Real Estate 2024 Comparisons

Real estate law is established by federal statutes, state statutes, and common law. General principles of contract and property law govern real estate transfers and ownership, and formalities related to such matters can vary by state and locality.

The industrial/logistics asset class remained strong in the wake of the COVID-19 pandemic, and the uptick should continue in acquisitions and assemblages of real property for industrial uses, much of which is related to the burgeoning automotive manufacturing and aerospace industry in South Carolina.

Construction, purchase, and sale activity related to multifamily projects continued to be robust, and there continues to be great interest in the acquisition of South Carolina real estate by out-of-state institutional investors. As a result of changing consumer habits, the office and retail sectors continue to be uncertain, and an increased number of restructurings and conveyances are expected as lenders and landlords begin to actively pursue their remedies in distressed settings.

The recent rise in mortgage interest rates and the Federal Reserve’s attempt to corral rampant inflation have impacted real estate investors due to increased borrowing costs and reduced cash flow. Higher vacancy rates are seen in commercial buildings, both from the post-pandemic restructuring of the physical workplace and from increases in rent and operating costs.

Many of the industrial sites being acquired are obtained from governmental or quasi-governmental regional or local development authorities; these acquisitions are generally intertwined with governmental incentives, such as real property tax abatements, cash grants, and government-provided or government-financed infrastructure granted as an inducement to site selection in South Carolina. In the financing area, private equity investors and equity fund lenders are becoming a significant source of funding for South Carolina real estate acquisition and development.

The Biden administration’s 2023 proposed limitations to the 1031 like-kind exchange rules were not enacted; however, the Biden administration’s budget for fiscal year 2024 again proposes limits on 1031 like-kind exchange deferrals. It can be expected that 1031 like-kind exchanges will continue to be targeted as a “loophole” by Congress.

In 2023, South Carolina reduced its top marginal income tax rate from 6.5% to 6.4%, with a stated goal of reducing such income tax rate annually until such rate is reduced to 6%. Like other states in the southeast, these lower state income taxes are expected to continue to attract retirees from higher income tax states.

Property rights generally fall into three categories – fee interest, leasehold interest, and easement interest. A fee interest generally describes ownership of the land and is often transferred by deed. A leasehold interest generally describes the right to use but not own the land, such as the interest acquired by a tenant when they enter into a lease with a landlord. An easement interest generally describes the right to access a portion of someone else’s land and is generally acquired pursuant to an easement agreement.

South Carolina has formal requirements for the validity of conveyancing real estate instruments to be recorded in the real property records located in each county. The parcel or parcels conveyed must have been legally created as separate parcels; any conveyance subdividing a parcel or combining multiple parcels into a single parcel requires an application and government approval for such reconfiguration. There are no special laws or regulations that apply to the transfer of specific types of real estate (although specific uses are always subject to zoning and land-use regulations).

Transfers of ownership of real property in South Carolina are made by deed, which may or may not include warranties of title. A deed must be in proper form and witnessed by two disinterested parties. In addition, a deed must contain an acknowledgment made by the transferor before a notary public or, alternatively, an affidavit of a subscribing witness.

In order to be valid as against third parties, deeds must be recorded in the real property records for the county in which the property is located. There is a transfer tax payable upon recordation of a deed, and each deed must be accompanied by an affidavit as to the actual consideration paid.

South Carolina is a lawyer closing state, meaning that a South Carolina licensed lawyer must undertake or supervise key parts of the real estate transaction, including the title review, drafting of the conveyancing documents, disbursing of funds and recordation of documents. The South Carolina Supreme Court takes these requirements very seriously and, as such, a lack of South Carolina lawyer involvement may affect the enforceability of the underlying documents.

During the COVID-19 pandemic, many counties in South Carolina adopted e-recording to facilitate recording in the real property records while offices were closed, and these counties have generally kept e-recording available on a going-forward basis. An original, wet ink signed and notarised signature is still required to e-record, and when the scanned original is submitted for e-recording, a memorandum of understanding confirming that the original, wet ink signed and notarised document is in hand with the submitter is also submitted.

Many aspects of real estate transactions are subject to arcane and technical rules and regulations, and, as a result, it is critical to have the assistance of knowledgeable South Carolina counsel. With respect to title due diligence, South Carolina is one of the few states in which law firms act as title insurance agents; most South Carolina law firms are empowered to issue title insurance commitments and policies. This arrangement facilitates the negotiation of title insurance coverage and allows for integration of title insurance coverage with the closing process. For these reasons, due diligence relating to title is generally conducted by purchaser’s counsel, and the purchaser or its counsel is responsible for the title examination and obtaining title insurance.

South Carolina is a filed-rate state, meaning that title insurance premiums are largely fixed by state regulation, although there may be some negotiation for the price of endorsements. Although not typical, in some transactions the seller will tender a basic title commitment for review by purchaser’s counsel.

Surveys

Purchasers are advised to obtain new surveys meeting the standards set forth by the American Land Title Association (ALTA) and the National Society of Professional Surveyors, Inc (NSPS). These standards contain a number of optional survey coverages and certifications; South Carolina counsel will provide guidance as to the optional provisions appropriate to the specific project. Surveys are necessary to adequately identify and locate encroachments (on or off the property), identify and locate easements and other possible title issues, and specifically locate on the property the exceptions identified in the title commitment.

Zoning and Entitlement

Zoning and entitlement due diligence likewise will be conducted by purchaser’s counsel by direct contact with the applicable planning and zoning officials to obtain a “zoning letter”; this due diligence may be supplemented by a zoning report obtained from a national provider.

