Contributed By Tonkon Torp LLP
Oregon, in particular the Portland Metropolitan Area, has become increasingly attractive to out-of-state investors, lenders and end users in recent years. Most large commercial real estate loans are made by out-of-state lenders and, more often than not, the tenant in a lease transaction and the buyer in a purchase and sale transaction are out-of-state entities represented by sophisticated in-house or general counsel. Whether serving as local counsel for these out-of-state entities or representing the local party, the Oregon real estate attorney must have the skills to match the talent and sophistication of these out-of-state legal counsel. The one advantage an Oregon attorney must maintain is an intimate knowledge of the local market as well as the local laws and customs. Oregon has a well-developed set of land use laws which, on large development projects, generally require the assistance of an Oregon attorney.
Industrial properties are in high demand by both investors and end users. The chief impediment to the development of more industrial facilities is the lack of well-located and properly zoned land. Oregon's state land use laws require all cities and counties to adopt urban growth boundaries within which urban development must take place. As a result, there is a shortage of industrial land other than brownfield sites, which themselves present an additional set of challenges.
Multi-family remains the most attractive product type to investors, although the number of new projects slowed somewhat in 2018 due in part to concerns about overbuilding as well as rising construction costs. In the city of Portland, several large multi-family projects were put on hold or abandoned following the city's adoption of rent control restrictions and an inclusionary housing policy that requires developers to make 15% of the units in large-scale apartment complexes available to individuals who make 80% or less of Portland's median family income.
The office market has remained fairly stable, with vacancy rates for all classes of office space below 10%, even while absorbing space in new office buildings that have been brought to market. By comparison with other large west coast cities, office rents in the Portland Metropolitan Area are low. Co-working spaces have entered the market but have not had much, if any, effect on the vacancy rate or asking rents.
Retail vacancies have remained low and rents have increased slightly, primarily because so little new product has been brought to market.
Most of the development and transactions that have occurred have been in the Portland Metropolitan Area, which includes Vancouver, Washington. The largest projects and transactions in the past twelve months have been in the Portland suburbs. In 2018, Nike completed the addition of 1.3 million square feet to its World Headquarters Campus in Beaverton and UPS acquired and moved into the 266,000 square foot Majestic Westmark Center near Amazon's 300,000 square foot sortation center in Hillsboro. In February of 2019, Intel, Oregon's largest employer, announced plans to add 1.5 million square feet to its chip factory in Hillsboro. In addition, Intel plans to add a 1 million square foot support structure and 2,200 parking spaces.
The 2017 Tax Cuts and Jobs Act (referred to hereafter as 'the Act') has had a positive effect on commercial real estate in two ways. First, due to the lowering of the maximum federal corporate rate from 35% to 21%, corporations have more available cash to spend on expansion and development of new facilities. Second, for commercial real estate owners and developers, the Act has increased the rate of return on commercial real estate and made investment more attractive by reducing their taxes.
One of the sections in the Act that is gaining the attention of real estate developers and investors is the portion that provides favorable tax treatment for investments in eligible census tracts identified as 'opportunity zones'. If gains from the sale of assets are reinvested in opportunity zones, the investor can qualify for deferral and reduction of taxes that would otherwise be immediately due on the sale of those assets. The opportunity zone benefit also has the potential of totally eliminating capital gains tax on the appreciation of the new investment. Opportunity zone investment takes place through a qualified opportunity fund, which anyone can set up and self-certify. In Oregon, 86 census tracts have been approved as opportunity zones, including broad swaths of Portland's thriving central business district.
There was concern that the Act would eliminate Section 1031 of the US Tax Code, which allows the seller of real estate to defer the gain on a sale if like-kind property is acquired as "replacement property" within 180 days. Fortunately, the Act did not eliminate Section 1031. A recent survey of local escrow officers indicates that in approximately two-thirds of large purchase and sale transactions, at least one of the parties is engaged in Section 1031 tax deferral.
Most commercial real estate in Oregon is owned by a single-purpose entity, such as a limited liability company (LLC), corporation or limited partnership. Tenancy-in-common is another common ownership structure for investment, and each tenant-in-common may be an individual or an entity, such as an LLC. The type of ownership structure is most often driven by the particular investment structure of the ultimate owners and by tax considerations.
Oregon has statutory forms of bargain and sale, special warranty and warranty deeds. A warranty deed includes covenants that the grantor is seized of the estate it purports to convey, that the property is free of encumbrances except as expressly stated in the deed, and that the grantor warrants and will defend title to the property against all persons who may lawfully claim the same. A special warranty deed limits the covenant from encumbrances to those created or suffered by the grantor, and the warranty is limited to defending title against all persons who may claim the same by, through or under the grantor. A bargain and sale deed contains no covenants of title, but does convey after-acquired title. Oregon also recognizes quitclaim deeds, although these are not usually used to convey fee simple title because they are not effective to convey after-acquired title of the grantor.
