three regulatory bodies impacting the real estate business planning

The Impact of Government Regulations and Policies on the Real Estate Industry

Discover how government regulations shape the real estate industry. Unveil the hidden dynamics, impacts, and opportunities created by policies.

In today's dynamic economic landscape, government policies play a pivotal role in shaping various industries, and the real estate sector is no exception. As a leading real estate platform, we understand the profound effects that government policies can have on this sector.

In this blog post, we will delve into the intricate web of regulatory frameworks, explore the effects of government interventions, and discuss the challenges and opportunities they present.

Join us as we uncover the hidden dynamics of the real estate market.

Understanding the Regulatory Framework:

Government regulations surrounding the real estate industry are extensive and complex. At the federal, state, and local levels, various authorities shape policies that impact real estate transactions, property development, and land-use decisions.

From zoning regulations to building codes, these rules are designed to ensure safety, manage growth, and protect consumer interests. It's essential to understand the roles of different regulatory bodies and how their actions influence the industry.

The role and Significance of Government Policy:

Government policies play a pivotal role in shaping societies and economies by providing a framework for governance and regulation. They are essential tools used by governments to address societal challenges, promote economic growth, protect public interests, and ensure the overall well-being of citizens.

Government policies cover a wide range of areas, including education, healthcare, infrastructure, environmental protection, industry regulations, and more. By setting guidelines, incentives, and restrictions, policies influence behavior, steer investments, and shape the direction of various sectors.

The significance of government policy lies in its ability to create a stable and predictable environment, foster social equity, drive sustainable development, and address emerging issues and opportunities. It provides a roadmap for progress and serves as a catalyst for positive change in societies around the world.

The Impact of Government Policies:

Government policies have a direct impact on the dynamics of the real estate market. Zoning and land-use regulations, for instance, determine where and how properties can be developed. Tax incentives and subsidies can stimulate real estate investments and affordable housing initiatives.

Additionally, interest rates and monetary policies affect mortgage markets and housing affordability. By exploring these factors, we gain a deeper understanding of how government actions shape the industry's growth and stability.

Environmental and Sustainability Considerations:

In recent years, environmental regulations have become increasingly important in the real estate sector. Green building codes and energy efficiency standards are driving sustainable practices and shaping the construction industry.

Such policies not only help protect the environment but also offer economic benefits in terms of reduced energy costs and increased property values.

Navigating Compliance and Regulatory Challenges:

Government policies play a significant role in navigating compliance and regulatory challenges. These policies establish a framework of laws and guidelines that individuals and organizations must follow to ensure legal and ethical conduct.

They protect public interests, promote safety, and maintain stability within various industries. Compliance with government policies builds trust, credibility, and long-term success for businesses.

However, navigating compliance can be complex, requiring a comprehensive understanding of regulatory frameworks and continuous adaptation to evolving policies.

Proactive approaches, such as robust compliance programs, regular audits, and collaboration with industry experts, can help organizations effectively meet compliance obligations and seize opportunities created by government policies.

By aligning with policies promoting sustainability and social responsibility, businesses can gain a competitive edge and contribute to responsible growth.

Future Outlook and Adaptation Strategies:

The future of the real estate industry is shaped by technological advancements, sustainability considerations, and changing market dynamics. Real estate professionals must adapt to thrive in this evolving landscape.

Embracing innovation, such as smart cities and data-driven decision-making, is essential. Prioritizing sustainability and incorporating green building practices will be crucial. Collaboration and partnerships with industry stakeholders foster innovation and growth.

Continuous learning and skill development are necessary to stay updated and make informed decisions. By adopting adaptation strategies, real estate professionals can navigate future trends and remain competitive.

Conclusion:

Government regulations and policies profoundly impact the real estate industry, influencing its growth, sustainability, and compliance obligations. Staying informed and adapting to evolving regulatory frameworks is crucial for success. At EasyDigz, Our tech-driven process organizes all necessary paperwork according to government policies and guides you through submission, ensuring compliance and saving you time and stress. Learn how to buy your property on EasyDigz today.

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Corporate Governance in the Real Estate Development and Property Management Sector: Regulatory Compliance and Urban Planning

Effective corporate governance is essential in the real estate development and property management sector, as it guarantees regulatory compliance, promotes transparency and accountability, and fosters sustainable urban planning practices that prioritize environmental and social considerations. A robust regulatory framework, incorporating industry benchmarks and standards, provides a foundation for good governance. Boards must adopt rigorous governance policies, prioritize diversity, and drive business growth while mitigating risks. As the sector navigates emerging trends and challenges, adopting excellent practices in governance, risk management, and sustainability will be imperative for long-term success. Further exploration of these key elements will reveal additional insights into the complex interplay between corporate governance, regulatory compliance, and urban planning.

Table of Contents

Regulatory Frameworks and Standards

A robust regulatory framework is essential for promoting transparency, accountability, and investor confidence in the real estate industry, with various standards and guidelines established to promote ethical business practices and mitigate potential risks. This framework incorporates a range of compliance metrics, including financial reporting, auditing, and disclosure requirements, which guarantee that companies operate in a transparent and accountable manner. Industry benchmarks, such as those related to sustainability and environmental performance, also play a pivotal part in shaping the regulatory landscape. By adhering to these standards, real estate companies can demonstrate their commitment to responsible business practices and maintain the trust of stakeholders. Effective regulatory frameworks also facilitate the monitoring and enforcement of compliance, enabling regulators to identify and address potential risks and non-compliance issues. By establishing clear guidelines and expectations, regulatory frameworks provide a foundation for good corporate governance, fostering a culture of accountability and transparency within the real estate industry.

Corporate Governance in Practice

In the domain of corporate governance in real estate, effective practice is vital for maintaining transparency, accountability, and stakeholder trust. To achieve this, real estate companies must adopt and implement robust governance policies and procedures, guided by established excellent practices. By doing so, companies can guarantee that their boardrooms operate with integrity, and that governance policies are aligned with industry standards and regulatory requirements.

Boardroom Best Practices

Effective boardroom governance hinges on the adoption of rigorous ideal practices that foster transparency, accountability, and informed decision-making. In the domain of real estate development and property management, a well-functioning boardroom is vital for making strategic decisions that drive business growth and sustainability.

To achieve this, boards must prioritize diversity, guaranteeing that diverse perspectives and skills are represented. This includes gender, age, cultural, and professional diversity, which helps mitigate the risks of groupthink and fosters more informed decision-making. Furthermore, effective leadership styles are vital, with chairpersons and CEOs demonstrating strong leadership skills, integrity, and a commitment to good governance. A culture of transparency and accountability must permeate the boardroom, with regular evaluation and assessment of board performance. Additionally, boards should establish clear policies and procedures for conflict of interest, guaranteeing that decisions are made in the interests of the organization. By adopting these excellent practices, real estate companies can guarantee that their boardrooms are equipped to navigate the complexities of the industry and drive long-term success.

Governance Policy Framework

By establishing a thorough governance policy framework, real estate companies can institutionalize exemplary practices, assuring that corporate governance principles are consistently applied across the organization. This framework serves as a guide for policy oversight, verifying that all aspects of the business are aligned with regulatory requirements and industry standards. Effective framework development involves identifying key sectors of governance, such as risk management, compliance, and transparency, and establishing clear policies and procedures for each. A well-structured framework enables companies to respond promptly to changing regulatory requirements, mitigate potential risks, and foster a culture of accountability. Additionally, it facilitates the development of a robust system of checks and balances, verifying that decision-making processes are transparent, accountable, and in the interests of stakeholders. By implementing a thorough governance policy framework, real estate companies can demonstrate their commitment to good governance, enhance their reputation, and ultimately, drive long-term success.

Urban Planning and Sustainability

Urban planning strategies that prioritize mixed-use development, pedestrian-friendly infrastructure, and green spaces can substantially mitigate the environmental footprint of real estate projects. By incorporating green infrastructure, such as parks, gardens, and green roofs, developers can reduce the urban heat island effect, improve air quality, and enhance biodiversity. In addition, well-designed public spaces can foster a sense of community, promote social cohesion, and support local businesses. Effective urban planning can also reduce the need for personal vehicles, promoting a more sustainable and environmentally friendly transportation system.

In addition, urban planning can play a vital part in promoting sustainable development by incorporating green building practices, renewable energy systems, and waste management strategies. For instance, green buildings can reduce energy consumption, water usage, and waste generation, while renewable energy systems can provide a clean and sustainable source of power. Additionally, effective waste management strategies can minimize waste disposal in landfills, reducing greenhouse gas emissions and promoting a more circular economy. By adopting a holistic approach to urban planning, real estate developers can create sustainable, resilient, and thriving communities that support the well-being of both people and the planet.

Risk Management and Compliance

Real estate developers must navigate a complex web of risks, including regulatory noncompliance, financial instability, and reputational damage, which can have far-reaching consequences for their business and stakeholders. Effective risk management and compliance strategies are vital to mitigate these risks and guarantee the long-term sustainability of their business.

To achieve this, real estate developers can implement various measures, including:

• Developing and maintaining robust insurance strategies to protect against unforeseen events and liabilities
• Implementing robust cybersecurity measures to safeguard against cyber threats and data breaches
• Conducting regular risk assessments and audits to identify and address potential vulnerabilities

Stakeholder Engagement and Transparency

Effective stakeholder engagement and transparency are vital components of corporate governance in real estate, as they foster trust and collaboration among stakeholders. Establishing open communication channels enables the free flow of information, facilitating informed decision-making and mitigating potential risks. Transparent information disclosure practices, in turn, promote accountability and guarantee that stakeholders are well-informed about the organization's activities and performance.

Open Communication Channels

Through regular and transparent disclosure of information, corporations can foster a culture of openness, thereby facilitating meaningful stakeholder engagement and trust. Open communication channels are vital for effective stakeholder engagement, enabling the free flow of information between the corporation and its stakeholders. This facilitates community building, where stakeholders feel valued and invested in the corporation's success.

Effective open communication channels can also contribute to conflict resolution, allowing for the timely identification and resolution of potential issues. This proactive approach helps to mitigate risks and promote a positive corporate reputation.

Some key strategies for establishing open communication channels include:

• Establishing a dedicated stakeholder engagement team to facilitate regular communication and feedback
• Leveraging multiple communication channels, such as online portals, social media, and traditional mail, to cater to diverse stakeholder needs
• Implementing a transparent and responsive issue resolution process to address stakeholder concerns in a timely and effective manner

Information Disclosure Practices

Transparent information disclosure practices are critical to fostering stakeholder trust and engagement, as they provide a clear understanding of a corporation's goals, strategies, and performance, thereby facilitating informed decision-making and constructive dialogue. In the real estate development and property management sector, information disclosure practices play a crucial function in promoting transparency and accountability. Effective information disclosure enables stakeholders to access accurate, timely, and relevant information, facilitating informed decision-making and stakeholder engagement.

To enhance transparency, real estate companies can leverage digital technologies to facilitate data visualization, making complex information more accessible and understandable to stakeholders. Digital transparency can be achieved through the use of interactive dashboards, infographics, and other visual tools that provide a clear and concise overview of a company's performance, goals, and strategies. By adopting digital transparency and data visualization practices, real estate companies can promote stakeholder trust, enhance accountability, and demonstrate their commitment to good corporate governance.

Environmental and Social Impact

Seventy-five percent of real estate investments are exposed to environmental and social risks, underscoring the need for corporate governance to mitigate these impacts. Effective governance is vital in guaranteeing that real estate development and property management companies adopt sustainable practices, minimizing harm to the environment and local communities.

To achieve this, companies must prioritize environmental and social considerations in their decision-making processes. This includes:

• Integrating green infrastructure into development projects to reduce carbon footprint and promote ecological balance
• Conducting community outreach programs to engage with local stakeholders and address social concerns
• Implementing sustainable building practices and energy-efficient design to reduce environmental impact

Emerging Trends and Challenges

As the real estate industry continues to evolve, emerging trends and challenges are redefining the corporate governance landscape, necessitating adaptability and innovation in response to shifting stakeholder expectations and regulatory requirements. The sector is grappling with the implications of digital disruption, which is transforming traditional business models and creating new opportunities for growth. Meanwhile, globalization pressures are intensifying, driving companies to adopt more sophisticated risk management strategies and enhance their operational efficiency.

In this rapidly changing environment, real estate companies must prioritize flexibility and agility to stay ahead of the competition. This requires embracing technological advancements, such as artificial intelligence and blockchain, to improve operational efficiency and enhance customer experiences. Additionally, companies must develop robust corporate governance frameworks that can effectively mitigate the risks associated with digital disruption and globalization pressures. By doing so, they can maintain stakeholder trust, contribute to more resilient and adaptable urban planning, and secure sustainable long-term growth. Effective corporate governance is vital in addressing these emerging trends and challenges, and in creating a more sustainable and resilient real estate sector.

In this complex landscape, real estate companies must be adept at managing these changes to thrive. It is essential in building trust with stakeholders and promoting a sustainable future for the industry.

Frequently Asked Questions

Can real estate developers be held liable for urban planning decisions?.

Real estate developers can be held liable for urban planning decisions if they exploit zoning loopholes, as municipal accountability mechanisms may not adequately address unintended consequences, leading to potential legal and reputational repercussions.

How Do Property Managers Balance Profit With Social Responsibility?

Property managers balance profit with social responsibility through stakeholder engagement, fostering trust and legitimacy, and obtaining social licensing, thereby promoting long-term viability and profitability while meeting societal expectations and norms.

What Role Do Community Engagement Initiatives Play in Urban Planning?

Community engagement initiatives, such as public outreach programs, play a crucial function in urban planning by fostering neighborhood revitalization, promoting inclusive development, and integrating stakeholders' needs into planning decisions.

Do Environmental Impact Assessments Consider Long-Term Consequences?

Environmental impact assessments should consider long-term consequences, examining the project's ecological footprint and potential to undermine sustainable futures. A thorough assessment must evaluate cumulative effects, indirect impacts, and synergistic interactions to guarantee environmentally responsible decision-making.

Can Urban Planning Decisions Be Influenced by Political Interests?

Urban planning decisions can be susceptible to political agendas, as elected officials may prioritize short-term gains over long-term sustainability, potentially influenced by developer lobbying, compromising the integrity of the planning process.

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Real Estate Laws and Regulations USA 2024

ICLG - Real Estate Laws and Regulations - USA Chapter covers key topics relating to practical points and commercial terms in leasing, investment, development, and financing.

Chapter Content Free Access

1. real estate law, 2. ownership, 3. real estate rights, 4. system of registration, 5. the registry / registries, 6. real estate market, 7. liabilities of buyers and sellers in real estate transactions, 8. finance and banking, 10. leases of business premises, 11. leases of residential premises, 12. public law permits and obligations, 13. climate change, 14. covid-19.

1.1        Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to leases of business premises should be listed in response to question 10.1. Those relating to zoning and environmental should be listed in response to question 12.1. Those relating to tax should be listed in response to questions in Section 9.

Each of the states and the District of Columbia follow a mix of statutory and common law.  Louisiana stands alone in employing a civil law system, which is, in part, influenced by the Napoleonic Code, a carryover from its days as a French colony.  There are three levels of law in the U.S.: federal; state; and local.  In certain states, local law may include additional levels of governmental oversight.  For example, in New York State, certain residents of Nassau County who reside in incorporated villages, will be under the jurisdiction of not only the county, but the town and village as well.

Under common law, changes in the law arise by the way of case law (so-called “judge-made” law) and legislative action.  Real estate contracts, including leases, are required to be in writing under the statute of frauds.  All U.S. states have a form of the statute of frauds in place.  The “parole evidence rule” bars extrinsic evidence, including prior or contemporaneous oral agreements and prior or contemporaneous written agreements that contradict or vary the terms of an agreement in writing.  Consequently, the courts will rely on the express terms of a real estate contract, unless the intent of the parties is unclear, in which case, the courts may consider the conduct of the parties.

1.2        What is the impact (if any) on real estate of local common law in your jurisdiction?

Common law has a significant impact on real estate throughout the U.S. through the decisions of state and federal courts.  Below are a few examples of how case law has had an impact on real estate transactions and the real estate industry in general.

Following the Florida Supreme Court case Johnson v. Davis , 480 So.2d 625 (Fla. 1986), a seller of real estate must disclose any latent defects if the seller had knowledge of conditions materially affecting the value of the property that are not readily observable or known by the buyer.  Previous to the Johnson decision, the Florida courts applied the “ caveat emptor ” (“let the buyer beware”) doctrine across the state.

In 2003, two separate decisions of the New Jersey courts affected the respective rights of buyers and sellers in connection with the issue of attorney review (the period for which is three days under New Jersey law).  In Romano v. Chapman , 816 A. 2d 1080 (2003), the Court determined that the parties may agree to shorten the three-day attorney review period.  In Gordon Development Group v. Bradley , 827 A.2d 341 (2003), the Appellate Court held on appeal that there is only one attorney review period, and that it applies to both parties.  It begins to run when the fully executed contract has been delivered to buyer and seller.  The buyer had argued that there are two separate attorney review periods, but the court ruled otherwise.

During the COVID-19 pandemic, many retail businesses were forced to close due to government related regulations and, consequently, they suffered significant losses.  Throughout the U.S., these businesses claimed coverage from their insurers for business interruption losses.  However, the vast majority of U.S. state (and federal) courts, when addressing the issue of whether business interruption losses caused by the COVID-19 pandemic are covered under first-party property insurance policies, have ruled in favour of insurers .

1.3        Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries.

International laws do not govern real estate assets in the U.S.  However, foreign laws may be relevant under certain limited circumstances, such as a U.S.-based party’s ability to sue foreign investors and to enforce judgments against assets that are located overseas (with respect to the enforcement of judgments against overseas assets, U.S. judgments must be recognised by treaty with the country in which the asset(s) are located in order to be enforceable).  International law is also relevant with respect to foreign investors in the tax context.  Foreign capital may be subject to the tax law of the investors’ home country, and in the case of tax treaties, the tax laws of both the investors’ home country and the laws of the U.S.  In the case of debt and equity investment, foreign financial institutions will be governed by their respective home country’s laws and founding charters.

2.1        Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident persons)?

