Spring 2009

Guarantee and Earn-Out Provisions
Lender unwillingness to provide financing for buyers is a key cause of the current real estate market freeze. Even a buyer in a position to pay cash may be unwilling to buy property in view of the uncertain economic conditions. One solution is for a seller to take back a purchase money mortgage. But even in this case, a buyer may insist that the seller assume part of the risk that the property will fail if the economy continues to worsen. A way to do this is for the seller to guarantee a portion of the buyer's return or to enter into an earn-out provision that closes the gap when bids and offers are too far apart. Read more...

Real Estate Transactions: Two Failures
Time was when real estate transactions were usually between an individual buyer and an individual seller and involved a specific property. But as real estate became more of a commodity, tax rules changed to permit new methods of buying and selling property. Two such methods are the tax-deferred exchange (TDE) and the tenancy-in-common (TIC). Both have become very popular and have been instrumental in broadening real estate markets. But two recent occurrences illustrate new forms of risks that have arisen as well. Read more...

Recourse Loans
Although non-recourse lending is prevalent in real estate, there are times such as now when lenders will only loan on a recourse basis. In a recourse situation, the lender is unwilling to rely on the real estate as the sole security for the loan and requires additional assurances of repayment, either by the borrower himself or by third-party guarantors. A guarantee is an undertaking by a person to be personally liable for another's debt. It is a legal maxim that a guarantor is a favored person in the eyes of the law; that is, the terms of the guarantee will be construed by courts strictly in favor of the guarantor. Thus, the lender must see to it that the guarantee is clear as to its coverage and the conditions that must be met before the guarantee is honored. Read more...

Mezzanine Loans: Purchase Considerations
Weakening market conditions means that all forms of real estate interests are being offered for sale. One such is the mezzanine loan, a special form of subordinate financing. Because this type of loan is not secured by a mortgage on the underlying property, the mezzanine lender cannot lay claim to the property in the event of the borrower's default. Instead, the mezzanine lender utilizes forms of security other than a mortgage--normally, a pledge by the fee owner of its equity in the property. For this reason, first mortgage lenders prefer mezzanine loans to second mortgages and often will agree to them when additional financing is required. The other side of the story is that a mortgage default by the fee owner resulting in a foreclosure will usually mean a total loss to the mezzanine holder unless a guaranty has been obtained from a third party. Read more...

Reviewing Annual Operating Expense Statements
As the new year begins, commercial tenants can anticipate receiving an envelope from the landlord containing the Operating Expense Reconciliation Statement. Typically prepared in the first or second quarter of the year for the prior calendar year, the statement reflects the tenant's obligation--spelled out in more or less detail in the office lease--to pay a share of increases in the total occupancy costs of the building, often the second highest expense after payroll. Tenants today accept the idea that increasing costs constantly chip away at the landlord's profit margin which was carefully calculated into the basic rent set when the lease was executed. In order to preserve the profit margin, landlords expect the building tenants to absorb increased costs of operating the building due to higher property taxes and a higher level of services. Read more...

Too Many Golf Balls
A Georgia appellate court ruled that an express easement allowing golf balls to enter a homeowner's property precluded an action in nuisance and trespass regardless of the volume of balls falling on the property. In 1999, the owner of a large tract of land to be developed into residential lots agreed to subject the lots to an easement in favor of an adjacent property being developed as a golf course. The easement allowed golf balls to fall on the lot and permitted golfers at reasonable times and in a reasonable manner to come on the exterior portion of the lot to retrieve errant golf balls. In addition, the easement provided that under no circumstances will the golf course owner be liable for any damage or injury resulting from errant golf balls. The easement, however, did not relieve golfers of liability for damage caused by golf balls. Read more...

Somerset Real Estate Team News
On Wednesday, April 22, our Real Estate Team will be hosting an exhibit booth at the BOMA Indianapolis Trade Show at the Indianapolis Marriott Downtown. We hope to see you there.

In Other News...
2009 Seminars. Our seminars calendar for 2009 keeps expanding--we just added "What Does Not Kill Us Makes Us Stronger: Strategies for Individuals to Survive and Thrive in a New Reality." Also, don't miss our popular Somerset Practical MBA Program, which includes a live webinar simulcast so those of you outside the Indianapolis area can participate. Please go online to see the schedule and register.

Somerset Client Satisfaction Survey. If you are a Somerset client, please take our survey concerning the services we have provided to you. Our goal is to improve our overall relationship and better serve you. Go to survey.

Somerset publishes a variety of newsletters in addition to Real Estate Focus--such as Wherewithal, Work-In-Process, Tax Times and several others. Please visit the Newsletters page of our web site to read the archives and sign up to have new issues delivered to your email inbox.

Real Estate Focus is provided by Somerset’s Real Estate Team for our clients and other interested persons upon request. For additional information on the issues discussed, please contact Michael Fritton, CPA. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. 

These articles were written by and published herein with the permission from professionals of BDO Seidman, LLP.  Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.