Environmental

Environmental due diligence will consist at a minimum of a Phase I environmental survey followed by a Phase II environmental survey, as necessary. Properly conducted environmental surveys may provide a purchaser with a defence against unlimited liability for existing contamination on the property, which otherwise attaches to parties in the chain of record title. In order for a purchaser to obtain this defence, there are number of technical requirements that must be complied with in connection with the environmental surveys.

With respect to contaminated properties, purchasers may enter into a voluntary clean-up contract with the state authorities in order to limit environmental claims. The ability of the purchaser to enter into such a voluntary clean-up contract, however, is subject to a number of technical requirements. For example, the clean-up contract must be in place prior to the time the purchaser obtains title; otherwise, the purchaser may have full joint and several liability for environmental contamination on the property. Even if an agreement is reached with the state environmental authorities, this is no guarantee that the protections in the agreement will be recognised by the federal environmental authorities.

Identification of Wetlands

Federal and state regulation precludes development of or damage to many kinds of wetlands and regulates the discharge of stormwater runoff into the wetlands. Wetland regulations are highly technical; the purchaser may be required to restore damaged wetlands (typically at considerable expense) if rules are not fully complied with. Should wetland impairment be necessary for an economically viable development, such impairment may be permitted if the purchaser makes an appropriate investment in a “wetland bank” that ensures the preservation of a comparable amount of wetlands located elsewhere.

Physical Condition

Due diligence as to the physical condition of the property is typically undertaken by engineers or consultants retained by the buyer or by way of a property condition report. If construction is contemplated, geotechnical soil tests will be conducted to determine the suitability of the site for construction.

Real Property Tax

Real property tax matters are a significant part of the purchaser’s due diligence. In addition to verifying that all taxes due and payable have been paid, certain transactions may be deemed to be “assessable transfers of interest”; this designation can trigger a reassessment of the property for tax purposes in the year following the transfer, and the resulting increase in value will result in an increase in real property taxes levied.

If the property has been classified as agricultural property, a change to a non-agricultural use may result in a recapture (or “roll back”) of tax discounts given in the prior three years on account of the property’s agricultural classification.

Under South Carolina law, the state can impose a tax lien on property in the hands of the purchaser for income and other general taxes not paid by the seller. South Carolina law further provides several safe harbours under which this liability can be avoided based on tax compliance affidavits of the seller and a compliance certificate from the South Carolina taxing authorities.

If a seller is an entity, the purchaser’s lawyer will verify the existence and good standing of the seller in South Carolina and, if different, its state of formation. The purchaser’s lawyer will also confirm that the transaction has been authorised by all necessary resolutions and that any other necessary entity action has been adopted or taken by the seller’s governing body.

There are no legally mandated representations and warranties or disclosures in commercial real estate transactions – the doctrine of caveat emptor prevails. Purchase and sale agreements typically contain customary representations and warranties, although representations as to ownership and the status of title are less common – title matters are left for due diligence by the buyer’s counsel, with the buyer’s risk further mitigated by title insurance.

Sellers frequently indemnify the purchaser against breaches of representations and warranties; however, the liability of a seller for such breaches is frequently capped monetarily and subject to shortened periods in which claims may be asserted, but even where such indemnities are capped, it may be the case that certain intentional, bad acts of the seller are carved out of the indemnity, such as fraud or willful misconduct. Note that the enforceability of provisions shortening general statutes of limitation may be unenforceable under South Carolina law, and South Carolina counsel should be consulted. It is also common for purchase and sale agreements to preclude recovery for indirect or consequential damages.

Most real estate transaction documents include waivers of jury trial and arbitration requirements. To ensure their enforceability, South Carolina counsel should be consulted during the drafting of such provisions.

General principles of contract and property law govern the transfer and ownership of real estate, but an investor would also want to understand the tax implications of investing in real estate. Specifically, real estate investment trusts (REITs) are a common investment vehicle that provide unique tax advantages to their investors.

The South Carolina Local Government Development Agreement Act (S.C. Code Title 6, Chapter 31) is critical for developers in South Carolina. The Act authorises binding agreements between municipalities and developers, gives developers confidence that they will be able to develop the project, and, among other terms, describes the responsibilities of each party for public infrastructure.

Fee in Lieu of Taxation Agreements (FILOTs) (S.C. Code Title 12, Chapter 44) are another important tool for developers in South Carolina. FILOTs are granted by, and at the discretion of, the county where the project is located, and are available to industries that invest at least USD2.5 million in South Carolina. FILOTs can result in savings of about 40% on property taxes otherwise due for the project.

Purchasers may become liable for environmental contamination simply by acquiring an interest of record in contaminated real property. For this reason, it is critical in South Carolina to conduct environmental assessments of property prior to acquisition. If property is found to be contaminated, a purchaser may enter into a voluntary clean-up contract with the state that limits the exposure of the purchaser to environmental claims asserted by the state; these voluntary clean-up contracts, however, must be entered into prior to the time the purchaser acquires the real property interest and do not necessarily protect a purchaser against claims asserted under federal law.

Generally, purchase and sale agreements provide that the seller is responsible for any clean-up costs and other liabilities arising from contamination occurring prior to the transfer of title, with the purchaser being liable for contamination occurring after the transfer of title. In larger transactions, purchasers are sometimes required to bear all the risk of contamination and may even be required to indemnify the seller against liabilities relating to such contamination.

