Month: February 2016

Minimum Standards Revised for ALTA/NSPS Surveys

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Celebrating the festival of Terminalia?

surveyorAmerican Land Title Association and National Society of Professional Surveyors have spent two years working on a new set of minimum standards for surveys. Their efforts resulted in the adoption of new 2016 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys which go into effect on February 23.  The standards can be found here.

A notable change is the title which acknowledges the merger of ASMC with NSPS. The list of atypical interests in real estate has been expanded to clearly include easements. And a surveyor should now be provided with the most recent title commitment. The term “record documents” has been abandoned in favor of referencing documents that are “to be provided to the surveyor”.

A significant change is the new duty of the surveyor to show “the location of each edge of the traveled way”, including divided streets and highways. The 2011 standards required showing the “width and location of the traveled way”. The change will require surveyors to show the width of the dedicated road in addition to the width of the asphalt.

The requirement to show water features has beefed up. Previously, surveyors were required to show springs, ponds, lakes, streams and rivers bordering or running through the property. Now surveyors must also show canals, ditches, marshes and swamps if any are “running through, or outside but within five feet of the perimeter boundary of the surveyed property.”

If a new legal description is prepared, the surveyor must include a note stating that the new description describes the same real estate as the record description, or if it does not, then the surveyor has to explain how the new description differs from the record description.

The surveyor must now show all observable evidence of both easements and utilities on his plat. Previously, there was some confusion as to whether both had to be shown.terminus 2

There are other modifications, most of which will assist surveyors while not diminishing the value of their surveyors to commercial practitioners and title insurers.

What’s the significance of the date? The Roman god Terminus protected boundary markers. The name “Terminus” was the Latin word for boundary marker. On February 23, Roman landowners celebrated a festival called Terminalia in honor of Terminus. Let’s throw a party!

Will Biltmore Estate’s Owners Get Their Fairytale Ending When IRS Is Done With Them?

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Biltmore EstateOne piece of real estate that fascinates most Carolinians is the picturesque Biltmore Estate in Asheville surrounded by the natural beauty of the Appalachian Mountains. According to articles in Law360*, a trial is scheduled for February 24 in the U.S. Tax Court that may determine whether the property continues to be privately owned and operated or whether portions of the real estate must be sold to developers to pay taxes.

The estate consists of 8,000 acres, 75 acres of formal gardens, and the largest privately owned house in the United States. The 255-room mansion was built between 1889 and 1895, in the Gilded Age, by George Washington Vanderbilt. Mr. Vanderbilt intended for the estate to be self-supporting, so he established a forestry program, poultry farms, cattle farms, hog farms, a dairy and a furniture business.

IMG_3884[1]George Vanderbilt had one child, Cornelia, who married British diplomat John Francis Amherst Cecil. Mr. and Mrs. Cecil worked with the City of Asheville to open the estate to the public in 1930 to spur tourism in the area during the Depression and to generate revenue to support the estate. The Cecil family turned the aging estate into a thriving tourist attraction, now including an inn, a farm, restaurants, gift shops and a winery, among other money-making ventures.

Most national treasures are operated by governmental agencies. According to the Law360 articles, the Cecils believe The Biltmore should be given special consideration because it operates as a business venture causing no drain on federal or state governments.

At issue now is a stock gift to the Cecils’ five grandchildren reported on 2010 tax returns at $20.88 million. The IRS claims the stock is worth $95 million. The family believes the stock should be valued as minority interests in a going concern.  But the IRS argues that the asset value is worth more than the value of the going concern, so a liquidation value should be used.

Lovers of this historic landmark will need to follow this story to determine whether the preferred destination of more than a million visitors per year will remain available as a vacation destination.

*Biltmore Owners Say IRS Is Stonewalling $95M Gift Row, 1/11/2016; Biltmore Owners Battle IRS over $95M Stock Gift, 7/7/2014.

(The Estate’s website is the source for many of the facts in this blog.)