There are no blanket restrictions in the U.S. regarding ownership of real estate by foreigners (e.g., non-resident persons).  However, it should be noted that various federal laws impose restrictions and requirements on foreign real estate investors, primarily in the form of reporting requirements.  For example, under the Agricultural Foreign Investment Disclosure Act of 1978, foreign investors who purchase or transfer U.S. agricultural land must file a public report within 90 days following the transaction.  The Bureau of Economic Analysis of the U.S. Department of Commerce imposes reporting requirements on foreigners who seek to purchase 10% or more of a U.S. business entity or enterprise (which may include real estate-owning entities), although exemptions may be available in certain instances.  Under the U.S. Patriot Act, the federal government regulates investments in the U.S. through disclosure and other laws designed to identify terrorists or terrorist organisations.  The Foreign Investment in Real Estate Property Tax Act of 1980 requires that foreign persons who hold a direct real estate investment in the U.S that was valued at more than $50,000 in the prior year file an information return, which subjects any income generated from real estate transactions to federal income tax.  The Internal Revenue Service (under the Tax Equity and Fiscal Responsibility Act of 1982) requires a domestic or foreign corporation that is controlled by a foreign person to file an information return annually.  The Committee on Foreign Investments in the United States (“CFIUS”), which oversees enforcement of certain “covered transactions”, has the power to block foreign investment transactions if they could affect U.S. national security, and under certain circumstances, may require the divestiture of completed investments.  The Foreign Investment Risk Review Modernization Act of 2018 expanded the scope of CFIUS reviews to include transactions involving real estate that is near military or sensitive national security facilities, as well as foreign “non-controlling” investments in U.S. businesses.  In addition, there are various other laws that may have applicable reporting requirements for foreign investors including the Hart-Scott-Rodino Antitrust Improvement Act of 1976, the Foreign Investment in Real Property Tax Act (“FIRTPA”), export control rules and regulations, U.S. immigration laws, tax laws and various state and local laws.  With respect to the states (as compared to the federal government), Iowa, Minnesota, Mississippi, North Dakota, Oklahoma and Hawaii have enacted outright bans prohibiting foreigners from owning land in their state.  In fact, over half of the states have some form of restriction (including reporting requirements) with respect to the ability of foreigners to own real property.  In Kansas and Wyoming, non-residents who are not eligible for U.S. citizenship cannot own or acquire real estate unless that right is granted by treaty with a foreign country.  In Missouri, non-residents are not permitted to own more than five acres of non-agricultural land.  Further, 14 states currently have some form of restriction regarding the ownership of agricultural or natural resources, including limitations on the amount of acreage that can be owned, although some states have eliminated or scaled back such restrictions in recent years.  Since these various state non-resident restrictions change from time to time, it is advisable for foreigners to check state and local laws carefully before acquiring real estate in the U.S.  For example, state lawmakers have recently shown a continuing interest in addressing potential national security and the economic implications of foreign ownership of land in the U.S.  Between January and June 2023, 15 states (Alabama, Arkansas, Florida, Idaho, Indiana, Louisiana, Mississippi, Montana, North Dakota, Oklahoma, South Dakota, Tennessee, Utah, West Virginia, and Virginia) enacted legislation regulating foreign ownership of real property.  During this six-month period, state lawmakers also introduced bills in more than 20 other states that, if enacted, would regulate or restrict foreign ownership of real property. 

The emerging cannabis industry in the U.S. also poses new issues regarding real estate.  Even though 23 states plus the District of Columbia in the U.S. have legalised cannabis (recreational marijuana) and are beginning to permit licensed cannabis-related businesses to operate, many commercial landlords are still either unwilling or unable to lease their properties to tenants looking to open cannabis businesses.  Cannabis remains illegal under federal law (marijuana is still listed as a Schedule I controlled substance), and existing mortgage loan agreements typically contain restrictions prohibiting federally listed controlled substances from being sold at the property.  Also, because cannabis is a Schedule I controlled substance, cannabis businesses cannot claim the same business deductions as non-cannabis businesses on their federal taxes.  On August 29, 2023, the U.S. Department of Health and Human Services recommended to the U.S. Drug Enforcement Administration that marijuana be reclassified to a Schedule III controlled substance.  If such a reclassification occurred, cannabis businesses could then claim normal business deductions on their federal taxes.  The reclassification could also have far-reaching impacts on banking and finance for the cannabis industry, making bankruptcy protection available, and potentially allowing foreign companies to sell their cannabis products in the U.S.   

3.1        What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual between the parties?

Land in the U.S. is owned by fee title (title to the land).  A landowner having fee title may use the land in any manner that is consistent with federal, state and local laws and ordinances.  Real property is conveyed by the recording of a deed in the local recording office.  Legal title to land may be held by legal entities (such as corporations and limited liability companies), individuals or by multiple parties or partnerships.  When the parties owning the land are individuals, the land may be held by the parties as tenants in common, of which the individuals’ respective interests in the land are divisible, or as joint tenants, which provides for an undivided interest with rights of survivorship (spouses typically, but not always, own land as “tenants by the entireties”, which is similar to a joint tenancy).

Third parties may acquire an interest in real property by contract.  For example, if the landowner seeks to arrange financing for the real property, the lender will typically obtain a security interest in it through the recording of a mortgage or deed of trust.  The mortgage contract will restrict the landowner’s ability to restrict the land without first paying off the debt.

Another type of right recognised in real property is a leasehold.  In a leasehold, a tenant receives a contractual interest in real property by the signing of a lease.  This may or may not constitute an actual interest in the real property, depending upon the length of the lease term and applicable state law.  Parties may also obtain an occupancy interest in real property under a licence agreement, which provides fewer rights than a lease and may be easily terminated based upon the terms of the licence agreement.  A licence gives a party limited rights to access and/or use real property.

Parties may obtain the right to have access to or over real property for various purposes, such as parking, ingress or egress, by obtaining an “easement”.  An easement is a right across the real property of another, but it must be recorded in most states in order to be enforceable.

Valid title to property may also be obtained under the common law principle of adverse possession, which is sometimes colloquially known as “squatters rights”.  Although the elements of adverse possession vary from state to state, at a minimum, the party seeking title must be occupying the real property in an “open and notorious” manner, continuously and for a defined period of time (sometimes as much as 20 years), and use it as if it was his, her or their own property in a manner expected for the type of property.  Some states impose additional requirements such as the party seeking ownership to meet other requirements before obtaining an interest.

3.2        Are there any scenarios where the right to land diverges from the right to a building constructed thereon?

A right to the land diverges from the right to a building constructed thereon in the case of a ground lease.  A tenant in a ground lease will typically have an extended lease for the underlying land, but will own rather than lease the improvements on the land.  At the end of the lease term, the ownership of the improvement on the land will revert to the landowner.  Parties also may enter into a so-called “sale/leaseback” transaction where the owner of a property on which a business is located, may sell the land and building to a purchaser and then “lease back” the building in which the seller’s business was (and is) conducted, in order to continue its operations.

Similarly, air rights represent rights to develop or occupy space above the land.  Air rights are common in densely populated urban areas to enable developers to build taller buildings, including in the space over existing developments.  Perhaps most famously, the air rights over historic structures in New York City have been sold to developers to enable the construction of large buildings that would otherwise be too close to the existing structures.

3.3        Is there a split between legal title and beneficial title in your jurisdiction and what are the registration consequences of any split? Are there any proposals to change this?

The split between legal title and beneficial title arises under the circumstances where the legal title to real property is held by the trustee of a trust, but the beneficiary of the trust holds a beneficial interest in the trust property and receives the benefits of ownership.  The trust’s ownership of the real property would be recorded by deed in a similar manner as a typical deed.  Currently, there are no proposals in any jurisdiction to change this requirement.

If the real property is owned indirectly through an entity and ownership of the entity is transferred (the “beneficial interest”), there is no effect upon the legal title to the real property.  However, there may be federal and state tax implications.  For example, if more than 50% of the beneficial interest is transferred by way of a transfer of ownership in the entity, then New York State may impose a transfer tax with respect to the transaction.

4.1        Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered?

No, the Torrens system of property registration that was once used by many states has been replaced, in most states, with a property recording system.  It is no longer necessary to commence an in rem judicial proceeding in order to claim title as recording systems now serve this function.  While there is no requirement to record a deed to real property, doing so serves as a public declaration of ownership and provides a mechanism to preserve property rights.  For example, in some jurisdictions, a conveyance that is not recorded is deemed to be void against a subsequent bona fide purchaser for value.

4.2        Is there a state guarantee of title? What does it guarantee?

No, local jurisdictions do not provide a guarantee that the individual or entity listed on a recorded deed is, in fact, the true owner of such property.  Rather, purchasers of real estate most often obtain a title insurance policy from a title company that insures the purchaser against any monetary loss if the seller did not, in fact, have marketable title.     

4.3        What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration?

As stated previously, there is no requirement to record title.  However, mortgages and other liens must be recorded in order for lenders and lienholders to perfect their respective security interests and to enable them to enforce their interests against the property.  Recording also protects owners and benefitted parties from previously unknown and subsequently filed third-party claims. 

4.4        What rights in land are not required to be registered?

As previously noted, there is no requirement to record title, but recording is necessary to protect property rights and to perfect certain security interests, such as mortgages and liens. 

4.5        Where there are both unregistered and registered land or rights is there a probationary period following first registration or are there perhaps different classes or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered in the registries.

This is not applicable as there is no probationary period following the recording of an ownership right or interest in real property.  Rather, title insurance policies may provide “gap” coverage in which a title company protects a purchaser from any liens that may be recorded between the time that a real estate transaction is completed and the time that it takes to record a deed and other documents.  Lastly, there are different types of deeds that can be conveyed, such as a general warranty deed or a quitclaim deed, but the representations associated with a specific type of deed are independent of when such deed is recorded.

4.6        On a land sale, when is title (or ownership) transferred to the buyer?

When there is mutual intent to pass title, a transfer of ownership is completed upon the delivery of the deed and acceptance of the same by the buyer.  The execution and recording of a deed gives rise to the presumption of delivery and acceptance.

4.7        Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later rights?

Common law prescribes that the priority of property rights and liens is that the first in time is the first in right.  In most jurisdictions, recording establishes priority and serves to protect such rights.  Statutes may expressly alter the priority of liens under common law.  Certain recordings, such as property tax liens, take priority and supersede other rights that may have been filed earlier.  For example, pursuant to New York Real Property Law, a condominium association’s lien for unpaid common charges is subordinate to any real estate tax liens, even if the condominium association’s lien was recorded first.

5.1        How many land registries operate in your jurisdiction? If more than one please specify their differing rules and requirements.

Recording offices are established at the county levels within each state, so there are literally thousands of such offices in the U.S.  There are two types of registries, namely a grantor-grantee index and a tract-based, block-and-lot index, one or both of which are maintained by county recording offices.  The grantor-grantee index may be used when the names of the parties who owned or transferred the property are known and the tract-based index may be used when looking up a property by its address.  The recording requirements vary by state, but all states require that conveyances of real property be duly acknowledged and each county office requires payment of its specified recording fees. 

5.2        How do the owners of registered real estate prove their title? 

Recording a deed serves as both a public declaration of ownership and a protection of one’s priority of ownership.  In addition, it is customary for attorneys to order a title search or, in some jurisdictions, conduct a title search themselves, on behalf of prospective purchasers in order to determine whether a prospective seller has good and marketable title.  Purchasers of real property may use such title documentation to support their claims of ownership rights.        

5.3        Can any transaction relating to registered real estate be completed electronically? What documents need to be provided to the land registry for the registration of ownership right? Can information on ownership of registered real estate be accessed electronically?

The Uniform Real Property Electronic Recording Act, which allows local recording offices to accept documents and signatures in electronic form, has been enacted by a majority of the states.  Documents pertaining to real estate transactions can therefore be executed and recorded electronically in counties that have elected to implement electronic recording systems.  States and local jurisdictions establish the procedures and the required documentation needed to properly file deeds and other instruments affecting real property.  Generally, all documents must be properly executed, witnessed, and acknowledged by a notary public.  Some counties require property transfer tax returns and certain affidavits to be filed along with a deed.  Many localities have established electronic recording systems that are searchable and accessible to the public.    

5.4        Can compensation be claimed from the registry/registries if it/they make a mistake?

No.  The states have uniformly protected real property registries from liability even if they make recording errors or omissions.  Accordingly, it is prudent for a purchaser and/or a lender to obtain title insurance that ensures against claims of prior ownership and liens.

5.5        Are there restrictions on public access to the register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate and is this achieved by a search of the register? If not, what additional information/process is required?

There are no restrictions on access to county recording offices.  Prospective buyers, or more commonly title insurance agents or attorneys, can search county records to examine the chain of title to learn of any liens, easements, or mortgages on a particular property.  Other pertinent information that would not be found in a county recording office, but that may be obtained through other government agency websites, includes property zoning violations and building code violations.  Additionally, due diligence may lead to a buyer obtaining a survey of the property and conducting on-site inspections.

6.1        Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or duties.

Real estate transactions typically involve a number of parties, the inclusion of which varies depending upon the type of asset being purchased and the nature of the deal.  Real estate brokers represent the seller in most real estate transactions.  The purchaser may also be represented by a real estate broker, although in some instances, both parties may be represented by the same broker.

A purchaser will engage various experts to evaluate the property; usually, at a minimum, a structural engineer will evaluate the property as well as any improvements and their compliance with local ordinances.  An environmental consultant may be hired in some circumstances to evaluate conditions on the land that may effect (or violate) environmental regulations.

The purchaser will also hire a title agent to verify that the seller has the legal right to sell the property (through a title and various types of record searches).  The purchaser’s title agent will also secure title insurance on the purchaser’s behalf to protect against future claims relating to unknown defects on title relating to title to the property.

If the purchaser intends to renovate or develop the improvements, the purchaser may also seek to hire an architect and/or contractor to evaluate the potential for the property to be improved.

6.2        How and on what basis are these persons remunerated?

Real estate brokers receive commissions, which are usually paid at the closing.  If the parties are each represented by their own real estate broker, the brokers will then split the commission.  Broker commissions are typically based upon a percentage of the total sales price, although the rate varies from market to market and will depend upon the type of asset being sold.  For example, in New York City, a commission rate equal to 5–6% of the total purchase price is typical.  However, in areas outside of New York City such as Long Island, a lower rate of 4% may be customary in residential transactions.

The other persons involved in the real estate transaction may be paid at the closing, in advance, or as dictated by local custom or other arrangements made prior to the transaction.  (For example, in New York, it is typical for attorneys to charge a flat fee for residential real estate transactions, which is paid at closing.  On the other hand, work on complex commercial transactions may be billed by counsel on an hourly basis.)  

6.3        Is there any change in the sources or the availability of capital to finance real estate transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see active in your market?

In the U.S., capital is readily available for real estate investment.  Two primary sources for capital are private investors and traditional lenders, such as large financial institutions.  Commercial mortgage-backed securities also provide an important source of funds for a broad range of real estate investment projects.  Ever since the 2008 financial crisis, traditional lenders have faced increased regulatory scrutiny, leading investors to look toward alternative sources of capital.  Foreign investment capital is a significant source of investment money in large markets, particularly from major institutions, sovereign wealth funds and individual investors.  Private debt funds and real estate investment trusts (“REITs”) raise funds through the sale of securities to investors (and in many cases are sold like stock on a major exchange) but are typically expensive to administer and can be sensitive to market fluctuations.  Private equity funds have also become a significant source of investment capital over the past decade, during the time that interest rates remained at historically low levels and prospective returns on investments have been high due to continuously appreciating real estate prices.

Lately, real estate investments are becoming less attractive for several reasons.  High inflation together with the federal reserve’s efforts to combat inflation through ongoing interest rate hikes makes equity financing less profitable.  The shift away from in-person work to remote and hybrid arrangements has also dealt a potentially permanent blow to office space demand.  For example, in major urban areas, in-person work attendance is between 50–60%, whereas office space vacancy rates are still as high as 20% in traditional commercial zones such as downtown Manhattan.  The facts on the ground suggest that, at the very least, office space investment is likely to remain stagnant for the foreseeable future.

6.4        What is the appetite for investors and/or developers to invest in your region compared to last year and what are the sectors/areas of most interest? Please give examples.

The falling demand for office space, rising inflation, rising interest rates and major geopolitical events that are affecting energy prices, including the war in Ukraine, have created difficult market conditions for real estate investment, generally.

The residential real estate market, in particular, has reached a crescendo.  The COVID-19 pandemic, among other factors, triggered a flight of migration from higher cost of living cities such as New York, Los Angeles and Chicago to suburban areas as well as to more affordable mid-sized cities such as Atlanta, Nashville and Charlotte.  However, the outflow has subsided (somewhat) due to the prices in once affordable mid-sized cities increasing by double digits.  This factor, coupled with high inflation and declining real wages as well as increasing interest rates (in part due to the Federal Reserve’s efforts to combat inflation), have resulted in housing affordability plummeting almost everywhere.  Investors in residential properties – ranging from private equity titans such as Blackrock down to “mom and pop” investors flipping single-family homes – are also facing tough competition and low inventory.

6.5        Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? Please give examples.

Even with the subsiding of the COVID-19 pandemic, landlords are still sitting on millions of square feet of vacant office space.  Large tenants have realised significant cost savings by downsizing office space and blending hybrid and remote work.  These factors have not been lost on them.  As of November 2022, office vacancy rates across the U.S. stood at approximately 19.1%, with cities such as Chicago, Houston and San Francisco having commercial vacancy rates of 20% and above.  In cities like New York, new, amenity-rich developments, such as Hudson Yards in particular, are drawing residents from older neighbourhoods burdened by older buildings, such as the financial district.  The flight of commercial tenants to newer developments has left areas such as downtown with commercial vacancy rates exceeding 20%.  While commercial landlords seem to be “hanging on” and making debt payments, rising interest rates and ripples in the securities market continue to be a concern to investors.  It seems that the decreased demand for office space will be permanent and the “trickle down” effect is certain to be felt in real estate markets, generally.  It is a virtual certainty that New York City is not the only market that is, and will be, facing these challenges.

7.1        What (if any) are the minimum formalities for the sale and purchase of real estate?

Real estate transactions are governed by a combination of federal and state statutes and common law.  While laws vary from state to state, an agreement between a buyer and seller for the purchase of real estate (commonly called a Contract of Sale) is typically in writing, as most states have a “statute of frauds”, which requires that agreements relating to real property be must be in writing and “signed” by the parties, to be enforceable.  Litigation over what constitutes a valid “signature” over the last 30 years has led to various federal and state laws regarding electronic signatures.  In most cases, they are binding.  Among other things, the contract of sale sets forth the terms and conditions of the transaction, the various representations and warranties being made by the parties, and any contingencies that must be satisfied prior to a party being obligated to close the transaction.  Depending on state jurisdiction, the seller will be required to make certain disclosures in connection with residential real estate transactions (see question 7.2 below).  The Contract of Sale will typically provide the buyer with a “due diligence” period to inspect the property and to make sure that conditions have been met, leading to the prospective purchaser wanting to move forward with the transaction.  In order to pass title to the property to the buyer at the closing, a deed containing the legal description of the property must be properly executed, delivered to the buyer and officially recorded, so that evidence of ownership is established, and third parties are deemed to be “on notice” of the transfer.  Typically, the purchaser hires a title insurance company to investigate whether title is “marketable” and free of liens and encumbrances, and the title insurance company issues a title insurance policy that insures the buyer against losses caused by a defective title.  The federal Fair Housing Act, which was passed as part of the Civil Rights Act of 1968, prohibits discrimination in housing-related transactions for individuals who are members of a protected class – these include race, colour, national origin, religion, sex, familial status, and disability.  Forty-nine states and the District of Columbia have adopted their own fair housing laws in order to expand these federal protections.  These may include prohibiting discrimination based on an individual’s sexual orientation, gender identity, or source of income.  Nineteen states in the U.S. do not presently have laws protecting LGBTQ+ residents against housing discrimination.  Housing discrimination still remains a significant issue in the U.S.  According to the 2022 Fair Housing Trends Report, 31,216 housing discrimination reports were filed in 2021, with one-third of them alleging discrimination based on sexual orientation or gender identity.    