Purchasers of South Carolina real estate may either verify directly with the appropriate local zoning authorities the zoning classification of the property or obtain a property zoning report from a third-party supplier. Zoning ordinances and maps are publicly available, and the property’s zoning classification and the resulting permitted uses and restrictions can be directly determined.

For appropriate projects, most local authorities will enter into development agreements to facilitate development of property deemed desirable by the local authorities. Development agreements may modify or supersede existing zoning provisions and facilitate development in accordance with the peculiarities of the specific project.

Condemnation is permitted in South Carolina, and it may be exercised by states, counties, municipalities, and utilities. Property may be taken only for true “public uses”, such as roads, airports, ports, and utility facilities; condemnation for the benefit of private enterprise or general redevelopment is not permitted.

South Carolina imposes a transfer tax on real property conveyances. The amount of the tax is USD1.85 for each USD500, or fractional part thereof, of the value of the property transferred. The calculation of the value of the property transferred, however, is fairly technical and dictated by statute; the value is sometimes (but not always) based on the consideration paid.

The transfer tax is also subject to a number of technical exceptions, and it is sometimes possible to structure the transaction so as to avoid the imposition of the transfer tax entirely.

The transfer tax applies only to transfers conveyed by way of a deed, and it generally does not apply to economic changes in ownership resulting from equity transfers by the title-holding entity. Some local jurisdictions, however, require that notice of an equity transfer be given to the local taxing authorities; this notice may trigger a reassessment of the value of the property in the year following the equity transfer, resulting in an increase in annual taxation.

Foreign investors should be aware of certain laws that affect real estate investors. Under the Foreign Investment in Real Property Tax Act, up to 15% of the proceeds from the sale of real property by a foreign seller may be required to be withheld and applied to the seller’s federal income tax liability.

A purchaser of agricultural land may be required to make a filing under the Agriculture Foreign Investment Disclosure Act of 1978.

If the foreign purchaser conducts a US business enterprise in connection with the property, a filing with the US Bureau of Economic Analysis, an agency of the US Department of Commerce, may be required. The purchase of property located near critical infrastructure or sensitive government facilities may require approval from the Committee on Foreign Investment in the United States. Under South Carolina law, a single foreign purchaser may not own more than 500,000 acres of land in the state.

Acquisition of commercial real estate is generally financed by mortgage lenders, who may be either institutional lenders or private equity funds, by way of JV investment or some combination of the foregoing. In addition, mezzanine financing is becoming more common and may be used in conjunction with the more traditional mortgage loan. Many loans of income-producing property are structured to the rating agency requirements for inclusion in a commercial mortgage-backed loan package.

Larger real estate portfolio acquisitions are frequently financed by private equity or multi-lender loans.

Most real estate financing is secured by a mortgage, which will grant to the lender a lien on the subject real property. Upon default by the borrower, the lender may institute judicial foreclosure proceedings and cause the public sale by the court of the mortgaged property. The proceeds of that sale will be applied to reduce the borrower’s indebtedness secured by mortgage.

Deficiency

Whether the borrower is potentially liable for any deficiency remaining after the sale is determined by the terms of the financing documents. Moreover, South Carolina has an anti-deficiency statute that allows a borrower to use an appraisal process to potentially reduce or eliminate any deficiency judgment. A borrower’s rights under this anti-deficiency statute may be waived, but the waiver must meet a number of statutory and procedural requirements, including the giving of a notice in a prescribed form prior to the transaction and the execution of a waiver in a prescribed form as part of the transaction.

Private Enforcement of Mortgages

South Carolina does not recognise private enforcement of mortgages, such as by way of a power of sale. Further, a lender is not entitled to take possession of the mortgaged property after default – a lender’s remedy is limited to judicial foreclosure. In a judicial foreclosure, a receiver may be appointed by the court to take possession of the property and collect rents for the benefit of the lender, but only if the appropriate language is contained in the mortgage loan documents.

Lenders are advised to consult South Carolina counsel to ensure that the financing documents include the necessary receivership provisions.

Assignment

In addition to a mortgage, borrowers are generally required to execute an assignment of the leases, rents, and profits of the property. South Carolina counsel should be consulted to ensure the adequacy of any such intended assignment. To the extent there is significant non-real-estate collateral located on the property (such as machinery and equipment), a borrower may grant a personal property security interest in that non-real-estate collateral.

Finally, security can also be taken at the equity level of the real estate owning entity. This is done by way of a pledge of the equity interests in the real estate owning entity by the owners of those interests.

Foreign banking organisations are subject to regulation at the federal level, with the nature and extent of the regulation depending upon whether the foreign banking operation is chartered in the United States or abroad.

Although there are several potentially applicable exemptions for mortgage lenders, foreign lenders may be required to obtain a certificate of authority to transact business in South Carolina. South Carolina counsel should be consulted as to whether the transaction may be structured so as to avoid the need for a certificate of authority.

There is effectively no usury in South Carolina and no other interest rate regulation with respect to commercial finance.

There are no mortgage taxes, transfer taxes, or documentary taxes imposed on the granting of mortgages or other security in real estate interests.

South Carolina entities are empowered to do all things necessary or convenient to carry out their business and affairs, including the mortgaging of their properties. Customarily, the governing body of a borrowing entity will adopt a resolution (or act by written consent) making a determination that the granting of the particular security is in the best interest of the entity and in furtherance of the business purposes of the entity.

A mortgage lender seeking to enforce its rights after a borrower default first must take any steps required by the loan documents. For example, the lender must give any notice as of right to cure or demand letters as may be required contractually. Once these preliminary matters are accomplished, the mortgage lender must bring a judicial foreclosure action in order to realise upon the mortgaged property.

