Real Estate 2024

Last Updated April 30, 2024

USA - Alabama

Law and Practice

Authors



Dentons is a global law firm with a team of over 1,000 real estate lawyers in more than 80 countries across the globe, including more than 180 real estate lawyers spread across 45 locations in the United States, and 19 real estate lawyers throughout the state of Alabama. Dentons’ team of real estate lawyers is adept at handling the myriad of needs pertaining to real estate developers and investors, including assisting clients in procuring capital and credit, often combining construction, permanent, mezzanine and tax credit facilities with equity participations. The team is also well equipped to handle zoning and other land use matters, as well as litigation and controversies, including eminent domain, design and construction, environmental regulatory enforcement, ejectments, and dealing with insolvent counterparties.

Knowledge of federal, state and local law, of the changes to those laws, and of local forms and customs is essential in successfully and efficiently practicing real estate law. Alabama land records are handled on a county-by-county basis, and laws are interpreted accordingly.

Many probate offices have implemented technological improvements for better filing, record-keeping and access to recorded documents, though these developments can vary significantly between counties. Successful transactions often involve extensive negotiations. Closing commercial deals involves standard forms and requirements for both state law compliance and title insurance.

All Sections referenced herein are Sections of the Code of Alabama (1975). 

Trends in 2023

In 2023, higher interest rates and continued high construction pricing caused a plateau in the resilient commercial real estate industry, reducing new developments and projects. Subsequently, commercial real estate became more limited to certain asset categories in specific markets, such as metropolitan areas and sub-markets.

Higher rates and lower appraised values due to levelling rents and less occupancy have slowed permanent refinancing of both construction debt and existing permanent credit facilities. Multifamily experienced these higher interest rates yet maintained its place as a solid long-term asset in commercial real estate.

Meanwhile, returns to the office never rounded back to pre-COVID-19 pandemic numbers. Having suffered the largest rise in vacancy due to post-pandemic downsizing, office properties appear to be most concerning in commercial real estate, as waves of such properties arrive at loan maturity dates with reduced appraised values in a difficult capital market for credit. Together, these factors have combined to create a clogged commercial real estate market.

In Alabama, the state’s residential housing markets followed the national decline. Nevertheless, the demand for vacation homes along the various lakes and shorelines in Alabama remained, as these desirable areas represented more affordable vacation spots compared to pricier alternatives.

Significant Deals in 2023

Major companies with existing industrial and distribution hub facilities in Alabama (such as Mazda Toyota, Mercedes-Benz, Hyundai, and Amazon) have grown Alabama operations through increased development. Huntsville, Alabama’s largest and fastest growing city, has been named a “real estate market to watch” by the National Association of Realtors, and continues to grow.

With the ongoing midtown developments, and with additional renovation, restoration, and development to the historic AG Gaston Motel, Southtown Court, Frank Nelson Building, Birmingham Building Trades Tower, and The Hardwick, there are many notable Birmingham projects. Luxury multifamily and commercial building opportunities are still ongoing, as downtown and metropolitan areas of Birmingham, Huntsville and other cities increasingly gain more attention. These types of projects and large, in-progress construction will likely generate additional real estate investment in 2024.

Broker Legislation (National Association of Realtors)

In the residential real estate market, the National Association of Realtors came under fire in 2023, with multiple lawsuits being focused on the commission paid by the homeowner seller in residential transactions which is divided among brokers for both buyer and seller in such transactions. A settlement in early 2024 could result in eliminating such commissions, which commonly fall around 6% of the purchase price. At this point, it is unclear how this legislation and trend toward eliminating anti-competition of broker fees and commission will affect the commercial real estate industry specifically.

The Corporate Transparency Act (CTA)

The CTA became effective on 1 January 2024, requiring entities to report information, including specific beneficial ownership information, to FinCEN (the US Department of Treasury’s Financial Crimes Enforcement Network). Community associations, such as homeowners or condominium associations, are likely required to provide such reporting despite operating as not-for-profit entities.

Applicability of the CTA and the specific reporting requirements should be reviewed to confirm that such community associations are in compliance. Challenges to the constitutionality of the CTA are currently ongoing in the first few months of 2024. In March 2024, the US District Court for the Northern District of Alabama declared the CTA unconstitutional, and this ruling is on appeal.

The Alabama Property Protection Act (APPA)

Effective on 1 August 2023, the APPA prohibits foreign principals (as defined in the APPA) from China (not including Taiwan), Iran, North Korea, and Russia from owning:

  • agricultural and forest property; or
  • property within ten miles of a military installation or critical infrastructure facility.

See Section 35-1-1.1. A list of what qualifies as a critical infrastructure facility is provided in Section 35-1-1.1(b)(2), and Section 35-1-1.1(d) provides an exception for existing owners.

Unless the conveyance specifies otherwise, when real property is conveyed, granted, or demised, it is transferred as an absolute fee simple estate (Section 35-4-2). Alabama law also permits life estates, easements and servitudes. A fee simple owner may grant a leasehold estate or license to permit others to occupy and use the owner’s real property. See 6. Commercial Leasing.

A conveyance of real property must generally be written and signed by all parties, with witnesses to the signatures (Section 35-4-20), and must contain a valid property description. Conveyance instruments must:

  • provide the instrument preparer’s name and address (Section 35-4-110);
  • list the grantor’s marital status and conveyed property’s homestead status (Section 35-4-73); and
  • provide ad valorem tax notice, typically using Real Estate Sales Validation Form RT-1 (Section 40-22-1). See also 8.1 VAT and Sales Tax.

Residential conveyances require special disclosures, but generally there are no special laws regarding the transfer of real property based on use. However, the parties to a transaction or locality rules may require additional provisions to be included in the deed or in a separate document recorded with the deed at closing.

Buyers should still take additional precautions to ensure that the property’s proposed use complies with relevant local rules (see 2.8 Permitted Uses of Real Estate Under Zoning and Planning Law).

Transfer of title is generally effectuated by a deed, usually taking the form of a general warranty deed, statutory warranty deed (Section 35-4-271), or a quitclaim deed. In commercial transactions, the most common form of deed is the statutory warranty deed. Other forms of conveyancing and/or transfer or occupancy instruments include:

  • ground leases;
  • leases;
  • judicial decrees vesting title to real property;
  • foreclosure deeds;
  • tax deeds;
  • sheriff’s deeds; and
  • deeds in lieu of foreclosure.

Conveyancing instruments must be recorded in the office of the judge of probate for the county in which the property resides (Section 35-4-50). Alabama uses a hybrid “race-notice” system where a purchaser takes priority over all prior purchasers of which they have no notice at the time they record their conveyance – eg, see Nelson v Barnett Recovery Corp, 652 So 2d 279, 281 (Alabama Court of Civil Appeal 1994) regarding Section 35-4-90.

In commercial transactions, due diligence typically involves:

  • review of title and survey matters;
  • physical property inspection;
  • financial and other property records inspection; and
  • review of relevant zoning, permitting, or platting requirements.

It may also include an examination of the property’s environmental condition.