Each deed of conveyance or land sale contract must contain a statutory disclaimer notifying the grantee of certain land use rights. A purchase and sale agreement for the sale of real property must contain a similar land use disclaimer.
Oregon does not have a transfer tax, with the exception of Washington County, discussed in 2.10 Taxes Applicable to a Transaction, below.
To avoid state tax withholding, a seller must execute an affidavit certifying that it is a domestic entity (or that it qualifies under one of the statutory exceptions). Otherwise, the closing agent must withhold Oregon tax from the proceeds of the sale.
For residential sales, Oregon requires certain disclosures to be made with respect to the condition of the property. The buyer has a right to rescind the sale if the statutory disclosure form is not provided. Such disclosures are not required for commercial transactions.
Deeds of conveyance must be executed and notarized. For the conveyance to be effective, the deed must be delivered to the grantee. Recording the deed in the official records of the county where the property is located constitutes constructive delivery of the deed.
Typically, the transfer of real property occurs through a title insurance company, which also provides escrow services for the transaction. The title company arranges for recording of the deed and issues title insurance effective as of the date of recording. Funds are disbursed after the deed is recorded.
Purchase and sale agreements typically provide for a time period for the buyer's due diligence. If the buyer is not satisfied with its investigations, prior to the end of the due diligence period the buyer may terminate the purchase and sale agreement and its earnest money will be returned.
Common due diligence items include:
Lawyers will typically assist with the title review, including a review of the survey if extended coverage is desired for the title insurance, review of leases, contracts and the environmental assessment, and may review the zoning analysis if it is uncertain whether the buyer's desired use will be permitted under the zoning code.
For residential transactions, Oregon requires a seller to provide a statutory disclosure form. Subject to certain limitations, the buyer has the right to rescind the transaction if this form is not provided.
Oregon does not mandate representations and warranties for commercial transactions, so the scope of representations and warranties in a purchase and sale agreement is subject to negotiation. At a minimum, a seller and buyer will usually each give representations as to the authority to enter into the transaction, that the agreement is binding on the parties, and that the parties are in compliance with the Order of Foreign Asset Control (OFAC).
Depending on the relative leverage of the parties, a seller may also give representations with respect to the physical condition of the property, compliance with environmental laws, the condition of title and any litigation affecting the property, including any pending or threatened condemnation proceedings.
If the agreement does not expressly provide that representations and warranties survive the closing, they will be merged, and the only surviving warranties will be those (if any) given in the deed. Typically, a purchase and sale agreement provides that the representations and warranties will survive closing for a period of six months to two years.
A purchase and sale agreement will usually provide for a termination right in favor of the non-breaching party if the representations and warranties are not true as of the closing. A breach by the seller may also be accompanied by a reimbursement of out-of-pocket costs incurred by the buyer. For a breach after closing, the non-breaching party may be entitled to damages, although the agreement often provides for a cap on such damages.
There are federal limitations on investment on US real property by foreign investors under the Foreign Investment Risk Review Modernization Act of 2018, which expanded the scope of real estate transactions subject to federal review to real estate which is part of a port, near a military installation or other sensitive government facility, or which could reasonably provide foreign persons the ability to collect intelligence on national security activities.
A foreign investor in real estate will also be subject to the Federal Investment in Real Property Tax Act (FIRPTA). As discussed in 2.2 Important Jurisdictional Requirements, above, Oregon has a similar statute, requiring tax withholding to be deducted from sale proceeds for a non-domestic seller at closing.
Oregon's Cleanup Law is analogous to the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), with the noted difference that it applies to petroleum and petroleum products in addition to other substances classified as hazardous under the federal law.
Under Oregon's Cleanup Law, a buyer of real property is potentially liable for environmental contamination as soon as they become owners of the property, regardless of when such contamination occurred or who caused it.
Because of the potential for liability, it is important for a Phase 1 Environmental Site Assessment to be done as part of the due diligence for a potential purchase, and for who bears the risk of environmental contamination to be expressly stated in the purchase and sale agreement.
How that risk is allocated may be highly negotiated, and may affect the purchase price of the property. Commonly, the seller will indemnify the buyer for any contamination caused by the seller or occurring during the seller's ownership, while the buyer will take on the risk of any contamination that occurred on the property otherwise. There may be limitations on the survival period for the indemnity, and caps on the indemnity claims. With properties at higher risk of contamination, it is becoming more common to mitigate the risk by the purchase of environmental liability insurance, with the seller paying at least a portion of the premium.