This foreclosure action will result in a public auction sale by the court of the mortgaged property. The mortgage lender may “credit bid” at the sale. Sale of the mortgaged property under a power of sale is not permitted; a judicial foreclosure proceeding is required. Likewise, a mortgage lender on default by the borrower is not entitled to take possession of the property.

Establishing Priority

In order to establish the priority of the mortgage over interests of competing creditors, the mortgage lender must record the mortgage in the applicable county’s real property records. Competing creditors claiming an interest in the mortgaged property must be named as defendant parties in the judicial foreclosure action; the public sale will be free and clear of those junior claims and interests.

Appointing a Receiver

Assuming the loan documents have the necessary provisions, the court may enforce assignments of leases, rent, and profits by the appointment of a receiver in connection with the foreclosure proceedings. The court may authorise the receiver to collect rents and other profits derived from the property and, after deducting costs of operation of the property and the receiver’s fees, to disburse the remaining proceeds to the lender to be applied to the secured indebtedness. South Carolina counsel should be consulted at the loan origination stage so that the necessary assignment of rents and receivership provisions are included.

Pledged Security

Where the equity owners of the real estate entity have pledged that equity as security, the lender is authorised under the Uniform Commercial Code to sell such equity at public or private sale after due notice to interested parties; no judicial action is required. The lender may credit bid at a public sale but may not bid at all in a private sale.

Existing indebtedness may be subordinated to new indebtedness by a contractual subordination agreement. Otherwise, existing secured indebtedness will generally retain its priority. Although advances made in connection with construction financing will generally maintain priority based on the original filing date of the mortgage, advances made after both the filing and the service of a mechanic’s lien may lose priority to the mechanic’s lien.

These priorities are determined in large part by the South Carolina recording acts, which are not straightforward and leave much to common law doctrine. For example, priority is not necessarily determined by the time of recording.

In addition to general priority questions that are determined by ordinary priority rules, in extraordinary circumstances involving lender misconduct, a court may subordinate existing indebtedness under the legal doctrine of “equitable subordination”. Finally, again, in extraordinary circumstances, usually in bankruptcy proceedings, debt may be re-characterised as equity, with the result that the debt is effectively subordinated to claims of other creditors.

As a general rule, a lender does not become liable under environmental laws by virtue of holding a mortgage or by virtue of foreclosing the mortgage and taking title to the property for the purpose of reselling it to an ultimate purchaser. A lender may nevertheless become liable if the lender actively participates in the management of the property. “Active participation” by a lender means that the lender exercised decision-making control over environmental compliance with respect to the property or exercised general management control such as that typically exercised by a manager of the facility or property.

A lender may, however, inspect the property, require a borrower to respond to contamination issues, provide the borrower with financial advice, or amend or restructure the mortgage or loan terms – these activities are not deemed to constitute active participation.

A filing of bankruptcy proceedings by or against a borrower will result in an automatic stay or injunction against all creditors. This automatic stay will prohibit any acts to enforce the mortgage or collect the mortgage indebtedness. In order to proceed with foreclosure or collection activities, a lender must have this automatic stay modified by the bankruptcy court.

A mortgage lender is deemed to be a secured creditor to the extent of the value of its collateral. As part of the bankruptcy process, the repayment terms of the mortgage indebtedness may be extended for a longer period and the interest rate may be modified, but in theory, the amended repayment terms must grant the lender on a present value basis the equivalent value of its mortgage interest.

Mortgages may be set aside in bankruptcy if the mortgage was granted within the period immediately preceding the bankruptcy filing as security for a pre-existing unsecured debt, if the mortgage lender did not provide reasonably equivalent value to the borrower in exchange for the granting of the mortgage, or if there is a significant delay in the recording of the mortgage. A mortgage may also be set aside in bankruptcy if it is not timely and properly filed and indexed in the real property records so as to cause the mortgage to have priority over competing lien creditors. The most important actions a mortgagor lender may take to protect itself from bankruptcy risks is to ensure that the mortgage is recorded in a timely manner and properly indexed in the appropriate recording office.

There is no existing or pending legislation in South Carolina that proposes to impose a mortgage recording tax, or tax on a pledge of share, or membership interests in the borrower in connection with a mezzanine loan.

Most jurisdictions have a local planning commission, which undertakes a continued planning programme for the physical and economic growth of the jurisdiction.

Most jurisdictions have adopted building codes, incorporating construction standards such as required building elevation, general structural matters, loadbearing and wind resistance, and electrical and plumbing requirements. Land disturbance and construction permits are required prior to the commencement of construction, and during construction, arrangements must be made for periodic governmental inspections to verify compliance with applicable building codes. Building code compliance is also required in connection with any major refurbishment of existing structures.

Some, but not all, jurisdictions have architectural review boards or equivalent entities with approval rights over the design and exterior appearance of new and renovated structures.

Most local governments have planning and zoning departments charged with enforcing zoning and land-use regulations and building inspection departments charged with enforcing construction requirements. These regulations typically include permitted uses, lot coverage, setback requirements, and general construction standards. In some rural areas, however, there is no applicable zoning regulation, although building codes will nevertheless be applicable.

In addition to general planning and zoning and construction regulation, the construction of “curb cuts” granting physical access to existing public roads requires approval of the applicable department of transportation. If there are regulated wetlands on the parcel, approval of the development plans by the US Army Corps of Engineers will generally be required. Approval of water, sewer, and stormwater retention and dispersal requirements is regulated by the South Carolina Department of Health and Environmental Control and local governments.