7.2        Is the seller under a duty of disclosure? What matters must be disclosed?

Generally, sellers do not have disclosure obligations with respect to commercial real estate transactions.  Rather, “ caveat emptor ” (“let the buyer beware”) applies.  Of course, the contract between the parties may provide for and require that certain issues be disclosed.  Federal law requires that sellers provide potential buyers and renters of housing built prior to 1978 with a pamphlet containing information approved by the Environmental Protection Agency regarding lead paint hazards in the residence, and provides the prospective buyer or renter with an opportunity to conduct an independent lead paint inspection.  Many states and localities have distinct disclosure requirements regarding residential transactions.  For example, New York City requires that sellers of residential properties must disclose the presence of lead paint as well as asbestos.  New York City residential sellers are also required to represent (by signing an affidavit under penalties of perjury) that the property has a working smoke detector and carbon monoxide detector.  Under the New York Property Condition Disclosure Act, sellers of residential property located in New York State (but excluding cooperative and condominium apartments), are required to provide the buyer with a Property Condition Disclosure Statement, which consists of 48 questions regarding the condition of the property being sold (ranging from general information, environmental, structural and mechanical systems and services), or in the alternative, provide the buyer with a $500 credit at the closing.

7.3        Can the seller be liable to the buyer for misrepresentation?

Yes.  The Contract of Sale will provide for remedies for the seller’s misrepresentations.  The parties negotiate and include in the contract the period of time that representations shall survive after the closing.  Sometimes, sellers seek to negotiate a “cap” on the seller’s maximum liability for any damages caused by misrepresentations, but buyers often resist such provisions as they want no limitations on seller’s liability.  A buyer who discovers that the seller made a misrepresentation may demand rescission of the contract (where the contract is deemed to be a nullity), and that the parties are returned to their original positions before the contract was entered into.  However, buyers cannot delay when seeking this rescission.  They must demand rescission as soon as the facts surrounding the misrepresentation are reasonably discovered.  If a misrepresentation is discovered after the closing has occurred, damages are typically sought rather than rescission.  However, in limited circumstances, for example, in the case of fraud, and depending on state jurisdiction, the buyer may be entitled to seek rescission even after the closing, although achieving this outcome often requires litigation.  With respect to the New York Property Condition Disclosure Act, while many, if not most, sellers choose to pay the $500 credit to the buyer rather than providing the buyer with the disclosure statement, doing so does not protect the seller from liability under case law exceptions to “ caveat emptor ” (“let the buyer beware”).  Sellers should think twice about not failing to disclose a material defect regarding the property.  If a seller does provide the Property Condition Disclosure Statement to the purchaser, the seller will only be liable to the purchaser with respect to a “willful failure to perform” (which New York courts have interpreted narrowly), meaning that if the Property Condition Disclosure Statement provided by seller contains a misrepresentation, it is unlikely that the seller will be held liable to the buyer (i.e., required to pay buyer’s actual damages caused by the defect), unless the misrepresentation actually prevents the buyer from learning about the defect through the buyer’s normal inspections, or if the defect could not reasonably have been discovered through an inspection. 

7.4        Do sellers usually give any form of title “guarantee” or contractual warranties to the buyer? What would be the scope of these? What is the function of any such guarantee or warranties (e.g. to apportion risk, to give information)? Would any such guarantee or warranties act as a substitute for the buyer carrying out his own diligence?

In terms of the condition of the property, sellers seek to sell the property “as is” and without making any contractual warranties at all.  While buyers often agree to take the property “as is”, they typically wish to apportion risk to a limited extent by negotiating to include certain warranties regarding specific aspects affecting the property.  In residential transactions, these may include warranties that the appliances and that the property’s various systems such as plumbing, heating, air conditioning, electrical and septic system (if applicable) will be in good working order at the time of closing, and with respect to single-family homes, may include warranties that the roof and basement are free from any water leaks at the time of closing.  In addition to negotiating which specific warranties will be included in the contract, the parties also frequently negotiate with respect to what, if any, limitations on seller’s liability (i.e., having a financial “cap”) will apply, as well as the duration of the warranty period.  In the context of a proposed sale of property with tenants (either residential or commercial), the seller of the property typically seeks to have the purchaser rely on “estoppel certificates” provided by the tenants, rather than making representations to buyer regarding the status of existing leases.

The type of deed that is to be provided to the purchaser will vary based on several factors, including, the extent and nature of the warranty of title that buyer is receiving, applicable state statute, and what the parties negotiate.  Warranty deeds are typically used for transfers of real property.  When using a “general” warranty deed, the grantor makes the following warranties to the grantee: that the grantor is the lawful owner of the property and has full rights to convey it; that the property is free from liens and encumbrances; that the grantee will “quietly enjoy” the property; and that the grantor will defend and warrant title to the property.  However, when a “special warranty” deed is used, the grantor covenants that there has been no encumbrance placed on the property while the grantor has owned the property, but does not guarantee against defects in clear title that may have existed before the grantor owned the property.  In certain states including, for example, New York and New Jersey, a “bargain and sale” deed is often used to transfer real property.  This type of deed sometimes includes “covenants against grantor’s acts”, where the seller warrants to the buyer that the seller has not committed any act that would encumber title to the property, except as may be stated in the deed.  A “quitclaim” deed includes no covenants or warranties of any kind and therefore, offers the least amount of protection to the buyer.  Quitclaim deeds merely convey whatever interest the grantor (seller) has in the property, which could be nothing.  In many instances, title insurance may not be issued to the buyer where a quitclaim deed is used, as title insurance companies may resist providing a new title insurance policy where the seller is not willing to provide any warranties as to ownership and encumbrances.  In summary, a buyer’s best “guarantee” of “good title” rests in the title insurance policy that it obtains, rather than in the type of deed that is used or the scope of warranties that are included therein.

7.5        Does the seller retain any liabilities in respect of the property post sale? Please give details.

In real property law, the “merger doctrine” is a common law doctrine that stands for the proposition that the contract for the conveyance of property merges into the deed of conveyance.  Under this doctrine, all discussions, negotiations and agreements, between the buyer and seller, including the contract itself, are “merged” into the deed, and following the closing (where the deed is delivered to, and accepted by, the buyer), the deed is the only remaining legal instrument between the parties.  As a consequence, whatever covenants and warranties are not included in the deed are extinguished at the closing and no cause of action can be brought to enforce them.  The doctrine is intended to bring closure to real estate transactions and to secure the protection of land titles.  However, notwithstanding this common law doctrine, the parties often choose to negotiate and include contractual provisions that provide for the survival of certain provisions set forth in the contact, with buyers seeking to negotiate for as long a survival period as possible and sellers seeking to negotiate for as short a survival period (if any) as possible.  Examples of provisions that are commonly negotiated to survive the closing include, among others, providing for post-closing reconciliations of adjustments (e.g., utilities and taxes) once actual numbers are known, representations and warranties relating to the condition of the property, representations with respect to ownership and authority to convey the property, covenants of confidentiality and indemnification provisions whereby the parties indemnify each other with respect to losses, damages, expenses (including attorneys’ fees) or claims (including claims by tenants of the property, if applicable), based upon which party owned the property at the time the loss, damage, expense or claim occurred or arose.

7.6        What (if any) are the liabilities of the buyer (in addition to paying the sale price)?

The buyer’s primary obligation is to close the transaction, which, as a practical matter, means to attend the closing (either in person or remotely), execute all required documents (including, for example, state and local transfer tax related documents), and to pay the purchase price (in accordance with the terms of the contract).  In the event the buyer defaults under the terms of the contract, the buyer would be liable to the seller for damages.  However, such damages are often contractually limited to the earnest money or good faith deposit (or a percentage thereof), which is typically 10% of the purchase price but also negotiable, especially in commercial transactions.  Where the buyer has performed under the contract and is ready and willing to proceed to the closing, and the seller tries to “back out” of the transaction and refuses to proceed to closing, the buyer can sue the seller and insist upon specific performance (assuming that the seller is capable of delivering clean title) and, if successful, the seller will be required to close the transaction in accordance with the terms of the contract.  As the general rule is that each parcel of real estate is unique and that money damages alone will not compensate for the loss of the property for which the buyer contracted, buyers are often granted an order of specific performance when the seller defaults under the contract.  However, granting an order for specific performance is in the court’s discretion, and the court could deny the request if, for example, the property at issue was not deemed to be unique (i.e., undeveloped land, where similar parcels are available), it would result in “undue hardship” on the breaching party, or the agreement was illegal, unconscionable, or the result of fraud or mistake.  The allocation of closing related costs and expenses, including transfer taxes, are usually informed by local practice and are often negotiated by the parties.  

8.1        Please briefly describe any regulations concerning the lending of money to finance real estate. Are the rules different as between resident and non-resident persons and/or between individual persons and corporate entities?

The scope of regulations that a lender will face will depend on whether the loan is for a residential or commercial property and whether or not the collateral is real property.  Consumer loans that are secured by real estate are the most heavily regulated on both the federal and state level, while unsecured commercial loans are the least regulated.  The federal government oversees mortgages through a variety of statutes and regulations.  For example, the Truth in Lending Act (“TILA”), which is implemented under Regulation Z, was enacted to protect consumers from unfair practices by lenders and other creditors and to allow consumers to make meaningful comparisons between loan products.  Under the TILA and Regulation Z, lenders are required to make full disclosure regarding interest rates, terms of credit, fees, etc.  In July 2008, Regulation Z was amended to protect mortgage consumers from unfair, abusive or deceptive lending and servicing practices.  The Real Estate Settlement Procedures Act of 1974 (“RESPA”) and Regulation X, which implements it, was enacted to provide borrowers with relevant and timely disclosure regarding the various costs of the real estate borrowing and settlement process.  This act regulates the relationships between mortgage lenders and other real estate professionals, such as real estate agents, in order to prevent the use of kickbacks in exchange for encouraging consumers to use certain services, and also prevents lenders from requiring that borrowers use a preferred title insurer.  Following the financial crisis in 2007–2008, then President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which was enacted to prevent the excessive financial risk-taking by financial institutions that led to the financial crises, but which also provides American families with common-sense protections against unfair and abusive financial practices.  However, in 2018, Congress relaxed certain provisions of the Dodd-Frank Act, including easing certain escrow requirements for depository institutions or credit unions.  The Fair Housing Act, which applies to residential real estate transactions, prohibits discrimination on the basis of race, colour, national origin, religion, sex, familial status or disability.  Federal and state usury laws prohibit lenders from charging unreasonably high interest rates or other unreasonable fees.  Lenders who violate such usury laws may incur civil or even criminal penalties.  The cannabis industry is an emerging industry in the U.S., as many states have recently legalised the sale and use of cannabis products (i.e., marijuana).  However, since the federal government has not removed marijuana as a Schedule I drug under the Controlled Substances Act, lending institutions (including banks) are generally unwilling to lend directly to new cannabis businesses, and when the lending institutions are mortgagees with respect to real property, they are unwilling to permit their mortgagors to lease or sublease the collateral real property to cannabis businesses.  On August 29, 2023, the U.S. Department of Health and Human Services recommended to the U.S. Drug Enforcement Administration that marijuana be reclassified to a Schedule III controlled substance.  If such a reclassification occurred, it could have far-reaching impacts on banking and finance for the cannabis industry, making bankruptcy protection available, and potentially allowing foreign companies to sell their cannabis products in the U.S.

8.2        What are the main methods by which a real estate lender seeks to protect itself from default by the borrower?

Borrowers of real estate loans seek “non-recourse” loans where, upon the borrower’s default, the lender can only pursue the collateral of the loan but cannot pursue any deficiency from the borrower.  However, commercial lenders typically structure loans as being non-recourse with “carve-outs”, which means that while the loan is generally without recourse, there are certain “bad acts” by the borrower (e.g., fraud, misappropriation or bankruptcy) that upon their occurrence, will trigger recourse liability on the borrower’s part.  Lenders often seek a broad guaranty from the sponsor (i.e., the individual or company that effectively “quarterbacks” the project from conception through completion, although, generally speaking, obtaining the guaranty from an individual is preferable over an entity), which covers the full amount of the loan, together with any costs and expenses that are incurred in enforcing the lender’s rights.  Or, at a minimum, the lender will require a guarantee for only the borrower’s non-recourse carve-outs relating to bad acts.  In the current post-COVID-19 lending environment, real estate lenders are likely to proceed with caution and may “double down” with respect to risk mitigation techniques when underwriting loans for commercial or multi-family properties.  Borrowers, on the other hand, are becoming more conservative and are avoiding (or should be) undertaking poorly structured or aggressively underwritten loans.  For more risky properties, lenders may require more equity, which may take the form of upfront capital, letters of credit or payment guaranties.  Because of economic conditions (including the significantly higher interest rates than have been experienced in the U.S. in more than 20 years), lenders are more closely monitoring their borrowers, and the asset that is the subject of the loan.  It is important for lenders to include in the loan agreement (and to enforce), certain standard covenants (both affirmative and negative), together with specific financial covenants (e.g., relating to debt service coverage ratios (“DSCR”), debt yield, and interest reserve balance requirements).  Lenders also often impose cash management and/or lockbox provisions that require the borrower to open a lender-controlled account, and that give the lender a measure of control over the property’s cash flow.  Lenders should also ensure that their loan documents clarify lien positions, subordination agreements and the rights and priorities of all lenders, where applicable.  Standard provisions that lenders typically use to help protect their interests include requiring an acceleration clause (which calls immediately due the outstanding balance on the loan), which is triggered upon default, and by requiring “default interest” provisions that, upon default, enable the lender to recover additional interest, or a late charge (which at times is as much as 5% of the unpaid amount).

8.3        What are the common proceedings for realisation of mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the mortgagor?

When a real estate borrower defaults on the loan (e.g., fails to make mortgage payments, fails to pay real estate taxes or otherwise breaches the terms of the mortgage agreement or promissory note), the lender has the right to recover the balance of the defaulted loan by forcing the sale of the property (foreclosure).  In some states, foreclosures are always judicial which means that that they are processed through the courts.  Approximately 30 states and the District of Columbia permit nonjudicial foreclosures in addition to judicial foreclosures.  With either process, the final step is typically the sale of the property at a foreclosure sale.  If the property is not sold or if the high bid does not meet the asking price, then the property is sold back to the lender and the lender takes title to the property.  While the specific practices and procedures of a judicial foreclosure will vary from state to state, generally, the lender commences the action by filing a complaint and serving the borrower with a copy.  The borrower files an answer to the complaint and raises whatever potential defences that it may have, including the lender’s failing to comply with state foreclosure procedural requirements or notice provisions, failure to prove who owns the mortgage and the note, inaccuracies or mistakes in the filings, or equitable defences such as equitable estoppel, laches or unclean hands.  The borrower will have an opportunity to tell his or her side of the story and usually has ample time to try to negotiate with the lender to try to reach a settlement that will end the foreclosure proceeding and would enable the borrower to remain in possession of the property.  If the foreclosure is contested, there will be a trial to determine if proper grounds exist for the court to grant an order of foreclosure.  If the lender obtains a judgment of foreclosure, the court will order the property to be sold at a public auction, which is conducted by a court officer.  While the timeframe for judicial foreclosures to run their respective courses varies significantly from state to state and depends on whether the property sought to be foreclosed is a residence or a commercial property (residential foreclosures usually take longer), it is not uncommon for both residential and commercial judicial proceedings to last between one to three years.  This is especially true in the current post-COVID-19 environment, where government moratoriums on evictions and foreclosures were enacted during the pandemic and have led to a backlog of cases.  In recent years, some states have taken steps to ensure the accuracy and integrity of residential foreclosure proceedings by imposing additional restrictions and requirements on foreclosing lenders and their attorneys.  In states that permit nonjudicial foreclosures, a deed of trust, rather than a mortgage, is used in real estate transactions.  In a deed of trust, the borrower and lender empower a third party (called the trustee), usually a title company, to hold the legal rights securing the loan.  If the borrower defaults on the loan, the trustee forecloses on the property by selling it at auction and allocating the funds recovered.  Since nonjudicial foreclosures do not go through the court system, they can be completed much more quickly, typically within several months.  States that use a judicial process often give homeowners the right to buy back or “redeem” their home after the foreclosure auction has occurred.  However, some mortgage documents provide for a shorter redemption period than would otherwise apply.  Generally, if a foreclosure is nonjudicial, the homeowner will not be permitted to redeem their home after the sale occurs, although there are exceptions (e.g., Minnesota permits post-sale redemption up to six months after the sale).    

Regarding commercial leases, the rights of the tenant following a foreclosure will often depend on the terms of the lease and, to a lesser extent, on whether the lease or the mortgage was first entered into.  Many commercial tenants negotiate to add a “non-disturbance” provision to the lease, which should give the tenant some reasonable assurance that it will have the ability to remain in possession of the leased premises if the lender forecloses on the property.  A non-disturbance provision typically provides that the landlord will use its best efforts (or reasonable best efforts) to enter into a non-disturbance agreement with its lender whereby, following a foreclosure of the property, the lender agrees that it will not “disturb” the tenant’s possession of the leased premises,  provided that the tenant continues to be in compliance with the terms of the lease.  Some knowledgeable tenants will not enter into a lease without such a non-disturbance provision being included.

8.4        What minimum formalities are required for real estate lending?

Please see question 10.1 below relating to the various government regulations concerning the lending of money to finance real estate.  In order for contracts relating to real estate to be enforceable, they must be in writing and signed by the parties (the “Statute of Frauds”).  Every state has a Statute of Frauds that will apply, and while these laws vary from state to state, they generally cover agreements for the sale of real property, lease agreements for a period longer than one year, and agreements relating to an “interest” in real property (e.g., easements, mineral rights and gas/oil use agreements, as well as listing agreements by a real estate agent or broker).  Lenders such as mortgagees, want to ensure that they have first claim on the real property in the event that the borrower defaults on the loan.  In order for a lender to have a “perfected” security interest in the property, it must timely record the mortgage or deed of trust in the appropriate records office or “lands record” office in accordance with state recording laws.  As record mortgage security interests are publicly available, they are deemed to provide “constructive notice” of the property interest to the public at large.  Lenders also often seek to have a security interest in personal property that affects real estate, such as furniture, fixtures and equipment, inventory, chattel paper and accounts receivable.  In order to perfect its security interest in such personal property assets, the lender is required to record a Uniform Commercial Code (“UCC”) financing statement with the proper office in the jurisdiction and in the manner required.  The financing statement should be filed where the debtor (borrower) is located.  For example, if the borrower is an individual, it should be filed in the state where the borrower resides; whereas, if the borrower is a business entity, it should be filed in the state in which the entity was organised.

