Ohio Supreme Court: OEPA Must Follow Rulemaking Procedure For New TMDLs Before Submitting To US EPA

On March 24, 2015, the Ohio Supreme Court issued its decision in Fairfield Cty. Bd. of Commrs. v. Nally, Slip Opinion No. 2015-Ohio-991, in which the court held that --

1. A total maximum daily load established by the Ohio Environmental Protection Agency (OEPA) pursuant to the Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq. (the Clean Water Act), is a rule that is subject to the requirements of R.C. Chapter 119 of the Ohio Administrative Procedure Act; and
2. The OEPA must follow the rulemaking procedure in R.C. Chapter 119 before submitting a total maximum daily load (TMDL) to the United States Environmental Protection Agency (USEPA) for its approval and before the TMDL may be implemented in a National Pollution Discharge Elimination System (NPDES) permit.

This case involved a challenge brought by Fairfield County regarding a renewed NPDES permit issued by the OEPA back in 2006 to a wastewater treatment place that discharges into Blacklick Creek.  The renewed permit included new phosphorus limitations that were not previously included in the county's permit. The county contended that it should have had a 'full and fair' opportunity to be heard and the right to review and challenge the TMDL before it was submitted to the USEPA for approval. The Ohio Supreme Court agreed affirming the judgment of the court of appeals that had vacated the NPDES phosphorus limitations but for different reasons.

The court of appeals and the Environmental Review Appeals Commission (ERAC) before it had both determined that OEPA had a right to impose the new limits in a renewed NPDES permit without following Ohio's Administrative Procedures Act (the APA) but vacated the limits and remanded to the OEPA for further consideration due to the OEPA's failure to consider with the new permit limits on phosphorus were technologically feasible and economically feasible as required by R.C 6111.03(J)(3).

The OEPA denies that the TMDL is a rule and characterizes it as simply guidance. The court has previously held that the Ohio EPA "cannot regulate through 'guidelines' that are in reality rules requiring formal promulgation" (Jackson Cty. Environmental  Commt. v. Schregardus, 95 Ohio App.3d 527, 642 N.E.2d 1142 (10th Dist. 1994)). When reviewing guidelines or other 'documents' the court has long emphasized that it will look at such guideline or document's effect not how an agency or other governmental entity chooses to characterize it.

When determining that the establishment a new TMDL is a rule requiring the OEPA to follow Ohio's APA, the court notes that it creates new legal obligations, and the standards have general and uniform effect even though they will not be implemented against a point source (such as a wastewater treatment facility) until an NPDES permit is issued.  The court further noted that the USEPA itself is required to proceed through rulemaking when it establishes its own TMDLs and other state supreme courts (ID; SC) have addressed this issue, finding that TMDLs must be promulgated as rules before becoming the basis for discharge limitations in a permit.

Justices O'Donnell and Kennedy, while concurring in the result, did so on the grounds held by ERAC and the court of appeals. In the concurrence prepared by Justice O'Donnell, he noted that the OEPA has issued 1,761 TMDLs, including 132 TMDLs for phosphorus.  Since the OEPA did not follow the Ohio APA for any of these TMDLS, this court's decision for Fairfield County essentially invalidates all of these TMDLs and opens up all of the permits for challenges.

I sympathize with Justices O'Donnell's and Kennedy's concern over the repercussions of this decision. However, in a time when private citizens, including private business, are being subjected to an ever increasing rules and regulations from all levels of government, it's important to all of us that the government is made to follow the rules as well. Only time will tell what the fallout is from this decision.
_____________________

Pending Real Estate Legislation in the Ohio Legislature

Spring is finally in the air and that means, among other things that the Ohio Legislature (https://www.legislature.ohio.gov/) is in session. The bills of the 131st General Assembly pending in the Ohio House and Ohio Senate related to real estate are as follows:

-----------------------------------------------------------------------------------------------------------------------
HB 18
To amend sections 5301.072 and 5311.191 and to enact sections 4781.401 and 5321.131 of the Revised Code to prohibit manufactured homes park operators, condominium associations, neighborhood associations, and landlords from restricting the display of blue star banners, gold star banners, and other service flags, and to prohibit manufactured homes park operators and landlords from restricting the display of the United States flag.

HB 77
To amend sections 4740.01-4740.06, 4740.061, 4740.07- 4740.10, 4740.101, 4740.12, 4740.13, 4740.131, 4740.15, 4740.16, and 4740.99 and to enact sections 4740.18- 4740.21 of the Revised Code to require statewide registration of home improvement contractors, to modify the membership of the Ohio Construction Industry Licensing Board, and to make an appropriation.

SB 84
To amend sections 4781.40, 5301.072, and 5311.191 and to enact section 5321.131 of the Revised Code to prohibit manufactured homes park operators, condominium associations, neighborhood associations, and landlords from restricting the display of Ohio flags and blue star banners, gold star banners, and other service flags, and to prohibit manufactured homes park operators and landlords from restricting the display of the United States flag.

SB 85
To amend sections 307.699, 3735.67, 5715.19, 5715.27, and 5717.01 of the Revised Code to limit the right to initiate most types of property tax complaints to the property owner and the county recorder of the county in which the property is located.

SB 96
To amend section 5715.39 of the Revised Code to waive any penalty due with respect to unpaid property taxes resulting when a mortgage lender fails to notify the county auditor of a satisfied mortgage.

SB 104
To amend sections 505.86 and 3929.86 of the Revised Code to provide owners and lienholders of insecure, unsafe, or structurally defective or unfit buildings with a right to a hearing before the board of township trustees proceeds to remove, repair, or secure the buildings.