Lawyers are typically assigned review and/or cure of title and survey matters, and are often involved in addressing permitting and platting requirements as well as the resolution of environmental matters, if applicable. The allocation of attorney versus client responsibility continues to vary considerably based on the client’s size and needs.

Purchase and sale agreements (PSAs) may vary from those providing for the sale of property in its “as is, where is” condition, with no representations to PSAs containing significant representations and warranties, such as the following:

  • the seller’s ownership of title;
  • the seller’s authority to sell the property;
  • that no violations of law are present on the property;
  • that the property has no tenants in possession (except as noted);
  • the seller’s warranty to satisfy mechanics’ liens;
  • environmental matters;
  • zoning and permitting status; and
  • the absence of pending litigation and condemnation.

Alabama law provides for an implied warranty of fitness and habitability for the sale of new residential property; however, the doctrine of caveat emptor generally applies – see Sims v Lewis, 374 So 2d 298, 303 (Alabama 1979).

A buyer’s customary remedies for a seller’s misrepresentation are based on the contract’s terms. The seller’s liability for such a breach can be negotiated and is often capped at a specific dollar amount, which varies.

Foreign companies are not required to register with the state unless they are considered to be transacting business in Alabama (Section 10A-1-7.01). Foreign companies must, however, comply with all federal laws relating to the transfer of property to a foreign investor, including FIRPTA, etc. Additionally, foreign investors should consider the tax implications of such a transaction when purchasing real estate (see 8. Tax). Recent changes to CFIUS regulations have had some impact in Alabama.

Alabama’s laws generally conform to federal environmental laws. Because environmental statutes often hold the current owner strictly liable for the costs of remediation, commercial real estate buyers and sellers may contractually allocate environmental liability. Buyers and sellers will negotiate the terms of any “as is” language, indemnification for environmental matters, and any release of environmental claims between the parties.

Negotiated terms vary between contracts, with sellers favoring caps on their liability and buyers preferring a complete indemnification from sellers. Additionally, many buyers wish to limit their liability by satisfying the requirements for the “innocent landowner defense” against CERCLA liability (discussed further in 3.8 Lender’s Liability Under Environmental Laws).

An interested buyer can request a zoning verification letter from the applicable jurisdiction’s planning department. Some departments will include statements of compliance or non-compliance, but many counties in Alabama do not have the staff capacity to do so. In those cases, if a buyer or its lender requires a compliance certificate, there are consultants available who will provide such a compliance report or certificate for a fee. Local municipalities may enter into a development agreement to facilitate a specific project use, depending on the municipality and project type.

Governmental taking of property by eminent domain and condemnation actions may occur if the property is taken for a “public use” and payment of “just compensation” is made (Alabama Constitution of 1901, Article XII, Section 235). In addition to state and federal constitutional limitations, Alabama has adopted the Alabama Eminent Domain Code, which sets procedures for eminent domain cases (Section 18-1A-1 to -311). If a landowner rejects an offer to purchase from the state, the state will file a complaint for condemnation with the probate court for the county where the relevant property is located.

The deed tax is triggered by any real estate conveyance and is typically allocated to the purchaser, unless otherwise agreed by the parties. The purchase of an interest in a property-owning company is not considered a conveyance of real estate and, therefore, does not trigger the deed tax. The deed tax is USD0.50 for every USD500 (rounded up) of the conveyed property’s value. If a mortgage is recorded simultaneously with the deed, a credit is provided by statute, such that the deed tax due is calculated on the value of the real property not securing the mortgage only (Section 40-22-1(c)).

For example, if a property is purchased and sold for USD2 million and the deed is recorded simultaneously with a mortgage of USD1.5 million secured by the property, the deed tax would be calculated only against the USD500,000 portion of the property’s value not already subject to the mortgage tax.

Statutory deed tax exemptions exist for certain instruments made for agricultural purposes (Section 40-22-4), farm loans (Section 40-22-5), and certain conveyances by religious organizations (Section 40-22-5.1).

See 1.3 Proposals for Reform regarding the APPA and Section 35-1-1.1.

Under Alabama law (in addition to FIRPTA), upon the sale of any real property, the transferor must withhold 3% (if the buyer is an individual) or 4% (if the buyer is an entity) of the purchase price; or, if the gain recognized on the sale is less than the purchase price and the seller provides the buyer with an Affidavit of Seller’s Gain (see Alabama Department of Revenue (ADOR) Form NR-AF2), the buyer may withhold 3% or 4% of the amount of the gain (Section 40-18-86). Transferors may be exempt from these withholding requirements under Section 40-18-86(d) (see 8. Tax).

The acquisition of commercial real estate is generally financed with indebtedness secured by a mortgage lien on acquired property. Depending on the type of real estate, financing may be available through bank debt, conduit loans, or government-sponsored enterprises.

A purchaser or developer of commercial real estate generally grants a mortgage to secure borrowed funds used to acquire and/or develop the real estate. Most commercial lenders also incorporate a security agreement into the mortgage (in addition to separate UCC filings made locally and in the borrower entity’s domicile state) to cover personal property attached to or used in connection with the mortgaged real estate and proceeds. Lenders can also collateralize (with additional agreements and filings) the borrower’s entity interests or stock and/or deposit accounts.

Financial institutions that are not domiciled in Alabama may be required to qualify to do business in Alabama and may be liable for filing tax returns and payment of annual privilege tax (under Sections 40-14A-21 to 40-14A-29) and excise tax (under Sections 40-16-1 to 40-16-8) if the financial institution is doing business in Alabama within the meaning of the laws.

Under Section 40-22-2, mortgage recording tax is generally USD0.15 per USD100 of the loan amount secured by the mortgage. Mortgages with open-end or revolving indebtedness have two options for paying the recording tax, as follows.

  • Paying the recording tax based on the maximum principal indebtedness stated in the mortgage, regardless of the cumulative amount advanced.
  • If the mortgage does not state the maximum principal indebtedness, the taxpayer must:
    1. pay a recording tax on the actual amount initially advanced;
    2. annually report the amount of indebtedness secured by the mortgage; and
    3. pay tax on additional advances made.

There are mechanisms, such as obtaining tax orders from ADOR, for allocating recording tax for mortgages covering property in multiple counties or states. Additionally, a nominal per-page recording fee will be collected upon recording.

Other than general contract law principles and granting a mortgage in proper form for recording, with the required information included in the document, there are no specific legal rules or requirements applicable solely to entities. For most transactions, it is recommended to obtain a lender’s title insurance policy insuring the mortgage.

A mortgage must be recorded to maintain priority over subsequent liens granted on the property. Section 35-10-1 to -98 deals with state requirements for foreclosure. There is a homestead exemption pursuant to Section 6-10-2 and a one-year statutory right of redemption under Section 6-5-248(b).

Existing secured debt can be subordinated to newly created debt if the parties execute and record a subordination agreement.

Unless the lender is deemed to be a partner in the transaction, it cannot be held liable under environmental laws for merely holding security (ie, a mortgage) unless it directly causes the pollution or contamination. Nonetheless, most Alabama lenders typically require an environmental indemnity agreement from the borrower and one or more beneficial owners.

