Ballard Spahr’s mixed-use, condominium, and multifamily lawyers are pleased to provide this newsletter to keep you apprised of important developments and trends in real estate law in Maryland, Virginia, and Washington, D.C. We hope you find it useful and we welcome your comments and questions.
Development Issues
Configuring and Financing Mixed-Use Projects
There are many issues to consider when planning the legal documents to create mixed-use projects, and these decisions can be influenced by jurisdictional requirements. Maryland, the District of Columbia, and Virginia each have different requirements, as do various counties and municipalities.
One issue that can arise is the timing, relative to construction, for creating vertical parcels to separate the mixed-use components for ownership or financing purposes. In D.C., it is not currently feasible to create condominium units until improvements are substantially complete. However, unlike Maryland and Virginia, D.C. permits creation of Assessment and Taxation lots. Doing so permits vertical parcels to be created without the need for a condominium regime.
On the other hand, subject to local law requirements, Maryland and Virginia permit condominiums to be created prior to completing construction. Creating vertical parcels before the completion of construction can be very useful in many situations, including for separate construction financing of different project components and for reducing transfer taxes by conveying unimproved parcels before they are assessed at a higher value based on completed improvements.
Another important consideration for mixed-use projects is end loan financing for purchasers. The secondary mortgage market imposes limitations on the percentage of non-residential uses that can be included within a project. For instance, Fannie Mae's standard requirement is that no more than 25 percent of a project can be non-residential, although this limit can be increased somewhat through the agency’s Project Eligibility Review Service program. For Fannie Mae purposes, rental apartments are deemed to be non-residential. Mixed-use projects that exceed these requirements may need to seek portfolio end loan financing.
Condominium Warranties and Construction Claims
Given the recent significant uptick in construction of new, for-sale condominium projects in the region, questions about warranty and construction defect liability, as well as strategies to reduce this liability, are arising more frequently. Maryland, D.C., and Virginia all have statutory warranty requirements, but each jurisdiction is unique with respect to warranty scope and length, as well as the time period and procedure applicable to asserting warranty claims. Subject to several qualifications, the statutory warranty period for both units and common elements in D.C. and Virginia is two years, with an additional three-year period to enforce a warranty claim. On the other hand, Maryland imposes a one-year warranty for units and a three-year warranty for common elements, with one additional year to enforce a claim for either unit or common element defects.
While the focus for many developers is on the applicable statutory warranty, condominium associations and unit owners may also pursue claims related to construction defects based on other legal theories, including violation of consumer protection statutes, misrepresentation, and negligence. It is possible that non-warranty-based claims for construction defects may be brought after the warranty enforcement deadline if statutory limitation periods for non-warranty claims have not yet expired. Virginia’s statute of limitations generally permits a claim to be asserted for damage or injury to real property within five years of the date the damage or injury occurs. Maryland and D.C. statutes of limitation, on the other hand, generally permit a claim to be asserted within three years of the date that a claimant knew, or reasonably should have known, of the claim. If a claim is not reasonably discoverable, the deadline is extended to 10 years after the building is complete under D.C.’s statute of repose, and 20 years after the building is complete under Maryland’s statute of repose.
Given these potentially longer time frames to assert claims, developers should pay particular attention to dispute resolution provisions when preparing documents to form a for-sale condominium, to ensure these provisions adequately address all potential claims that could be asserted by condominium associations or unit owners. For questions regarding construction defect claims or additional information on the benefits of carefully drafted dispute resolution provisions, please contact Shelah Lynn.
Legislative Changes
District of Columbia
D.C. Zoning Commission Redrafts City's Zoning Regulations (effective September 6, 2016)
The D.C. Zoning Commission has completed a full redraft of the city's zoning regulations. The new regulations take effect starting September 6, 2016, for all applications received on or after June 1, 2016. In addition, the D.C. Office of Zoning has launched a new interactive zoning map, which provides new imaging and data capabilities.
Questions about the new code and its impact should be directed to Emily Vaias.
Maryland
Recordation and Transfer Taxes – Transfer of Controlling Interest – Exemptions (effective July 1, 2016)
Maryland imposes significant transfer and recordation taxes on real estate transfers, and transactions often involve creative means to avoid or reduce these taxes. This new law provides a new, although somewhat narrow, exemption from recordation and transfer taxes. It provides that a transfer of a controlling interest in a real property entity is not subject to recordation and transfer taxes if the interests in the transferor and transferee entities are owned, directly or indirectly, by the same parties and in the same proportions.
Landlord and Tenant – Security Deposit – Contents of Lease (effective October 1, 2016)
Maryland law requires residential landlords to provide receipts to tenants for their security deposits that contain information describing the tenants’ rights with respect to their deposits. This new law requires that the receipt be included in the residential lease, thus ensuring these disclosures are received by tenants at the time the lease is signed.