Planning and Zoning Departments

If the proposed use is consistent with existing zoning codes, then the initial step in development of property is to obtain approval from the applicable planning and zoning departments of a site plan setting forth the basic layout of the project. The site plan may include (or will be followed by) civil engineering plans showing regulated wetlands, stormwater retention and dispersal plans, utility plans such as water and sewage, and building footprints. Additional approvals required in connection with the site plan approval process include approval of stormwater containment and dispersal plans, approval of curb cuts for access to public roads obtained from the applicable department of transportation, and approval of wetlands delineation and impairment by the US Army Corps of Engineers.

Architectural Review Board

Architectural plans likewise require approval of the applicable planning and zoning department as well as, if applicable, the governing architectural review board. Appropriate permits must be issued before land disturbance and the commencement of construction. If the project and proposed use of the property conforms to existing zoning requirements, there is generally no formal public input into the permitting process.

To the extent the project or the resulting use of the property requires a variance or a zoning amendment, the property owner must comply with a formal application process, requiring, among other things, one or more public hearings. The public is given the right to object to any requested variances or zoning amendment and to participate in the related public hearings.

Most state and local authorities have a board of zoning appeals or a functionally equivalent body that is expressly authorised to hear appeals from permitting and zoning actions, including denials of or the imposition of conditions on permits and zoning variances. Aggrieved parties generally have an appeal as a matter of right to the appeals board with respect to any adverse decision made under a zoning or development ordinance, including adverse decisions with respect to the issuance of permits.

The construction or development of projects that are in conformity with applicable zoning and land-use requirements does not require specific agreements with local authorities. Nevertheless, in order to provide certainty to developers prior to the investment of substantial funds, local governments are authorised to enter into development agreements with property owners. The development agreements are intended to allow for pre-approval of the scope and permitting of a proposed project and will typically address zoning and land-use issues, density, infrastructure, and the funding of related public services.

Local governments are required to have one or more public hearings after public notice before entering into development agreements. Development agreements are commonly used in connection with larger projects and where the specific project requires amendments or variances from the current zoning.

Restrictions on development and the designated use of property are generally enforced at the permit level; land disturbance and building permits are denied if the proposed project is not consistent with applicable restrictions. Certificates of occupancy may be denied for the same reason. Restrictions on use and the development of property may also be enforced by both the local governmental authorities and the public by way of legal proceedings seeking to enjoin the unauthorised use or development of the property.

Title real estate can be held by any legally recognised entity having a separate legal existence, including partnerships, LPs, LLCs, corporations, and statutory trusts. Title can also be held by trustees under common law trusts. The type of entity most frequently used to hold title to real estate is the LLC. LPs are also frequently used.

The use of corporations and partnerships as title-holding vehicles is less common.

Limited Liability Companies (LLCs)

LLCs provide limited liability protections – members and managers are not liable for debts of the LLC. LLCs have great flexibility with respect to:

• management and control options;
• allocations of profits, losses, and other tax attributes among the members;
• distributions among the members; and
• limitation of duties owed by members to each other and to the LLC.

In some states, creditors of individual members may only reach the distributional interest of that member and not the member’s actual limited liability interest; to this extent, an LLC may provide limited asset protection benefits.

Single-member LLCs are generally ignored for income tax purposes, with taxation occurring at the parent/owner level. Multiple-member LLCs are typically taxed as partnerships. As a result, the LLC is a pass-through entity for tax purposes – taxation is at the member level and not the entity level. LLCs may, however, elect to be taxed as C corporations under the Internal Revenue Code, such that tax is also levied at the entity level.

Partnerships

Partnerships are similar to LLCs, but they have a significant disadvantage: the individual partners are jointly, or jointly and severally, personally liable for the debts and obligations of the partnership – there is no limited liability. Thus, a partner in a partnership may have liability greatly exceeding the amount of the partner’s investment in the partnership.

Limited Partnerships (LPs)

An LP is similar to a partnership, but it must have at least one general partner and one or more limited partners. Although the general partner is fully liable for the debts and obligations of the LP, the limited partners’ liability is limited to their investment in the LP. As an LP is able to offer limited liability to its partners, it is a commonly used vehicle when there are multiple third-party investors.

Partnerships and LPs

Partnerships and LPs are pass-through entities for tax purposes, with taxation at the partner level and not the partnership level.

Corporations

Corporations are also established methods of holding title and provide limited liability to their shareholders. The use of corporations as title-holding entities is less common than the use of LLCs and LPs because corporations are considered less tax-efficient real property investment vehicles.

Corporations are taxed at the entity level, and distributions of property and cash may also be subject to taxation at the shareholder level; because of this double taxation, and less favourable tax consequences on liquidation, corporations are generally viewed as less favourable vehicles from a tax perspective for the ownership of real property.

Both public and private REITs are common investment vehicles used in South Carolina, although they are typically organised outside of the state. REITs receive beneficial tax treatment and South Carolina has adopted the federal income tax treatment of REITs as established by the Internal Revenue Code. Among additional requirements, to qualify as a REIT, a company must invest at least 75% of its total assets in real estate, derive at least 75% of its gross income from real property rents, real property mortgage interest or from real property sales, and pay out at least 90% of its taxable income as shareholder dividends.