If the lender forecloses and becomes the property owner, the only way to qualify for liability exemptions under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for existing contamination is to conduct all appropriate inquiries (AAI), according to the ASTM E1527-13 standards, in a timely manner prior to the date the loan is made. AAI must be conducted no more than one year prior to the loan closing.

Any report more than one year old is of no value in establishing an innocent purchaser defense under CERCLA. Certain portions of the AAI are only good for 180 days. If AAI is not performed or completed in a timely manner, a lender can be liable once it takes possession of the property for contamination it did not cause.

In addition to AAI, most mortgage lenders in Alabama require the borrower (and other indemnitors) to agree to indemnify the lender against potential environmental liability.

Lenders should consider the general principles of US federal bankruptcy law. Typically, loan documents will include provisions dealing with a borrower’s potential bankruptcy, though such provisions are of limited or no value in a bankruptcy proceeding.

Borrowers Filing Bankruptcy Petitions

When a borrower files a bankruptcy petition, there is an automatic stay of all actions against a borrower’s property, including foreclosure. If a security interest is foreclosed prior to the bankruptcy filing, then, in the absence of some defect in the foreclosure process, the foreclosed property does not become part of the borrower’s bankruptcy estate, and the lender is free to exercise its state law rights regarding the property (including taking possession). Even in that scenario, a lender may be forced to ask the bankruptcy court for permission via a motion for relief from the automatic stay. In addition, the foreclosing lender may have an unsecured claim (a deficiency claim) to assert against the borrower in bankruptcy.

Alternatively, if a secured lender fails to foreclose its lien prior to a borrower’s bankruptcy filing, the lender will be forced to assert its rights in the borrower’s bankruptcy case. Typically, a lender will file a proof of claim and, depending on which bankruptcy chapter the borrower files under (eg, Chapter 7 (liquidation), or Chapter 11 or 13 (business or consumer reorganization, respectively)), will participate in the confirmation process as to the borrower’s proposed plan of reorganization. While in bankruptcy, the lender may assert the rights granted to it under the relevant loan documents.

Petitioning the Court

Prior to taking many actions that would otherwise be allowed outside bankruptcy, a lender must petition the court for relief from the automatic stay. In addition, as to non-residential property that is not a borrower’s homestead, a lender’s secured lien can be “valued” – ie, bifurcated into secured and unsecured portions after a valuation hearing with the bankruptcy court. Likewise, a wholly unsecured junior lien may be stripped off the property and treated as completely unsecured in certain circumstances.

Defaults

A borrower’s insolvency will ordinarily lead to a default under the terms of the relevant loan documents and subsequent foreclosure of the secured collateral. In the commercial context, and depending on the commercial loan and property’s size and characteristics, a borrower’s insolvency might lead to a receiver being appointed under Alabama law; see Section 6-6-620 to -628.

There are no taxes related to mezzanine loans besides taxes due on interest and income therefrom.

Alabama law (Title 11, Counties and Municipal Corporations) allows for regulations on property through zoning ordinances or subdivision regulation. See 4.2 Legislative and Governmental Controls Applicable to Design, Appearance and Method of Construction. The property owner/developer should research any applicable planning and zoning regulations to the property by ordering a zoning report and communicating directly with the appropriate municipality(ies). In addition, the Alabama business license fee can vary depending on the location of the property and the use. See 8.3 Municipal Taxes.

Local municipal corporations (cities and towns) may enact zoning laws and regulations through the creation of a comprehensive zoning ordinance, which must be compatible with the enabling statute (Section 11-52-1 et seq). Zoning laws generally designate areas into business, industrial, and residential districts, and control the type, character, kind, and use of structures and improvements in such designated zones or districts (Section 11-52-70). County governments may also enact zoning ordinances and building codes for flood-prone areas outside municipalities (Section 11-19-3).

Private restrictive covenants in the property’s chain of title may also create similar controls on the development of property or refurbishment of an existing building.

Local zoning laws are passed by the local municipal planning commission and must be consistent with the local comprehensive plan, in accordance with Section 11-52-3. Zoning laws typically control:

  • the permitted shape, proportion, and dimensions of lots and structures located thereon;
  • the use of such structures;
  • setback requirements; and
  • the use of parcels in designated zones or areas.

For certain redevelopments, the Alabama Department of Environmental Management may have recorded restrictions on use, development, etc, into the chain of title of a property.

Developers typically begin by engaging consultants, such as architects and civil engineers, and by contacting the local planning department for guidance on the permitting process. Developers should review the applicable zoning laws and obtain approval from the local zoning official/department before applying for a building permit.

Depending on the project, a developer may be required to obtain approval from various municipal departments before obtaining building permits. If a project requires a change to the zoning code, vacation of road, etc, public hearings are held, and third parties are permitted to comment and object. Local professionals, such as civil engineers, may be able to provide guidance on local customs to help navigate this process.

The process of appealing will differ based on the project and jurisdiction, and interested parties should consult the relevant state and local laws.

The process for obtaining permits and approvals varies between different local governmental authorities and utility companies. Planned unit developments are sometimes used or required by a local government to facilitate the development of a project. Interested parties should consult the relevant local authority for further details.

The first governmental enforcement mechanism for restricting development or designated use of a specific property is for a local planning department to refuse to issue a building permit. After issuance of a building permit, restrictions on development or designated use are enforced by an inspector named by the designated zoning official/administrator.

Private parties may also restrict the development or use of real property by creating a restrictive covenant that runs with the land. The Alabama Supreme Court defines a covenant as “an agreement or promise of two or more parties that something is done, will be done, or will not be done. In modern usage, the term covenant generally describes promises relating to real property that are created in conveyances or other instruments”. See Collins v Rodgers, 938 So 2d 379, 385 n 15 (Alabama 2006).

In the real property context, restrictive covenants are generally memorialized by:

  • restrictive language in a conveyance instrument;
  • an express declaration of covenants, conditions, and restrictions created by a single property owner; or
  • an agreement for covenants, conditions, and restrictions agreed to by two or more property owners, all of which may be recorded in the probate office of the county of the encumbered property.

Such private restrictive covenants may be enforced by the parties to the covenant or by the successor in title to such a party. However, Alabama does follow a “general rule that restrictive covenants are not favored in the law and, therefore, that they will be strictly construed, with all doubts resolved in favor of the free and unrestricted use of land and against the covenants”. See Whaley v Harrison, 624 So 2d 516, 518 (Alabama 1993).

Alabama law authorises the formation of corporations, general partnerships (GPs), limited partnerships (LPs), limited liability companies (LLCs), and real estate investment trusts (REITs) for the purpose of holding real estate.

The most frequently used ownership entities in Alabama are LLCs and LPs (including limited liability limited partnerships). Generally, LLCs are preferred to LPs as investment vehicles because none of an LLC’s owners (“members”) is liable for the entity’s debts and obligations, while an LP is required to have at least one partner (the “general partner”) liable for such debts and obligations. LLCs also have a potential tax basis advantage over LPs in qualifying for non-recourse basis treatment for an entity-recourse debt. Alternatively, an LP may be preferable if certain owners are not US citizens and if the requirements of their home country’s tax laws would impose additional tax burdens upon them otherwise.