SB 108
To amend section 5323.04 and to enact sections 525.01- 525.04, 525.99, and 5715.111 of the Revised Code to permit townships to require owners of residential rental property located within the township to register certain information with the board of township trustees.

SB 109
To enact sections 5755.01 to 5755.12 of the Revised Code to authorize townships to levy impact fees on new development to finance capital improvements necessitated by that development.

SB 112
To amend section 3781.109 of the Revised Code to require public buildings to have at least one rest room facility with an adult changing station.

HB 114
To amend section 3737.84 and to enact section 3781.106 of the Revised Code to require the Board of Building Standards to adopt rules for the use of a barricade device on a school door in an emergency situation and to prohibit the State Fire Code from prohibiting the use of the device in such a situation.

It is a Good Time to Borrow Again

“Low” is the operative word of the day.

According to the US Energy Information Administration, U.S. weekly regular gasoline retail prices averaged $2.78/gallon (gal) on December 1, the lowest since October 4, 2010. U.S. regular gasoline retail prices are projected to continue declining for the remainder of the year, and average $2.60/gal in 2015.

But wait, there’s more. Mortgage rates are below 4% again, hovering around their lowest level since June 2013.They started the year a little over 4.5 percent. A 15-year-loan is now averaging 3.1 percent as opposed to 3.9 percent for a 30-year loan, according to today’s Bankrate.com averages

And that’s not all. The Federal National Mortgage Association (“FNMA” or “Fannie Mae”), as of December 13, 2014, and Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) as of March 23, 2015 will back loans with 3 percent down payments for first-time home buyers. Fannie Mae, Freddie Mac, the National Association of Realtors (“NAR”) and other groups believe the “3% Down Payment Mortgages” could provide a boost to first time home buyers with good credit, but little cash. Industry surveys have shown that 40-45% of those who rent, do so because they cannot afford a down payment.

Critics are concerned that the program will just create more mortgage availability for customers who are more likely to default. In a recent press release, Federal Housing Finance Agency Director Mel Watt disagreed with the critics, stating that the program “provides a responsible approach to improving access to credit while ensuring safe and sound lending practices.”

Among the safeguards and other requirements to qualify for a 3% Down Payment Loan are:

“First Time Home Buyer” (Not having owned a home in the last 3 years)

·         “Primary Residence” (Not for vacation homes or investment property)

·         Minimum Credit Scores (FannieMae-620; Freddie Mac- 660)

·         Documentation of income, assets and employment

·         Credit Counseling

·         Private Mortgage Insurance (but may be canceled once mortgage balance drops below 80% of home’s value)

Whether or not the 3% Down Payment Loan opens the flood gates for first time home buyers, or clutters foreclosure dockets, one thing is clear: It is good time to borrow again. We may not see gasoline prices and mortgage rates this low and incentives this high again, without a time-traveling DeLorean.

Limitations on Bringing Federal Civil Penalty Claims: Federal Agencies Subject to a Stricter Reading

A decision issued last year by the U.S. Supreme Court has ramifications that affect property owners. The case, Gabelli v. Securities and Exchange Commission, No. 11-1274 (“Gabelli”), involved an enforcement action filed by the SEC against two investment advisers for actions that allegedly took place more than five years earlier.  28 U.S.C. Section 2462 applies a 5 year statute of limitations to most federal civil penalties enforcement cases, including the SEC. Because most federal environmental statutes do not contain a statute of limitations clause, they are subject to Section 2462 as well. 

Not surprisingly, disagreements arise as to when the clock starts running on the 5 year statute of limitations. Section 2462 provides that the statute of limitations starts running when the action accrues. However, governmental agencies in the past, including the EPA, have argued that they can’t be expected to know about the actions of the defendants until they uncover the alleged violations during an inspection or investigation, and therefore the 5 years statute of limitations should start running only upon discovery of the alleged conduct, not when it occurred. This is often called the “discovery rule.” 

In the Gabelli case, the SEC argued, and the court of appeals agreed, that the discovery rule should be read into Section 2462 because of the allegations that form the basis of the SEC claims against the defendants were sounded in fraud.  The US Supreme court disagreed, holding that the discovery rule doesn’t apply to civil penalty claims that fall under Section 2462. The court distinguished its decision from fraud actions brought by an injured plaintiff (i.e., not a governmental agency) where the discovery rule might apply. 

This ruling pulls the rug out from under the EPA and other federal agencies that have relied on the discovery rule in the past. Landowners should obtain some protection from the narrower reading of the statute of limitations that the EPA and other federal agencies will have to observe. 

In recent months, as a result of the Supreme Court’s ruling, I’ve encountered purchase agreements where the seller wants to limit all of its environmental representations and warranties to the past 5 years. This is overreach on the part of sellers and buyers need to be aware.  This ruling does not impact private party actions, criminal actions or actions by state or local agencies (Ohio EPA penalty or administrative actions are subject to a more liberal statute of limitations). 

Overall, the effect of the Gabelli decision is good for property owners but needs to be kept in perspective.

________________________

 

Appellate Court Ruling on Oil and Gas Leases Appealed to Ohio Supreme Court

On September 26, 2014, in Hupp v. Beck, the 7^th District Court of Appeals in Ohio overturned the trial court’s decision that certain oil and gas leases in Monroe County, Ohio between landowners and Beck Energy Corporation (Beck) were void from their inception.  On Friday, November 7, 2014, the plaintiff landowners filed an appeal with the Ohio Supreme Court.


The leases at issue contained clauses regarding the lease term that are commonly used in oil and gas leases, and therefore the outcome of this litigation can have far reaching effects in Ohio. The lease term was two-tiered, with a 10-year primary term and a secondary term that could continue indefinitely so long as certain conditions were met. During the primary term, if the property wasn’t being drilled, Beck, as the lessee, would be obligated to pay a ‘delay rental’ payment to the landowner.  Landowners challenged Beck’s form lease arguing that this two-tiered term structure rendered the leases “no-term” or “perpetual” leases, which are contrary to public policy and therefore void.