Although South Carolina imposes minimal capital requirements on certain banking and financial institutions, and de minimis organisation fees are owed to the South Carolina Secretary of State for an entity to organise or register to conduct business in South Carolina, South Carolina does not otherwise impose minimal capital requirements on the investment entities discussed in 5. Investment Vehicles.

LLCs are usually governed either by the members or by appointing managers, although they can also be governed by a board of directors. Partnerships and LPs are governed by their general partners. Corporations are usually governed by a board of directors. In each case, the applicable members of the governing bodies approve proposed transactions by way of resolutions or actions by written consent.

The Corporate Transparency Act has increased disclosure requirements for the beneficial owners of LLCs. Historically, it would have been common for a real estate attorney to co-ordinate organisation of an LLC, but in response to the Corporate Transparency Act, it is recommended that organisers consult with corporate counsel or third-party servicers to ensure compliance with the Corporate Transparency Act.

The annual entity maintenance and accounting compliance cost for each type of entity used to invest in real estate can vary dramatically from a few hundred dollars to several thousand dollars depending on the amount of assets owned or the volume of transactions by the entity.

The granting of the right to possess real property without the transfer of title is usually accomplished by a lease. Leases grant a right of possession, typically for a term of years.

A limited right of possession or use may also be granted by way of a license; typically, however, a license is for a very short, transitory period and for a limited, specific purpose. Moreover, leases granting an exclusive right of possession are considered an interest in real property; licenses do not grant an exclusive right of possession and are not considered an interest in real property.

The right to use another’s property for a specific purpose may also be granted by way of an easement. Easements may be perpetual or for a specified term and may be classified as appurtenant, meaning that the easement benefits transfer with the benefited property, or personal, meaning that the easement benefits are not transferable. Personal easements are frequently for a limited term. Easements are considered an interest in real property.

Commercial leases are generally classified based on the nature of the property leased. A commercial lease that grants the right to possession to unimproved land only is commonly referred to as a ground lease and is typically used where the lessee intends to construct and own title to the buildings, with title to the ground remaining with the lessor. Commercial leases may also grant the right to possession of an entire facility or property – both land and improvements. Likewise, leases may grant the right to possession of a portion of existing improvements, such as in office buildings. These leases of only a portion of property are frequently referred to as “space leases”.

Rents and lease terms in commercial leases are, generally, not regulated. For certain property tax regulatory purposes, however, ground leases having terms of 90 years or more may be deemed to be full transfers of title to the lessee.

There is statutory regulation of residential leases, limiting remedies, providing for rights to cure defaults, requiring the provision of essential services and regulating security deposits. There is, however, no direct rental amount regulation, except with respect to certain federally subsidised housing.

Lease terms vary based on the nature of the lease and the nature of the property subject to the lease. Typically, commercial leases have a term of between 10 and 30 years, with provisions for multiple optional extension terms that may double the initial lease term. Ground leases usually have much longer terms, ranging from 30 years to 99 years. Space leases typically have terms in the range of five years to 20 years.

It is typical for a tenant to be responsible for repair and maintenance obligations for all matters within their leased premises, while the landlord remains responsible for structural components of the building within which the leased premises sit, as well as facilities up to the point of connection with the leased premises.

Rent obligations are typically quoted in annual terms but payable monthly in equal instalments.

In response to the COVID-19 pandemic, construction build-out terms have become more favourable to tenants, as landlords are willing to contribute larger sums toward tenant build-out plans in an effort to attract tenants while maintaining base rent values. It is much more common for “pandemics” to be included in the definition of force majeure, which has the consequence of excusing late performance of maintenance obligations by the landlord (and sometimes even the tenant), but it is less likely that a pandemic will excuse timely payment of rent or trigger a right of the tenant to abate rent. 

Most leases provide for periodic, automatic increases in rent during the lease term. The adjustments may occur each lease year or in some multiple thereof (eg, every five years). If the lease provides for renewal or extension terms, the rent will typically increase at the inception of each such additional term.

Leases for large retail businesses have traditionally included an “override”, meaning that the tenant will, in addition to scheduled rent, owe additional rent calculated as a fixed percentage of its gross sales in excess of an agreed-upon baseline amount.

Changes in rent are frequently based on negotiated fixed increases set forth in the lease at inception. Changes in rent may also be based upon changes in one or more measures of the consumer price index or other governmental indices of inflation.

There are no taxes or governmental levies payable with respect to rent in South Carolina, except that rent received by an owner will be included in the gross income of the owner for general income tax purposes.

Tenants typically pay a security deposit equal to one or more months’ rent at the inception of the lease. Alternatively, the landlord may require a letter of credit to serve as a security deposit. Tenants are also generally required to pay the first month’s rent upon signing the lease.

Where there are multiple tenants in a property, the cost of maintenance and repair of the common areas (CAM charges) is divided among the tenants. Generally, each lease will specify a fixed, specified proportionate share of the CAM charges attributable to that tenant.

In most cases, utilities are directly metered to the separate tenant spaces and paid for by the tenant. Otherwise, where there are multiple tenants, each tenant is typically charged a percentage of the total utility bill based upon an agreed-upon percentage set forth in the lease at inception.

In most commercial leases, the tenant pays directly the cost of insurance on the leased premises. When there are multiple tenants, each tenant will pay its pro rata share based on its proportionate share as set forth in its lease. Alternatively, the landlord may pay the cost of insurance and be reimbursed on a monthly or annual basis by the tenants. With respect to ground leases, where the tenant typically owns the improvements, the tenant will pay the cost of insurance.

