the premises are in such a condition that no tenant could reasonably be expected to stay there.  Exactly what conditions constitute constructive eviction are usually subject to debate.  Problems such as persistent building code violations, serious ongoing roof leaks, electrical problems or other safety hazards might provide a strong argument for constructive eviction.  Other problems (such as a bad odor, noise issues, etc.) may provide a less compelling argument, depending on the circumstances.

Importantly, if a tenant claims constructive eviction, the tenant must show that it “abandoned the premises within a reasonable time” because of the condition of the premises.  If a tenant stays in the premises for a long time, an argument of constructive eviction is unlikely to succeed.  After all, if a tenant actually stays in purportedly intolerable premises for many months before finally vacating, it seems hard to say that the tenant “had to” leave.

An allegation of constructive eviction can radically change the dynamics of a landlord-tenant case.  Whereas a tenant might usually owe the landlord money for prematurely vacating the premises, a tenant arguing constructive eviction can assert that the landlord was the party that breached the lease and seek money in court from the landlord for damages such as moving expenses and lost profits associated with being “forced” to move.

Important Considerations

The merits of a constructive eviction allegation will depend on the facts of each case.  Parties in a dispute about constructive eviction should consider, among other things:

• Does the case involve a residential or commercial lease? The expectations for what is intolerable may differ.  For instance, having no hot water for an extended period of time may be seriously problematic for a home, but only a minor nuisance for an office that rarely uses hot water.
• What are the terms of the Lease? Particularly in landlord-friendly commercial leases, the landlord’s obligations to the tenant may be extremely limited.
• Did the tenant timely abandon the premises? There is no set duration for what constitutes a “reasonable” time.  Sometimes, it may be infeasible for a tenant to immediately vacate when intolerable conditions arise.  However, the more time it takes to vacate, the less likely a constructive eviction argument will succeed.
• Did the tenant sign anything confirming that the premises were indeed satisfactory? In commercial leases, tenants are sometimes required to sign “estoppel” certificates to confirm that they are satisfied with the premises.  Once an estoppel is signed, the tenant may not be able to “change its tune” later and say that the premises were defective.
• Are there facts that show that the tenant really left the premises for reasons other than the condition of the premises? A business that has failed because of its own bad management or poor business model may attempt to use constructive eviction as an excuse to stop operating without incurring liability for a broken lease.  In a lawsuit, the landlord may want to explore relevant facts through “discovery” techniques such as document requests and depositions.

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About the Author

Elliot Fus

Elliot has a broad range of experience with landlord-tenant law and has assisted many of North Carolina’s premier shopping centers in matters ranging from routine collection issues to complex jury trials.

Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 6 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.

 

Pitfall # 6 – Failure to Understand Personal Guarantees

Often a business may not be creditworthy on its own, and lenders and trade vendors will seek a personal guaranty from an owner, officer, manager or affiliate of a company. It is important to understand the type of guaranty an individual or affiliate of the business is being asked to execute. Most business owners think they will only be liable after all resources of the company have been exhausted when they sign a personal guaranty. They are surprised to learn that today most commercial guaranty agreements are unconditional, unlimited guaranties of payment. Generally, that means the guarantor is also primarily liable for the debt and can be looked to for payment of the debt without the lender first seeking collection from the company or its assets. Close attention should be paid to any request to execute a personal guaranty.

Also, many trade vendors include a personal guaranty provision at the end of their business contracts. Accordingly, many times owners end up signing a guaranty, without fully understanding the import of what they are signing. All business owners should be looking for personal guaranty provisions contained within a contract and looking for a separate signature line when signing vendor contracts. If a business owner is unsure of what the vendor is asking for in the contract, he or she can always ask to have the document reviewed by an attorney before signing.

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About the Author

Ashley Rusher

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.

Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 5 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.