Under Oregon's land use planning law, cities and counties are required to adopt zoning codes. It is possible to obtain a zoning letter from some jurisdictions describing the zoning and permitted uses for a particular property. Otherwise, the zoning may be ascertained from the jurisdiction's zoning map and a review of the zoning code to determine permitted uses in that zone. Additionally, the zoning code will describe height and setback requirements. If a use is a conditional use, the zoning code will describe the conditions that must be satisfied and the standard of review that will apply to the conditional use application.
Development agreements between a property owner and a local jurisdiction are possible in some instances, usually for long-term planning approvals, to establish what may be developed, to address conditions imposed on the development and to describe any waivers of applicable zoning requirements.
The state, counties, cities and other government agencies have the power of eminent domain; however, with some exceptions, including condemnation for transportation or utility facilities, private residences, businesses and farms and forests may not be condemned for the purpose of transferring the property to a private third party. The most common scenario is a condemnation in connection with the construction of a road, highway, transit corridor or other transportation facility.
A landowner may have a claim for inverse condemnation where government action causes a physical taking or material interference with the use and enjoyment of the property, even though the power of eminent domain was not formally exercised.
It is very difficult to make a successful claim for a regulatory taking in Oregon. Courts have held that no compensable taking occurs so long as some beneficial use of the property remains after the regulation is imposed. Mere inconvenience or a reduction in profits is not enough. As a result, beginning in 2000, Oregon voters passed a series of ballot measures providing for compensation to landowners in certain instances where new zoning regulations restrict property uses that were available when the owner purchased the property. Measure 49, passed in 2007, is the current law, and provides for "just compensation" (in the form of a monetary payment or a waiver of land use regulations) for land use regulations enacted after January 1, 2007, which restrict a residential use, or a farm or forest practice, and result in a reduction in the value of the property.
Oregon does not have a transfer tax, with the exception of properties located in Washington County, Oregon. The Washington County transfer tax is discussed in 8.1 Sale or Purchase of Corporate Real Estate, below.
As discussed in 2.2 Important Jurisdictional Requirements, above, foreign sellers will be subject to Oregon state tax withholding from the proceeds of any sale.
Acquisitions of commercial real estate in Oregon are financed similarly to acquisitions elsewhere in the western US, with a combination of debt and equity, with one or more guaranties by a credit-worthy individual or entity with a close connection to the borrower. The debt is usually secured by the lien of a first-position trust deed, assignment of leases and rents, and fixture filing on the commercial real estate being acquired.
Trust deeds are the most common security instrument used for commercial real estate financing transactions in Oregon, although mortgages and land sale contracts are used on occasion. Land sale contracts are only used in seller-financed transactions, typically when there is some impediment to the buyer/borrower obtaining other financing. Oregon has enacted the Uniform Commercial Code with few variations, which governs the granting and perfection of security interests in personal property.
Oregon laws and regulations regarding foreign lenders making real estate loans in Oregon vary depending on the lender's choice of business entity. Foreign corporations, limited partnerships and limited liability companies are not considered to be 'transacting business' in such a way as to require qualification to do business in Oregon solely by making or acquiring a loan secured by Oregon real estate or collecting a debt or foreclosing on a lien, unless the foreign entity regularly and systematically makes loans. The Oregon Bank Act and the Oregon Insurance Code impose specific registration requirements on out-of-state banks, extranational institutions, financing associations and out-of-state insurers.
Oregon has no mortgage registration tax, documentary stamp tax or similar tax or fee imposed upon granting, recording or enforcing a security instrument. There are nominal recording fees for recording security instruments and nominal filing fees for commencing a lawsuit to enforce a debt or foreclose a security instrument. A foreclosure also generates legal, title search and publication of notice costs. Acquiring title by foreclosure or deed in lieu of foreclosure is exempt from the Washington County Transfer Tax (see 8.1 Sale or Purchase of Corporate Real Estate, below) but an exemption form must be promptly filed.
Borrowing entities must comply with their organizational documents to grant security interests in their real estate assets. For corporations, this may require board of director and/or shareholder approval; for limited liability companies, manager and/or member approval. Security instruments to encumber real estate must be written and include the correct and complete legal description of the real estate. To be recorded, a security instrument must also be acknowledged by an authorized representative of the borrowing entity in the presence of a notary public, as evidenced by the notary public's stamp or seal, and comply with the applicable county recorder's requirements for document margins and payment of applicable recording fees.