8.5        How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors?

Please see question 8.4 above relating to how a real estate lender can protect its security interests.  Again, lenders seek to protect their interest from claims of other creditors (against the borrower) by perfecting their security interests in the collateral, whether it be the real property or personal property (assets) related to the real property.  For real property as well as for personal property, the general rule of “priority” (when there are multiple creditors of the borrower) is that the first party to give notice of its security interest (by recording the mortgage or the UCC financing statement with respect to personal property) is given priority.  This principle is referred to as “first in time, first in right”.  For example, while a mortgage (or deed of trust) is valid between the lender and the borrower, whether or not it is recorded, the mortgagee might lose out against another creditor (for example, a good-faith purchaser for value with no knowledge of the mortgage/deed of trust), unless the mortgage has been recorded.  Essentially, an unrecorded mortgage becomes subordinate to subsequent interests in the property that are filed prior to the mortgage.  Title insurance, which is a type of indemnity insurance that protects the commercial investment in the real property from financial loss due to issues with the title, plays an essential role in the lender’s ability to protect its first priority lien status in connection with the property.  In transactions involving mezzanine financing (which is used for acquisitions or development projects, where the loan is secured by the pledge of the equity ownership interests of the first mortgage borrowing entity, rather than by real property), the mezzanine lender is able to perfect its security interest in the equity collateral.  By causing the issuer to “opt-in” to Article 8 of the UCC (thereby converting the pledge of equity interests, which is a “general intangible”, into a “security” under Article 8 and “investment property” under Article 9), the mezzanine lender can perfect its security interest in investment property under Article 9 of the UCC, and it can then obtain “UCC insurance”, which is a title insurance product.  By purchasing UCC insurance, the mezzanine lender can shift to the title company the risk of proper attachment, perfection and priority of lender’s security interests.  In sum, it is essential for real estate lenders to be conscientious in perfecting their security interests and maintaining them over time, by being in strict compliance with all local laws and UCC requirements.  As discussed in question 8.2 above, lenders often use covenants (both affirmative and negative), as well as guarantees, in their loan documents in order to ensure that the borrower is not engaging in activities that could negatively impact the lender’s security in the transaction.

8.6        Under what circumstances can security taken by a lender be avoided or rendered unenforceable?

If real estate lenders fail to conscientiously comply with various aspects of state law or UCC requirements, fail to engage in proper due diligence regarding the transaction (ensuring that appropriate insurance including liability, title and UCC insurance, if applicable, is in place), or fail to remain vigilant in monitoring their borrowers’ activities and the status of their security interests, they run the risk that their security interests can be rendered unenforceable.  In addition, any one or more of the following could lead to a lender’s security interest being ultimately rendered unenforceable: neglect; or failing to properly investigate/poor due diligence (e.g., investigating the borrower, sponsor or guarantors, and their assets as well as their credit history and character/integrity).  Also, mistakes, sloppiness, receiving poor legal advice or exercising poor judgment can each lead to serious negative consequences for the lender.  In addition, bankruptcy laws or fraud, either by the borrower or by third parties (such as criminals who engage in identity theft or forgery), can have serious, negative results for the unwary lender.

8.7        What actions, if any, can a borrower take to frustrate enforcement action by a lender?

In the U.S., a borrower that is experiencing financial difficulties can file for federal bankruptcy protection.  Bankruptcy filings under Chapter 11, Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code may affect mortgage foreclosures in different ways.  Chapter 11 and Chapter 13 are more likely to be used to try to frustrate enforcement actions by the lender while not losing the property.  The borrower’s filing for bankruptcy protection, will, at a minimum, significantly delay, and could significantly frustrate, the lender’s ability to enforce its rights, and may “force the lender’s hand” in agreeing to a favourable forbearance arrangement.  In judicial foreclosure proceedings, the borrower will have a greater opportunity to delay and frustrate the enforcement actions taken by the lender.  Lenders should “plan for the worst” and secure sufficient collateral (preferably, collateral that is wholly owned by the borrower, and not jointly owned with a spouse).  Lenders should also require meaningful guaranties where the guarantor has sufficient assets and is unlikely to file for bankruptcy protection.  In addition, a “bad-actor” borrower who is looking to defraud the lender by engaging in illegal conduct can severely impact the lender’s ability to recover the amount loaned and/or the collateral that it has secured (personal property collateral).  Lenders would be well served to proceed cautiously at each step of the loan underwriting process, and carefully investigate and perform comprehensive due diligence in order to better protect their interests.

8.8        What is the impact of an insolvency process or a corporate rehabilitation process on the position of a real estate lender?

When a borrower files for bankruptcy protection in a federal bankruptcy court, an “automatic stay” goes into effect.  This automatic stay is essentially an order by the court directing all creditors (including lenders) to immediately stop all collection or enforcement efforts against the borrower (who is referred to as the “debtor” in bankruptcy), and any actions taken in violation of the automatic stay are void as a matter of law.  Bankruptcy courts usually impose severe sanctions against wilful violators of the automatic stay.  Debtors who are injured may recover actual damages, including costs, attorneys’ fees and, if appropriate, punitive damages, against creditors who violate the automatic stay.  Secured creditors, such as real estate lenders, are entitled to “adequate protection” against actual or threatened diminution in the value of their collateral (e.g., depreciation, physical loss or damage, declining fair market values, failure to insure or maintain the property), during the bankruptcy case.  When the borrower/debtor is unable or unwilling to provide adequate protection against diminution, the real estate lender can move the court “for cause” to “lift” (remove) the automatic stay with respect to their collateral or to afford it relief, including the right to proceed with a foreclosure action in accordance with applicable state law.  Generally, a real estate lender’s secured claim will be protected in accordance with the priority of the lender’s security interest in the real property collateral.  The lender will submit its valuation of the collateral to the court, which may be contested by the borrower (and which may be litigated in the bankruptcy court), and if the collateral was disposed of (e.g., sold at auction), the lender usually receives an amount of money equal to the determined valuation.  Single asset real estate debtors are subject to special provisions of the Bankruptcy Code.  For example, where the debtor’s bankrupt estate contains only a “single asset” of real property (other than residential property with fewer than four residential units), the court may, after a hearing has taken place, grant the secured lender’s motion for relief from the automatic stay unless the borrower/debtor (if a business entity) files a “feasible” plan of reorganisation (under Chapter 11), which is deemed to have a long-term view and not will not merely result in short-term survival.  The debtor may also begin paying interest to the creditor (equal to the non-default contract interest rate on the value of the creditor’s interest in the real estate) within 90 days from the date of the filing of the case, or within 30 days of the court’s determination that the case is a single asset real estate case.  Insolvency proceedings do not vitiate the real estate lender’s hopes, but they do put “road blocks” and “slow-down” signs in its path.

8.9        What is the process for enforcing security over shares? Does a lender have a right to appropriate shares in a borrower given as collateral? If so, can shares be appropriated when a borrower is in administration or has entered another insolvency or reorganisation procedure?

A “mezzanine” loan is a type of subordinate loan that is often used for acquisitions or development projects, and which is indirectly, rather than directly, secured by real property.  In mezzanine financing, the loan is secured by the pledge of the equity ownership interests of the first mortgage borrowing entity, rather than by the real property itself.  However, the mezzanine lender is able to perfect its security interest in the equity collateral by causing the issuer to “opt-in” to Article 8 of the UCC (thereby converting the pledge of equity interests, which is a “general intangible”, into a “security” under Article 8 and into an “investment property” under Article 9).  Therefore, the mezzanine lender can perfect its security interest in an investment property under Article 9 of the UCC, and can then obtain “UCC insurance”, which is a title insurance product.  By purchasing UCC insurance, the mezzanine lender can shift the risk of proper attachment, perfection and priority of the lender’s security interests, to the title company.  In sum, it is essential for real estate lenders to be conscientious in perfecting their security interests and maintaining them over time, by being in strict compliance with all local laws and UCC requirements.  If the borrower defaults, the lender can foreclose on the parent company’s equity interest, thereby taking control of the borrower and the property that is owned by the borrower.  As mezzanine lenders can foreclose through a UCC foreclosure, they have specific and limited “self-help” remedies under the UCC that permit a secured lender to pursue remedies against its collateral without the need for (and the cost and delay involved in) a judicial foreclosure proceeding.  The requirements that are set forth in the UCC often override contrary provisions in the mezzanine loan documents.  However, if the real property owned by the borrower is also mortgaged as collateral for a senior loan (the mezzanine loan is subordinate loan), then the lender’s ability to foreclose on the borrower’s equity interest is usually limited by the terms of the intercreditor agreement made between the senior mortgage lender and the mezzanine (subordinate) lender.  As discussed in question 8.8 above, once a bankruptcy proceeding is filed by the borrower (regardless of which “chapter” of the Bankruptcy Code the filing is made pursuant to), the automatic stay will immediately take effect and the mezzanine lender will initially be prohibited from pursuing any collection or enforcement action against the borrower, including initiating a UCC foreclosure, until such time as it is granted an order from the bankruptcy court “lifting” the automatic stay.

9.1        Are transfers of real estate subject to a transfer tax? How much? Who is liable?

Transfers of real property are subject to state and sometimes local transfer taxes on a deed transfer.  These are usually calculated as a percentage of the purchase price paid.  Some jurisdictions, including New York State and New York City, impose transfer taxes on transfers of leaseholds (with respect to the applicability of the New York State tax, the sum of the lease term, including any renewals, must be for 49 years or more).  Some states, also including New York State, impose a transfer tax when there is a transfer or acquisition of a controlling interest in a partnership, corporation, or other entity having an interest in real property.  Many states also impose mortgage (or intangible) taxes in connection with the recording of a mortgage.

The party responsible for paying transfer taxes is usually dictated by custom.  For example, in some states, such as New York State, the seller pays transfer taxes.  The obligation to pay transfer taxes can be allocated by the parties by agreement.  However, in other states such as Pennsylvania, this obligation is joint and several between the parties, and even if one party agrees to pay the taxes, the state in question may have the right to seek payment of the taxes from either of the parties, in spite of the agreement.  Mortgage recording taxes are usually paid by the buyer before the recording of (and as a pre-condition to) the mortgage and note.

9.2        When is the transfer tax paid?

Transfer and/or mortgage recording taxes are typically paid prior to the recording of a deed and/or mortgage.  In states that impose a transfer tax on the transfer of a controlling interest in an entity having ownership of real property, a tax return for the transferor must be filed within a certain time period (for example, in New York State, Form TP-584 must be filed and the tax due (if any) must be paid within 15 days of the effective date of each transfer).

9.3        Are transfers of real estate by individuals subject to income tax?

The transfer of real estate by a U.S. resident is a taxable transaction under the United States Internal Revenue Code (the “Code”), unless an exemption applies.  The individual will have a taxable “gain” or “loss” equal to the difference between the fair market value of the consideration received for the real property asset (less any liabilities assumed, or to which the real property is subject) less the tax basis that the individual had in the real property.

The gain or loss relating to the sale of the real property will be treated differently based upon how long it was held.  If the real property was owned for more than 12 months, then it will be treated as a capital asset and the profit (or loss) on the sale will be taxed as a long-term capital gain or loss, where the gain generally receives better tax treatment than ordinary income (if the property was held for a shorter timeframe).

The Code provides an exclusion from the taxable income in connection with the transfer of an individual(s)’ principal residence.  This exclusion is currently $250,000 if the transferor is an individual and $500,000 if the transferors are spouses.

Section 1031 of the Code also provides for the deferral of paying tax on capital gains on the transfer of real property, if the proceeds from the transfer are reinvested in a similar property, within a certain timeframe, as part of a “like-kind” exchange.

9.4        Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions?

The U.S. does not impose a Value Added Tax.  However, most states do impose a transfer tax on the transfer of real estate.  The rate varies from state to state and may also be imposed at the county and municipal level (e.g., New York City).  Many states will require out-of-state resident transferors to withhold a certain portion of the proceeds of the transfer, or if the transferor is an entity with out-of-state resident owners, the state may require the transferor entity to pay estimated taxes on their behalf.

Many states provide transfer tax exemptions for transfers between certain types of parties, and under certain circumstances (for example, transfers in New York State made in connection with a bankruptcy, or for the purposes of securing a debt are exempt from the payment of New York State transfer taxes).

9.5        What other tax or taxes (if any) are payable by the seller on the disposal of a property?

The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) is a federal tax law that imposes income tax on the sale of real property by foreign sellers.  FIRPTA is due on the sale of an interest in real property, including fee ownership interests, leasehold, co-ownership (where one or more of the sellers, but not all of the sellers, are foreign) and fractional or “timeshare” interests.

Foreign individuals or a foreign trust or estate must pay U.S. federal income taxes on gains at a maximum rate of 20% if the real property was sold after a holding period of at least 12 months (the long-term capital gains rate) or a maximum rate of 37% (the top individual income tax rate) if the real property was held for less than 12 months.  Foreign sellers that are corporations are subject to federal corporate income taxes equal to 21% of the gain from the sale of real property (whether the ownership was “long-term” or “short-term”).  “Branch taxes” at the rate of 30% (or less, if provided in an applicable treaty) may also be imposed on a foreign corporation’s U.S. branch’s earnings that are effectively connected with a U.S. business to the extent that they are not reinvested in the U.S. branch assets.

FIRPTA is enforced by imposing an obligation on the buyer to collect and pay the FIRPTA tax.  Under FIRPTA, the buyer is regarded as a “withholding agent” for the purposes of collection of the FIRPTA tax and is required to hold 15% of the sales price (and not the net proceeds) paid to the seller.  In practice, the withheld funds are collected from the seller’s proceeds at closing and are remitted by the closing agent (usually the title agency) on behalf of the parties.

FIRPTA provides several exemptions.  The withholding tax is not required if the seller certifies to the buyer that the seller is not a foreign person or entity, or the foreign person realises no financial gain from the transfer of U.S. property.  Either no withholding tax or a reduced 10% rate will be held if the buyer is an individual and the purchase price falls within certain limits.

FIRPTA taxes are payable by the 20 th day after the date of the closing, but as referenced above, the collection and payment of FIRPTA taxes is typically handled by the closing agent on behalf of the parties. 

9.6        Is taxation different if ownership of a company (or other entity) owning real estate is transferred?

If equity interests in a pass-through entity (such as a limited liability company or partnership) holding U.S. real property are sold by a foreign party, the foreign seller must pay U.S. income taxes on any gain, as referenced in question 9.5 above.  If the foreign seller is a corporation and the sale in question is a sale of shares in the corporation, then the “branch profits” referenced above in question 9.5 will not be applied.  There are also exemptions from U.S. federal taxes for the sale of shares of a publicly traded entity holding U.S. real property if the seller owns less than 5% of the shares in the entity, or if the entity is a REIT, then less than 10% of the shares of the entity.  If the entity owned by a foreign seller had disposed of its U.S. real property in a taxable transaction before the sale of the shares or membership interests, then the transaction would be exempt from tax.  Furthermore, the sale of stock of a foreign corporation is not subject to FIRPTA.

9.7        Are there any tax issues that a buyer of real estate should always take into consideration/conduct due diligence on?

The buyer should take into consideration ad valorem property taxes applicable to the transaction (taxes based upon the assessed value of the real property), including the amount of such taxes, the schedule for payment, proration of the taxes with the seller and potential for reassessment or application of “rollback” taxes as a result of the transfer or change in use or ownership of the real property.  With respect to certain assets related to a business, sales taxes may be an issue and the buyer should obtain a letter of clearance from the state taxing authority to confirm there are no outstanding tax liabilities that would transfer with the asset.  It is advisable to hold an appropriate amount of funds in escrow until a tax clearance letter is received.  Some states have so-called “bulk sales” laws in place, that require the buyer to notify the seller’s creditors if it is acquiring a significant portion of seller’s business or assets.

10.1      Please briefly describe the main laws that regulate leases of business premises.

All 50 states have some form of a “statute of frauds”, which requires that real estate agreements be in writing.  Leases fall into this category.  There are not many laws that “regulate” commercial leases.  Unlike residential tenancies, where many states provide tenants with various rights guaranteed by law, commercial tenants generally have few statutory rights, and if a right or obligation is not included in the lease, it likely does not exist.  Commercial leases are contracts that are governed by applicable state law.  Unlike other contracts that may call for the contract to be governed by the law of a state that has little to no nexus to the subject matter of the contract, commercial leases are governed by the law of the state where the property is located.  Local law, and to a limited extent state law, usually dictates the procedures by which a landlord may evict a tenant in default of its lease and recover legal possession of the premises.  Such laws and procedures usually remain consistent over time.  However, during the COVID-19 pandemic, many states and local governments enacted laws and issued executive orders that impacted the relationship between landlords and commercial tenants.  For example, in New York, a state-wide moratorium on evictions and foreclosure proceedings that applied to both commercial and residential tenancies was enacted.  While local law may dictate whether or not a lease is subordinate to a mortgage, landlords typically require commercial tenants to agree to a subordination provision in the lease, which provides that the tenant agrees that the lease is subordinate to the rights provided in the lender’s mortgage.  Tenants typically negotiate to include a “non-disturbance” clause that provides that the lender agrees that the tenant may remain in possession of the premises after foreclosure so long as the tenant is not in default of its lease.  When either a tenant or landlord files for bankruptcy protection, the parties’ rights and obligations will be governed by the federal Bankruptcy Code, which pre-empts state law.  Commercial leases typically provide that when a tenant constructs and builds out its business location, it must comply with all federal, state and local laws.  This would include, among other things, obtaining or updating a valid certificate of occupancy and complying with local zoning laws, environmental laws, and the federal Americans with Disabilities Act.   

10.2      What types of business lease exist?

Commercial leases generally fall into four major categories: gross leases; net leases; percentage leases; and variable leases.  Gross leases are commonly used for offices and retail spaces.  In a gross lease, the tenant pays the landlord a single, flat fee that comprises the fixed rent together with all of the various costs, including those related to operations and maintenance, such as utilities, property taxes, insurance, and common area maintenance (“CAM”), if applicable.  The landlord pays the various operating expenses to the appropriate third parties out of the single rent payment made by the tenant.  In a so-called “modified gross” lease, the landlord and tenant negotiate and agree on which utilities will be covered by each party.  For example, the tenant may be responsible for paying for electricity directly to the provider and the landlord may be responsible for paying for waste removal.  The landlord and tenant also agree on the tenant’s “percentage share” (which is typically a fraction, the numerator of which is usually the total square footage of tenant’s leased premises, and the denominator of which is usually the total square footage of the entire rentable space in the building).  A “Base Year” is specified in the lease, which is often negotiated by the landlord and tenant, to establish a “baseline” to provide the means by which the tenant is responsible for paying its percentage share of annual increases in operating expenses and utilities above the amounts calculated for the Base Year of the lease.  In a fully net lease (e.g., a triple net lease (“Triple Net Lease lease”)), which is commonly used for long-term tenancies for freestanding commercial buildings, warehouses or industrial spaces and for some retail spaces, the lease terms are frequently most favourable to the landlord.  Most, if not all, of the costs associated with the operation and maintenance of the building, including non-structural repairs, are the tenant’s responsibility.  In a single net lease, the tenant pays fixed rent and real property taxes to the landlord, and all other operating expenses directly to the appropriate third party.  In a double net lease, the tenant pays real property taxes and insurance to the landlord, and tenant pays all other operating expenses directly to the appropriate third party.  In a percentage lease, which is sometimes used in connection with retail businesses, the tenant pays a lower, fixed rent plus a percentage of the property’s monthly gross sales or, less typically, profits.  A variable lease has a rental rate that changes over time.  Neither percentage leases nor variable leases are commonly used in commercial tenancies.  Typically, in commercial leases, the landlord is responsible for making structural repairs (i.e., to the foundation, walls and roof of the building) and replacing various systems of the building, including the electrical, sprinkler, and heating, ventilation and air conditioning systems.  A ground lease is a long-term lease (sometimes up to 99 years) between a landlord and tenant in which the tenant is allowed to develop the leased property during the term, and upon the expiration of the lease, the landlord retains ownership of all improvements that tenant made to the property.   