The Big Short: Required Reading (and watching) for Dirt Lawyers

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Super Bowl 50 was the big entertainment news of the weekend, but coming in at a personal close second were the book and movie The Big Short. I rushed to finish the former before dragging my husband to a Saturday matinee of the latter. Then, a friend pointed me to an NPR special “The Giant Pool of Money”, which provided a fascinating diversion for my Saturday afternoon walk.  (I confess to being easily entertained by all matters involving real estate.)

I encourage everyone involved with “dirt” to read the book, watch the movie and listen to the podcast. All relate to the 2008 financial crisis. At the center of the book (and movie) were several eccentric investors/money managers, who predicted the fall and brilliantly crafted a method to cash in on it. At the center of the podcast was the “giant pool of money”, the trillions of dollars in the economy that constantly need a place to be invested.

Locally, we heard the stories about real estate investors who lost properties and funds in the crash. In our office, we compared the crash to a game of musical chairs. The investors who sat in the chairs when the music stopped (the ones who held titles to the properties) were the ones who lost.

All areas of South Carolina were affected, but our coastal areas were hardest hit. Property values were phenomenal!  A contract on a yet-to-be-constructed residence might change hands several times at increasing prices before the final purchase. And loans were easy to procure at all income levels. No one thought property values would ever soften, and it didn’t matter if adjustable rate loans would reset in two years at staggeringly high fixed interest rates because refinances were readily available. Properties and mortgages churned like butter. There was apparently no end in sight.

The book’s author, Michael Lewis, who also wrote Moneyball and The Blind Side (back to football, which really is the center of the universe), said in explaining the mindset of the people who would borrow again and again, “How do you make poor people feel wealthy when wages are stagnate? You give them cheap loans”.

One of the money managers in The Big Short had his eyes opened by a story from his own household. His babysitter revealed she and her sister owned five townhouses in Queens. When he questioned asked how that possibly could have happened, she responded that after they bought the first townhouse, the value increased, and lenders suggested they refinance and take out $250,000, which they used to buy another townhouse. And so on….

The “giant pool of money” that at one time had been invested safely in boring assets like Treasury bonds, needed a place to land with higher interest rates. With mortgage rates being at 3.5% and higher, no better place could be found.

How did the money managers cash in?  They looked at pools of mortgages that were being sold on the secondary market, saw that the interest rates would collectively begin to reset in early 2007, and bet against the housing market.

They created a “credit default swap” market that bet against collateralized debt obligations. Huh?

One of the points of the book is that the financial markets created fancy terms that average individuals could not possibly understand. In this particular case, it turned out that that the big Wall Street firms, the people who ran them as well as their regulators, did not understand what was happening either.

“Credit default swap” is a confusing term because it is not a swap at all. It is an insurance policy, typically on a corporate bond, with semiannual payments and a fixed term. The money managers who predicted the subprime lending crisis bought credit default swaps that paid off, like insurance policies, when the market crashed.  These eccentric money men were able to predict that there would be a crash of the subprime mortgage market even if housing prices only stalled because borrowers would not be able to refinance or make payments.  When prices dropped, the money men were able to cash in at astonishing levels.

The most horrifying point of the book was that the government’s response to the crisis, the so-called bailout, will not prevent the crisis from happening again. We can only hope that we are all better educated the next time around. As I opened Outlook this morning, though, the first article that caught my eye was from Housingwire entitled “Risky home lending really on the comeback?”  Let’s collectively hope not!

SC Supreme Court Assesses “Sick” Pawleys Island Condo Project

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A 30+-year saga of leaky buildings continues to be litigated

watery apartmentFisher v. Shipyard Village Council of Co-Owners, Inc.,* involves a four-building condominium project in Pawleys Island that experienced leaks as early as 1983. The leaks began around the windows and sliding glass doors, which were defined as a part of each “unit” by the master deed, making the respective owners responsible for repairs rather than the owners’ association.

The bylaws require the Board to act if an owner fails to maintain a unit and that failure adversely affects other units or the common areas. Reducing the facts in this case to one sentence, the issue is whether the owners of units in all four buildings must be responsible for extensive repairs required in two of the buildings.