Before commencing a foreclosure action following a borrower default of a mortgage loan, a lender must comply with all notice and cure rights in the loan documents. Thereafter, the lender must strictly comply with notice and procedural requirements specified in the mortgage and trust deed statutes with the assistance of a competent, experienced, Oregon-licensed lawyer. Note that special rules apply to foreclosure of residential mortgage loans.
In the absence of a written agreement between secured lenders, the priorities of their liens against real estate are governed by first-in-time of recording. A lender with priority can agree in writing to subordinate to a junior lender, a process that typically involves substantial negotiation and consideration of some kind to the senior lender. Non-consensual liens in favor of governmental entities can obtain priority over liens for commercial debt, such as liens for unpaid property taxes, income taxes and payroll and withholding taxes.
Oregon and federal environmental laws impose liability for environmental remediation of contaminated real estate on 'owners' and 'operators' of the real estate. Holding a mortgage loan is not enough, in the absence of additional actions, for a secured lender to be deemed to be an owner or operator. However, if a lender exerts sufficient management or operational control over contaminated real estate, it is possible that the lender's actions could create exposure for the lender as an operator. Acquiring title to contaminated real estate through foreclosure or by deed in lieu of foreclosure can create liability for a lender as an owner.
The lien of a properly-created and perfected security instrument encumbering commercial real estate is not affected by the borrower's insolvency, although a federal bankruptcy filing by a borrower will at least temporarily halt incomplete foreclosure proceedings and other remedies until allowed by the bankruptcy court. Debtors, bankruptcy trustees and other creditors may also attempt to invalidate security interests as fraudulent transfers or preferential transfers.
Design review is a permissible form of land use regulation that has been adopted by some but not all local governments in Oregon. Design review may apply to all properties within a jurisdiction, or just properties in certain zones, overlay districts or types of development. The applicability, scope and methods of implementation of design review vary widely, but most design review schemes focus on regulating the appearance of structures to fit within a pre-determined design style or plan of development. Methods of construction are governed by building codes promulgated by the International Codes Council and adopted by the state Building Codes Division. Local governments can adopt additional building regulations only if they do not contradict the minimum standards set forth in these codes.
Zoning regulation in Oregon is first and foremost the responsibility of local governments. Cities regulate land use within their city limits; counties regulate land use in unincorporated areas. All local governments must adopt a comprehensive land use plan that is consistent with the Statewide Land Use Planning Goals, which are broad statements of statewide policy that are implemented by rules adopted by the state Land Conservation and Development Commission. The comprehensive plan is a broad statement of the jurisdiction's policies and goals. Zoning regulations implement the plan by regulating both the types of uses that are permitted in certain zones, and the development standards (building height, lot coverage, landscaping, etc) that apply to different types of development within the zone. The comprehensive plan and zoning regulations must be updated on a regular basis.
State agencies and other special-purpose entities have jurisdiction over certain specialized development applications or issues. For example, the development of some energy projects is within the exclusive jurisdiction of the state Energy Facility Siting Council. Development in exclusive farm and forest zones must comply with state statutes and regulations administered by the Department of Land Conservation and Development. Other state agencies commonly involved in development projects are the Department of State Lands, the Department of Environmental Quality and the Department of Fish and Wildlife. Special purpose entities include bodies like water and sewer districts and parks and recreation districts.
Most development permit applications are made to a local zoning or planning department. The department will review the application and determine if any additional information is necessary to make the application complete. Once the application is deemed complete, the government has either 120 days (in a city) or 150 days (in a county) to reach a final decision. Depending on the type of application, the decision-maker can be a government employee, a third-party hearings officer, an appointed board or an elected governing body, and neighbors and the general public may or may not be entitled to advance notice and an opportunity to comment on the application.
In some local jurisdictions the initial decision on an application is final. In others, one or more levels of local appeal may apply before the decision is final. Final decisions can be appealed to a statewide administrative court called the Land Use Board of Appeals (LUBA) for a period of 21 days. LUBA decisions can be further appealed to the civil appellate courts.
A LUBA appeal must be completed within 77 days of the local government delivering the administrative record from the prior proceedings. Any further appeals to the civil appellate courts will take about four to six months. With limited exceptions, a party seeking to appeal an issue must have raised the issue in the proceedings below; new issues may not be raised in land use appellate proceedings. Appeals rarely result in a reversal. Most often, either the decision will be affirmed or an error will be identified and the matter will be remanded back to the local government for further proceedings.