While the trial court agreed with the landowners, the 7^th District Court of Appeals disagreed and reaffirmed the viability of leases containing these typical provisions. The 7th District covers the following Ohio counties: Belmont, Carroll, Columbiana, Harrison, Jefferson, Mahoning, Monroe and Noble.  Now that an appeal has been filed with the Ohio Supreme Court, we wait.  The court typically (but not always) announces whether it will accept an appeal approximately 2 to 4 months after the appellee’s memorandum in response is filed. If the Ohio Supreme Court elects to hear the landowners’ appeal and decides in the landowners’ favor, it could trigger a massive scramble by gas and oil companies to rewrite their leases.

______________________

14 Predictions We Like for 2014

Real Estate Prognosticators See Commercial Real Estate Recovery Continuing to Accelerate in 2014

Reprinted with permission from: Mark Heschmeyer, the CoStar Group

Commercial real estate firms are moving into the New Year with a renewed sense of optimism - a positive outlook not seen for the past seven or eight years.

While many in the industry predicted a recovery in 2013, they did so with a sense of nagging worry over slower than expected job growth and concerns that the political brinkmanship in Washington could threaten the nation's credit rating and pitch the economy into stagnation or, even worse, recession.

Much of those concerns have ebbed as the two parties came to terms in December over next year’s budget. In addition, the Federal Reserve has established a clear path for rolling back the so-called quantitative easing steps taken in years past to bolster the economy. By spelling out its path for reducing debt purchases, the Fed has taken out much of the guesswork for when those financial supports will end.

Given the overhanging sense of dread seems to have disappeared from most forecasts, experts are predicting a better year in 2014.

CoStar News has encapsulated the following 14 outlooks for 2014 from forecasts offered by respected industry participants and observers. We’ve sorted them alphabetically by the firm making the forecast:

Cassidy Turley: Impact from Rising Rates

If the big economic story of 2013 was policy vs. housing, this year doesn’t promise much in the way of variety. Policy vs. Housing, Part II will see the same threats to economic growth as we continue to struggle with dysfunction in Washington and, most likely, more political brinksmanship that may undermine confidence in the economy. But, while the challenges will be the same, the underlying fundamentals will be slightly stronger. Perhaps the biggest difference is that by the middle of 2014, economic growth should be strong enough for inflation to start to be a possibility once again. This is actually a good thing. The timetable could vary, but we anticipate the Fed raising interest rates by the end of the second quarter-likely in May or June. So long as interest rates don’t move too far too fast, the impact on the overall economy will be minimal. But there will be one. This could slow the housing recovery and it will certainly have an impact on commercial real estate pricing as the price of borrowing becomes more expensive. But that is assuming the underlying economic fundamentals have heated up to the point of warranting such a move-which is ultimately a good thing. A stronger economy may bring higher interest rates, but it will also bring higher earnings, lower unemployment, greater consumer spending and-for landlords-better rental rate growth and NOI. In the meantime, look for the first big political squabble (over the debt ceiling once again) to start up again in late January.

CBRE: Office Market Recovery Poised To Accelerate

The office market recovery is poised to accelerate in 2014, as an improving economy should result in increased office-using employment according to CBRE, the world’s largest commercial real estate services and investment firm. The growth in office-using occupations, particularly in high-tech industries, is expected to increase demand for office space. The U.S. office market vacancy rate will continue to decline next year, falling by 80 basis points (bps) to 14.3% by the end of 2014, Steady improvement in the office market is expected to continue in 2015, with the vacancy rate forecasted to dip another 80 bps to 13.5%. CBRE forecasts that office rents will increase by 3%, on average, in 2014, and rise another 4.4% in 2015, as vacancy levels fall steadily toward the “equilibrium” level over the next two years.

Cornell Univ. and Hodes Weill: Big Money Will Continue To Rule

Institutions are significantly under-invested in real estate and are poised to allocate significant capital to new real estate investments. The weight of this capital can be expected to have broad implications for the industry, including transaction volumes, fund raising, lending activity and property valuations. The supply of capital may sustain current valuation and financing metrics (including capitalization rates and the cost of debt capital), according to Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates, which co-sponsor the Institutional Real Estate Capital Allocations Monitor.

Deloitte: Steady Growth but Not Enough To Spur Much New Development

CRE fundamentals continue to improve across all property types, including vacancy, rent, and absorption levels, according to Deloitte's real estate forecast. However, demand is yet to increase enough to drive development activity, except for multifamily and hotel construction, which continues to be robust. These same sectors, which were the first to grow and recover after the recession, may see some tapering off in fundamentals as new supply comes to the market. Overall, it appears that fundamentals will continue to improve at a moderate pace, in line with the macroeconomic situation.

DTZ: Business Tenants Keep Bargaining Clout

The U.S. economy will continue to expand at a moderate rate, which will lead to more job growth and a related increase in demand for occupational space, reports global property services firm DTZ. However, with the expected moderate job growth, vacancy will only trend down slowly. Occupiers will remain in good bargaining positions over the next two years and occupancy costs will increase in line with inflation. They will continue to receive concessions as landlords compete to increase their properties' net operating income. Occupiers will gravitate to the most affordable markets and continue to reduce their costs through more efficient internal space build-outs.