Both LPs and LLCs are usually preferred over corporations (other than real estate investment trusts (REITs), as described below) because corporate income is taxed at the corporate level, and then the dividends paid to the corporate owners (“shareholders”) are taxed again.

Corporations that own real estate often do so in connection with their trade or business (eg, factories). Other entity types can be used to hold real estate assets as well, such as S corporations and general partnerships, but their use is infrequent due to taxation and liability concerns, respectively. 

With respect to LPs and LLCs, almost all features of their operations are negotiated among the partners or members in an LP’s limited partnership agreement or in an LLC’s limited liability company agreement, including how and by whom decisions are made as well as how the economics are divided. Major decisions typically require the consent of the partners or members, and often include:

  • a sale or refinancing of the principal asset;
  • certain major leases;
  • construction matters, such as budgets and hiring of contractors; and
  • decisions affecting the continuation of the entity, such as merger, termination, and bankruptcy.

These agreements also establish the priorities of economic distributions and the payment of agreed-upon fees among the partners or members, providing for how and when additional capital may be called from the partners or members. It is important that these agreements properly address income tax considerations, as the allocation of economic benefits and tax liabilities of ownership must comply with detailed US tax code regulations or risk unintended tax outcomes. Both types of agreement will generally have provisions allowing for certain owners to buy the interests of other owners or to have the assets sold under certain circumstances.

Corporate Statutes and Judicial Decisions

Many activities of corporations, including REITs, are governed by Alabama corporate statutes and judicial decisions. In closely held corporations, the owners (shareholders) may enter into a shareholders’ agreement, which establishes, among other things, how votes are cast and how interests in the corporation may be bought and sold or otherwise transferred.

Economic distributions within corporations are generally less flexible than distributions within LPs and LLCs. Each share in the same class of ownership shares is entitled to the identical economic distribution as each other share in that class. In order to allocate economics in a corporation differently among shareholders, multiple classes of shares must be created with different priorities of payments and claims on a corporation’s distributions.

REITs are corporations or business trusts that elect for REIT status, allowing them to pass income through to their owners, like LPs and LLCs; however, because of the complex qualifications required of REITs under the US tax code, investments in REITs are normally limited to large income-producing assets or portfolios of assets. Many REITs are formed as Maryland corporations.

A REIT must pay the same filing fees as other Alabama entities required under Section 10A-1-4.31. When computing such fees under this Section, a REIT should treat its declaration of trust in the same manner as a certificate of formation. Section 10A-10-1.13.

REITs organized under Alabama law (Section 10A-10-1.01 to -1.24) should file its declaration of trust in the same manner as the certificate of formation of an Alabama domestic filing entity. Section 10A-10-1.06 identifies the requirements of a declaration of trust, and Section 10A-10-1.07 sets forth the division of classes of REIT shares permitted by Alabama law. REITs should follow 10A-10-1.11 regarding annual report requirements and submission requirements to shareholders.

There is no minimum capital requirement, though a nominal amount such as USD100 is common.

LP Governance

The governance structure of an LP is set out in the agreement of limited partnership, and generally provides that most decisions be made by the general partner. Alabama law allows certain voting rights for the limited partners without jeopardizing their status as limited partners; however, one reason why limited partners do not have liability for the obligations of an LP is because they generally do not have control of the day-to-day activities of the partnership.

LLC Governance

In an LLC, there are two types of governance structure.

One is the “member-managed” structure, where the members are responsible for managing the LLC, making decisions by majority, supermajority or unanimous vote, depending on the nature of the decision and the relative weight of each member’s vote as set forth in the limited liability company agreement.

The other structure is a “manager-managed” LLC, in which a person or entity is designated as the manager with decision-making rights as set forth in the limited liability company agreement. Members who are not managers often retain the right to consent to certain major decisions. A manager can be one person or several persons each having the ability to act independently or being required to act by majority, supermajority, or unanimous vote, depending on the nature of the decision and the relative weight of each member’s vote as set forth in the limited liability company agreement.

Corporation Governance

For corporations, including REITs, governance is set forth in their articles of incorporation and their by-laws. The articles of incorporation are a filed, public document containing certain statutorily required information, such as the name, registered office, and registered address of the corporation. The by-laws govern:

  • how shareholders vote for the members of the board of directors;
  • how the board elects officers;
  • the duties of the officers;
  • the frequency of shareholder meetings;
  • the frequency of board of directors’ meetings; and
  • other routine matters.

In most corporations, all day-to-day decisions are made by the officers without the approval of owners who are not officers. Certain decisions outside the normal course of business will be made by the board of directors, again without input from owners who are not part of the board. Unless an owner is a director or officer, its only governance right is to periodically vote for members of the board or in connection with certain statutorily required matters, such as merger transactions.

Maintenance and costs are variable and will depend on ownership/accounting structure. Certain entities must pay an annual Business Privilege Tax in accordance with Sections 40-14A-21 through -29. The rate will vary depending on taxable income and net worth. See Section 40-14A-22.

A real property’s fee owner may grant a leasehold estate or license to permit others to occupy and use the owner’s real property for a limited timeframe. Leasehold estates allowing a tenant to occupy and use real estate without buying it outright are generally categorized into the following types.

  • A tenancy for years is a leasehold estate “limited to endure for a definite and ascertained period, fixed in advance”. See Waldrop v Siebert, 237 So 2d 493, 494 (Alabama 1970).
  • A periodic tenancy is one where the lease has no stated duration and periodic rent is reserved or paid. See Gulf Coast Realty Co, Inc v Prof’l Real Estate Partners, Inc, 926 So 2d 992, 1007 (Alabama 2005). If no time for termination is stated, the law construes the term to be from December 1st to December 1st (Section 35-9-3).
  • A tenancy at will or at sufferance is a lease “for an indefinite and uncertain term” and is sometimes called a tenancy from month to month. See Melson v Cook, 545 So 2d 796, 796 (Alabama Civil Appeal 1989). If a lease is specified as a tenancy at will, it may be terminated by either party at will by giving ten days’ notice in writing (Section 35-9-3).

There are no formal, legal distinctions between different types of commercial leases; however, commercial leases are generally divided between “net” leases and “gross” leases. In a net lease, a landlord charges its tenant a base rent plus additional rent for pass-through items, such as common area maintenance, insurance costs, advertising, etc; such pass-through items will vary based on the terms negotiated by the parties.

In a gross lease, a landlord charges its tenant one flat fee for rent, and the landlord is responsible for the property’s maintenance costs; however, such maintenance costs are typically accounted for in the amount of the gross lease’s base rent. Furthermore, certain categories of commercial leases often contain specialized terms that are unique to the subject matter involved.

There are no restrictions on the type or amount of rent charged under a commercial lease in Alabama. A lease term may not be longer than 99 years (Section 35-4-6). If any portion of a lease term is longer than 20 years, the lease or a lease memorandum must be recorded within one year of signing; otherwise, the portion of the term exceeding 20 years is invalid (Section 35-4-6).