Development agreements with local governments are authorized by statute but are uncommon in practice. A development agreement is most often used for complicated projects requiring multiple permits. The term of a development agreement may not exceed 15 years in the case of a city or seven years for a county. The agreement may establish permitted uses and other parameters for a proposed development, but the local government cannot negotiate away its obligation to ensure that the applicable approval criteria set forth in the comprehensive plan and applicable zoning regulations are met.
Agreements between developers and governments are much more common to implement conditions of approval that are imposed on a development permit, such as the construction of public improvements to mitigate the impact of the proposed project. Such agreements often govern the specifics of the developer's contribution, the timing of the work and any mechanisms for partial reimbursement by future developments that benefit from the same improvements.
Most development permits require that the applicant show that sufficient public services and utilities are available to serve the project. This is typically done by obtaining 'will serve' letters from the impacted utilities. In some cases, an agreement with a third-party utility provider will be needed to govern construction or expansion of existing utility infrastructure before the provider will issue a will serve letter.
Local governments are authorized by statute to establish programs for transfer of development credits and other entitlements between properties. A common example is programs authorizing the transfer of development density or building height between properties in urban environments.
Restrictions on development are usually imposed as a condition of approval to a development permit. The conditions have to be satisfied before any final permits (usually a building permit) are issued. Otherwise, code and permit enforcement is almost universally complaint-driven. Upon receipt of a complaint, the local government will investigate and, if any violations are found, issue a notice of violation giving the offender an opportunity to cure the violation. Failure to cure will result in an escalating series of enforcement actions that may include fines, stop work orders and injunctions against further violations.
Any legal entity may be used to hold real estate in Oregon. Taxes and limited liability are the biggest drivers of entity choice for a real estate holding company. LLCs are the most frequently used entity, but corporations and limited partnerships are also common. LLCs may elect to be taxed as a partnership or as a corporation. Most elect the former in order to get the benefit of both pass-through taxation and limited liability.
Corporations are taxed at the entity level and at the shareholder level, and so are generally seen as inefficient vehicles for real estate investments. Corporations provide limited liability for shareholders.
LLCs usually elect to be taxed as partnerships, so are not subject to double-taxation like corporations. LLCs also provide limited liability for members.
Limited partnerships are taxed as partnerships. While the limited partners of a limited partnership have limited liability, the general partner does not. For that reason, many general partners of limited partnerships are structured as LLCs or some other limited liability entity.
As described above, a corporation is taxed at the entity level for income received by the corporation, and any dividends that may be distributed are taxed at the shareholder level.
Partnerships, such as limited partnerships and LLCs which have elected to be taxed as partnerships, are 'pass-through' entities, meaning the entity does not pay tax, but the partners or members do.
Domestic corporations must file Articles of Incorporation with the Oregon Secretary of State. The bylaws of a corporation will describe the rights and duties of the board of directors, officers and shareholders. The Oregon Business Corporations Act sets forth default rules to the extent the corporate bylaws do not sufficiently meet legal requirements.
Domestic LLCs must file Articles of Organization with the Oregon Secretary of State. The governance of an LLC is established through its Operating Agreement, which will describe the rights and duties of its managers and members. The Oregon Limited Liability Company Act sets forth default rules to the extent that the operating agreement does not sufficiently meet legal requirements.
Domestic limited partnerships must file a certificate of partnership with the Oregon Secretary of State. Unlike the general partner, the limited partners are passive partners and not involved in the day-to-day governance of the partnership, so are given limited liability. The rights and duties of the partners are described in the partnership agreement.
Corporations, LLCs and limited partnerships which are formed in a different state must qualify to do business in Oregon by filing an application with and paying a fee to the Oregon Secretary of State. Upon doing so, the entity receives a Certificate of Existence.
Leases and licenses are the most prevalent arrangements in Oregon. A lease grants a right of continuous and exclusive possession to the tenant, including the right to exclude the landlord except as described in the lease. A license is typically used when the occupancy does not exclude the landlord or when the occupancy will be intermittent rather than continuous. Unlike a lease, a license is typically terminable by either party at any time upon advance notice.
There are no legal distinctions between different types of commercial leases. The term 'ground lease' is often used to refer to a long-term lease (typically 30 years or more), where the tenant assumes all attributes of ownership except for legal title to the land. A lease for a shorter term is more likely to allocate the responsibilities of ownership between landlord and tenant depending on the particular transaction.
There are no statutes in Oregon regulating the rent or other terms of a commercial lease. Some court-adopted policies may render certain lease terms unenforceable under certain circumstances. For example, an agreement to indemnify another party for that party's negligence may not be enforceable in certain circumstances. Rent control and other tenant protection laws for residential tenants exist in some local jurisdictions, and in 2019 the State Legislature enacted a new statewide residential rent control law.