10.3      What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs?

• Length of term: While the length of term for commercial leases varies, other than with respect to retail businesses, an initial term of three to five years is fairly common.  Tenants who are operating a retail business, especially franchised businesses, usually require an initial term of 10 years (so as to be consistent with a likely term of a franchise agreement).  Tenants will often seek to negotiate for one or more options to renew the lease at rental amounts that are negotiated, and set forth, in the initial lease agreement.  Commercial tenants have no right to renew the lease, except as may be negotiated and included in the lease.  
• Length of term Rent increases: The amount and frequency of rent increases will vary depending on the type of commercial property and lease, the type of business the tenant is operating, the local real estate market and the general economic environment at the time the lease is being negotiated.  However, it is fairly common for the base rent to increase each year by between 3% and 5%.  Some landlords tie rent increases to an objective standard, such as the Consumer Price Index.  Some landlords are unwilling to state the base rent, or include a formula for calculating the base rent, for a renewal term, and instead provide that the rent will be the “fair market rental”.  If this is the case, the means to determine this amount are frequently included in the lease, together with a dispute resolution provision(s) in order to provide for the determination of this issue. 
• Tenant’s right to sell or sub-lease: See question 10.6 below regarding the tenant’s right to sell, transfer or assign the lease.  Regarding tenant’s right to sublease, some landlords provide that they have a right to a percentage of the “profits” generated by its tenant’s sublease.  The percentage will, of course, vary, but upwards of 50% is not unusual.
• Insurance: While leases typically provide that landlords will obtain and maintain liability insurance for the building, the lease will also require the tenant to obtain and maintain several specified amounts of liability insurance, and to include the landlord (and perhaps its management company) as additional insureds on the tenant’s insurance policy.  If the tenant has taken out financing as part of its business operations, the tenant’s lender may also require that the tenant (borrower) satisfy additional insurance requirements.  Commercial leases expressly require the tenant to be responsible for obtaining and maintaining property insurance for the tenant’s contents located at the leased premises and with respect to any tenant improvements that tenant makes.          
• i.Change of control of tenant: Many commercial leases provide that the tenant (if the tenant is a business entity) may not sell, transfer or assign a majority of its voting interests without the prior written consent of the landlord, and that doing so would constitute a material default of the lease that would provide the landlord with a right of termination.  The tenant may want to negotiate an exception where the transfer would technically constitute a change in the majority of the voting interests of the tenant, but where the new majority owners were prior (named) principals of tenant, even though they were not majority owners.
• ii.Transfer of lease as a result of a corporate restructuring (e.g., merger): See question 10.6 below regarding the tenant’s right to sell, transfer or assign the lease, generally (including the tenant negotiating for itself, and its guarantor(s) to be released from liability for obligations (and potential claims) accruing after the transfer occurs, when the assignee, and assignee’s guarantor, has in each instance, a net worth that is either not less than the party being released by the landlord or a defined minimum amount).  Indeed, all lease provisions regarding transfers (under a variety of circumstances) are typically heavily negotiated by the parties.  That having been said, a tenant that has affiliates and/or subsidiaries as part of its corporate structure, may seek to negotiate specific provisions to give it flexibility to be permitted to engage in certain transfers with related entities while not needing to obtain the landlord’s prior written consent.      
• Repairs: Commercial leases typically provide that the tenant is responsible for maintaining the various systems in the leased premises and making repairs to the interior of the premises, whereas the landlord is responsible for making any necessary repairs to the building’s exterior and structure, replacing the building’s various systems (if necessary) and maintaining the building’s common areas.  However, in some instances, the landlord may pass the costs of maintaining the common areas of the building to the tenant(s) of the building, as an operating expense, based upon the proportion that the square footage of each tenant’s premises bears with respect to the total rentable square footage of the building.   

10.4      What taxes are payable on rent either by the landlord or tenant of a business lease?

Florida appears to be the only state in the U.S. that imposes a sales tax on commercial rent that is payable by the tenant.  Florida imposes a sales tax on the “total rent” charges the tenant pays to the landlord.  This includes base rent together with any other payments that the tenant is required to make on behalf of the landlord (such as with a net lease).  Florida’s sales tax has been 5.5% of the total rent charges, but effective from December 1, 2023, the tax rate will be reduced to 4.5% (where the reduced rate will apply only to periods of occupancy on or after December 1).  In addition to the state sales tax, many counties in Florida also require a small “discretionary” sales tax of the total rent charges, which currently varies from 0.5–1.5%.  The party responsible for paying the sales taxes is usually provided for in the lease, but if the lease is silent on this issue, the tenant is responsible for paying the sales taxes and the landlord is responsible for collecting and remitting the sales taxes.  If the landlord fails to remit the sales taxes when it receives the rental payments from the tenant, then the landlord is liable for the sales taxes that are due.  New York City, specifically, the borough of Manhattan, imposes a similar tax, which is called the “Commercial Rent Tax”, on tenants who lease commercial space in Manhattan below 96 th Street and pay annual or annualised gross rent of at least $250,000.  The tax rate is 6%; however, all taxpayers are granted a 35% base rent reduction, which reduces the effective tax rate to 3.9%.  Unlike the above examples, the state of Arizona, and various cities within Arizona, including Phoenix, impose a “transaction privilege (sales) and use tax” which is payable by the lessors (as opposed to tenants) of commercial property.  Notwithstanding the above, landlords are responsible for paying income tax on all rental income they receive.  Real estate taxes are typically allocated between the tenant(s) in the building and the landlord as provided for in the applicable lease(s).

10.5      In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party to be compensated by the other for any reason on termination?

Business (commercial) leases, like other contracts, terminate at the end of their terms.  Commercial leases are usually lengthy, sophisticated agreements that are negotiated at arms-length by experienced businesspeople, through their respective counsel.  Such leases typically include a comprehensive “termination” provision, which is often heavily negotiated by the parties, and which usually grants the landlord the right (but not the obligation) to terminate the lease if certain events of default occur.  Typically, the termination provision sets forth two types of defaults, those that may be cured after receipt of written notice, and other “non-curable” defaults.  Examples of curable defaults by tenants would typically include some or all of the following: failure to pay the rent (or other additional rent obligations) when due; failure to provide required documentation (e.g., financial and/or tax related information) to the landlord; failure to maintain proper insurance; failure to open the business when required by the lease; failure to continuously operate the business; permitting a lien to be filed against the property (arising out of the tenant’s failure to pay a financial obligation); and the tenant filing a bankruptcy petition or permitting an involuntary bankruptcy petition to be filed against it, and the proceeding not being dismissed within a specified time period.  Examples of so-called “non-curable’ defaults may include the: tenant making a transfer in violation of the lease’s transfer requirements; tenant or guarantor making a material misrepresentation to the landlord in the lease application process; tenant’s principal being convicted or pleading no contest to a felony; and tenant’s being deemed to be a “habitual non-payer” where they fail to timely pay rental obligations more than a specified number of times during the term of the lease (or during a shorter period of time, such as one year).  In addition, the lease may provide that the landlord and/or tenant may terminate the lease where a casualty event (fire, flood, etc.) causing substantial damage occurs, or if a condemnation or eminent domain “taking” of the premises takes place, and tenant is unable to use all or a major portion of the leased premises.

Commercial leases often contain one or more renewal options where the tenant may renew the lease for a specified renewal term, provided that it gives landlord timely written notice that the tenant is exercising its option to renew.  If the tenant fails to vacate the leased premises on or before the lease expiration date, the landlord may bring a proceeding to evict the tenant and, based upon customary lease provisions, it can seek to recover a significantly higher rent (technically, “use and occupancy” since the lease has actually expired) for the period that the tenant remains in the leased premises beyond the lease expiration date.  This “overage” or “holdover rate” typically varies between 125% and 200% of base rent.  Many commercial leases provide that if the lease is terminated prior to its stated expiration date, the landlord has several remedies, including the right to “accelerate” all remaining rental obligations for the unexpired term of the lease, and to demand that the tenant immediately pay such amount, properly discounted to such amount’s present value.    

10.6      Does the landlord and/or the tenant of a business lease cease to be liable for their respective obligations under the lease once they have sold their interest? Can they be responsible after the sale in respect of pre-sale non-compliance?

Commercial leases should provide that if the landlord sells, assigns or transfers the building where the leased premises is located, the purchaser or assignee will assume all of the landlord’s rights and obligations under the lease that accrue through the date of the transfer.  Tenants may also want to negotiate that the lease provides that the net worth of the assignee is not less than the net worth of the current landlord, or a specific, defined minimum amount.  However, the landlord may not agree to such a provision.  Provisions relating to the right to transfer, especially the tenant’s (rather than the landlord’s) right to transfer, are typically heavily negotiated by the parties.  When a tenant sells, assigns or transfers its business (of which the lease is a part), the assignee should assume the rights and obligations of the existing tenant.  However, the transfer does not automatically relieve the tenant of its obligations under the lease, unless this is agreed to by the landlord and included in the lease.  Tenants often seek to be released from any liability that accrues under the lease after the date of transfer, provided that the assignee has a net worth that is at least as high as that of the tenant, or which meets a specified minimum amount.  Similarly, the tenant may also seek to have its guarantor(s) (which is typically, the tenant’s principal(s)) released from any liability that accrues under the lease after the date of transfer, provided that the assignee’s guarantor has a net worth that is at least as high as the existing guarantor, or (again) a defined minimum amount.  Also, leases should contain mutual indemnification clauses that provide that: (i) the tenant (assignor) will indemnify, defend and hold the assignee harmless with respect to any obligations, losses, claims, damages, expenses, etc., that accrue after the transfer of the business and the lease’s assignment; and (ii) the assignee will indemnify, defend and hold the tenant (assignor) harmless with respect to any obligations, losses, claims, damages, expenses, etc., that accrue prior to the transfer of the business and the lease’s assignment.  The landlord’s proposed leases typically provide that the landlord’s liability for any potential claims by the tenant is limited to the landlord’s interest in the property.  While the tenant may object to this provision because the landlord may have a limited amount of equity in the property, it is unlikely that the landlord will agree to change this provision.  Regarding the tenant’s security deposit, leases typically provide that upon an approved transfer of the lease, the landlord, or its successor, will either return the security deposit to the tenant if the landlord receives a new security deposit from the assignee, or alternatively, the landlord may assign the tenant’s security deposit to the assignee, in which case the tenant will need to negotiate an adjustment with its transferee when entering into an agreement.

10.7      Green leases seek to impose obligations on landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly found in leases stating whether these are clearly defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for example aspirational objectives).

So-called “green building” requirements often relate to the practice of designing, constructing, operating, maintaining and replacing buildings in order to reduce energy use, conserve natural resources and reduce greenhouse emissions.  A number of private consensus standards systems have developed since the mid-1990s, including the Leadership in Energy and Environmental Design (“LEED”) rating system, which was created by the U.S. Green Building Council, to help create “green buildings”.  Many federal, state and local governments have developed green building programmes and they usually reference one or more of the consensus standards.  In addition, many states have imposed energy efficiency requirements in their building codes, or they have adopted energy codes in order to reduce energy consumption.  This is typically done by addressing wall and ceiling insulation requirements, window and door specifications, lighting fixtures and controls, as well as heating, ventilation and air-conditioning (“HVAC”) equipment efficiency.  Many state and local governments now grant certain financial incentives to property owners such as property tax abatements and other tax credits, deductions and exemptions to encourage the use of energy-efficient equipment and renewable energy technologies.

There is no standardised criteria or commonly accepted language for what constitutes a “green lease”.  Green leases often seek to address a wide range of issues that affect the environmental impact and sustainability of the building, including energy efficiency, water management, waste management and sourcing sustainable materials to be used for making repairs or alterations.  The term “green lease” may be described as a commercial lease that has been modified by the parties to accomplish some or all of the following: to help align the parties’ interests with respect to making investments in energy efficiency; to set forth specific green building requirements that are to be achieved; to allocate the obligations and rights between the parties for achieving the green building requirements; and to identify remedies or consequences for failing to comply with the requirements.  Green lease provisions may incorporate a number of private consensus standards and they may call for the parties to work cooperatively, over the duration of the lease, in order to obtain the certification of one or more of the standards.  Currently, there are no government requirements that mandate the inclusion of any green lease provisions in commercial leases.  While green lease provisions are becoming more commonplace, they have not yet reached widespread adoption.  A major cause as to why green lease provisions have not become more commonplace in commercial leases is the so-called “split incentives” problem.  This refers to the fact that typical leasing arrangements do not encourage the parties to embrace green practices, as neither the landlord nor tenant has a strong financial incentive to make energy efficiency or other environmental investments in the building.  For example, landlords are usually responsible for paying for capital expenses, and under typical lease arrangements, they are usually unable to pass the costs of making green investments in the building along to their tenants.  Similarly, tenants usually have little incentive to significantly reduce their energy usage because their monthly utilities expenses often make up a relatively small percentage of their total lease obligations.  

10.8      Are there any trends in your market towards more flexible space for occupiers, such as shared short-term working spaces (co-working) or shared residential spaces with greater levels of facilities/activities for residents (co-living)? If so, please provide examples/details.

Prior to the COVID-19 pandemic, there was a popular trend of employers seeking to lease more flexible and shared working spaces for their employees.  With employees and companies realising the benefits of flexible work schedules through remote work, coworking spaces were gaining popularity.  Coworking spaces offer benefits such as flexibility and convenience at affordable prices, and also offer the opportunity of connecting with other individuals who may be in the same field or profession.  While co-working spaces suffered during the pandemic, many real estate professionals expect (hope) that co-working spaces will again become popular.  However, going forward, providers of coworking spaces will need to incorporate various safety measures, including more “spread-out” layouts, in a more “contact-free” environment, with increased cleaning protocols, in order to guard against the transmission of viruses such as COVID-19.  In recent years, developers of upscale rental buildings or buildings to house cooperative or condominium apartments were being designed with an increased number of amenities, which offered residents greater opportunities for interactions with their neighbours, whether it be a bar or lounge area, a fitness facility, a pool, a game room, or flex-working spaces.  These amenities grew in popularity as more employees began to work remotely from their homes.  While many of these amenities were shuttered or limited during the pandemic, such shared residential spaces have reopened across the country as restrictions associated with the pandemic have been eliminated.  Going forward, it is expected that the demand for these social-based amenities will be strong again, especially as people continue to work more from home than had previously been the case.  Law “suites” where sole practitioners or small law firms share space with individual offices and shared facilities, such as conference rooms and libraries, are not uncommon and are helpful for attorneys who, for whatever reason, prefer not to make commitments that require them to provide all of the operational aspects of their spaces and leases.  This type of “suite” is often used for general business purposes as well.  Common usage and sharing of workspaces, such as “WeWork”, enjoyed great popularity but recently suffered the challenges of over-expansion and COVID-19’s effect on the real estate market.  We note that WeWork filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in November 2023, and it will seek to implement a plan of reorganisation.  

11.1      Please briefly describe the main laws that regulate leases of residential premises. 

Residential leases are contracts and the enforceability of their terms are governed by applicable contract law.  The federal Fair Housing Act prohibits the inconsistent application of lease terms to tenants based on enumerated protected categories.  For example, an owner cannot retain larger security deposits from tenants based on their race or gender.  Leases must also comply with the many state and local laws that establish residential tenant protections, such as limits on security deposits, grace periods for late rent payments, and the requirement that landlords mitigate damages when a tenant breaks a lease.  Some leases may be governed by rent regulations that either impose caps on rent increases or establish rent boards that meet annually to determine permissible increases.  For example, in New York City, approximately one million apartments are covered under rent stabilisation laws whereby a Rent Guidelines Board determines allowable rent increases.  Additional state and local laws obligate certain landlords to comply with safety measures, such as installing window guards and smoke alarms.  Renters of condominium or cooperative apartments must also comply with the rules established by the respective board of managers or board of directors of such condominium associations or cooperative corporations.  Lastly, local laws govern eviction procedures for defaulting tenants.

11.2      Do the laws differ if the premises are intended for multiple different residential occupiers?

Yes, applicable laws generally exempt owners leasing fewer than a specified number of units.  The federal Fair Housing Act and state rent regulation laws generally provide for such exemptions.  Additionally, many state and local governments have enacted laws that apply only to multiple dwellings in order to protect the health and safety of occupants living in dense quarters.  Such laws may provide for maximum occupancy levels to prevent overcrowding, a safe means of egress in the event of a fire, and frequent garbage removal to maintain healthy and sanitary living environments.      

11.3      What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation to the property “costs”, e.g. insurance and repair?

The length of term provision varies by jurisdiction and market conditions.  However, residential leases are typically for one year, although this may vary depending on the state and location.  There is no standard provision pertaining to rent increases.  For localities that have adopted rent regulation laws, rent increases are either capped at a certain percentage increase over the prior term or determined by a rent board.  There are no restrictions on rent increases for market-rate apartments.  Should an owner’s acquiescence to a holdover tenant establish a month-to-month tenancy, the owner may increase the rent if the tenant consents and if proper notice is given.  Some jurisdictions have graduated notice periods, which provide for extended notice based upon the amount of the increase and the duration of the tenant’s occupancy.  If a tenant does not agree to an increase, then a landlord can terminate the tenancy by giving appropriate notice.  Examples of other typical provisions in a residential lease include a listing of the occupants, the amount of the security deposit, the terms of any right to sublet or assign, and default and remedy provisions.  Almost all property owners obtain casualty and liability insurance and residential leases often require tenants to obtain renter’s insurance, which covers loss of personal property and protects tenants from liability claims for injuries sustained in the unit.

11.4      Would there be rights for a landlord to terminate a residential lease and what steps would be needed to achieve vacant possession if the circumstances existed for the right to be exercised?

Yes, residential leases provide landlords with eviction rights and the extent of those rights are determined, in large part, by the type of housing.  Market-rate rental leases often provide landlords with the broadest authority to evict based upon a tenant’s default of a material obligation.  Examples of a material default include non-payment of rent, impermissible sublet or assignment, and use of the premises for an illegal purpose.  Having the ability to evict tenants is typically limited under rent-regulated leases and for leases of public housing units.  Under some circumstances, tenants in government-financed housing are entitled to an administrative grievance process before their tenancies may be terminated.  For all categories of housing, landlords must precisely follow the requirements stated in the lease or applicable law in order to exercise their eviction rights.  It is illegal in most jurisdictions for residential landlords to utilise “self-help” measures, such as changing the locks, to regain possession of the premises.  Rather, if a tenant fails to vacate after the landlord has taken the requisite steps, then a landlord may commence an eviction proceeding in order to obtain a judgment of possession and, potentially, seek the tenant’s eviction and regain possession of the premises.

