Month: December 2020

Holiday wishes for you….

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The holidays make us thankful, and we have so much to be grateful for even in this incredibly difficult year!

We are enormously thankful for the smart, selfless and dedicated workers who put their own lives and health at risk again and again to fight this pandemic that plagues us, the doctors and nurses who have manned the hospitals and other facilities that have cared for the sick.

We are thankful for others who have been at risk during this scary year, first responders, food industry employees, retail employees and others who met the public and kept us as safe as possible and kept our economy running to the extent possible.

We are thankful for the scientists who have worked tirelessly to give us guidelines for protecting ourselves and others. We are unquestionably thankful for the brilliant scientists, doctors and their support systems who worked at record speed to develop vaccines that give us much needed light at the end of the tunnel.

We are thankful for teachers who have worked courageously and at their own peril to educate our children.

And I am personally thankful for you! I am thankful for the hard, dedicated and creative work performed this year by the talented group of individuals who handle real estate closings in South Carolina and elsewhere. You have handled record levels of work this year in masks, in your parking lots, behind Plexiglas, from your home computers. You have established methods to deliver documents and funds without contact. You have sanitized between closings. You have given away pens to avoid sharing germs. You have allowed staff to work remotely. You have implemented new technology. In short, you have done great, creative work this year, and you deserve these holiday wishes.

HOPE: I wish for each of you the hope that 2021 will be a much better year; that the pandemic will be controlled; and that we will be able to celebrate with family and friends everything we were unable to celebrate in 2020. I wish for the hope of good health for you and your loved ones.

PEACE: Sometimes the most difficult times seem to give us peace. When we are able to admit that we don’t have control of our daily situations, we can somehow relax and find peace. This pandemic has definitely taken away a certain amount of control! For those of us who believe in a higher power, we can give our higher power control and find peace that passes understanding. I wish that kind of peace for you.

JOY: Although 2020 has provided us with plenty of reasons to be less than joyful, I wish for you and your family the kind of joy little children find during the holidays.

LOVE: I wish for you and your family members the kind of love that only the holidays can bring.

I’m typing this in front of the Christmas tree on the cold and rainy Sunday before Christmas. My dog is at my feet and my husband is nearby watching the Falcons vs. the Bucs. We are sad that we won’t have our usual loud, crazy and fun holiday celebrations, but we are thankful! And I am thankful for you!

Rollback tax law in SC changes effective January 1, 2021

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South Carolina real estate lawyers who represent developers or clients who sell land to developers deal with the issue of rollback taxes routinely. But lawyers who don’t deal with this issue on a regular basis should be aware of it to avoid stepping into what can amount to a very expensive trap.

Rollback taxes are assessed when the use of property that has been taxed as agricultural rate changes. Under prior law, rollback taxes were accessed for a five-year period. South Carolina Code Section 12-43-220 was amended in this year’s shortened legislative session to reduce the lookback period to three years. The amendment is effective January 1, 2021. In the year the use of the property changes, the difference between the tax paid under the agricultural use classification and the amount that would have been paid (typically under a commercial designation) is charged at full fair market value.

How expensive can the difference be? Agricultural use valuation is based upon crop yield and was frozen in 1991. For coastal and many other counties the difference between the agricultural use fair market value and the commercial fair market value can be enormous. In addition, many, but not all, agricultural use properties are taxed at a four percent assessment ratio versus the commercial designation’s six percent assessment ratio, and the millage is different.  This alone can contribute to a large rollback tax. Rollback taxes can easily amount to thousands if not tens of thousands of dollars.

When agricultural property is sold, the rollback tax issue comes into play. There is no norm in South Carolina as to who pays the rollback taxes. If the parties and their lawyers are aware of the issue, payment of the additional tax should be covered by contract. I’ve seen the issue arise for the first time at closing, however, and the typical tax proration contract provisions just don’t do the job to cover this issue. The buyer will argue that the decision to change the use of the property was not the buyer’s concern, and the seller will argue that the buyer had the advantage of the lower tax rate. Negotiations can get heated quickly.

When agricultural property is sold, the purchaser is required to sign an affidavit within thirty days of the sale stating under penalties or perjury that the property continues to qualify as agricultural. If that affidavit is not filed, the assessor will automatically apply rollback taxes. Note that if the issue is not handled at closing, the purchaser will have the ultimate responsibility, and you do not want to be the lawyer who failed to notify your purchaser client of this trap.

Fee-in-lieu completely eliminates rollback taxes and this should be a consideration for any large commercial project. A minimum investment of $2.5 million is required for a fee-in-lieu but many urban counties will not approve a fee-in-lieu for the statutory minimum. As always, contact a tax expert for assistance with these sticky matters.

Will Bay Point Island in Beaufort County be developed?

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Bay Point Island – Image courtesy of The Post and Courier

An interesting development vs. environment saga has been transpiring in Beaufort County for the last few years. In 2016, the town council of Hilton Head voted to accept an application for the annexation of Bay Point Island, a vulnerable barrier island at the mouth of Port Royal sound. But two storms and the knowledge of the historical and ecological significance of the island caused the council to back away, and the island has remained largely untouched.

The island currently has no infrastructure and is only accessible by boat or air.

The island is a refuge for thousands of shorebirds and seabirds and the home of other wildlife, including threatened sea turtles. It also protects fragile marshland and water rich in fish and other marine life. Beaufort County has designated Bay Point a “T1 Natural Preserve”, the county’s most restrictive rural zoning designation.