The terms of a commercial lease are set by contractual negotiation, not regulation. While the duration can vary widely, a typical office, retail or industrial lease will usually have a term ranging from three to 15 years, with one or more extensions available at the tenant's option. A single-tenant lease is more likely to place all responsibility for maintenance and repair of the leased premises on the tenant. In a multi-tenant lease, the landlord usually is responsible for structural items and major building system components, and the tenants responsible for the non-structural elements of their respective leased premises. Landlords that provide maintenance and repair often recover their costs from tenants through 'triple-net' leases that require each tenant to pay their proportional share of such costs. Rent is usually calculated on an annual per-square-foot basis and paid in monthly installments on the first day of each calendar month.
Most commercial leases for a term longer than one year will provide for changes to the amount of rent over the lease term. In many markets, landlords offer a period of 'free rent' at the start of the term as a leasing incentive, which is often retroactively due and payable if the tenant defaults during the lease term.
Rent usually changes during the lease term at a fixed percentage or in accordance with the rate of change tied to a specified consumer price index. If the rent change is tied to an index, most leases provide that the rent can never decrease. Occasionally, leases will provide that the rent resets to a 'fair market rent', in which case the lease typically provides a process for establishing the fair market rent by arbitration with a neutral third party if the landlord and tenant cannot agree.
Oregon imposes no VAT or similar tax or surcharge on rent.
Upon signing a lease, the tenant usually pays to the landlord the first month's rent plus a security deposit, usually equal to the amount of rent due for the last month of the lease term. Security deposits can be larger for tenants with poor credit or for exceptionally hazardous uses, and are often eliminated for larger, credit-worthy tenants.
For a single-tenant property, the tenant is usually responsible for maintenance and repair of the entire property, including areas that would often be considered 'common areas' in a multi-tenant property. For a multi-tenant property, the landlord maintains the common areas and recovers the cost from tenants as 'triple-net' or CAM expenses. Common area expenses are allocated to tenants in an equitable manner, usually based on the tenant's proportional share of the total rentable square footage. Typically, the landlord charges tenants monthly for an estimated share of common area expenses and, at the end of the year, reconciles estimated payments against actual costs. Any surplus is either applied to rent or refunded to the tenant, and any deficit is due to the landlord as additional rent.
Third-party services will be separately metered to each tenant when feasible, and each tenant will establish its own separate account directly with the provider. Otherwise, the landlord will pay the cost and recover each tenant's fair share through common area expense reimbursements.
The landlord typically obtains property and liability insurance and passes the cost through to tenants as a common area expense. Tenants are usually expected to insure their own moveable personal property and to carry liability insurance naming the landlord and any lenders with security interests in the property as additional insureds. In certain situations, tenants can also be obligated to carry rent loss and/or business interruption insurance protecting the landlord's income stream. When significant improvements are being made to prepare the premises for the tenant, the party building the improvements or its contractor will be required to carry builder's risk insurance.
Oregon landlords may restrict the permitted uses under a lease or require that the landlord approve any changes in use.
In the absence of an express restriction in the lease, the tenant may make any improvements to the leased premises as it sees fit. Accordingly, almost all commercial leases require that some or all improvements by the tenant be approved by the landlord in advance. Common variations allow tenants to make improvements that are below a certain cost, or that do not affect structural elements and are not visible from outside the premises, without the landlord's consent. Often, the lease will expressly grant the landlord the right to review and approve plans and/or the contractors selected to perform the work. Landlords often impose a fee for review of requests to make alterations, regardless of whether or not the alterations are approved. Improvements that are affixed to the leased premises become the property of the landlord upon expiration of the lease term, unless the lease states otherwise.
Most residential leases are subject to the Oregon Residential Landlord Tenant Act (Oregon Revised Statutes, Chapter 90) and, in some cases, additional regulations at the local level. The Act exempts certain residential living arrangements from its scope such as hotels, nursing homes, housing associated with employment and others. Several local jurisdictions in Oregon have also imposed regulations on short-term housing and vacation rentals, such as Airbnb. Non-residential classes of leases are not subject to additional regulations.
Bankruptcy and insolvency is almost exclusively governed by federal law under the various chapters of the US Bankruptcy Code (US Code Title 11), which imposes specific rights and obligations on both landlords and tenants in the event of a bankruptcy. Bankruptcy concepts that often impact commercial leases are the automatic stay, the right of tenants to reject leases, the rights of secured lenders and the prioritization, payment and release of debts.