 

Pitfall # 5 – Failure to Protect Intellectual Property

Types of Intellectual Property — what is intellectual property? Most companies have heard of patents, copyrights and trademarks, but seldom recognize the need to protect certain aspects of the business which safeguard unauthorized use of this type of property by others. Patents protect ideas, concepts, systems, or mechanisms which are novel and unique. Specially licensed attorneys practice patent laws, and the regulations for filing patent applications and maintaining patents require their special attention. Copyrights protect creative expression fixed in a tangible medium. Examples of copyrighted materials are written works, music, and video. Trademarks protect designs, phrases or words which brand a product, service or business. Registration of copyrights and trademarks can provided added protection for a business. Any business that creates a brand, creates an idea or publishes a creative expression should consult with an intellectual property attorney to determine if their idea should be protected from unauthorized use by third parties.

Trade secrets are certain commercial information about a business which is not disclosed to the public, such as a customer list, the McDonald’s secret sauce recipe, or a business plan which must be maintained in secrecy for the success of the company. Contracts with trade vendors, employees, consultants, and anyone else invited into a business and given access to trade secrets should contain special provisions to protect the integrity of a company’s trade secrets.

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About the Author

Ashley Rusher

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.

 

For over fifty years the HUD Section 202 program funded the construction of housing and the provision of supportive services for elderly households. The original program authorized federal direct loans with below-market interest rates and little to no rental subsidy to serve moderate-income elderly and disabled families. The program evolved through several financing and rental assistance phases before shifting to capital advances, 40-year forgivable loans, with rental subsidies provided to very low-income elderly families through project rental assistance contracts (“PRAC”).  Aside from a modest FY2018 appropriation, Congress last funded new construction of Section 202 units in FY2011.  As a result, preservation of the existing stock of Section 202 capital advance units and supportive services is critical to maintaining this housing resource for the growing population of very low-income elderly families.

 

Background:  Section 202 Program

In 2000, Congress acted to preserve a large portion of the Section 202 direct loan inventory by authorizing the repayment and refinancing of those Section 202 properties originally financed with high interest rate loans, which were generally constructed between 1975 and 1992.  The program required the owner of a direct loan project to record a long-term use agreement on the property and demonstrate that refinancing would produce debt service savings, a low bar given the low interest rate environment of the early 2000s.   Debt service savings could be used to provide additional supportive services and other uses beneficial to the residents, as permitted by the statute.  Refinancing also generated funds for needed repairs.

In 2010, Congress expanded the scope of the preservation effort by authorizing the repayment and refinancing of pre-1975 Section 202 direct loans with original interest rates below six percent to allow property owners to address the physical needs of those projects.  The expanded program permitted an increase in debt service to fund capital improvements.  Accordingly, the statute allowed an increase in Section 8 rents to support the refinance; however the overall increase was limited to mark-up-to-market or mark-up-to-budget rent increases under the Multifamily Housing Reform and Affordability Act.  In addition, HUD required any rehabilitation to address significant repair needs and qualify as a substantial rehabilitation, as defined by FHA.

The bulk of the existing Section 202 capital advance properties have operated for at least ten years, and the oldest are approaching twenty-five years of age.  As a result, many of these properties require major repairs and updates.  Because capital advances do not amortize and PRAC rents are sized accordingly, the financing challenges associated with preservation are somewhat unique but align more closely with the needs of pre-1975 Section 202 direct loan properties as expenses for debt service are expected to increase as a result of rehabilitation.

 

“The 2018 Act”

Through the 2018 Consolidated Appropriation Act (“the 2018 Act”) Congress expanded the Rental Assistance Demonstration Program (“RAD”), which allows the conversion of certain types of housing subsidy to Section 8 assistance, to permit conversion of PRACs to long-term Section 8 project-based rental assistance contracts and project-based voucher contracts.  In addition, the 2018 Act authorized the subordination and/or restructuring of existing capital advances, as necessary, to facilitate restructuring.  These changes are designed to allow Section 202 capital advance owners to leverage their rental assistance to make necessary repairs and updates.