Notice of Deferred Water and Sewer Charges in Residential Resale Contracts (effective October 1, 2016)
A new Maryland state law requires that a contract for the resale of residential property that is subject to deferred water and sewer infrastructure assessments contain a specified statutory disclosure of the assessments. Maryland state law previously only required disclosure of such assessments in new home sales contracts, although some local jurisdictions require disclosure in resale contracts as well as for new home sales. Counties that have a resale disclosure requirement for deferred water and sewer assessments similar to the new state law are exempt from the new law. The remedies for failing to disclose deferred water and sewer assessments in resale contracts under the new law differ from remedies for new home sales contracts. The new law includes a rescission right for the resale purchaser prior to closing, or the purchaser is entitled to receive from the seller payment of the undisclosed assessments after closing—unless the seller was never charged for the assessments.
Condominiums and Homeowners Associations – Resales – Disclosures and Fees (effective October 1, 2016)
Existing law requires owners of condominium units and residences within homeowners associations to furnish disclosures to purchasers upon resale of properties. This new law caps fees charged by a condominium or homeowners association at $250 to prepare the disclosure information, plus an additional fee of up to $100 if the disclosure information is delivered within seven days of request, or up to $50 if delivered within 14 days. This new law also caps condominium association charges for any required inspection of a condominium unit at $100. In addition, the law makes largely technical changes to certain disclosures required to be furnished to purchasers upon resale of a condominium unit.
Tax Sales – Condominium Assessments and Homeowners Association Fees (effective July 1, 2016)
This law requires that notice of tax sale proceedings be issued to condominium and homeowner associations where an action to foreclose the right of redemption is filed against properties that are part of the association. The law further permits the condominium or homeowners association to collect assessments on the property from the tax sale purchasers after a final judgment is entered in the foreclosure action, regardless of whether a deed has been recorded transferring ownership of the property to the tax sale purchaser.
Montgomery County, Maryland
Expedited Bill 15-16, Recordation Taxes (effective September 1, 2016)
This bill increases the recordation tax on properties sold or refinanced in Montgomery County from $3.45 to $4.45 for each $500 paid up to $500,000, and from $5 to $5.75 for each $500 above $500,000. In addition to the Montgomery County recordation tax, properties sold or refinanced in Montgomery County are subject to Montgomery County transfer taxes of 1 percent of the consideration paid, and state transfer taxes of 0.5 percent of the consideration paid.
To soften the impact of the rate change, the Montgomery County Council delayed implementation of this law until September 1, 2016. The Council also raised the exemption from the Montgomery County recordation tax for first-time home buyers from $50,000 to $100,000 for owner-occupied homes. First–time Maryland homebuyers may also be entitled under existing law to a reduction of the state transfer tax from 0.5 percent to 0.25 percent, provided the home will be occupied as their principal residence.
Virginia
Residential Development – Developer Rezoning Requests – Conditional Proffers (effective July 1, 2016)
Virginia Senate Bill 549, significantly changes the proffer system for many residential developers seeking rezoning from local governments. For those residential projects covered by this legislation, the new law prohibits all proffers, whether requested by the local government or offered by the developer, from being "unreasonable." To be reasonable, the proffer must address an impact specifically attributable to the proposed residential project or the external impacts of the proposed project. Thus, a proffer is reasonable only if the new residential development creates a need for public facility improvements in excess of those existing at the time of the rezoning or proffer condition amendment request, and the new development receives direct and material benefit from the proffer. Proffers for included residential projects must be accompanied by studies that quantify the impact of the new development and explain the need for any proffer that accompanies the rezoning or proffer condition amendment request. The major benefit to the development community is that this legislation imposes significant limitations on proffer requests of developers, placing the burden on the locality to undertake an analysis of the effect of a new project on the local government’s systems and infrastructure.
Ballard Spahr Tackles TOPA
Ballard Spahr recently convened a large group of developers, lenders, investors, government officials, and other industry leaders at a Breakfast with Ballard Event moderated by Ballard Spahr’s Mixed-Use Development and Condominiums Team Leader Roger Winston, to discuss current regulatory requirements, interpretations, and practices involving D.C.’s Tenant Opportunity to Purchase Act (TOPA). Topics addressed included application of TOPA to sales of mixed-use properties and shelf condominiums, application of the new TOPA appraisal requirements, and different mechanisms to address TOPA’s impact on procuring title insurance. Ballard Spahr continues to engage in legislative outreach to promote positive changes to TOPA.
Condominium Section of the District of Columbia Lawyers Practice Manual Prepared by Ballard Spahr
The Real Estate, Housing, and Land Use Section of the District of Columbia Bar asked the Ballard Spahr team to review and revise the Condominium and Cooperatives chapter of the 2016 Edition of the District of Columbia Practice Manual. The manual is considered a must-have resource for many legal practitioners. The newly revised Condominiums and Cooperatives chapter provides current legal requirements for establishing condominiums and cooperatives in D.C. The new edition is scheduled for release this fall.