The most common security for the obligations of a tenant is the security deposit posted with the landlord, discussed above in 6.8 Costs Payable by Tenant at the Start of a Lease. For tenants with little to no assets or credit, many landlords will require a payment and performance guaranty from an individual or parent company with significant assets. Guaranties can be required in addition to, or in lieu of, a security deposit. Bank letters of credit and cash escrows are rare.
A tenant that occupies commercial premises beyond the expiration of the lease term is called a 'holdover' tenant. Absent the consent of the landlord, the holdover tenant has no right to occupy the space and can be evicted. Most leases provide that rent for any holdover period is some multiple (usually 125% to 200%) of the rent most recently due under the lease. The lease often further provides that if the landlord accepts holdover rent, the lease converts to a periodic tenancy (usually month-to-month) that is terminable by either party upon advance notice (usually 30 days).
The grounds for permissible early termination of a commercial lease vary widely and are not regulated by any applicable laws. Leases are also always terminable by the landlord upon a tenant default, sometimes after notice and an opportunity for the tenant to cure. Rarely are leases terminable by the tenant due to the landlord's default; rather, the tenant's remedy for a landlord default is almost always limited to a claim for monetary damages.
Eviction of a tenant requires the use of an expedited court procedure called forcible entry and detainer (FED) in which the court only decides whether or not the tenant has the continued right to possession of the premises. Other claims, such as counterclaims for damages, are not permissible. A landlord can obtain a FED judgment in 10 to 15 days if the tenant does not contest the case; otherwise, judgment can take between 30 to 45 days. Judgments of eviction must be executed by the local county sheriff. Holdover rent will accrue under the lease until the tenant is evicted.
Federal, state and local authorities, and some private utilities, have the power of condemnation which allows them to take private property for public use upon payment of just compensation. Any privately owned real estate is subject to the risk of condemnation, and the condemning authority can terminate any underlying leases. Because defendants in condemnation proceedings rarely contest the right of the authority to condemn the property, the condemning authority is usually able to obtain possession quickly (within a few weeks or months) and the parties then litigate the amount of compensation due. A condemnation award for leased property will not be allocated by the court between the landlord and tenant (although some courts will make a separate award to tenants specifically for moving expenses). Thus, unless the lease specifically allocates the award, the entire award will belong to the landlord.
Leases can also be terminated by foreclosure of a lien securing a debt of the landlord that has priority over the lease. Priority is determined chronologically – a lender's lien that predates the lease will have priority, whereas a lien that is imposed after the lease already exists will not. For this reason, lenders making loans to landlords will often require existing tenants to subordinate their leases to the lender's lien. In exchange, sophisticated tenants require the lender to agree that upon foreclosure it will not 'disturb' (ie, terminate) the lease so long as the tenant is not in default.
Most private construction contracts are either stipulated sum (ie, fixed price) contracts or cost of the work plus a fee contracts. The latter can be with or without a guaranteed maximum price. If the design of the project is sufficiently advanced, owners often competitively bid the scope of the work to a number of general contractors. In general, public projects must be competitively bid on and the contract must be awarded to the lowest responsible bidder.
Typically, the owner engages design professionals (architects and engineers) to develop plans and specifications for the project. The owner then contracts with a general contractor to construct the project in accordance with the plans and specifications. In some instances, the owner contracts with the design professional to monitor the construction to assure adherence to the plans and specifications.
In some instances, certain components of the project (eg, heating, air conditioning, plumbing and electrical) are designed by the general contractor or by subcontractors of the general contractor. The owner specifies the performance specifications and the design responsibility is consolidated with the construction responsibility in a single firm.
On occasion, the general contractor takes on responsibility for both the design and construction of the project, commonly referred to as a 'design build' project. This arrangement occurs most often where the owner cares primarily about the ultimate function of the completed project, rather than its appearance. Warehouse facilities and parking structures are examples where 'design build' contracts are often utilized.
The primary method of managing construction risk is by detailed contract provisions in the construction contract documents. On most commercial projects, the parties use forms promulgated by the American Institute of Architects (AIA), which contain provisions that address a long list of items, including warranties, limitations of liability, insurance, payment terms, change order requirements, dispute resolution and lien releases. Most sophisticated general contractors modify the AIA forms to make the documents more favorable to the general contractor. Most well-represented owners revise the forms to make them more 'owner-friendly'.
Retainage is one mechanism often used to protect the owner. However, under Oregon law, in both public and private construction contracts, the owner is not allowed to retain more than 5% from progress payments for the work completed.