EY: Private Equity Funds Getting Hands Dirty

Having emerged from the global recession and its aftermath, the real estate private equity sector is finally positioned for growth in 2014, according to a global market trends outlook in real estate private equity published by EY (Ernst & Young). Strategies being deployed by different PE firms and even funds to take advantage of this growth opportunity differ, as fund managers seek to differentiate themselves in a hotly competitive fundraising environment. But EY sees fewer opportunities in the future for fund managers to capitalize purely from the financial structuring side of their investments. The funds that come out ahead of the competition in this next phase of growth will have one thing in common: an 'old school' asset management approach that realizes maximum investment value by working closely with service providers to fill buildings and manage real estate.

Freddie Mac: The Emerging Purchase Market

Led by a resurgent housing sector, 2014 should shape up to be better than 2013 with a quickening recovery pace leading to more job creation. Freddie Mac expects single-family home sales and housing starts to be at their highest levels since 2007, and expect multifamily transactions and construction to post gains as well. The big shift ahead will occur as the single-family mortgage market begins transitioning from a rate-and-term refinance-dominated market, to a first purchase-dominated market. The emerging home-buyer purchase market should gather momentum in the coming year.

 Grant Thornton: Huge Boost Ahead for Industrial Markets

U.S. companies will bring production, customer service and IT infrastructure back home, reports tax-advisory firm Grant Thornton. The reshoring trend is real and about to dramatically reshape the U.S. economy. More than one-third of U.S. businesses will move goods and services work back to the U.S in the next 12 months, which means that as much as 5% overall U.S. procurement may return home. The Grant Thornton LLP "Realities of Reshoring" survey found that even IT services, one of the first business functions to move offshore, are likely to return within a year. The trend could provide an enormous boost to domestic manufacturers, retailers, wholesalers/distributors and service providers.

Jones Lang LaSalle: Pent Up Retail Demand Will Drive Investment

Total retail investment is expected to increase upwards of 20% in 2014, according to Jones Lang LaSalle, as pent up demand that was not satisfied in 2013 fuels investments and investors look to balance their portfolios. The retail market will continue to turn around despite store closings and consolidation. Vacancy rates are projected to inch downward driven by power center popularity, while rents are expected to increase albeit slightly for the fourth consecutive quarter. JLL also expects the number of retail property portfolios coming to market, which combine a broad spectrum of B and C retail assets, will increase as REITs look to sell assets and recycle capital in the year ahead.

Kroll Bond Ratings: Multifamily Resurgence in Conduit CMBS

The Federal Housing Finance Agency (FHFA) has begun to implement strategies to reduce the multifamily footprints of the two GSEs it oversees. As a result, Kroll Bond Rating Agency expects we will see a gradual decline in Fannie and Freddie’s securitized market share, which could revert to levels not seen since before the run-up to the CMBS market peak. At the peak of market in 2007, the conduit market’s share of the $36 billion securitized multifamily loan market was just over 78%. As the financial markets spiraled, that trend reversed and the GSEs became the primary source of loan production, dominating securitized new issues with more than a 95% market share.

Nomura: Muted CMBS Loan Maturity Risk

Based on the performance of loans maturing in 2012 and 2013, the investment bank Nomura estimates that 84% of loans maturing in 2014 will pay in full, a decline of just 3% from 2013 levels. Similar to 2013, Nomura expects the balance of loans rolling to delinquency to decline over the coming year, influenced by muted maturity risk and fewer term defaults resulting from improving CRE fundamentals. Most of the loans maturing in 2014 have 10-year terms and were underwritten prior to the sharp rise in property values that began in 2005. However, 15% of maturing loans have 7-year terms and were underwritten at the market peak. This set of loans has an increased risk of default at maturity.

PKF: U.S. Hotel Investors Poised To Do Well in 2014/2015

After a slight deceleration in growth during the last half of 2013, PKF Hospitality Research, LLC (PKF-HR) is forecasting very strong gains in revenues and profits for the U.S. lodging industry in 2014 and 2015. PKF projects national revenue per available room (RevPAR) to increase 6.6% in 2014, followed by another 7.5% boost in 2015. Concurrently, hotel profits should enjoy growth of 12.8% and 14.5% respectively over the next two years.

PwC US and ULI: Investor Activity Continues To Expand Beyond Core Markets

The U.S. real estate recovery is set to continue into 2014, with investors increasingly looking beyond some of the traditionally popular markets to secondary markets in search of higher yields, according to the latest Emerging Trends in Real Estate 2014, co-published by PwC US and the Urban Land Institute (ULI). The predicted growth in secondary markets will be driven by investors searching for returns as opportunities in core markets become harder to find and the most sought-after properties become more expensive. The move into secondary markets is underpinned by the anticipated increase in both debt and equity capital during 2014.

Transwestern: More Opportunities in Sale-Leasebacks and Net Lease

The cost of capital for owner occupants is on the rise, thanks to increasing interest rates. To cope with higher costs, owner-occupants are increasingly looking at selling their owned real estate as one strategy to generate funds for operating expenses, company expansion or retiring debt. This scenario presents an excellent sale-leaseback opportunity for investors looking to acquire real estate that comes with a long-term tenant in place. The lending environment is expected to bring more net-lease properties to market, as well. As interest rates increase, a larger number of office, industrial and retail buildings are projected to be marketed for sale.

That's 14 predictions for 2014. We look forward to covering these and many other major trends in commercial real estate in the year ahead. Here is a bonus prediction from CoStar's Property and Portfolio Research group:

CoStar: 2014 Best Year of Office Occupancy Gains in Recovery Cycle

Heading into New Year, office employment has been growing at the fastest rate since the start of the recovery, with the sole exception of early 2012. But there are two key differences between today's market and that of the past few years. First, the office market now has far less under-utilized "shadow" supply space, which will drive a higher level of net absorption as more office-using tenants expand. Second, with the demand outlook improving and new construction still at bay in most markets, the 2014 occupancy gains in US office markets should be the best of the entire recovery and should tip the scales toward greater rent growth during 2014 than in the past few years. However, developers have already shown their willingness to break ground at the first sign of improvement. This has already happened in Boston, Houston, Silicon Valley and most recently, San Francisco. As developers ramp up new supply, the office occupancy gains are likely to slow in 2015 and certainly by 2016. Investors should enjoy the benefits of occupancy gains in 2014, which are expected to be the best in the current recovery cycle.