The cause of the water intrusion is still in question, but the evidence indicates the Board may have known about the leaks for years before it took action.

In 1999, the Board notified owners that they should waterproof balcony thresholds and window frames. In 2002, the Board hired a consultant who found safety issues with the windows and told the Board to pursue legal action. In 2003, the Board hired a construction company that concluded water was leaking through stucco, not windows.

In 2004, Ben and Katie Morrow, owners of a unit in Building B, replaced their windows but continued to experience water intrusion. They engaged an engineer who identified stucco cracks as the source of the problem and stated that Building B was “sick and about to become cancerous” because of the severe moisture intrusion.

And the saga continued.

In 2006, the Board received a $2.4 million proposal to replace windows in Buildings A and B and attempted to amend the Bylaws to designate the windows as common elements, which would have placed the responsibility on the Board. After two attempts to pass the amendment, the Board crafted a letter stating the amendment had passed. The letter did not address the voting procedure and, in fact, incorrectly said a special meeting had been held. The amendment did not address the sliding glass doors.

In 2007, the Board hired a consultant who identified an “open joint” directly under the doors’ thresholds which allowed water to leak to units below.  In 2008, the Board said Buildings A and B required repairs to the tune of $12 – 13 million. The Board hired yet another consultant who identified two primary problems in Buildings A and B: (1) failures in the structural concrete, including corrosion of the reinforcing steel; and (2) the building envelope was not “weather tight”. Another inspection revealed this startling list of defects in Buildings A and B:  roof, façade, edge beam, soffit, concrete, expansion joint, horizontal surface and HVAC anchorage failures, and poor to non-existent flashing in the windows and doors.

In 2008, the owners of units in Buildings C and D hired an attorney, who sent a letter to the Board asserting that a proposed special assessment was invalid because the amendment had not been property adopted, and the cost of repairs should be the responsibility of the owners in Buildings A and B. In 2009, a majority of the owners of units in Buildings C and D brought suit challenging the validity of the amendment. Later that year, the Board notified the owners that the windows and doors in Buildings A and B would be replaced through a special assessment of up to $88,398 per unit. The owners voted against the special assessment, and the Board incorporated the repair costs into the 2010 and 2011 operating budgets.

Later in 2009, the Petitioners (50 owners in Building C and D) filed a new suit, alleging negligence, gross negligence, negligent and gross negligent misrepresentation, breach of fiduciary duty and breach of the master deed and bylaws. This two suits were consolidated, and in May of 2012, the Petitioners moved for summary judgment on their negligence and breach of fiduciary duty causes of action.

The trial court granted summary judgment on the issues of duty and breach, finding the bylaws and master deed imposed affirmative duties on the Board to enforce, investigate and correct known violations, and to investigate evidence of the owners’ neglect of maintenance responsibilities. The trial court also found that the Board was precluded from asserting the business judgment rule because of its ultra vires conduct, as well as its lack of good faith and failure to use reasonable care in discharging its duties.

The Court of Appeals affirmed the trial court’s grant of summary judgment on the existence of a duty to investigate but reversed on the business judgment rule and the issue of breach. The case was remanded for trial, but the Supreme Court granted Certiorari.

The Supreme Court stated that the business judgment rule applies only to intra vires acts. In other words, the rule protects a board that exercises its best judgment within the scope of its authority. The Court held that a corporation that acts within its authority, without corrupt motives and in good faith, is protected by the rule, and remanded the case for jury consideration of whether the Board violated its obligations.

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As to the issue of summary judgment on breach of duty, the Court found that the record contains at least a scintilla of evidence that the Board did not breach its duty to investigate. The Court stated that the record contains some evidence to support a conclusion that the water leaks occurred because of water intrusion through the common elements.  Thus, the trial court should not have decided the question of whether the Board breached its duty to investigate as a matter of law.

The parties are now free to litigate for years to come!

* S.C. Supreme Court Opinion 27603, January 27, 2016