The county development code states this designation is “intended to preserve areas that contain sensitive habitats, open space and limited agricultural uses. This Zone typically does not contain buildings; however, single-family dwellings, small civic buildings or interpretive centers may be located within this zone.”

A Bangkok, Thailand resort developer seeks to build and operate on Bay Point Island fifty beach bungalows, four spa and wellness centers, several restaurants and areas for listening to music and watching movies.

The developers submitted a special use application for “ecotourism”, but Beaufort County’s Zoning Board of Appeals denied this application on September 24. That denial is being appealed. 

An interesting new development is the entry of The Gullah/Geechee Fishing Association into the dispute. The South Carolina Environmental Law Project issued a press release on November 27 announcing the Association has filed a motion to intervene in the appeal.

According to the press release, the Association seeks to intervene because the livelihoods of its members will be impacted by the development. For generations, the Association’s members have relied on the marshes, beaches and waters surrounding Bay Point to harvest fish and shellfish which support their businesses and their families.

Opponents of the development include Governor Henry McMaster. Environmentalists argue that the damage from the resort would extend beyond the island to the nearby marshes which would be threatened with increased chemical, storm water and septic runoff.  

Ecotourism permits in Beaufort County have been granted for oyster farms, flower farms and kayak operators. This resort development would be a huge leap from those environmentally friendly uses, according to the development’s opponents.

SC Court of Appeals rejects “replacement mortgage” doctrine

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Our Court of Appeals issued an opinion* on November 25 addressing and rejecting a novel foreclosure theory in South Carolina. Let’s look at the facts.

Jimmy and Laura Bailey owned a residence located at 247 Morninglow Drive in Winnsboro. They obtained a $256,500 mortgage loan from Quicken Mortgage in 2009. Later that year, the Baileys obtained an equity line of credit from ArrowPointe in the amount of $99,000. Next, the Baileys obtained a loan from Quicken in the amount of $296,000. The proceeds of this loan were used to pay off the first Quicken mortgage, which was satisfied of record.

At the time of the second Quicken loan, Quicken did not have actual knowledge of the ArrowPointe mortgage, but that mortgage was recorded. The Baileys signed an owner’s affidavit stating there were no outstanding mortgages.

The Baileys defaulted on the ArrowPointe line of credit, and ArrowPointe filed the subject foreclosure action. U.S. Bank (a successor to Quicken) and ArrowPointe filed competing motions for summary judgment, both claiming priority. U.S. Bank first asserted an equitable subrogation argument but abandoned that argument before the hearing and argued the replacement mortgage doctrine instead.

The special referee denied U.S. Bank’s motion, concluding that the replacement mortgage doctrine is not the law of South Carolina and that ArrowPointe’s mortgage had priority. U.S Bank appealed.

The Court of Appeals began its analysis by stating that South Carolina is a race-notice state, that is, the recording statute determines the priority of mortgages, and a mortgage is valid from the date of recording without notice. A subsequent creditor who records first, without notice, is protected by the recording statute.

One exception to the race-notice statute, the Court stated, is the doctrine of equitable subrogation. That doctrine allows a subsequent creditor to obtain priority if it meets the following elements: (1) the lender claiming subrogation has paid the prior debt; (2) that lender was not a volunteer but had direct interest in the discharge of the prior debt; (3) that lender was secondarily liable for the prior debt or for the discharge of the lien; (4) no injustice will be done by allowing the equity; and (5) that lender must not have actual notice of the prior mortgage.

The doctrine of replacement mortgage is also an exception to the race-notice statute, the Court stated. This theory, according to the Restatement (Third) of Property (Mortgages), is described as follows: (a) If a senior mortgage is released of record and, as a part of the same transaction, is replaced with a new mortgage, the latter mortgage retains the priority of the predecessor, except (1) to the extent that any change in the terms of the mortgage or the obligation it secures is materially prejudicial to the holder of a junior interest, or (2) to the extent that one who is protected by the recording act acquires an interest in the real estate at a time that the senior mortgage is not of record.

Courts have adopted three different approaches to equitable subrogation: (1) the majority position holds that a party with actual knowledge of an intervening lien cannot seek equitable subrogation; (2) the minority position holds that a party with actual or constructive knowledge of an intervening lien cannot seek equitable subrogation; and (3) the Restatement approach states that actual or constructive knowledge of an intervening lien is irrelevant and does not bar equitable subrogation.

The Court indicated it is cognizant of a trend toward adopting some form of replacement mortgage doctrine in other states and of our Supreme Court’s dicta in Matrix Financial Services Corp. v. Frazer.** In Matrix, our Supreme Court stated that a lender that refinances its own debt is not entitled to equitable subrogation but specifically did not decide whether a lender that refinances its own debt could succeed under the theory of replacement mortgage.

The Court held that ArrowPoint has priority under our race-notice statute because U.S. Bank had constructive notice of ArrowPointe’s mortgage.

Changing our rule is a matter for the legislature, according to the Court of Appeals. My guess is that our Supreme Court may have the opportunity to weigh in on this issue.

* ArrowPoint Federal Credit Union v. Bailey, South Carolina Court of Appeals Opinion No. 5784 (November 25, 2020).

** 394 S.C. 134, 714 S.E.2d 532 (2011).