Residential leases are generally more regulated than commercial leases and are subject to the Alabama Uniform Residential Landlord and Tenant Act (Section 35-9A-101 et seq).

Lease terms range from less than one year up to 99 years, depending on the terms of a specific lease.

Landlords typically maintain structural components of leased real estate, while tenants are often required to maintain the leased premises and those systems and improvements serving the leased premises in good working order, although the extent of such maintenance responsibilities varies widely.

Monthly rent payments are typical, but the parties may agree to different terms.

The rent payable may vary between different payment periods during the term, based on the lease’s terms, typically increasing as time passes during the term.

Changes and increases in rent will be determined by the terms negotiated by the parties in the lease.

There is, typically, no governmental tax collected on rent paid to a landlord. However, transfer taxes are due when a lease (or memorandum of lease) is recorded in the public records in an amount equal to the tax consideration. See 6.20 Registration Requirements.

Costs paid by a tenant at the start of a lease vary by transaction and the parties’ negotiation. Tenants may pay the first month’s rent, a security deposit, broker’s fees, or other landlord administrative fees at the start of a lease.

Net commercial leases often pass operating expenses (including common area maintenance and repair) through to the tenant, in accordance with the lease’s terms, typically prorated among the tenants of a specific property based on the amount of square footage leased by each tenant at said property. Gross commercial leases typically require the landlord to pay for common area maintenance and repair, though these costs are also typically priced into the rent paid by the tenant.

For a residential lease, the landlord is required to “keep all common areas of the premises in a clean and safe condition”, along with other requirements for the leased premises’ working order and condition (Section 35-9A-204).

Net commercial leases often include utilities and telecommunications services serving an entire property (not just an individual tenant) in the operating expenses that are charged to tenants on a pro rata basis, while gross commercial leases may include the costs of such services, utilities, and telecommunications in the rent charged to the tenant. If such utilities or services are separately metered and service only a single tenant’s leased premises, that tenant is often responsible for the payment for such utilities or services.

Payment of insurance premiums insuring leased real estate is typically done by a landlord, but such costs are often passed through to tenants as an operating expense in net commercial leases. Insurance coverages vary by property, but many commercial landlords carry general liability, casualty, flood, and fire insurance, as well as coverage for bodily injury, property damage, lost rents, etc.

Landlords may limit the way commercial tenants use leased real estate and often prohibit tenants from using the leased premises for certain exclusive uses negotiated with other parties. Applicable zoning laws and private restrictive covenants in the property’s chain of title may impose further restrictions on tenant uses.

The terms of a lease will dictate whether a tenant is permitted to alter or add improvements. Often, tenants may receive a tenant improvement allowance to induce signing the lease, requiring that a landlord either installs certain improvements on the premises or reimburses the tenant for its costs.

Often, a lease requires a tenant to obtain the landlord’s written approval for materials, plans, contractors, etc, involved in such improvements before starting the construction or installation of such improvements. Furthermore, trade fixtures may generally be removed by a tenant, though the tenant may be held liable if they damage the underlying real property in the process of removal. See LaFarge Bldg Materials, Inc v Stribling, 880 So 2d 415, 419 and 424 (Alabama 2003).

The Alabama Uniform Residential Landlord Tenant Act (Section 35-9A-101 et seq) governs any rental agreement (“all agreements, written or oral, and valid rules and regulations adopted under Section 35-9A-302 embodying the terms and conditions concerning the use and occupancy of a dwelling unit and premises”) related to the rental of any dwelling unit (a “structure or the part of a structure, including a manufactured home, that is rented as a home, residence, or sleeping place by one or more persons”) to a tenant (“a person entitled under a rental agreement to occupy a dwelling unit to the exclusion of others”); Sections 35-9A-141.

This statute includes additional rules and regulations for both landlords and tenants in the residential context. Non-residential real estate leases may include specific restrictions related to the category or use of the leased premises, but such leases are generally not subject to specific regulations or laws due to the use or category of the underlying leased premises.

Leases often contain language stating that a tenant’s insolvency or the filing of any bankruptcy petition, voluntary or involuntary, constitutes a default under the lease. However, if the lease remained in force at the filing of a bankruptcy petition, the leasehold estate is considered an asset of the tenant, which is protected by the Bankruptcy Code’s automatic stay.

In addition to requiring a tenant to provide a security deposit under the lease, a lease may provide that a tenant grants the landlord a security interest in the furniture, fixtures, equipment, inventory, etc, located at or related to the leased premises. The landlord may file such a security agreement under applicable law.

A landlord may also require the tenant to deliver a letter of credit or personal guarantee for costs related to any default by a tenant under the lease. However, for residential leases, liens or security interests of a residential landlord in a tenant’s household goods are not enforceable unless perfected before January 1st, 2007 (Section 35-9A-425).

Commercial landlords are also granted statutory liens over crops grown on rented land (Section 35-9-30) and for the goods, furniture, and effects of a tenant or subtenant for rent due (Section 35-9-60).

Generally, a tenant does not have the right to continue to occupy the leased premises after the expiry or termination of a commercial lease. When a tenancy is for a certain period of time and the term expires under the lease, the tenant is bound to surrender possession without the landlord providing notice to quit or demanding possession (Section 35-9-8).

If a landlord has terminated the lease for a breach or default, the landlord must give the tenant notice of termination at least ten days prior to terminating a commercial lease, unless the lease provides for additional time (Section 35-9-6).

If the tenant does not deliver possession of the leased premises after demand, as described above, the landlord may pursue an unlawful detainer action in the district court of the county where the premises are located (Section 6-6-330). The landlord’s complaint must be served on the tenant at least six days before the hearing date (Section 6-6-332).

If the district judge rules in favor of the landlord, the court will file a writ of execution, which requires the sheriff to restore the premises to the landlord (Section 6-6-337). The tenant may file an appeal of the judge’s ruling within seven days, and a trial on the appeal is scheduled within 60 days of the date of the appeal (Section 6-6-350).

The landlord’s right to possession will not be delayed by a tenant’s appeal, and can only be prevented if the tenant pays all rent payable before the landlord regains possession by a writ of possession (Section 6-6-351).

Typically, the ability to assign the lease or sublease the premises is restricted to a certain extent in the lease, but a tenant generally has the right to sublease the property or assign the lease without the landlord‘s consent if the lease is silent about subleases and assignments. If the lease requires the landlord’s consent before subleasing or assigning the lease, the landlord cannot “unreasonably and capriciously” withhold consent (Homa-Goff Interiors, Inc v Cowden, 350 So 2d 1035, 1038 (Alabama 1977)).

In Alabama, provided the remedy is included in the commercial lease, a landlord is typically allowed to terminate the lease for:

  • failure to pay rent or other amounts due under the lease in a timely manner;
  • default under the lease (sometimes after a required opportunity to cure);
  • violation of applicable laws; and
  • other terms specified in the lease.