Most leased properties are insured against fire and other casualty. In larger projects, terrorism insurance may be included. In certain geographic regions, insurance will include one or more of earthquake, ground subsidence, windstorm and hail, and flood insurance. In addition, many owners of a leased property will carry rent loss and business interruption insurance.

Landlords are free to restrict the use of leased premises by way of restrictive provisions in the leases. In addition, the permitted uses of leased premises will always be subject to general zoning and use limitations applicable to the location of the leased premises irrespective of the provisions of the lease.

Whether a tenant may alter or improve the lease premises is governed by the terms of the lease. Typically, a lease will expressly prohibit alteration or improvement of the lease premises without the prior written consent of the landlord. If alteration or improvement is allowed, the landlord will require indemnity against mechanic’s liens and other liability from the tenant and require the payment of any additional insurance premiums resulting from the alteration or improvement. The construction or alteration of leased premises will also be subject to the general construction and permitting requirements of the jurisdiction.

There are safety regulations applicable to high-density uses, such as multifamily properties, hotels, and office buildings, including requirements for smoke detectors, sprinkler systems, isolated stairwells, firewalls, and general resistance.

High-risk uses may be subject to special regulation by the US Department of Homeland Security. For example, chemical manufacturing facilities may be subject to the Chemical Facilities Anti-Terrorism Standards regulations promulgated by the US Department of Homeland Security. These requirements typically include fencing and screening adequate to limit access and sightlines onto the property.

Commercial real property that is to be used for the sale or consumption of alcoholic beverages is subject to regulation under state law as to whether such sale or consumption is permitted on the property. Otherwise, except for generally applicable zoning and land-use regulations, there are no specific regulations or laws that apply to particular categories of commercial real property leases.

Insolvency

An insolvent tenant who fails to pay rent when due may be evicted from the property, and the landlord may terminate the lease. A landlord may also recover past-due rent and damages arising from the tenant’s failure to pay future rent.

Bankruptcy

A tenant in bankruptcy, however, will generally have the right to reject any lease determined to be burdensome to the tenant, and as a result of such rejection, the lease will terminate. Further, a tenant’s bankruptcy will result in an automatic stay prohibiting acts to enforce the lease or evict the tenant without prior bankruptcy court approval.

Typical protections obtained by a landlord against the defaulting tenant include the taking of a security deposit or obtaining a letter of credit at the inception of the lease and requiring that a solvent third party execute a guaranty of the tenant’s obligations under the lease.

A tenant has no right to possession after termination of the lease and may be evicted by appropriate court procedures. If the lease so provides, a tenant holding over beyond the expiration of the term may be liable for rent during the holdover period at some multiple of the original rental amount.

Assignment and sublease provisions are generally included in leases, but where they are omitted, the majority rule is that the lease can be freely assigned or sublet; however, South Carolina takes a minority position for subletting, requiring consent from the landlord for a tenant to sublease where the lease is silent (S.C. Code Title 27, Chapter 35). It is common for leases to restrict assignment and subleasing but carve out limited exceptions in the event of an assignment or sublease to a related entity (eg, in connection with a reorganisation of the tenant entity) or in the event of an assignment to a successor entity (eg, the tenant entity is acquired by a third party). Where assignment or subletting is permitted in the lease, it would be typical for the landlord to require evidence of adequate net worth from the proposed assignee or sublessee, and the landlord may not agree to release the assignor from backstopping the assignee if the assignee fails to satisfy their lease obligations after assignment. 

A landlord has a statutory right to terminate the lease upon non-payment of rent. Most commercial leases also contain a detailed list of defaults that will allow the landlord to terminate the lease and evict the tenant. These defaults frequently include the non-payment of rent, the failure to maintain the premises, the unauthorised use of the premises, the unauthorised assignment of the lease, the unauthorised subleasing of the premises, a violation of environmental laws with respect to the premises, abandonment of the premises, and the insolvency of the tenant.

Investors should consult with South Carolina counsel to verify that the list of defaults in a commercial lease is appropriate and sufficient.

South Carolina does not require that the lease itself be notarised, but a memorandum of lease requires notarisation to be recorded. If the lease permits the recordation of a memorandum of lease, the tenant typically bears the cost of the de minimis recording fees, and it would be worthwhile for the tenant to co-ordinate same, as recording the memorandum of lease puts third parties on notice of tenant’s occupancy rights and can be used to provide notice of special lease terms such as a purchase option. 

If the lease contains appropriate language, a tenant in default under a lease may be evicted prior to the expiration of the lease by way of a summary eviction proceeding. Eviction proceedings typically take between several weeks and several months to complete.

Condemnation of property that is subject to a lease will result in termination of the lease. As between the property owner and any tenant, a condemnation award is divided in accordance with the terms of the lease. Absent a governing provision in the lease, the allocation of the award between landlord and tenant will be decided by the courts.

In the event of a tenant breach that results in termination of the lease, a residential landlord is obligated to mitigate damages in South Carolina (S.C. Code Title 27, Chapter 40), which in general, means that the landlord must try to replace the tenant instead of simply collecting rent from the breaching tenant. If, despite efforts to mitigate, the landlord is unable to replace the tenant, the tenant would still be liable for the rent owed, and may also owe the landlord for its costs incurred in seeking to have the tenant replaced. It is typical for a landlord to hold a security deposit, usually equal to one month’s rent, and although letters of credit are sometimes used, cash deposits are more common.

The most common form of construction contract pricing is the use of a fixed-price contract. Also used are cost-plus contracts, with general contractor compensation based either on a percentage of total costs or a negotiated fixed-fee basis.