HUD is currently drafting a much-anticipated revision of the RAD Notice, which will detail the program requirements for “RAD for PRAC” as a Component 2 RAD program.  Congress did not cap the number of units that may convert under Component 2, so the selection process is not competitive.  RAD is revenue neutral:  it permits conversion of existing subsidy but does not provide additional funding.  As a result, this program presents some unique challenges that need to be addressed in the RAD notice:

 

Rents / Rental Subsidy

PRAC rents were not designed or permitted to support an amortizing mortgage.  Even if the existing capital advance “debt” is subordinated or restructured rather than refinanced, Section 8 rents based on current pre-RAD budgets without debt service would limit a Section 202 owner’s ability to support loan amounts necessary to provide adequate funding for transaction costs and necessary repairs/rehabilitation.  While the introduction of other sources of financing, including soft loans and low-income housing tax credits, will defray some of this expense, the availability of subsidy and the method of determining rents, both initially and over time, will play a key role in determining the feasibility of this program for individual projects.

Restructuring of Existing Capital Advances

The 2018 Act authorizes the subordination and restructuring of the existing Section 202 capital advance, which currently includes obligations under a note, mortgage/deed of trust and use agreement.  Subordination and restructuring of the capital advance must be considered within the context of acceptable project ownership structures, which Congress expanded in 2000 and 2010 to include for profit limited partnerships with various types of nonprofit general partner control. A shift to for-profit ownership will be required for capital advance properties to take advantage of some financing tools. However, the entity that will become the “debtor” under any capital advance note and deed of trust/mortgage, the obligations of the continuing capital advance, and tax implications related to those obligations, must be addressed within the context of potential changes in ownership structure.

 

Scattered Site Projects

Given that many Section 202 capital advance projects include fewer than fifty units, aggregation of multiple facilities into a single scattered site project, if permitted, would distribute certain fixed expenses and increase the feasibility of the RAD for PRAC program for some projects.  Authority to transfer projects would further encourage consolidation and create an opportunity for cost savings.  Transfer authority would also provide an opportunity for some smaller sponsors and owners that no longer desire or are no longer equipped to continue in those roles to exit the program and facilitate transfer of properties to those with the tools to take advantage of the RAD for PRAC program.

 

Supportive Services

By statute, the 202 program requires owners to provide supportive services considered essential for elderly residents to continue to live independently.  Some owners receive grants to fund those services.  For others, employment of a service coordinator is considered an eligible cost under the PRAC.  Inclusion of those expenses in the Section 8 operating budget is vital to the continued provision of those services.

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About the Author

Susan E. Campbell

Susan provides counsel and assistance with housing, community development, and regulatory matters, focusing on HUD/FHA-insured loans and asset management issues.

 

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Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 4 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.

 

Pitfall # 4 – Failure to Address Employment Issues

Proper Documentation of Employees – Federal laws require all employers to obtain copies of certain documents at the time of hire, and to maintain copies of those documents on file for the duration of the employment.  Best practices should be adopted for all incoming employees to ensure proper documentation is received.  In addition, routine audits of employment records should be performed to make sure a company’s records would pass muster in a federal audit.  Failure to adhere to these laws can result in the business being shut down, and even criminal charges in some circumstances.  Consulting with an HR professional or an employment attorney on proper procedures and best practices in hiring and record retention is advisable.

Employment Contracts – North Carolina is an “at will” state, which means employees may be hired and fired, at will, for any cause or no cause at all.  Accordingly, most employees do not have written employment contracts.  There are two exceptions.  The first would be a union contract where a collective bargaining agreement governs the employment relationship.  The second would be a key management position where a written offer of employment is agreed to between the company and the employee.  The laws which govern what employment contracts can and cannot provide are constantly evolving.  A business wanting to use a written employment agreement to retain top executives in its business should have an employment attorney draft a standard employment agreement to ensure the employment laws regarding restrictive covenants and non-competes, confidentiality, termination, and the like are adhered to.  If you have a written employment agreement that you have been using for a number of years, it is good idea to have it reviewed every few years by an employment attorney to make sure the provisions in it are still enforceable.

Employee Policy Manual – Since most employees do not have an employment contract to govern the terms of their employment, any business that employs more than three people in the business should have an employee policy manual to guide the employment relationship. The employee handbook can cover an array of issues. One important area to address is use of computer systems and the internet. Having policies in place regarding use of a computer terminal at work by employees has been increasingly important in the age of cyber security. An HR consultant or employment attorney can prepare an employee handbook, or review and update any current policies and procedures a company may already have in place.

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About the Author

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.

 

 

 

Ashley Rusher