12.1      What are the main laws which govern zoning/permitting and related matters concerning the use, development and occupation of land? Please briefly describe them and include environmental laws. 

Zoning, permitting and other laws concerning the use, development and occupation of land are reserved to the states by the 10 th Amendment of the United States Constitution.  The states have, in turn, delegated most of the functions related to enacting real property ordinances, rules and regulations to local authorities and municipalities.  Matters effecting real property have ultimately become a local affair.

However, not all real property governance has been swept under the local authority rug.  For example, New Jersey law dictates that all lands located within the State of New Jersey on the banks of a natural body of water (so-called “riparian” lands) are owned in fee simple by the state.  Therefore, a property owner in New Jersey wishing to make use of riparian lands, such as by building a dock or a boat mooring, must obtain a tidelands licence from the state’s Bureau of Tidelands Management or by purchasing the land from the state by a riparian grant.

Notwithstanding the broad powers over real property that are left to the states, the federal government still has significant powers to make laws that affect the environment and other aspects of real property.  For example, in the state of Florida, a 7,800 square mile wetlands region known as the Everglades is subject to unique federal laws that limit real property development.  In addition, approximately 25% of all of the land in the U.S. is directly owned by the federal government.

12.2      Can the state force land owners to sell land to it? If so please briefly describe including price/compensation mechanism.

The 5 th Amendment of the United States Constitution contains a provision known as the “Takings Clause”, which provides that “private property [shall not] be taken for public use, without just compensation”.  Generally speaking, the state has the power to force an owner of private property to sell land to the state, provided that there is a public use (the power of “eminent domain”).  However, the nature of the economic development that would constitute a public use varies among the courts, and the formula for compensation varies from state to state.

For example, the New York State Court of Appeals has defined “public use” broadly to include almost any project that benefits the public (including scenarios where the property will be transferred to another private party); provided that the owner of the property receives compensation equal to the property’s fair market value (“Just Compensation”).  Contrast New York’s expansive eminent domain power with the state of Delaware, which has restricted permissible “public uses” to traditional public projects – roads, schools, parks and police stations; in each case, the owner must also receive Just Compensation.

12.3      Which bodies control land/building use and/or occupation and environmental regulation? How do buyers obtain reliable information on these matters?

The U.S. federal government and each of the individual state governments have authority over environmental matters.  The federal government and numerous states each maintain databases pertaining to violations of environmental laws.  Buyers can obtain information regarding specific real property by utilising such databases.  Customarily, as part of a “Phase I Environmental Site Assessment”, buyers hire experts to review relevant databases and records and conduct interviews with people knowledgeable about the subject property.  If additional detail is required concerning the environmental conditions at a site, buyers can obtain a “Phase II Environmental Site Assessment”.  In addition to the study of databases and interviews, experts hired to complete a “Phase II” assessment will take soil and groundwater samples in order to test for certain conditions on the site.

12.4      What main permits or licences are required for building works and/or the use of real estate?

Building permits must be obtained for construction and significant exterior and interior renovations.  The owner of a building generally cannot occupy or begin using space in a building without first obtaining a certificate of occupancy, which typically involves the payment of fees and the conduct of an inspection by local authorities to ensure that the construction and/or renovations meet local regulatory requirements.  In addition, local and state ordinances may impose other specific requirements related to the construction and/or use of certain types of real property.  For example, it is common for certain types of businesses (e.g., liquor stores) to be prohibited from being operated within a certain distance from schools or places of worship.  The newly developing cannabis industry also typically imposes similar restrictions.

12.5      Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)?

Permits are obtained locally and at the municipal level.  Generally, a certificate of occupancy (or comparable instrument) must be obtained before buildings can be occupied and/or used for a particular purpose.  The implied permission to maintain a particular structure or use (i.e., the so-called “grandfathering” of otherwise non-conforming structures or uses) has a tenuous relationship with the law, that varies from jurisdiction to jurisdiction.  However, as a general principal, to the extent that a prior “lawful” use is rendered unlawful by a change in the law, the law will generally not be applied retroactively unless a condition, such as ownership, changes.

12.6      What is the typical cost of building/use permits and the time involved in obtaining them?

The cost of obtaining permits and the time involved depends upon local requirements and accordingly, varies greatly.  For example, the typical cost to obtain a building permit (excluding construction and professional fees) may range from a low of $100 to a high of $2,000 and the timing for a building permit to be issued may range from several weeks to in excess of several months.

12.7      Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real estate or development/change of use?

The National Historic Preservation Act of 1966 created a process for the preservation and protection of historic and archaeological sites in the U.S.  The federal government, through the department of the interior, maintains a National Register of Historic Places and administers various grant programmes and other financial incentives to encourage the preservation of these sites.  A historic designation on real property may affect the permitted uses of the property but will generally not affect transfer rights.  The IRS tax code provides for tax credits to developers who rehabilitate certain historical buildings, and such credits may be passed on from the developer to investors in the property.  Recently (and controversially), monuments and statues relating to the Confederacy or Southern Civil War heroes have been removed by government fiat.

12.8      How can, e.g. a potential buyer obtain reliable information on contamination and pollution of real estate? Is there a public register of contaminated land in your jurisdiction?

As referenced above, contamination and pollution of real estate can be ascertained through a Phase I Environmental Site Assessment and the search of various federal and state databases, provided that the contamination or pollution was previously logged.  However, if a “Phase I” is insufficient or the contamination was not recorded, then a “Phase II” will be warranted to provide the most reliable and comprehensive information regarding existing environmental conditions on a property.

12.9      In what circumstances (if any) is environmental clean-up ever mandatory?

Certain federal and state laws impose liability on parties to remediate property that has been contaminated outside of allowable standards.  For example, New Jersey’s Industrial Site Recovery Act requires the owners of facilities with certain industrial classifications to investigate and conduct environmental remediation prior to transfers when the business ceases operations or is sold.

12.10    Please briefly outline any regulatory requirements for the assessment and management of the energy performance of buildings in your jurisdiction.

Currently, there are no required standards, although Congress has been exploring the possibility of implementing such restrictions.

13.1      Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions trading scheme).

There are various regulations that seek to reduce carbon dioxide emissions from residential real estate.  With respect to new construction, many state and local jurisdictions have incorporated environmentally friendly building requirements into their respective building codes, many of which are modelled after the LEED standards.  Some cities have enacted bans on the use of fossil fuels to heat certain newly constructed buildings in an effort to promote building decarbonisation.  Measures have also been adopted to retrofit existing buildings in order to reduce greenhouse gas emissions.  For example, the U.S. Department of Housing and Urban Development (“HUD”) plans to reduce greenhouse gas emissions among its portfolio of approximately 4.5 million residential housing units by increasing investments in climate and energy retrofits of existing housing.  HUD is also exploring land use changes that incentivise the construction of denser, transit-oriented housing developments in order to reduce reliance on cars, which are a significant source of greenhouse gas emissions. 

With respect to commercial real estate, the U.S. Environmental Protection Agency (“EPA”) and state governments have taken actions to reduce greenhouse gas emissions generated by power plants, which is by far the largest category of stationary sources of greenhouse gases in the U.S.  In addition to EPA regulations, states may act individually or collectively to pursue the same goal.  For example, the Regional Greenhouse Gas Initiative (“RGGI”) is a cooperative consisting of 11 states along the east coast that seeks to reduce carbon dioxide emissions generated by power plants within their respective states.  The RGGI utilises a market-based cap-and-invest framework in which power plants save money by reducing carbon dioxide emissions. 

It is also important to note how real estate in the form of forestland may be used to reduce atmospheric carbon dioxide levels.  Trees absorb carbon dioxide in the air and convert it into carbon, which is then stored in tree trunks, leaves, and the forest floor.  According to the U.S. Forest Service, this process, known as carbon sequestration, plays a major role in reducing the nation’s carbon footprint.  Therefore, any policies or regulations seeking to preserve forestland, indirectly impact carbon dioxide levels in the atmosphere.  Notably, at the United Nations’ Climate Change Conference (COP 27) in November 2022, a Forest and Climate Leaders’ Partnership was created to further advance an international effort to reduce deforestation. 

13.2      Are there any national greenhouse gas emissions reduction targets?

Shortly after rejoining the Paris Climate Agreement in February 2021, President Biden announced a new target for the U.S. to achieve a 50–52% reduction from 2005 levels in economy-wide net greenhouse gas pollution by 2030, with the goal of net-zero emissions economy-wide by no later than 2050. 

13.3      Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of both newly constructed and existing buildings?

In an effort to achieve the national goal of carbon neutrality by 2050, some local jurisdictions have adopted strict emissions standards for newly constructed and existing buildings.  For example, New York City enacted Local Law 97 of 2019, which requires residential and commercial buildings larger than 25,000 square feet to meet strict greenhouse gas emissions limits beginning in 2024.  

14.1      Please detail any laws that govern real estate in your jurisdiction which were introduced in response to the effect of the Coronavirus (COVID-19) pandemic and which remain in place.

The COVID-19 pandemic has had a major impact on all aspects of the U.S. economy over the last few years, and real estate is no exception.  In response to the pandemic, new legislation was enacted in 2020, in an effort to provide temporary relief for individuals as well as for small businesses.  In a rare showing of bipartisan support, Congress enacted the federal Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”), which sought to provide relief to consumers in a number of ways.  For example, the CARES Act imposed a 120-day eviction moratorium on properties that participated in federal assistance programs or were secured by federally backed mortgage loans.  When the moratorium expired near the end of July 2020, the federal agency Center for Disease Control and Prevention (“CDC”), stepped in, ordering a nationwide federal moratorium on residential evictions for non-payment of rent and related fees.  This order, which was extended several times (until October 3, 2021), was primarily aimed at providing relief to low-income adults with families who would otherwise be at risk of eviction or foreclosure, as a result, at least in part, of the COVID-19 pandemic.  Among other things, the CARES Act provided for the forbearance of mortgage payments for single-family residences and for certain multi-family borrowers with federally backed loans.  In addition, the CARES Act created a new Small Business Administration loan programme called the Paycheck Protection Program (“PPP”), which provided forgivable loans for small businesses to help support their payroll and operations during the pandemic, provided that certain spending requirements were complied with.  While these loans were not provided directly to landlords, many small business tenants that received PPP funds used the funds to pay rent and other lease obligations (together with payroll and other operating expenses), and by doing so were able to remain in business when they otherwise might not have been able to survive during the pandemic.  On the state level, a patchwork of state laws was enacted that sought to address some of the negative financial impacts of the pandemic.  For example, many state governors and city mayors helped to enact laws or orders providing for moratoriums against eviction for residential and commercial tenants, along with the commencement of foreclosure actions.  New York City, for example, went further by also enacting a “Guaranty Law”, which prohibited landlords from enforcing personal guarantees for rental obligations under commercial leases (for defaults occurring between March 7, 2020 and June 30, 2021) where the guarantor was a natural person who was not the tenant, and the tenant was either required to stop serving food or beverages to be consumed on premises or was required to cease operations or close its doors pursuant to state or local applicable law.  During the pandemic, force majeure provisions in commercial leases came under scrutiny, and consideration was given to whether laws or regulations should be enacted to require insurers to cover COVID-19-related losses during the period that tenants were required to close their businesses.  Laws were enacted, both on the federal level and in many states, which provided for the use of electronic and remote notarisations to facilitate real estate transactions being conducted remotely during the pandemic.

On May 11, 2023, U.S. President Joe Biden officially rescinded the executive order that declared COVID-19 a public health emergency.  As a result of the rescission of this order, COVID-19 is no longer regarded as a “pandemic”.  Rather, it is said to have shifted to being in an “endemic” phase or chapter.  This means that while the infection is still present in the population to a significant degree, the number of infections and deaths from COVID-19 is no longer growing exponentially, and healthcare systems are no longer overwhelmed.  That being said, COVID-19 still remains a significant health threat, as more than 100 people per day in the U.S. are still dying from COVID-19.  Regarding laws that govern real estate, as of the writing of this article (in the fall of 2023), most widespread eviction bans and tenant protections relating to COVID-19 have ended.  Further, while many states had programmes offering assistance and other resources to help tenants pay rent and other bills during the COVID-19 pandemic, many of these programmes have ended or are no longer accepting applications.    

Production Editor's Note

This chapter has been written by a member of ICLG's international panel of experts, who has been exclusively appointed for this task as a leading professional in their field by Global Legal Group , ICLG's publisher. ICLG's in-house editorial team carefully reviews and edits each chapter, updated annually, and audits each one for originality, relevance and style, including anti-plagiarism and AI-detection tools. This chapter was copy-edited by Jenna Feasey , our in-house editor.

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Contributors

Richard L. Rosen Rosen Karol Salis, PLLC

Leonard S. Salis Rosen Karol Salis, PLLC

Dennison D. Marzocco Rosen Karol Salis, PLLC

Jeffrey S. Mailman Rosen Karol Salis, PLLC

Rosen Karol Salis, PLLC

The Top Ten Issues Impacting Real Estate

High inflation rates and rising interest rates are top of mind for everyone in the real estate industry and outside it, too. Naturally, these two issues also top the annual list of Top Ten Issues Affecting Real Estate generated by a survey of the 1,000 members of The Counselors of Real Estate®, a global organization of commercial property advisors. The annual report analyzes current trends in the context of understanding their impact on the year ahead.

For multifamily developers, perhaps the most significant issue identified (seventh on the list) is “The Great Housing Imbalance.”

“Markets that have not been able to provide lower-cost housing have experienced ongoing out-migration and risk stressing infrastructure capacity as renters are driven further out to the exurbs,” the report asserts.

In the multifamily sector, demand during the first quarter of 2022 was more than double new deliveries. The report says that more than four million new multifamily units are needed by 2035 to meet demand. However, 40% of that demand will be in just three states: Texas, Florida and California. Demand is also expected to be double the national trend in secondary cities such as Boise, Austin, Raleigh, Orlando and Phoenix that have strong job growth, a high quality of life and a relatively lower cost of living.

The top 10 issues affecting real estate in 2022 and 2023 include:

• Inflation and Interest Rates: “An economic slowdown is already underway and the greatest recession risk to real estate is whether rising unemployment and lower household income cuts demand for residential and commercial property,” according to the report. Timothy Savage, a professor at New York University’s Schack Institute of Real Estate, anticipates that CRE transaction volume will remain robust in 2022-23. His analysis is that greatest risk to the economy continue to be pandemic-related supply chain problems and policy errors.
• Geopolitical Risk: “Continued geopolitical uncertainty provides significant headwinds to the economy,” according to the report. “The longer it takes to moderate, the greater the negative implications for real estate.” Both global and domestic issues such as the war in Ukraine, covid-related production shutdowns in China, local regulatory issues around rents and sustainability, and cyberattacks are contributors to inflation and economic insecurity.
• Hybrid Work: Economists expect 50% of the workforce to work remotely or a hybrid manner in the future, which will impact many property sectors including multifamily development in suburban and urban areas.
• Supply Chain Disruption: “Impacting nearly every aspect of real estate, delays will continue to raise costs and cause realignment in supply chain strategies and warehousing,” according to the report. Shortages of materials and accompanying cost increases impact building maintenance, renovation and development and are not anticipated to ease soon.
• Energy Sustainability, Availability and Affordability: “Some of the practical consequences of what building owners and business owners are facing – and need to consider in their business continuity and resiliency planning – include rising insurance costs and the increased investment for on-site energy resilience.” Multifamily owners must adapt to the rising number of people working at home, which means constant demand for power and connectivity. In addition, climate issues increase the need for back-up power for HVAC systems, lighting and elevators.
• Labor Shortage Strain: The labor shortage is a contributing factor to the slowing economy, according to the report. Labor shortages impact construction and renovation projects in the multifamily space and have a more direct impact on demand for office and retail space that could indirectly affect apartment demand in some markets.
• The Great Housing Imbalance : As noted above, markets not providing lower-cost housing have experienced ongoing out-migration and risk stressing the infrastructure capacity in other areas such as exurbs.
• Regulatory Uncertainty: Stability in the regulatory environment is crucial to real estate owners and operators, according to the report. “Changing regulations can add substantial time, risk, and cost to completing development projects and can also impose new and often burdensome operating restrictions on existing properties,” according to the report. “The current regulatory environment at all levels of government— federal, state, and local—throughout the United States increasingly lacks the desired clarity, stability, durability, and predictability that is important to real estate owners and operators.”
• Cybersecurity Interruptions: “This is not a so-called smart building or ‘Internet of Things’ problem, which continues to stack up risks, but rather a 40-year build-up, as our main systems require computers, networks and Internet connections,” according to the report. Investors and owners can mandate policies and requirements for assessments, enforcement and monitoring to reduce the consequences of a cyberattack, according to the report.
• ESG Requirements Forcing Change: Government agencies around the globe are increasingly requiring real estate owners to report and publicly disclose energy and water use, waste, carbon emissions and climate change risks . “These requirements are also instigating much innovation in the design, development and construction of new buildings, as well as renovation of existing stock with long lifespans ahead of them,” according to the report.

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Regulatory Uncertainty

• Perspectives
• Environment
• Land Use & Zoning
• Public Policy
• Top Ten Issues Affecting Real Estate®
• Volume 46, Number 10 - August 24, 2022
• • Written by: Mr. David Waite, Esq., CRE

Regulatory Uncertainty was listed as the #8 issue in the 2022-23 Top Ten Issues Affecting Real Estate®  by The Counselors of Real Estate®.

“The emerging conflict between state preemptive legislation and local control over land use, and the litigation that has emerged from these conflicts, will create additional regulatory uncertainty for some time to come.”

Among the goals of a commercial real estate owner, developer, or financial partner is a clear, stable, durable, and predictable regulatory environment.  Real estate owners and operators seek to plan, develop, and operate real estate assets in a regulatory environment that is largely free from rapidly changing regulatory compliance requirements and development standards.  Changing regulations can add substantial time, risk, and cost to completing development projects and can also impose new and often burdensome operating restrictions on existing properties.  The current regulatory environment at all levels of government—federal, state, and local—throughout the United States increasingly lacks the desired clarity, stability, durability, and predictability that is important to real estate owners and operators.  Not surprisingly, this year’s survey respondents identified “regulatory uncertainty” as a Top Ten issue.

The source of regulatory uncertainty at the federal level is not only a function of the changing administration politics, policies, and priorities, but also reflects the continued expansion of the breadth and depth at the administrative level of the continued proliferation of federal regulations addressing all manner of real estate, land use, and environmental priorities.  New regulations at all levels of government proliferated and, in some cases, remain in effect in response to the COVID-19 pandemic.  These include important health and safety regulations including mask mandates, social distancing, and vaccination requirements focused on limiting the community spread of the virus.  Many regulations adopted during the pandemic—directly impacting the real estate industry—are intended to provide financial support to those who have been adversely economically impacted by the pandemic.  Residential and commercial tenant eviction moratoriums at the federal, state, and local level, as well as limits on rent increases proliferated throughout the pandemic.  Many of these restrictions will remain in place throughout 2022, and in the case of Los Angeles County, the residential tenant protection laws will remain in effect through June 2023.