In instances where the completion date of the project is of importance to the owner, the owner will seek to insert a liquidated damages provision in the contract. Typically, the contractor will be required to compensate the owner a specified amount for each day the contractor fails to meet the agreed-upon completion date. Often the specified amount gradually increases as the length of the delay increases. As a precaution, sometimes interim milestone dates are established with corresponding liquidated damages paid to the owner if the contractor fails to achieve the milestone dates.
When the issue of liquidated damages is raised, contractors often seek to obtain a bonus if the contractor achieves early completion of the project. On occasion, general contractors seek provisions requiring the owner to pay the contractor additional compensation for owner-caused delays.
In managing schedule-related risk, a well-advised owner focuses on other contract provisions which address changes to the construction schedule, notice requirements and conditions for time extensions, and conditions allowing for excusable delay including force majeure.
In Oregon, subject to a few exceptions, performance and payment bonds are required on public projects.
Bond premiums are generally charged to the cost of the work and paid by the owner. Accordingly, on private projects, performance and payment bonds are not required in cases where the general contractor is experienced and well capitalized. In instances where the general contractor is inexperienced or not well capitalized, the owner often accepts the cost and requires both a performance bond and payment bond. Also, in situations where a well-capitalized general contractor proposes to use a subsidiary, a well-represented owner will insist on a parent company guaranty.
In Oregon, contractors, designers and material suppliers do not have the right to lien public property. Instead, they have the right to make a claim against the statutorily required payment bond.
In private projects, contractors, subcontractors, designers (eg, architects and engineers) and material and equipment suppliers who comply with the detailed statutory notice and filing provisions have lien rights. Oregon is a direct lien state, meaning claimants have the direct right to file a lien claim even if the party with whom they have contracted (such as the general contractor or higher-tier subcontractor) has been paid.
Such liens are subordinate to a construction lender's deed of trust as long as the deed of trust is recorded before the lien claimant commences work, provides services or first delivers materials or equipment to the project. If the construction lender's deed of trust is recorded after such commencement, the claimant's lien will gain priority.
A perfected construction lien may be removed from the property by the owner or other interested party posting a bond or cash deposit with the treasurer of the county where the claim of lien is filed. The bond or cash deposit must be 150% of the amount of the lien claimed.
In order to occupy a new commercial building, including a new multi-family project, or the tenant improvements in a commercial building, a Certificate of Occupancy (CO) is required, which confirms that the building or work area as defined in the building permit's scope of work has been found to satisfy all applicable governmental requirements and is allowed to be occupied for its intended use. COs are issued by the local jurisdiction: the city in incorporated areas and the county in unincorporated areas.
Most cities and counties in Oregon allow for the issuance of a Temporary Certificate of Occupancy (TCO) once all life, fire and safety systems have been completed and approved following final inspection. TCOs are also often utilized in multi-tenant properties like office buildings, with a TCO obtained as each tenant space is completed and with a permanent CO obtained for the entire building after all of the tenant spaces have been completed.
Only one county in Oregon has a real estate transfer tax – Washington County, which includes the cities of Beaverton and Hillsboro. A constitutional amendment adopted by the voters in 2012 prohibits other jurisdictions from enacting a transfer tax. Washington County's transfer tax rate is USD1 per USD1,000 of the selling price. Typically, the seller and buyer each pay one-half of this tax. There are a number of exemptions to this tax listed in Washington County Code §3.04.030.J. Exemptions are typically claimed by filing an exemption form with the deed of conveyance. If the exemption form is filed more than 15 days after recording the deed of conveyance, the exemption is lost.
Transfers of interests in organizations such as limited liability companies and corporations are not subject to the Washington County transfer tax when the beneficial ownership doesn't change due to the transfer, or if another exemption applies. Transfers in which the selling price is less than USD13,999 are exempt.
In general, Oregon municipalities do not impose taxes on occupation of business premises or payment of rent, but this should be confirmed on a case-by-case basis with the municipality in question.
Oregon has a state income tax and a state-level counterpart to the federal Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA requires withholding of 15% of the total amount realized on the sale of United States real property interests by foreign investors. For transfers with consideration in excess of USD100,000, Oregon's counterpart requires withholding the lesser of 4% of the consideration, 8% of the gain, or the seller's net sale proceeds, if the seller is a natural person who is not an Oregon resident, or a C corporation that is not qualified to do business in Oregon. For disregarded entities, the status of the ultimate owner is determinative.
For the most part, the State of Oregon follows the federal tax laws with respect to the taxation of real estate transactions. Subject to a few exceptions, if gain is deferred or eliminated at the federal level, the same treatment obtains at the state level.
See 1.3 Impact of the New US Tax Law Changes, above.