For residential leases in Alabama, by statute, a landlord may terminate a lease by delivering written notice to the tenant specifying the acts or omissions causing the breach in the following cases:

  • the tenant’s material non-compliance with the lease;
  • the tenant’s intentional misrepresentation of a material fact;
  • the tenant’s material non-compliance with any of their statutory obligations; or
  • if the tenant does not pay rent when due (Section 35-9A-421(a) and (b)).

If the breach arises from unpaid rent or other curable breaches, the lease shall terminate within seven business days of receiving the notice if not remedied by the tenant. Other breaches are not curable, including intentional misrepresentation of a material fact and certain acts on the premises (eg, possession of illegal drugs or criminal assault). See Section 35-9A-421(a), (b) and (d).

A lease must be either:

  • properly acknowledged by an authorised officer (for example, a notary public); or
  • attested by one witness.

See Sections 35-4-20 and 35-4-23.

If a lease term is 20 years or less, including options to extend, a memorandum of lease is not required to be recorded to be enforceable against a third party, if that third party had actual or constructive knowledge of the lease. Leases for more than 20 years, including options to extend, are void for the period of time over 20 years, unless, within one year of the lease’s execution, the lease or a memorandum of the lease is recorded with the probate office in the county where the leased property is situated. See Section 35-4-6.

Transfer taxes are due when the lease (or a memorandum of lease) is recorded in the public records (Section 40-22-1(a)). Transfer taxes are USD1 multiplied by the tax consideration.

The tax consideration is calculated as follows: term of lease (in months) multiplied by monthly rent multiplied by percentage from a lease percentage chart kept by the probate court of the county where the property is located (which is based on the term of the lease), divided by 1,000. See Section 40-22-1(c).

To obtain the proper lease percentage table, attorneys should contact the probate court of the county where the property is located. The tax consideration is rounded up to the nearest USD500 (Section 40-22-1(c)).

Residential Lease

For a residential lease, the landlord must give the tenant seven business days’ notice of default; if the default is not cured, the landlord may file an unlawful detainer action, notice of which must be posted at the leased premises. The tenant then has seven days from the posting of notice to file an answer. Assuming the tenant does not answer, the landlord may file for a writ of execution with the district court for the county where the leased premises are located, which will be issued to the county sheriff, and it may take several weeks to actually serve and evict the tenant.

In total, the process can take several months or longer, based on the case’s specific circumstances; see Section 35-9A-461.

Commercial Lease

For a commercial lease, the landlord must give the tenant ten days’ notice of default (or more, if required under the lease); if the default is not cured, the landlord may file an unlawful detainer action, notice of which must be posted at the leased premises. The tenant then has 14 days from the posting of notice to file an answer. Assuming the tenant does not answer, the landlord may file for a writ of execution with the district court for the county where the leased premises are located, which will be issued to the county sheriff, and it may take several weeks to actually serve and evict the tenant.

In total, the process can take several months or longer, based on the case’s specific circumstances; see Section 6-6-310 to -353.

Pursuant to its terms, a lease may be terminated by a third party in the case of condemnation or foreclosure on the part of a lender that pre-dated the lease. In the event that the leased premises are condemned, “the lessee is entitled to share in the total award only in proportion to [its] interest” (State Highway Department v Lawford, 611 So 2d 285, 288 (Alabama 1992)); and, if the fee owner is satisfied with the award for its interest in the property, but the leasehold owner is not, the circuit court can order a separate trial for the leaseholder on appeal (State v SouthTrust Bank of Baldwin City, 634 So 2d 561, 563-564 (Alabama Civil Appeal 1994)). Payment is based on the fair market value of the leasehold interest.

An Alabama landlord may only accelerate rent in a commercial lease if the lease expressly permits this. A landlord may only pursue self-help to retake possession of the premises after a default if the lease permits re-entry on default. Alabama law does not impose on a landlord a duty to mitigate damages absent an express obligation in the lease to do so (Bowdoin Square, LLC v Winn-Dixie Montgomery, Inc, 873 So 2d 1091 (Alabama 2003)). The typical form of an eviction proceeding involving commercial leases is an action for an unlawful detainer. See Section 35-9-1 to -100 and Section 6-6-310 to -353.

The type of pricing structure used for projects depends on several factors, including:

  • the current economic climate;
  • owner’s desires;
  • financing concerns; and
  • public entity status.

In commercial construction projects, there are typically more guaranteed maximum or fixed-price contracts than open-ended cost-plus contracts, while fixed-price contracts are used almost exclusively in the public works sector.

Alabama law requires a registered architect to sign off on plans for the design and construction of a project (Section 34-2-32). For projects of USD50,000 or more, a contractor must be licensed by the Alabama Licensing Board for General Contractors (Section 34-8-9).

If there are engineering requirements, a licensed engineer must be consulted and approve the plans. In addition, most trades are required to be licensed by their respective governing authority, such as plumbers/gas fitters and electrical contractors (Sections 34-37-1 and 34-36-1 et seq). The project’s owner will typically employ an architect and engineer to work with a general contractor to conceptualize the project; the general contractor then delegates subcontracts as necessary, often without being subject to owner approval, unless the owner contractually retains that right.

Owners and general contractors frequently utilize insurance policies and indemnification agreements in their contracts with each other, and in particular with their subcontractors. Since contribution among joint tortfeasors is unavailable, the only method for obtaining contribution is to contractually oblige the counterparty to indemnification. Waivers are generally acceptable, and interim and final lien waivers are highly recommended.

Each payment on a pay application should be accompanied by an interim lien waiver, and the final payment (including retainage) should be accompanied by a final, unconditional lien waiver and hold harmless agreement. Furthermore, limitations or caps on liability can be negotiated into the contract, in addition to provisions requiring the contractor to post payment and performance bonds from a reasonably acceptable surety.

Delays in construction should always be addressed in the contracting documents. While a penalty is not available, the contract can provide for an agreed-upon “liquidated damages” provision providing for a certain amount to be allocated for each day, week, or month that the project is behind schedule or for each milestone missed. Delay damages can be accounted for as a back charge to the contractor to be deducted from payments due.

As additional security for paying material suppliers or remedying defects and delays in construction, owners and general contractors are entitled to hold back retainage; see Section 8-29-3. An owner or general contractor may retain 10% of payments to the general contractor or subcontractor, respectively; see Section 8-29-3(i) and (j).

The retainage may only be taken from the first 50% of the payments for completion, after which “no further retainage shall be withheld”; see again Section 8-29-3(i) and (j).

Depending on the project’s size, payment and performance bonds are the most common form of security to guarantee a contractor’s performance on a project. As a general rule, the larger the project, the more likely it is for an owner to require more expensive security on a project. Public works are required to be bonded (see Section 39-1-1), but there is no requirement for any security or bonding to be posted by a contractor on private work.

The most common method is for the owner to require both a payment and a performance bond from a reputable surety. Other layers of security may be negotiated into the relevant contract if risk is increased.

Any party who contributes work to the property that improves the property is eligible for a materialman’s lien (Section 35-11-210 et seq). The work provided must be a lasting improvement, not temporary. For example, an architect’s work in providing plans would be lienable, whereas a surveyor’s work would not; Wilkinson v Rowe, 98 So 2d 435 (Alabama1957).