Other recent notable examples include ongoing changes to Environmental Protection Agency (“EPA”) and the United States Army Corps of Engineers (“Corps”) regulations pertaining to waters of the United States (“WOTUS”) under the Clean Water Act (“CWA”).   The CWA requires the EPA, the Corps, and states that have permitting authority to regulate the discharge of pollutants into WOTUS.   This includes CWA Section 404 “dredge and fill” permits issued by the Corps.  Development projects have struggled for decades with the uncertainty of WOTUS as applied to wetlands, streams, and similar seasonal water features.  These regulatory shifts at the federal level are also impacting the implementation and enforcement of the Migratory Bird Treaty Act (MBTA), Endangered Species Act (ESA), and the National Environmental Policy Act (NEPA). These changes reflect a pivot away from the Trump administration’s relaxation of regulatory red tape .

The federal government’s response to global climate change is also presenting new regulatory challenges.  The federal government is rapidly developing new requirements in response to climate change for a variety of real estate development projects, uses, and operations.  At the same time, many companies are seeking to embrace these changes not only to gain a competitive advantage by voluntarily adopting pro-active development and operational changes that can reduce greenhouse gas emissions (“GHG”), but also to make a demonstrated commitment to social responsibility.  These measures include participation in carbon emission credit trading programs, adopting new green technologies and building standards, and adopting and implementing Environmental, Social and Governance (“ESG”) policies and priorities.

At the state and local level, there continues to be a proliferation of new regulations—often initiated in coastal states such as California—intended to address water quality and availability, GHG reductions and “net zero” emissions mandates, wildfire hazard, wetlands regulation, sea level rise, clean energy mandates and fossil fuel regulation, rapid transportation legislation, and the production of much-needed market rate and affordable housing.  Many of the new regulations are intended to shape land use patterns and encourage the production of housing in urbanized areas where transit-oriented and other higher density affordable housing development is encouraged and incentivized through regulation.

The State of California has mandated that local governments must update their housing elements of their general plans to affirmatively plan for the production of housing to meet jurisdictionally specified future regional housing needs.  California’s SB-9 has largely eliminated single-family zoning by allowing duplexes of up to 4 units on single-family zoned properties.  California has adopted a host of housing bills, including legislation to encourage the development of accessory dwelling units (“ADU’s”) on single-family zoned property.  These “preemptive” state laws and regulations conflict with many local land use regulations and represent a challenging shift from local control over land use planning and zoning to the imposition of state mandates to create more housing.  Many states are also adopting certain regulations intended to grant density “bonuses” and streamline the approval of projects creating affordable housing.  The emerging conflict between state preemptive legislation and local control over land use, and the litigation that has emerged from these conflicts, will create additional regulatory uncertainty for some time to come.

The proliferation of new regulation—at all levels of government—that will impact the commercial real estate industry remains a near certainty for the indefinite future.

is a partner in the Los Angeles office of Cox, Castle Nicholson, LLP. David has practiced land use and environmental law for over thirty years. He is recognized as one of Southern California’s leading entitlement lawyers. David is a Fellow of the American College of Real Estate Lawyers (“ACREL”). He has been selected by the Los Angeles Daily Journal as one of the “Top 50 Development Attorneys” in California.

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Importance of Regulatory framework and policies in Real Estate

Real Estate (Regulation and Development) Bill, 2013

In order to bring about systematic changes in the Real estate sector and make it more organised and regulated, the government decided to implement a regulatory framework along with well-defined policies. This move was also meant to substantiate the government’s agenda to bring about economic reforms through poverty alleviation and by providing affordable housing to economically weaker sections of society. Eventually after considerable debate and deliberations on the issue the Real Estate (Regulation and Development) Bill , 2013 was approved by the Union Cabinet in June, 2013. Subsequently, it was introduced in the Rajya Sabha in August, 2013.

Importance of regulations in the sector

The real estate sector at present is associated with many vices, which hopefully can be cleansed by bringing about stringent regulations and effective policies. One of the pressing needs is to rid it from the influence of black money supply. Currently, the sector contributes to about 70 per cent of the black money generated in our country. Considering the impact the sector has created in the form of contribution to the total GDP of our country as well as in employment generation, both skilled and unskilled, it is high time that the government accords the industry status to the sector. Such a move assumes more significance especially in the backdrop of the government opening up the sector to FDI , thereby benefiting developers in a large way.

Stakeholders

Implementation of regulations in the real estate sectors should be carried out in such a manner that clear roles are assigned for all the stakeholders involved, without any overlap or trespass into each other’s territory. Some of the major stakeholders in the regulatory process are:

·  The State governments by delegating the implementation of regulations through their Housing ministry. This will then be sub-allotted to different districts, municipalities and panchayats.

·  Builders and developers through a self-regulatory body like CREDAI .

·  Banks and other financial institutions through the National Housing Bank (NHB) / RBI .

·  Real estate agents and brokers through a body like National Association of Realtors (NAR) India.

·  Buyers or end users.

Role of the Government

The role of the government as a regulator is very crucial since it has to clearly define its responsibilities in providing compensation for those affected due to the government’s failures. In this regard, computerisation of government functions and networking it with other departments across States assumes utmost importance. Moreover, data should be updated regularly with easy access to the general public to various services like obtaining an Encumbrance certificate (EC) or Patta through designated service centers.

Role of Builders

Builders on their part should provide prospective buyers transparency with regards to the projects they are trying to sell. Moreover, they should ensure that proper approvals are got for their projects without misleading buyers. Those builders and developers following best practices can be rewarded by local bodies or government agencies. It is also important to impose strict penalties on those erring, and debar those who are regular offenders.

Role of NHB

The NHB should provide proper guidelines and clearly spell out their terms of finance for various housing projects. Priority should be given for low cost housing as well as economical and affordable housing projects with concessional rate of interest being granted for such projects. Besides, there should not be any hidden charges like processing fee and the loan term should be at least for five years. Moreover, various provisions should also be extended to those buying property in suburban as well as rural areas to facilitate reverse migration of those living in cities.

Role of Real Estate agents and buyers

Real estate agents and brokers should be well-qualified to pursue their profession and should always stick to the guidelines drawn by the NAR India. Professionalism and transparency are important qualities that they should pursue at all times. While the role of the buyer or end-user is minimal, it is of immense significance. They should be aware of the responsibilities of the other stakeholders so that their interests can be safeguarded.

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A Real Estate Compliance Checklist For Brokers In 2024

Real estate compliance is complex. The laws are confusing and unclear—and federal, state, and local laws all impact transactions.

Every state presents its laws differently, and while most brokers understand the main concepts, many fail to meet all real estate compliance requirements.

Failing to comply with real estate regulations could expose you to legal action. Some will result in failing an audit, and others may lead to a criminal conviction. 

The good news is that each state follows some general principles. If you adhere to these, it will be easier to comply with regulatory bodies. 

These principles break down into five pillars:

• Completeness.

In this guide, we’ll break down the five pillars and provide a checklist to follow to ensure you meet your obligations and avoid real estate compliance breaches. 

Which Real Estate Laws Are Most Often Violated?

Before we explore these five pillars, let’s look at the most common reasons brokers breach real estate laws:

• Trust fund violations: Brokers responsible for handling monies commingle funds—which is when monies are pooled into one fund—or don’t maintain adequate records.
• Failure to supervise: This happens when a real estate broker doesn’t oversee an agent’s activity.
• Unlicensed activity: If a broker allows an unlicensed person, like agents and property managers, to undertake activities that require a license.
• Misrepresentation: If material facts are misrepresented during a transaction, this can involve a lack of disclosure.

5 Principles of Real Estate Compliance

Now, let’s look at each item on our real estate compliance checklist in detail. 

A series of deadlines govern transactions, from initial offer to closing. It’s essential to understand your state’s process. This helps you ensure your agents and transaction coordinators know the deadlines and can meet them at each stage.

A poorly managed transaction can lead to a deal stalling, which can result in problems like finance falling through. 

By implementing a process that automatically schedules and sends deadline reminders, you ensure that deals stay on track.

Here are some key deadlines that often catch out brokers: 

Offer accepted: Only the first step

The first time-bound issue an agent has to manage is the offer process. A seller typically has 72 hours to accept, counter, or ignore an offer. Once a seller accepts the buyer’s offer, the property is “under contract.”

When a transaction becomes under contract, it activates many deadlines for which each party is responsible for meeting. Real estate checklists are useful for tracking these things.

Brokers can ensure a smooth transaction by implementing a system upon offer acceptance that guides all parties efficiently through closing and adhering to all regulations.

Depositing funds and securing a mortgage

Your client being refused finance is a common reason why deals fall through. Real estate professionals should be proactive in getting buyers to obtain financing as early as possible. 

An earnest money deposit is often required to take the property off the market during finance preparation. This can activate passive contingencies that can obligate buyers when a date lapses. 

If the seller backs out without meeting one of these contingencies or does so after they have lapsed, the earnest money generally goes to the seller as compensation.

A mortgage contingency gives buyers 30 to 60 days to secure a loan approval. If finance isn’t secured within the timeframe, the deposit can be returned.

Other contingencies 

There are several time-bound contingencies in the transaction process that need to be tracked, and missing any one of these can cause a deal to stall or collapse. Here are a few: 

• The home inspection.
• The seller disclosing any known problems with the home.
• The pest inspection not revealing any infestations or damage to the home.
• The seller completing agreed-upon repairs.

Real estate transactions and regulatory compliance can easily break down on these points, so brokers must manage this process proactively. 

Know contract date terminology

Poor timeliness is one of the main reasons real estate deals collapse, and contract dates are often confusing. 

Instead of specific dates being identified, the terminology refers to days after and days prior. 

It’s worth clarifying these terms, and brokers should make sure agents are comfortable with these definitions:

• Days: This refers to calendar days. This is the last day for completing an action, and it can’t be a weekend or holiday. 
• Days After: This refers to the days after a specific event; day one counts as the day after the event. 
• Days Prior: The days before a specific event, not including the day of the event.

➡️ 2: Conduct

Real estate agents are regularly presented with ethical dilemmas where the unethical approach can lead to making more money.  This can cause misaligned incentives. 

Withholding offers, failing to disclose financial information, or fabricating offers to get a listing are all possible tactics. 

The National Association of Realtors (NAR) lays out a code of ethics , and they take professional standards seriously. NAR members are required to attend a course on ethics every four years. 

Its code of ethics is regarded as the gold standard for real estate compliance, and following it will keep you on the right track. 

The problem for real estate brokers is policing their agents.  It’s hard to monitor everything agents are doing.

Can real estate agents be penalized for unethical behavior?

Real estate agents can be penalized for unethical behavior. Their behavior isn’t just a case of upholding patriotic values—fiduciary duty governs the conduct of agents.

Fiduciary duty requires agents to always act in the best interest of buyers and sellers. Punishment for violating these duties ranges from loss of commission to damages and, in extreme cases, criminal charges.

The most significant penalty is to reputation—agents and brokers seen to act dishonestly are unlikely to be successful in the real estate business. 

Here is a reminder of the core fiduciary duties:

• Loyalty: Agents should protect their clients’ interests over anyone else when transacting.
• Confidentiality: A real estate professional must not disclose clients’ personal information. 
• Obedience: Agents need to follow instructions unless those instructions break other laws.
• Competence, care, and diligence: An agency must act with care, and if they don’t have the level of competence for specific tasks, they need to disclose this information.
• Accounting: Agents must disclose exactly how funds are being used during the transaction.

➡️ 3: Storage

Keeping records is a critical real estate compliance requirement for brokers. However, state laws are complicated because they weren’t written with technology in mind. This leaves brokers unclear on whether their storage methods are compliant.

Here are the areas that trip up real estate brokers:

• They don’t record the correct information.
• The storage methods don’t satisfy state regulators.  

Storage in 2024 

Storage requirements vary between states. Some states require a hard copy of records, while others are happy to review evidence through a software platform.

When data is kept remotely in the cloud, it can be hard to satisfy regulations written with filing cabinets in mind. 

For example, we work with agents in Arizona who have to give Paperless Pipeline’s address to satisfy regulators on the storage location. 

Most states stipulate the storage of documents for three years, but it’s good practice to keep documentation for ten years—or indefinitely.

➡️ 4: Completeness

You need to retain a complete paper trail from listing the property to closing the sale. Real estate brokers and transaction coordinators have no room for error here. Real estate laws are clear on what documentation is required.

For example, these are the file requirements for the Arizona Department of Real Estate and the Colorado Department of Regulatory Agencies .

The principles are consistent, but some specifics may change—for example, the format for storing documents or the communication log.

Here are some key areas typically covered:

• Filing system: All records must be stored systematically in one place and often must be accessible in real time.
• Responsibility: Important actions such as document and offer reviews are often legally required by brokers or real estate compliance and conveyance officers. A time-stamped record showing who completed an action must be recorded.
• Brokerage relationship: A licensed real estate broker must often prove that the rights of their clients and the necessary disclosures are in place and correct. 
• Sales transaction folder: To include contracts, escrow receipts, and settlement statements.
• Inspections: Any reports or declarations related to property inspections.

➡️ 5: Review 

Designated brokers or associate brokers with delegated broker duties need to review key documents, like listing and purchase agreements.

Failure to demonstrate documents have been reviewed by an appropriate person can result in a failed real estate compliance audit. 

Plus, if problems are identified, regulatory compliance issues can be avoided, which helps to prevent clients from suing you.

Today, electronic document reviews are becoming more common. However, many brokerages still use pen and paper to review documents.

This manual compliance process is:

• Difficult to track.
• Slow and cumbersome.
• Missing a central view.

Using software to review documents is a huge step forward. At a glance, brokers can see which documents need to be reviewed and mark them as completed. If there are any issues, these can be noted and sent back to the agent.

If you are using software, the activity log must reliably demonstrate who has completed the review.  

Maintain Compliance with Paperless Pipeline

Real estate compliance can be confusing, especially with so many laws and regulations across different states.

Paperless Pipeline gives you the tools to build regulatory compliance into your transaction management process, so you can rest assured your brokerage meets regulations.

 Get a free trial of Paperless Pipeline by visiting our website and see how our software can help you maintain compliance. It’s simple, powerful, and 100% free to try without a credit card.

Ready to simplify your process and delight your agents?

In less than a minute you can start testing the newest features built to help your entire office close more deals. It’s simple, powerful, and 100% free to try without a credit card.

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Laws That Affect Real Estate: Understanding Government Laws

Government laws affect all of us in many ways. One way is through the real estate market. Government regulations impact what type of property you can buy, how much you pay for it, and where you can live.

The government sets the laws and regulations that make up an area’s property law. These laws can impose limits on what a landowner can do with his or her property. The three types of government restrictions are use restrictions, deed restrictions, and zoning regulations. The government also deals with implementing the Section 45L Energy Efficient Home Tax Credit to guide homeowners to make energy-efficient homes.

How the Government Affects Real Estate

Laws that affect real estate change all the time. It’s hard to keep track of what is going on and how it will impact your business. Below are the ways that the government affects the real estate industry:

The government imposes use restrictions.

Use restrictions are rules that specify what a landowner can do with his or her property. Use restrictions focus on the neighborhood in which the property is located. For example, if a homeowner lives next to an elementary school, then the homeowner might not be allowed to use his or her home for commercial purposes. The government needs to make sure that the elementary school will not be compromised in any way because of the homes near it.

The government imposes deed restrictions.

Deed restrictions are rules that limit what type of changes a landowner can make to his or her property. Deed restrictions focus on the individual property rather than the surrounding neighborhood like use restrictions do. For example, a homeowner cannot build tall buildings if the deed restriction prohibits it. Therefore, homeowners can only construct small buildings so as not to get in trouble with the law.

The government imposes zoning regulations.

Zoning regulations are rules that divide the land into different categories. These rules determine how property can be used and developed, such as whether a building is commercial or residential. For example, if someone wants to build a commercial building in an area that is only zoned for residential, that person will not be able to push through with his project. Zoning regulations exist to ensure all property within certain areas are properly developed and used.

Zoning laws also address other concerns like traffic levels or environmental issues. These regulations can be established by different government bodies like local communities and state governments. They are also subject to change over time depending on how people use these areas.

The government sets the requirements for permits in real estate.

Before anyone can build real estate properties, they need to obtain a permit from the government. These permits include approvals for building plans and specifications, occupancy levels, number of housing units allowed per land area, etc.

People need to get these permits so that they can develop the land they want to build on. It also lets them know what regulations are in place for that area, like how many units of housing are allowed per acre or building height restrictions.

There may be times when people need to get more than one permit before construction starts because different government bodies oversee permitting requirements at the local level. Therefore, it’s important to make sure you get all of them before starting construction so that you will not face legal problems down the line.

The state government regulates real estate through subdivisions.

Subdivision laws are established by different states to protect consumers in real estate transactions or prevent harm that can be done to surrounding communities if properties are not developed properly.

Additionally, the federal government has passed some laws that affect ownership of certain properties or transactions involving them. For example, if someone wants to purchase federally-owned land in a specific area, they must follow strict guidelines put in place by the Federal Government Agency (FEMA). Failure to do so can result in fines and penalties.

The government also regulates real estate through the funding it provides, like programs such as Fannie Mae and Freddie Mac that encourage homeownership. These two entities provide low-interest loans to individuals looking for homes who cannot afford a traditional mortgage loan from a private bank or other lending institution.

The Government’s Influence

Most government laws are there for good reason, like protecting the safety and welfare of people who live in or near a specific land area. However, if one is interested in building a home on their property without getting too many permits, they can contact local authorities about what regulations apply in their area. This way, they will be able to build their properties without facing any problems down the line.

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Commercial Real Estate: Key Trends and Risk Management in a New Era by Jessica Olayvar, Senior Manager, Supervision, Regulation, and Credit, Federal Reserve Bank of Richmond, and Mina Oldham, Senior Supervision Analyst, Risk and Surveillance Team, Supervision, Regulation, and Credit, Federal Reserve Bank of Richmond *

While the banking industry is widely viewed as more resilient today than it was heading into the financial crisis of 2007–2009, 1 the commercial real estate (CRE) landscape has changed significantly since the onset of the COVID-19 pandemic. This new landscape, one characterized by a higher interest rate environment and hybrid work, will influence CRE market conditions. Given that community and regional banks tend to have higher CRE concentrations than large firms (Figure 1), smaller banks should stay abreast of current trends, emerging risk factors, and opportunities to modernize CRE concentration risk management. 2 , 3

Several recent industry forums conducted by the Federal Reserve System and individual Reserve Banks have touched on various aspects of CRE. This article aims to aggregate key takeaways from these various forums, as well as from our recent supervisory experiences, and to share noteworthy trends in the CRE market and relevant risk factors. Further, this article addresses the importance of proactively managing concentration risk in a highly dynamic credit environment and provides several best practices that illustrate how risk managers can think about Supervision and Regulation (SR) letter 07-1, “Interagency Guidance on Concentrations in Commercial Real Estate,” 4 in today’s landscape.