---

Commercial real estate professionals look to CoStar for verified, continuously updated property information, market and asset analysis, and Internet marketing support. Today their suite of information, marketing and analytic services provides subscribers with the professional-grade tools they need to find, market and analyze properties with unsurpassed confidence. For more information, log on to: www.costar.com/

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings. Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings.

A Residential Landlord-Tenant Relationship May Be Established More Easily Than You Think

Imagine the following: John Doe owns a house that he typically rents out but was currently empty. He's hanging out with his brother, Jim Doe, while they watch the Ohio State-Michigan game and the subject of John's empty house comes up in conversation. Jim needs a place to stay. They verbally agree that Jim could move into John's unoccupied rental.  Jim wouldn't have to pay John any rent, but he would take care of paying the utility bills and real estate taxes while he stays there and also handle any basic repairs that are needed.

After a while John gets fed up with Jim. He's not maintaining the house any better than he cleaned his room when they are kids and the damage caused to the house by Jim's friends at his Superbowl party is going to cost John quite a bit of money to repair.  They argue and John tells Jim that he wants him out of the house.  While Jim is gambling in Atlantic City for a long weekend, John has the locks on the house changed and moves his brother's stuff over to their sister, Jane's, basement. 

John goes through the house and learns that the damage is substantially worse than expected. When Jim doesn't even acknowledge how badly he damaged the house and apologize, John goes off the deep end and files a lawsuit against his brother for the damages. Shockingly, Jim files a countersuit against John stating that they had a landlord-tenant relationship under Chapter 5321 of the Ohio Revised Code, and therefore he was wrongfully evicted since John did not follow the legally required eviction process . Sounds crazy, right?

Not really. While my story above was hypothetical, the 6th District Court of Appeals in Lucas County held in Ramsdell v. Ramsdell, 2013-Ohio-409 (decided on February 8, 2013), that a landlord-tenant relationship can be established under Ohio law by oral agreement, even with no rent payment; particularly when there are other payments, such as the payment of the real estate taxes and utility bills and even repairs to the property.

The next time you consider letting a friend or family member stay in an empty rental unit, keep in mind that under the eyes of the law, that friend or family member may be entitled to the protections afforded to tenants under Ohio law and a formal eviction process may have to be initiated through the court.
_______________________

Controversial Plan to Use Eminent Domain to Seize Underwater Mortgages Advances in California

The following article was written by Laura Englehart, Law Clerk at Kohrman Jackson & Krantz and a law student at CSU's Cleveland-Marshall College of Law

* * *

In an attempt to keep residents in their homes and prevent foreclosures, municipal leaders in Richmond, California are advancing a plan that allows the city to use its eminent domain powers to seize and refinance underwater mortgages.  While Richmond is still far from actually executing it, the controversial plan could have far-reaching effects if it continues to move forward.  Because Ohio is similarly struggling with an abundance of underwater mortgages, Ohio’s local lawmakers, lawyers, realtors, and other interested parties should take note of how the debate and implementation proceed.

The power of eminent domain allows a government to take private property for public use, but Richmond would be the first to use this power to seize underwater mortgages.  A mortgage is underwater when a homeowner owes more on the home than it is worth.  According to Zillow, 45% of homes in Richmond were underwater in the second quarter of 2013.  

In July, the City of Richmond sent letters to mortgage servicers and trustees offering to buy 624 underwater mortgages at considerable discounts and has indicated that it can otherwise use eminent domain to forcibly take the mortgages.  Upon seizing these kinds of mortgages, the city intends to compensate the banks at fair market value and would then refinance the mortgages to make them more-affordable for homeowners.

 

Housing and community advocates who support using eminent domain in this way believe it is a mechanism that can help stop the housing crisis that is devastating local communities by lowering principal balances and enabling more homeowners to stay in their homes.  Those in opposition argue that it will create a chilling effect by making banks unwilling to enter into future mortgage agreements in Richmond. The Federal Housing Finance Agency has already stated that Fannie Mae and Freddie Mac should stop doing business in places that approve the use of eminent domain to seize and refinance underwater mortgages, effectively eliminating mortgage financing.

 

Investors holding the mortgages in Richmond sued the city through their Mortgage-bond trustees Wells Fargo, Deutsche Bank, and The Bank of New York Mellon and sought an injunction to halt the plan.  Last week, however, U.S. District Court Judge Charles Breyer dismissed the case on grounds that the lawsuit was premature, as Richmond City Council has not yet voted to approve the use of eminent domain. Regardless of the ruling, whether this is a legitimate use of eminent domain remains undecided, and further lawsuits are expected as Richmond continues to move forward. 

 

Lawyers and stakeholders in Ohio should stay abreast of this ongoing controversy because Ohio is also struggling with the magnitude of the housing crisis and has a similarly high percentage of underwater mortgages. According to Zillow, in Ohio 35% homes in Lucas County (Toledo); 32% of homes in Montgomery County (Dayton), 30% of homes in Franklin County (Columbus) and Cuyahoga County (Cleveland), and 28% of homes in Hamilton County (Cincinnati) are underwater.  Other jurisdictions across the nation are already exploring whether eminent domain can or should be used as a new tool to seize and refinance underwater mortgages to stop such homes from going into foreclosure. The eventual outcome in Richmond will have widespread influence.