If the lienor’s work is commenced prior to the “creation” of a mortgage on the property, the lien will take priority over the mortgage; otherwise, the lien will be junior to the mortgage (Section 35-11-211). Liens may be removed from the property by transferring the lien to a bond using the statutory framework found in Section 35-11-233.

Each governmental jurisdiction has a building inspector’s office, which must issue a certificate of occupancy prior to the project being inhabited, and which establishes standards for construction in its respective jurisdiction. Inspections are typically required to be conducted, and passed, prior to each phase of the work.

Recording Tax

Alabama imposes a recording tax upon the filing of a deed or similar instrument conveying an interest in real estate with the county probate court where the real property is located (Section 40-22-1 et seq); the tax is USD0.50 per USD500 (rounded up) of value for the property conveyed. The obligation to pay the recording tax is on the buyer.

However, the parties do commonly negotiate the economic burden in real estate sales contracts. Under Alabama law, a deed or other instrument conveying such property must include a Real Estate Sales Validation Form (RT-1) provided to the county probate court at the time the instrument is presented to the probate court for recording. This form must include either proof of the actual purchase price (if the property is being sold) or the actual value of the property (which may be evidenced by a licensed appraisal or the assessor’s current value for the property).

Income Tax

Alabama imposes an income tax that is similar to the federal income tax system (Section 40-18-1 et seq). The maximum Alabama marginal income tax rate on taxpayers other than C corporations is 5%. The maximum Alabama marginal income tax rate on C corporations is 6.5%. The seller must report the gain on the sale of the real property in its annual income tax return. Unlike federal income tax law, Alabama’s income tax law does not contain a preferential rate for long-term capital gains.

Withholding of Income Tax

Alabama imposes a withholding of income tax in connection with sales by non-Alabama resident taxpayers (Section 40-18-86). No withholding is required if the seller is an Alabama resident or a “deemed” resident, provided the seller provides a duly completed affidavit confirming such residency (AL Form NR-AF1).

Certain limited types of transactions are exempt from non-resident withholding under Section 40-18-86 (AL Form NR-AF3). If the seller is not an Alabama resident, and if the transaction is not an exempt transaction, the buyer is generally required to withhold either 3% (where the buyer is an individual) or 4% (where the buyer is an entity) of the purchase price.

However, if the gain recognized on the sale is less than the purchase price, and the seller provides the buyer with an Affidavit of Seller’s Gain (see AL Form NR-AF2), the buyer may withhold 3% or 4% of the amount of the gain. If the amount to be withheld, as based on the purchase price or the gain, is greater than the net proceeds of the transfer, then only the net proceeds need to be withheld and remitted by the purchaser. Generally, the net proceeds of the sale are the net payments to the transferor as shown on the closing statement, but “net proceeds” may be calculated in other statutorily prescribed manners.

See 5.6 Annual Entity Maintenance and Accounting Compliance regarding Business Privilege Tax.

If the property being conveyed is located in more than one county in Alabama, there is a procedure for obtaining an order from the Alabama Department of Revenue (ADOR) to allocate the value of the property being conveyed among the relevant counties, so that the proper recording tax in each county can be determined.

Each municipality is permitted to impose an annual business license tax on business conducted within its taxing jurisdiction, including leasing real estate.

Alabama has two withholding regimes related to income taxes attributable to non-Alabama resident taxpayers, including non-US taxpayers.

Income Tax Withholding Regime

See 8.1 VAT and Sales Tax regarding withholding of income tax. In addition, non-Alabama resident owners of pass-through entities, such as partnerships or S corporations, are subject to a composite payment regime under Section 40-18-24.2 (relating to partnerships and other “Subchapter K entities”) and Section 40-18-176 (relating to S corporations).

Composite Payment Regime

Under the composite payment regime, the pass-through entity files and directly remits taxes to ADOR with respect to the allocable pass-through income of the non-Alabama resident taxpayer, including the share of gain from the sale of real estate by the pass-through entity.

Income tax benefits are provided under Alabama’s income tax law, which is generally consistent with the federal income tax system.

In certain circumstances, Alabama law provides for tax incentives with respect to certain qualifying investments in the state, such as:

  • the creation or expansion of industrial or research facilities;
  • various job credits;
  • data-processing centers;
  • the relocation of corporate headquarters;
  • investments to rehabilitate certain historic structures; and
  • other qualifying projects.

The potential incentives may include abatements related to:

  • income tax;
  • state and local sales and use tax;
  • state and local ad valorem tax; and
  • state recording taxes.

To qualify for such incentives, the taxpayer must file the required applications and reports, and must be approved by the proper governmental authorities; the approved investment must also comply with additional compliance requirements. A summary of Alabama’s taxes and tax incentives can be found on the ADOR website.

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Trends and Developments


Authors



Dentons is a global law firm with a team of over 1,000 real estate lawyers in more than 80 countries across the globe, including more than 180 real estate lawyers spread across 45 locations in the United States, and 19 real estate lawyers throughout the state of Alabama. Dentons’ team of real estate lawyers is adept at handling the myriad of needs pertaining to real estate developers and investors, including assisting clients in procuring capital and credit, often combining construction, permanent, mezzanine and tax credit facilities with equity participations. The team is also well equipped to handle zoning and other land use matters, as well as litigation and controversies, including eminent domain, design and construction, environmental regulatory enforcement, ejectments, and dealing with insolvent counterparties.

Introduction

Although USA’s real gross domestic product (GDP) increased at an annual rate of 2.5% last year, real estate sectors in 2023 “stutter-stepped” due to several different factors straining development and transactions. Stubborn inflation caused rate hikes and a delay in rate decreases, making debt more expensive. As debt rose in cost, equity followed suit, including completion requirements, returns, and more stringent market selections. Higher rates also slowed permanent refinancing of construction debt, causing more construction debt on lender books and less appetite for new construction loans.

Further, while construction materials costs decreased, labor costs generally did not, and construction costs ultimately remained relatively high in 2023. Joint venture equity agreements continued to be common, with developer completion guaranties becoming more strenuous as many deals and projects were delayed throughout the year. Nationally, the office sector faced loan maturities with lower occupancy, which caused lower values.

In comparison, multifamily endured as certain markets remained vibrant and active, even with a decline in new project starts. This imminent decrease in supply has caused many market participants to expect a spike in rents, which would result in a wave of new investments and construction. Retail and industrial assets continued trying to evolve in line with the new normal, which includes more online shopping and a greater desire for physical retail to incorporate experiential activities with traditional shopping.

This chapter will summarize how this past year’s general real estate trends will shape the market in Alabama for the future.

The Housing Market

The housing market began to slow after a period of rapid growth since 2020, due largely to a competitive environment created by high mortgage rates and incredibly low availability for interested buyers. Recent homebuyers who bought when mortgage rates were much lower were able to afford more expensive houses. Now, these homebuyers have no reason to sell when similarly priced houses are less affordable due to higher mortgage rates. Other contributing factors included home prices undergoing significant increases, as homes on the market continued to sell above listing price. The inventory of housing at the end of the year was also at an all-time low, and the median sale price peaked in June 2023 at USD425,000, causing market averages that proved to be too competitive for the majority of consumers.