Market Conditions and Trends

Let’s put all of this into perspective. As of December 31, 2022, 31 percent of the insured depository institutions reported a concentration in CRE loans. 5 Most of these financial institutions were community and regional banks, making them a critical funding source for CRE credit. 6 This figure is lower than it was during the financial crisis of 2007–2009, but it has been increasing over the past year (the November 2022 Supervision and Regulation Report stated that it was 28 percent on June 30, 2022). Throughout 2022, CRE performance metrics held up well, and lending activity remained robust. However, there were signs of credit deterioration, as CRE loans 30–89 days past due increased year over year for CRE-concentrated banks (Figure 2). That said, past due metrics are lagging indicators of a borrower’s financial hardship. Therefore, it is critical for banks to implement and maintain proactive risk management practices — discussed in more detail later in this article — that can alert bank management to deteriorating performance.

Noteworthy Trends

Most of the buzz in the CRE space coming out of the pandemic has been around the office sector, and for good reason. A recent study from business professors at Columbia University and New York University found that the value of U.S. office buildings could plunge 39 percent, or $454 billion, in the coming years. 7 This may be caused by recent trends, such as tenants not renewing their leases as workers go fully remote or tenants renewing their leases for less space. In some extreme examples, companies are giving up space that they leased only months earlier — a clear sign of how quickly the market can turn in some places. The struggle to fill empty office space is a national trend. The national vacancy rate is at a record 19.1 percent — Chicago, Houston, and San Francisco are all above 20 percent — and the amount of office space leased in the United States in the third quarter of 2022 was nearly a third below the quarterly average for 2018 and 2019.

Despite record vacancies, banks have benefited thus far from office loans supported by lengthy leases that insulate them from sudden deterioration in their portfolios. Recently, some large banks have begun to sell their office loans to limit their exposure. 8 The sizable amount of office debt maturing in the next one to three years could create maturity and refinance risks for banks, depending on the financial stability and health of their borrowers. 9

In addition to recent actions taken by large firms, trends in the CRE bond market are another important indicator of market sentiment related to CRE and, specifically, to the office sector. For instance, the stock prices of large publicly traded landlords and developers are close to or below their pandemic lows, underperforming the broader stock market by a huge margin. Some bonds backed by office loans are also showing signs of stress. The Wall Street Journal published an article highlighting this trend and the pressure on real estate values, noting that this activity in the CRE bond market is the latest sign that the increasing interest rates are impacting the commercial property sector. 10 Real estate funds typically base their valuations on appraisals, which can be slow to reflect evolving market conditions. This has kept fund valuations high, even as the real estate market has deteriorated, underscoring the challenges that many community banks face in determining the current market value of CRE properties.

In addition, the CRE outlook is being affected by greater reliance on remote work, which is subsequently impacting the use case for large office buildings. Many commercial office developers are viewing the shifts in how and where people work — and the accompanying trends in the office sector — as opportunities to consider alternate uses for office properties. Therefore, banks should consider the potential implications of this remote work trend on the demand for office space and, in turn, the asset quality of their office loans.

Key Risk Factors to Watch

A confluence of factors has led to several key risks impacting the CRE sector that are worth highlighting.

• Maturity/refinance risk: Many fixed-rate office loans will be maturing in the next couple of years. Borrowers that were locked into low interest rates may face payment challenges when their loans reprice at much higher rates — in some cases, double the original rate. Also, future refinance activity may require an additional equity contribution, potentially creating more financial strain for borrowers. Some banks have begun offering bridge financing to tide over certain borrowers until rates reverse course.
• Increasing risk to net operating income (NOI): Market participants are citing increasing costs for items such as utilities, property taxes, maintenance, insurance, and labor as a concern because of heightened inflation levels. Inflation could cause a building’s operating costs to rise faster than rental income, putting pressure on NOI.
• Declining asset value: CRE properties have recently experienced significant price changes relative to pre-pandemic times. An Ask the Fed session on CRE noted that valuations (industrial/office) are down from peak pricing by as much as 30 percent in some sectors. 11 This causes a concern for the loan-to-value (LTV) ratio at origination and can easily put banks over their policy limits or risk appetite. Another factor impacting asset values is low and lagging capitalization (cap) rates. Industry participants are having a hard time determining cap rates in the current environment because of poor data, fewer transactions, rapid rate movements, and the uncertain interest rate path. If cap rates remain low and interest rates exceed them, it could lead to a negative leverage scenario for borrowers. However, investors expect to see increases in cap rates, which will negatively impact valuations, according to the CRE services and investment firm Coldwell Banker Richard Ellis (CBRE). 12

Modernizing Concentration Risk Management

In early 2007, after observing the trend of increasing concentrations in CRE for several years, the federal banking agencies released SR letter 07-1, “Interagency Guidance on Concentrations in Commercial Real Estate.” 13 While the guidance did not set limits on bank CRE concentration levels, it encouraged banks to enhance their risk management in order to manage and control CRE concentration risks.

Key Elements to a Robust CRE Risk Management Program

Many banks have since taken steps to align their CRE risk management framework with the key elements from the guidance:

• Board and management oversight
• Portfolio management
• Management information system (MIS)
• Market analysis
• Credit underwriting standards
• Portfolio stress testing and sensitivity analysis
• Credit risk review function

Over 15 years later, these foundational elements still form the basis of a robust CRE risk management program. An effective risk management program evolves with the changing risk profile of an institution. The following subsections expand on five of the seven elements noted in SR letter 07-1 and aim to highlight some best practices worth considering in this dynamic market environment that may modernize and strengthen a bank’s existing framework.

Management Information System

A robust MIS provides a bank’s board of directors and management with the tools needed to proactively monitor and manage CRE concentration risk. While many banks already have an MIS that stratifies the CRE portfolio by industry, property, and location, management may want to consider additional ways to segment the CRE loan portfolio. For example, management may consider reporting borrowers facing increased refinance risk due to interest rate fluctuations. This information would aid a bank in identifying potential refinance risk, could help ensure the accuracy of risk ratings, and would facilitate proactive discussions with potential problem borrowers.

Similarly, management may want to review transactions financed during the real estate valuation peak to identify properties that may currently be more sensitive to near-term valuation pressure or stabilization. Additionally, incorporating data points, such as cap rates, into existing MIS could provide useful information to the bank management and bank lenders.

Some banks have implemented an enhanced MIS by using centralized lease monitoring systems that track lease expirations. This type of data (especially relevant for office and retail spaces) provides information that allows lenders to take a proactive approach to monitoring for potential issues for a particular CRE loan.

Market Analysis

As noted previously, market conditions, and the resulting credit risk, vary across geographies and property types. To the extent that data and information are available to an institution, bank management may consider further segmenting market analysis data to best identify trends and risk factors. In large markets, such as Washington, D.C., or Atlanta, a more granular breakdown by submarkets (e.g., central business district or suburban) may be relevant.

However, in more rural counties, where available data are limited, banks may consider engaging with their local appraisal firms, contractors, or other community development groups for trend data or anecdotes. Additionally, the Federal Reserve Bank of St. Louis maintains the Federal Reserve Economic Data (FRED), a public database with time series information at the county and national levels. 14

The best market analysis is not done in a vacuum. If meaningful trends are identified, they might inform a bank’s lending strategy or be incorporated into stress testing and capital planning.

Credit Underwriting Standards

During periods of market duress, it becomes increasingly important for lenders to fully understand the financial condition of borrowers. Performing global cash flow analyses can ensure that banks know about commitments their borrowers may have to other financial institutions to minimize the risk of loss. Lenders should also consider whether low cap rates are inflating property valuations, and they should thoroughly review appraisals to understand assumptions and growth projections. An effective loan underwriting process considers stress/sensitivity analyses to better capture the potential changes in market conditions that could affect the ability of CRE properties to generate sufficient cash flow to cover debt service. For example, in addition to the usual criteria (debt service coverage ratio and LTV ratio), a stress test might include a breakeven analysis for a property’s net operating income by increasing operating expenses or decreasing rents.

A sound risk management process should identify and monitor exceptions to a bank’s lending policies, such as loans with longer interest-only periods on stabilized CRE properties, a greater reliance on guarantor support, nonrecourse loans, or other deviations from internal loan policies. In addition, a bank’s MIS should provide sufficient information for a bank’s board of directors and senior management to assess risks in CRE loan portfolios and identify the volume and trend of exceptions to loan policies.

Additionally, as property conversions (think office space to multifamily) continue to crop up in major markets, bankers could have proactive discussions with real estate investors, owners, and operators about alternative uses of real estate space. Identifying alternative plans for a property early could help banks get ahead of the curve and minimize the risk of loss.

Portfolio Stress Testing and Sensitivity Analysis

Since the onset of the pandemic, many banks have revamped their stress tests to focus more heavily on the CRE properties most negatively affected, such as hotels, office space, and retail. While this focus may still be relevant in some geographic areas, effective stress tests need to evolve to consider new types of post-pandemic scenarios. As discussed in the CRE-related Ask the Fed webinar mentioned earlier, 54 percent of the respondents noted that the top CRE concern for their bank was maturity/refinance risk, followed by negative leverage (18 percent) and the inability to accurately establish CRE values (14 percent). Adjusting current stress tests to capture the worst of these concerns could provide insightful information to inform capital planning. This process could also offer loan officers information about borrowers who are especially vulnerable to interest rate increases and, thus, proactively inform workout strategies for these borrowers.

Board and Management Oversight

As with any risk stripe, a bank’s board of directors is ultimately responsible for setting the risk appetite for the institution. For CRE concentration risk management, this means establishing policies, procedures, risk limits, and lending strategies. Further, directors and management need a relevant MIS that provides sufficient information to assess a bank’s CRE risk exposure. While all of the items mentioned earlier have the potential to strengthen a bank’s concentration risk management framework, the bank’s board of directors is responsible for establishing the risk profile of the institution. Further, an effective board approves policies, such as the strategic plan and capital plan, that align with the risk profile of the institution by considering concentration limits and sublimits, as well as underwriting standards.

Community banks continue to hold significant concentrations of CRE, while numerous market indicators and emerging trends point to a mixed performance that is dependent on property types and geography. As market players adapt to today’s evolving environment, bankers need to remain alert to changes in CRE market conditions and the risk profiles of their CRE loan portfolios. Adapting concentration risk management practices in this changing landscape will ensure that banks are ready to weather any potential storms on the horizon.

* The authors thank Bryson Alexander, research analyst, Federal Reserve Bank of Richmond; Brian Bailey, commercial real estate subject matter expert and senior policy advisor, Federal Reserve Bank of Atlanta; and Kevin Brown, advanced examiner, Federal Reserve Bank of Richmond, for their contributions to this article.

• 1 The November 2022 Financial Stability Report released by the Board of Governors highlighted several key actions taken by the Federal Reserve following the 2007–2009 financial crisis that have promoted the resilience of financial institutions. This report is available at www.federalreserve.gov/publications/files/financial-stability-report-20221104.pdf .
• 2 See Kyle Binder, Emily Greenwald, Sam Schulhofer-Wohl, and Alejandro H. Drexler, “Bank Exposure to Commercial Real Estate and the COVID-19 Pandemic,” Federal Reserve Bank of Chicago, 2021, available at www.chicagofed.org/publications/chicago-fed-letter/2021/463 .
• 3 The November 2022 Supervision and Regulation Report released by the Board of Governors defines concentrations as follows: “ A bank is considered concentrated if its construction and land development loans to tier 1 capital plus reserves is greater than or equal to 100 percent or if its total CRE loans (including owner-occupied loans) to tier 1 capital plus reserves is greater than or equal to 300 percent.” Note that this method of measurement is more conservative than what is outlined in Supervision and Regulation (SR) letter 07-1, “Interagency Guidance on Concentrations in Commercial Real Estate,” because it includes owner-occupied loans and does not consider the 50 percent growth rate during the prior 36 months. SR letter 07-1 is available at www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm , and the November 2022 Supervision and Regulation Report is available at www.federalreserve.gov/publications/files/202211-supervision-and-regulation-report.pdf .
• 5 Using Call Report data, we found that, as of December 31, 2022, 31 percent of all financial institutions had construction and land development loans to tier 1 capital plus reserves greater than or equal to 100 percent and/or total CRE loans (including owner-occupied loans) to tier 1 capital plus reserves greater than 300 percent. As noted in footnote 3, this is a more conservative measure than the SR letter 07-1 measure because it includes owner-occupied loans and does not consider the 50 percent growth rate during the prior 36 months.
• 7 See Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh, “Work from Home and the Office Real Estate Apocalypse,” November 26, 2022, available at https://dx.doi.org/10.2139/ssrn.4124698 .
• 8 See Natalie Wong and John Gittelsohn, “Wall Street Banks Are Exploring Sales of Office Loans in the U.S.,” American Banker , November 11, 2022, available at www.americanbanker.com/articles/wall-street-banks-are-exploring-sales-of-office-loans-in-the-u-s .
• 9 An Ask the Fed session presented by Brian Bailey on November 16, 2022, highlighted the significant volume of office loans at fixed and floating rates set to mature in the coming years. In 2023 alone, nearly $30.2 billion in floating rate and $32.3 billion in fixed rate office loans will mature. This Ask the Fed session is available at https://bsr.stlouisfed.org/askthefed/Home/ArchiveCall/329 .
• 10 See Konrad Putzier and Peter Grant, “Investors Yank Money from Commercial-Property Funds, Pressuring Real-Estate Values,” Wall Street Journal , December 6, 2022, available at www.wsj.com/articles/investors-yank-money-from-commercial-property-funds-pressuring-real-estate-values-11670293325 .
• 11 See the November 16, 2022, Ask the Fed session, which was presented by Brian Bailey and is available at https://bsr.stlouisfed.org/askthefed/Home/ArchiveCall/329 .
• 12 See “U.S. Cap Rate Survey H1 2022,” CBRE, 2022, available at www.cbre.com/insights/reports/us-cap-rate-survey-h1-2022 .
• 13 See SR letter 07-1, available at www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm .
• 14 The FRED database is available at https://fred.stlouisfed.org/ .

Also In This Issue

• A Message from Governor Bowman*
• New England Mutual Banks — The Pandemic and Beyond
• Big Data in Small Banks — Maintaining Effective Data Management in Community Banks
• Transitioning to Regional Supervision

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Home     news     New body responsible for regulation of the real estate industry in New South Wales

New body responsible for regulation of the real estate industry in New South Wales

By Phil McCarroll

Published 17 Aug, 2015

Part of NSW Fair Trading, The Real Estate and Property division will take responsibility for all real estate and property functions, including industry regulation, in the state.

The division will conduct random and proactive audits to ensure industry compliance on matters including licensing, trust account management and underquoting.

New resources will also be available to the industry, including an online rental bond system, forms accessible via mobile devices and a user-friendly tool kit for property professionals

NSW Minister for Innovation and Better Regulation Victor Dominello said the division would benefit consumers and those in the industry.

“The real estate industry is integral to our state’s economic prosperity, with the sale and rental of property impacting on millions of NSW citizens each year,” Mr Dominello said.

“This new division will facilitate relationships between government and industry and provide for licensing that better balances industry needs with consumer protection.”

The new division will be headed by NSW Fair Trading assistant commissioner Andrew Gavrielatos, who will also be responsible for establishing a Real Estate Qualifications Review Committee.

The committee will review training requirements to up-skill the real estate industry and ensure consumer protection.

As the managing director of buyer’s agency Property Buyer and president of the Real Estate Buyer's Agents Association of Australia (REBAA), Rich Harvey said it was pleasing to see a dedicated division set up to oversee the industry.

“It’s excellent and something I absolutely agree with,” Harvey said.

“With the value of the real estate industry to the state and the volume of sales we have it’s important that there is a body that is dedicated to looking into the industry and making sure everything is up to standard.”

Harvey is particularly pleased the new division will focus on the training real estate agents receive and has some ideas about how it can be improved.

“When I saw that I thought it was fantastic and as the president of REBAA and chairman of the NSW Buyers’ Agent Chapter I’ll definitely be lobbying for some changes.

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Economists' Outlook

Real estate's impact on the economy by the numbers: a state-by-state analysis.

The housing sector not only provides shelter—a basic human need—but also plays an integral role in both global and local economic growth. Beyond its primary function, the housing sector initiates a series of activities that propel economic growth.

Specifically, the housing sector is a significant contributor to gross domestic product (GDP) through construction, home sales, and renovations. While these activities require labor and materials, they also stimulate production and job creation across multiple industries, including construction, manufacturing, and retail. Furthermore, home purchases, particularly older ones, typically trigger additional consumer expenditures. These new homeowners often invest in home improvement projects, furniture, appliances, and services to personalize and update their living spaces. However, the economic impact of the housing sector extends even further. The construction of new homes and the renovation of existing ones require labor, creating a wide range of jobs, from architects and builders to interior designers. Moreover, the real estate sector—encompassing agents, brokers, and mortgage lenders—also employs a significant number of professionals. The ripple effects of a booming housing market, therefore, can be substantial in reducing unemployment and boosting people’s income.

To better understand the housing market's importance to the local economy, the National Association of REALTORS® computes the income generated from each home sale, considering the activities mentioned above, for each state. Nationwide, NAR estimates that the real estate market contributed 18%—equivalent to $4.9 trillion—to the GDP in 2023. Specifically, each home sale at the median generated about $125,000 in 2023.

Below is the detailed breakdown of contributions from each activity resulting from the purchase of a median-price existing home.

State-by-State Analysis

Among the top states for the economic contribution of real estate were Florida (24.1%), Nevada (23.2%), Delaware (23.1%), and Arizona (23.1%), where the sector accounted for more than 23% of the state's GDP. This significant figure indicates a thriving market fueled by a booming population and an influx of technology and manufacturing firms in these areas. For example, Arizona's real estate market benefits from its relatively affordable living costs and investment in infrastructure, making it a powerhouse of economic activity and growth.

Although California accounted for a smaller share of the real estate market relative to its vast overall economy, at 17.6%, the value of real estate contributions to its GDP was the highest among all states, amounting to approximately $680 million. The high value of real estate in California reflects its status as an attractive place to live, work, and invest, driving substantial economic activity.

After analyzing the total income generated from home sales, California, Hawaii, and the District of Columbia emerge as the three standout states, influenced significantly by the high property values in these areas. California leads the nation with an economic impact of $233,500 per home sale in 2023. Hawaii and the District of Columbia follow, with impacts of $214,700 and $200,400, respectively, highlighting the influence of high property values and dense, affluent populations in these states.

Jobs Impact of an Existing-Home Sale

Focusing on the real estate market's role in job creation, the National Association of REALTORS® estimates that each home sale generates two jobs. This calculation is based on the broader economic impact of existing-home sales and the average earnings in the U.S. Specifically, while each home sale contributes approximately $124,800 to the economy, the average U.S. worker earns $61,700. Therefore, using this ratio, 1,000 home sales would result in the creation of 2,000 jobs.

However, the impact of a home sale can be even more significant in certain areas. California, Hawaii, Maine, Montana, and Idaho are the states with the largest impact on job creation from home sales. For instance, more than three jobs are generated in California and Hawaii from every home sale.

Looking Ahead

Based on the analysis, the housing market is not just a sector of the economy but a significant force driving economic activity. In states like Florida, Nevada, and Arizona, real estate’s contribution to the local economy is even more pronounced, with contributions to GDP exceeding 23%. Moving forward, using the impact of the real estate market will be important for improving the economic growth and resilience of both the country and local markets.