In most projects, design responsibilities are separated from construction responsibilities – commonly referred to as “design-bid-build”. Typically, the design function is assigned to third-party architects. Less frequently, a design-build contract is used, in which the contractor itself provides the design services.

Management of construction risk is largely through the use of third-party inspectors; ie, architects or other construction professionals. These inspectors make periodic inspections – typically coincident with each construction loan draw or advance – and assess the percentage of completion and verify that the improvements on the ground are consistent with the amount of funds disbursed to date. The use of fixed-price contracts with appropriate delay penalties is another method of addressing construction risk.

Another common approach for the management of construction risk by lenders is to require a guaranty of completion from a parent or other affiliate of the owner entity. Lenders also typically require a substantial equity investment either prior to or coincident with advances of construction loan proceeds. The equity investment may or may not be segregated and pledged to a lender.

Additional equity deposits are frequently required by lenders in the event a construction loan becomes “out of balance”.

Schedule-related risk in construction projects is managed by use of third-party inspectors and the inclusion in the underlying construction contract of substantial penalties for delays in meeting intermediate milestone dates and the completion date. In addition, lenders frequently incorporate construction milestones into the financing documents.

Owners frequently seek additional assurance as to performance by contractors by way of a payment and performance bond issued by surety. The use of letters of credit in construction projects in South Carolina is not common.

Persons performing work or providing materials with respect to construction and development of property who are not paid for such work or materials are entitled to file a lien on the property as security for the amounts owed. In addition, liens may be filed by persons providing security services, by surveyors, by leasing (but not selling) real estate brokers, by persons providing landscaping services, and by persons providing design services (architects and engineers).

Mechanic’s liens may be discharged from the real property by the posting of a bond; the lien then attaches to the bond and is released from the real property. Further, in a proper circumstance a court may order the removal of a mechanic’s lien.

Buildings may not be occupied until a certificate of occupancy has been issued. The requirements for obtaining a certificate of occupancy include the inspection of the major functional portions of the building (including electrical and plumbing) during the construction process and verification that construction was done in accordance with the approved plans and specifications.

The gain on the sale of real estate is taxed as income under general state and federal income tax laws. In addition, there is a transfer tax levied on transfers of ownership of real estate evidenced by deeds, which is typically paid by seller, and the rate is USD1.85 per USD500 of the sales price, subject to limited statutory exemptions. There is no sales tax on the sale of corporate real estate. 

In some cases, transfer tax (deed recording fee) may be avoided or reduced by structuring the transaction appropriately. For example, the deed recording fee may be avoided by contributing the property to be sold to a single-member LLC and then selling the equity in that single-member LLC to the economic purchaser of the property.

Although in most jurisdictions there is a business license tax assessed against businesses at the county and city level, this tax is based on gross revenues of the business in the jurisdiction and not on the property per se. The ownership and operation of real property would constitute a business subject to this business license tax.

In addition, commercial properties may be subject to solid waste disposal, stormwater, and other user fees. South Carolina law also allows for special assessments of property for adjacent improvements (such as street paving). There are no specific occupancy taxes or taxes on rent other than ordinary state and federal income taxes.

Foreign purchasers of real estate should review whether applicable treaties exempt such purchaser from the imposition of general income tax withholding requirements by the state of South Carolina or the United States on income from the property purchased or on proceeds from the resale of such property. Absent such a treaty-based exemption, it may be possible to use appropriate transaction structures, such as “blocker” corporations, to limit the tax liability and withholding obligations with respect to foreign investors.

Under the federal Foreign Investment in Real Property Tax Act, up to 15% of the proceeds from the sale of real property by a foreign seller may be required to be withheld from the foreign seller to be applied to federal income taxes.

In addition, under South Carolina law, foreign investors that are deemed “non-resident sellers” may be subject to withholding with respect to the proceeds of the sale of South Carolina real property to the extent of the gain recognised by the investor under the income tax laws. South Carolina law provides that “non-resident sellers” include individual residents outside of the state, entities organised outside of the state, and trusts administered outside of the state. An entity formed under the laws of South Carolina is considered a resident; accordingly, taking title to South Carolina property in a South Carolina-organised subsidiary may avoid any otherwise applicable requirement for the withholding of a portion of the proceeds of the sale of the property. There are limited exceptions to this withholding requirement for foreign investors who qualify as “deemed residents”.

South Carolina is known for taking an aggressive approach to economic incentives for businesses opening and conducting operations in the state. These incentives include both tax credits and the reduction of property taxes and are typically based on the size and scope of the operation, the number of jobs created, and the wages those jobs command, as well as the facility’s geographic location within the state. South Carolina counsel working in this area should be consulted to assist in structuring incentive packages, which may include fee-in-lieu-of-tax agreements, job tax credits, payroll tax rebates, tax abatements, capital credit agreements, tax increment financing, and various types of infrastructure grants.

The owner of real property is generally entitled to take deductions for depreciation with respect to buildings and improvements located on the land. In addition, investors in real property who are not dealers in that property and have met the requisite holding periods may be entitled to defer the recognition of gain on the sale of real property by entering into a like-kind exchange pursuant to Section 1031 of the Internal Revenue Code. Finally, property owners who invest the capital gain proceeds from the sale of real property into an opportunity zone project may defer or reduce the amount of gain ultimately recognised.

Developers can also benefit from South Carolina-specific tax credits related to historic building rehabilitation and abandoned building revitalisation. Real property owners who develop solar farms on their property may be entitled to state and federal tax credits.