Franklin County Ahead of the Curve with Property Tax Valuation Mediation Program

Franklin County homeowners now have a cheaper and less time consuming way to resolve property tax valuation disputes- Mediation.

According to the Franklin County Auditor (http://www.franklincountyauditor.com/mediation/mediation):

“Franklin County's mediation program to resolve property value disputes is the first of its kind in the state of Ohio. The program began on June 4, 2013.

Mediation is an opportunity in which an individual (mediator) facilitates communication and negotiation between parties to assist them in reaching a voluntary agreement regarding their dispute. This procedure is outside of the hearing process for the Board of Revision. However, the Board of Revision must approve any stipulation which is reached in mediation.

The basic idea for this program is to conduct the mediations by phone for the convenience of the complainant. It is our goal that your case will be resolved quicker than the standard Board of Revision process.

The complainant, a mediation representative from the Franklin County Auditor's Office and the mediator will typically be the individuals involved in the mediation. If the respective school board becomes involved in the mediation they will become another party.

The mediator does not take sides. The mediator helps the parties work through case issues and reach an agreement. The mediator is not a judge.

A typical mediation session will last about 20 minutes. The issues are typically not that complicated and oftentimes revolve around agreement on a valuation amount for a parcel of real estate.

The primary focus area for negotiation is the market value of the parcel of property which can be agreed by the complainant.

The agreement is then sent to the Board of Revision for approval. Usually the complainant's attendance is not required for approval.

The program has been designed with the convenience of the complainant in mind and to provide better government to the litigants.”

Cuyahoga and other Ohio counties do provide an informal hearing with officials upon a new valuation triennial, but have yet to adopt, to this author’s knowledge, a program like Franklin County’s mediation program.

According to Stephanie Beougher in her 9/11/13 Blog article entitled ‘Homeowners Take Advantage of Mediation Program’ ( http://www.courtnewsohio.gov ),  Franklin County’s  program was designed using a format similar to the Supreme Court of Ohio’s Foreclosure Mediation Program Model, and the goal of the Supreme Court of Ohio is to make this tax valuation mediation program a model program, and then share it with other counties and states interested in providing mediation as an option for property owners.

Franklin County property owners who would like more information about the mediation program should call 614.525.HOME (4663).

Unreasonable Conditions on Land Use Permits — Lack of Remedies for Ohio Landowners

The following article was written by Laura Englehart, Summer Associate at Kohrman Jackson & Krantz and a law student at CSU's Cleveland-Marshall College of Law

*   *   *

Earlier this month, we posted an article outlining the U.S. Supreme Court decision in Koontz v. St. Johns River Water Management issued on June 25, 2013.  The Court concluded that it is unconstitutional for the government to attach unreasonable conditions to land use permits, even when a permit is denied.  However, the Court also articulated a difference between denying a permit and a consummated taking, and it left open the question as to what is the appropriate remedy for a landowner harmed by an unconstitutional conditions violation. 

Though an unreasonable condition to a permit burdens a constitutional right, the Court stated in Koontz that if the permit is denied and the condition never imposed, then there is no actual taking and the remedy of just compensation is not available.  Rather, remedies and damages are available based on the particular cause of action.  Koontz was brought under a Florida law expressly allowing landowners to sue for monetary damages when conditions on permits are unreasonable and constitute a taking without just compensation. Ohio law does not clearly provide for remedies with respect to a permit at all.

Ohio has seen significant legislative and judicial action on regulatory takings and eminent domain in the past eight years.  Following the 2005 U.S. Supreme Court decision Kelo v. New London, which allowed takings of non-blighted private land for purposes of economic development, the State of Ohio enacted a one-year moratorium on such takings and created a task force to study eminent domain restrictions.  At the same time, the Ohio Supreme Court in Norwood v. Horney imposed limits that prohibit eminent domain for economic benefit alone, require heightened scrutiny review of eminent domain, and prevent government from condemning a non-blighted property simply because the property may be deteriorating.  In 2007, based on the recommendations of the task force, Ohio enacted legislation that defines blight, requires notice to property owners before government can initiate appropriation proceedings to effect a regulatory taking, and sets forth procedures for determining compensation. 

Under Ohio law today, to allege an involuntary taking of private property, the appropriate action is for a landowner to file a writ of mandamus to compel government to commence appropriation proceedings. See State ex rel. Shelly Materials v. Clark County Bd. of Comm'rs, 115 Ohio St. 3d 337, 340 (Ohio 2007).  According to Ohio’s appropriation proceedings, the government must first file a petition for appropriation of property in the proper court, the landowner then must file an answer, and a jury must assess compensation for the property appropriated as well as for damages, including relocation expenses and interest. 

However, these appropriation proceedings assume a consummated taking and do not delineate a separate procedure or remedy for disputes over unreasonably conditioned permits.  Because no actual taking occurs when government imposes unreasonable conditions on a permit, the process set forth in Ohio’s appropriation proceedings are unlikely to be available as a remedy.  Therefore, even if the Koontz decision allows landowners to better challenge unreasonable conditions on permits, with the remedies of just compensation and statutory appropriation proceedings unavailable, it’s unclear what remedies, if any, would be available to Ohio landowners.

Are Mortgage Servicers “Suppliers” of “Consumer Transactions” pursuant to the Ohio Consumer Sales Practices Act (Part II)?

On May 14, 2013, the Ohio Supreme Court in Anderson v. Barclay’s Real Estate, Inc., Slip Opinion No. 2013-Ohio-1933 answered the above question posed to it by the Federal District Court for the Northern District of Ohio by holding that “the servicing of a borrower’s residential  mortgage loan is not a ‘consumer transaction’ as defined in O.R.C. 1345.01(a); and “an entity that services a residential mortgage loan is not a ‘supplier’ as defined in O.R.C. 1345.01(C).

A complete background and fact summary of the case can be found in this author’s earlier blog posting of March 4, 2013 appropriately titled: “Is a Mortgage Service Company a Supplier of Consumer Transactions pursuant to the Ohio Consumer Sales Practices Act (“CSPA”)?  Basically, the Anderson case originated in the Federal District Court for the Northern District of Ohio, who concluded (with regard to the CSPA claims) that there was no controlling precedent in Ohio on whether the CSPA applied to mortgage services, so the Federal Court asked the Ohio Supreme Court to answer the following two questions:

1) Does the servicing of a borrower’s residential mortgage loan constitute a “consumer transaction” as defined in the Ohio Consumer Sales Practices Act, O.R.C. 1345.01(a)?  The Plaintiff, Mrs. Anderson  argued that the answer to this first question should be “yes” because mortgage servicers provide a number of services to borrowers, including accepting their payments and working with borrowers to obtain loan modifications.  The servicer, Barclay’s Real Estate, Inc. dba HomEq Servicing (“HomEq”) argued that mortgage servicers perform their services for financial institutions, not for borrowers/consumers, and that therefore the transactions were commercial and not covered by the CSPA.

The Supreme Court of Ohio agreed with HomEq, holding that the servicing of a borrower’s residential mortgage loan is not a “consumer transaction.”  To justify its holding, the court first recognized that one essential element of O.R.C. Section 1345.01(a) was not met:  that there was no “sale, lease, assignment, award by chance, or other transfer of a service [by the servicer]to a consumer”.  Rather, the court reasoned that mortgage servicing is a contractual agreement between the mortgage servicer and financial institution, with no direct contract between the borrower and the mortgage servicer.  While the court acknowledged that the servicer’s duties might involve interaction with borrowers, it reasoned that those interactions are always on behalf of the financial institution. 

The court further reasoned that service provider transactions are not consumer transactions because there is no “transfer of an item of goods, a service, a franchise or an intangible” as required by the statute. The court explained that while a financial institution may contract with a mortgage servicer to service a loan, the mortgage servicer does not transfer a service to the borrower.  The court’s decision was also influenced by:  (1) the CSPA 2007 amendment which added dealings between consumers and loan officers, non-bank mortgage lenders and mortgage brokers as being covered by the CSPA but did not include dealings between consumers and mortgage servicers; (2) Uniform Consumer Sales Practices Act commentary which noted that land transactions should be specifically excluded from Consumer Sales Practices Acts; (3) Ohio court decisions holding that the CSPA does not apply to “collateral services” that are solely associated with the sale of real estate; and (4) other states that wanted real estate transactions and loan servicing covered by their consumer protection statutes specifically defined consumer transactions to include them.

2) Is a mortgage servicer a “supplier”?  Mrs. Anderson argued that servicers are “suppliers” within the CSPA because they essentially function as collection agencies.  The court disagreed, concluding that in order to be a supplier, the servicer would have to be engaged in the business of “effecting” or “soliciting” consumer transactions as provided in O.R.C. 1345.01(c). The terms “effecting” and “soliciting” are not defined in the CSPA, so the court went to Black’s Law Dictionary and found “effect” to mean “to bring about or to make happen”; and  “solicit” to  mean “requesting or seeking to obtain something”. Since servicing a mortgage does not cause a consumer transaction to happen, and mortgage servicers do not seek or request borrowers, the court handily dismissed the plaintiff’s argument and held that servicers are not “suppliers” under the CSPA.

 In spite of the Supreme Court of Ohio’s ruling, many believe that since lenders often disappear once they sell their loans, and the homeowners are left to deal with a servicer exclusively, mortgage servicers are exactly the type of entity intended to be regulated by the CSPA.  Since the court has spoken, however, the only recourse for those who disagree with its decision is to lobby the Ohio Legislature to specifically amend the CSPA to include dealings between consumers and mortgage servicers. 

 

Sun Continues to Shine on the Housing Industry

Spring is in the air and the sun continues to shine on the housing industry in Ohio, and nationwide.

In fact, sales of previously owned homes, nationwide grew to their highest level in more than three (3) years. Last week, the National Association of Realtors (“NAR”) reported a .8% increase in home sales from January to February, 2013, and a 10.2% increase from February, 2012 to February, 2013. That is the 20th consecutive month of year-over year gains as reported by Alan Zibel and Sarah Portlock in their March 22, 2013 Wall Street Journal Article: “Existing Home Sales at 3-Year High.” Lawrence Yun, chief economist for the NAR adds that “the only headwinds [faced by the housing industry] are limited housing inventory, which varies around the country and credit conditions that remain too restrictive”.

In Ohio, sales of new and existing homes from February, 2012 to February, 2013 increased by the same robust 10.2%. For those who like to look beyond the silver lining and focus on the clouds, however, sales in Northeast Ohio have reportedly slipped within this same February, 2012 to February, 2013 period. According to the Northern Ohio Regional Multiple Listing Service (MLS), and the March 22, 2013 Cleveland Plain Dealer article: “Area Home Sales Slip in February” (by PD Reporter, Michelle Jarboe McFee), the 15 County Northeast Ohio Area saw an overall decrease of 1.6% during such period. Some of the Northeast Ohio County results were reported as follows:

Geauga County: -15.0%;

Summit County: -22.5%;

Lorain County: -2.5%;

Portage County: +24.6%;

Cuyahoga County: +4.8%

Northeast Ohio’s reported price decrease, however was called into question by Howard Hanna, the president of Howard Hanna, Ohio. According to Mr. Hanna, his company showed a 24-28% increase in sales from last year.

Elsewhere in Ohio, Franklin County showed a 6.3% increase in home sales from February, 2012 to February, 2013, and according to the Cincinnati Board of Realtors, the overall Cincinnati area (including Butler and Warren Counties) posted an average 15% increase for such period.

Personally, I think it is time we focus on the more than half-full part of the glass. Throw in great “Dow gains”, low interest rates, more credit availability, and rising, but still affordable sales prices and we have the ingredients for a complete housing recovery, and something to smile about.

To Disclose or Note Disclose: When Your House Has Notariety

A question often raised by homeowners and realtors is whether disclosure is required if a house about to be listed for sale is reputed to be haunted or a murder or suicide took place in the house.

This issue was recently litigated in Pennsylvania and the answer, at least for those residing in the state of Pennsylvania, is “No.”

On December 26, 2012, the Pennsylvania Superior Court issued its decision that psychological damage to real property is not a material defect in the property that is required to be disclosed by a seller to a buyer.  The case in question is Janet S. Milliken v. Kathleen Jacono and Joseph Jacono and Cascia Corporation, trading as Re/Max Town & Country and Fran Day and Thomas O’Neill and John Restrepo and Fox & Roach LP, 2012 Pa. Super. LEXIS 4105 (December 26, 2012).  The sellers and their agent were sued over the fact that a murder/suicide occurred in the house and the buyer did not learn of this fact until 3 weeks after buyer moved into the house.  Pennsylvania’s disclosure statute was silent regarding the disclosure of psychological damage. The courts in Pennsylvania sided with the sellers and agents, stating that a murder having occurred on the real property goes to its reputation and not its actual physical structure.   It declined to read into Pennsylvania’s disclosure statute a legal requirement to disclose psychological damage.

Psychological damage is hard to measure as some potential buyers would refuse to buy a house that was alleged to be haunted or the scene of a grotesque murder, while other potential buyers would be attracted to the notoriety. Also, how far back do you go? A seller may be the third owner of the house since the crime occurred. Must it be disclosed in perpetuity? It is difficult to draw a bright line on how to address psychological damage, which is probably a reason why the court declined to open that Pandora’s Box.

 Like Pennsylvania, Ohio’s disclosure statute doesn’t address psychological damage.  Since the decision in Pennsylvania is not binding in Ohio, there is no clear direction in our state whether an Ohio court would follow the Pennsylvania decision or go in another direction.

Even if the odds are favorable that an Ohio court might decided the same way, there is a tremendous cost in both time and money to litigating disputes in court. A seller should consider disclosing the existence of any notoriety associated with the real property, even if it scares off a potential buyer or two. In the long run, it is a lot cheaper than spending thousands of dollars defending oneself in court just to prove a point.

 

Ohio Passes Nonrecourse Mortgage Protections

Borrowers who financed their commercial real property in Ohio with a nonrecourse loan will soon be better protected from inadvertently triggering the full recourse provisions in the loan documents.

 

Many borrowers finance a commercial property such as a hotel loan, retail strip or multi-family housing, through a commercial mortgage-backed securities (CMBS) loan, also known as conduit financing.  These loans have a lot of up-front costs but are attractive to borrowers because of the nonrecourse provisions.  Nonrecourse to the borrower and guarantors means the lender can only look to the collateral (i.e., the real property that is the mortgaged as security for the loan) if there is a default and cannot pursue the borrower or a guarantor for a deficiency balance.

 

All such nonrecourse loans have a carveout to the nonrecourse provisions that allows a lender to go after the borrower or guarantor if certain actions have taken place. These acts are commonly referred to as the ‘bad boy’ acts. The common understanding of the parties has always been that the borrower or a guarantor would have to affirmatively take action contrary to the requirements of the loan documents before the lender could pursue to them for the full amount of the loan.

 

A couple of court decisions that came out of state and federal courts in Michigan at the end of 2011 turned this assumption on its head. Due to vaguely written language in the loan documents, the mere insolvency of the commercial project was sufficient for the courts to allow the lender to seek full recourse against the borrower and guarantors even though the property’s financial problems were due to the bad economy and real estate downturn, and none of the parties had affirmatively committed any act to cause the insolvency. 

 

These decisions created a stir among the CMBS markets and the State of Michigan responded by passing the Nonrecourse Mortgage Loan Act in early 2012.  Despite this, borrowers with nonrecourse loans on properties outside of Michigan continued to be concerned as the decisions could still be used as precedent for actions brought in the other states.   

 

Now Ohio has passed its own version of the Nonrecourse Mortgage Loan Act with language virtually identical to Michigan’s.

 

A final analysis (see pages 41-43) provided by analyst Andrea Holmes of the Ohio Legislative Service Commission states that “[t] act provides that a postclosing solvency covenant may not be used, directly or indirectly, as a nonrecourse carveout or as the basis for any claim or action against a borrower or any guarantor or other surety on a nonrecourse loan. A provision in the documents for a nonrecourse loan that does not comply with the above provision is invalid and unenforceable (see R.C. 1319.08)  

 

The above-described paragraph does not prohibit a loan that is secured by a mortgage on real property located in Ohio from being fully recourse to the borrower or guarantor, including, but not limited to, as a result of a postclosing solvency covenant, if the loan documents for that loan do not contain nonrecourse loan provisions.” (see R.C. 1319.09)

 

The effective date of the new law is March 27, 2013 and its provisions will apply to any claim made or action taken to enforce a postclosing solvency covenant on or after the effective date, unless a judgment or final order has been entered in that action.

____________