In the fastest-growing city in Alabama, Huntsville’s major establishments (such as Google, NASA, Boeing, Toyota, and even the federal government) are continuing to recruit educated workers, particularly from the 24- to 34-year-old demographic, into the local real estate market. This demographic has held home ownership rates steady, especially those with household incomes of greater than USD100,000.

There were multiple lawsuits against the National Association of Realtors in 2023 focused on the commissions paid by homeowner sellers in residential transactions, with these commissions generally being divided among brokers for both buyer and seller in such transactions. In early 2024, a settlement resulting in the elimination of these commissions occurred, with over USD400 million in damages being paid to groups of homeowner sellers. At this point, it is unclear how the legislation and trend against anti-competition of broker fees and commissions will impact on real estate markets.

Multifamily

Rental demand is back on the rise, and apartment buildings have proven yet again to be a resilient asset, despite high construction costs. However, high interest rates remained a cause of concern throughout the year, with flatter rents and less occupancy leaving investors waiting for stabilization, and resulting in a slowdown in new construction projects.

Nevertheless, Huntsville again remained a target for multifamily investment, and is commonly identified as a great market for rental property. Huntsville’s population has continued to grow, driven in part by the technology and aerospace sectors attracting large employers to the state. Over the past few years, Huntsville has surpassed Birmingham as the largest city in Alabama, and will continue to outpace other areas in the state. One of the many reasons for such growth is the movement of FBI employees to its new facility in the Redstone Arsenal. This, among other large projects, has created a competitive and fast-paced market in the Huntsville-Madison area. Throughout Alabama (and nationally), certain markets and sub-markets were still active in multifamily.

Repurposing retail properties into multifamily and mixed-use projects continued through 2023, though this can be challenging due to construction costs and many zoning laws lacking provisions that contemplate adaptive re-use, coupled with a push to prioritize multifamily housing with moderate tier rents. In addition to a spike in “workforce housing” development, there was a moderate increase in single family rental developments and build-for-rent (build-to-rent) developments. These redevelopments have triggered an uptick in zoning/entitlements work, disputes (or threatened disputes) with neighbors and municipalities, and private title declarations and easement agreements.

Lending

The London Interbank Offered Rate (LIBOR) was phased out in 2023 as lenders transitioned to the Secured Overnight Financing Rate (SOFR), which seems to be the replacement rate of choice. The transition from LIBOR was facilitated by a working group of the Federal Reserve, which has promoted the SOFR index as a replacement. Being based on overnight transactions, SOFR relies entirely on transaction data, whereas LIBOR is based partially on expert estimations. Neither the amendments nor new loans using the SOFR benchmark caused any notable problems. Some bank failures occurred in 2023, causing many banks in the market to prioritize deposits over loans, and subsequently causing the volume of loans to decrease. At the same time, rates increased, also causing permanent financing loans to decrease. Ultimately, construction loans were not paid off, and there was less desire in the market for construction loans in general. 

Suburbs

In 2023, the seller’s market maintained its momentum, especially in the suburbs. Home prices continued to rise, with an unusual combination of low supply and high demand in popular suburban areas. Mortgage rates also continued to increase, rising past 8% for the first time in 20 years; the average monthly mortgage rate reached over USD2,600, growing at a faster rate than wages. However, rates began to steady towards the end of the year and are predicted to drop by mid to late 2024.

Suburban popularity is buoyed by the continued disinterest in office spaces and historically low inventory for potential buyers. The resulting outcome makes sense: if more people are staying at home in the suburbs, they are more likely to shop and support businesses in their immediate areas. Just as businesses followed people into cities, businesses are likely to follow the labor force into the suburbs, particularly given the lower rents and commute times. This proved to be true even with the prices of goods and services facing high rates of inflation.

Even as Gen Z joins the workforce, millennials are still considered a vital source of talent and remain the focus of HR professionals. They also remain the largest group in the workplace, with the power to set and maintain trends and to request change, particularly accommodation for work-from-home flexibility and coworking solutions. Millennials’ homebuying decisions are disproportionately based on convenience and proximity to work; in other words, the decision on where to purchase a home relates directly to the job location. Coupled with millennials wishing to become first-time homebuyers are those who have finally recovered from the financial crisis of 2007–2008, resulting in a pent-up demand for quality homes in convenient locations.

Office

As is to be expected, the movement of office properties on the market continues to be minimal. Unlike in multifamily, which sees turnover from year to year even during difficult climates, office leases are generally much longer, and are showing signs that they are unlikely to reach pre-COVID-19 pandemic norms any time soon. While remote work was already growing in popularity, the pandemic jump-started a new normal for office work that creates an interesting dynamic. Nationally, office buildings as assets became higher risk. However, many workers in Alabama have returned to the office; as such, compared to the national landscape, there have been fewer office space foreclosures in Alabama.

Further, organizations and companies moving to Alabama cities such as Huntsville and Birmingham suggests that entities, not just individuals, may be looking to transition to more affordable places for central hubs. Even so, Birmingham continues to be an attractive destination for businesses. Brassfield & Gorrie announced plans to invest USD18.9 million to expand its national headquarters in the Lakeview District of Birmingham, and start-up Primordial Ventures recently announced plans to construct a USD3.3 million manufacturing operation in the city. 

Suburbs and Office Space

Perhaps surprisingly, the US suburbs continue to hold a large percentage of total office space inventory and occupancy. Undoubtedly, this stems from cheaper land, availability, and a desire for spacious sites. Though vacancy has historically been higher in the suburbs, the gap between the central business district (CBD) and suburbs shrunk to a mere 35 basis points just prior to the pandemic. Annual growth rates for the suburbs have held steadier than the rates for the CBD in the past five years. Vacancy rates peaked in mid-2010, though rates declined faster in the suburbs than in the CBD. From 2005 to 2015 – just ten years – the CBD rent premium more than doubled.

The Birmingham office market ended Q4 of 2023 with a positive net absorption totaling 89,117 square feet and a vacancy rate of 19.0%, according to Cushman & Wakefield’s MarketBeat report. With vacancies very slowly dropping and softening demand, owners are continuing to raise rents, though at a slower pace. Commercial leasing remained steady, and multiple multi-tenant office redevelopments are ongoing in the CBD and midtown supermarkets, including the Hardwick, which is expected to add around 40,000 square feet of office space to the CBD. While some have predicted that office development will continue in the future, it is unclear whether this will favor the suburban market or the CBD/midtown areas, given the lack of growth over the past few years.

With office spaces open and generally fully functional, building owners and managers should stay up to date on the newest regulations to avoid potential liabilities. Specifically, the CDC has directed building owners to review the guidance from the Building Owners and Managers Association (BOMA), which assembled a task group from across North America to develop best practices for owners and managers. BOMA recommends that owners meet with their risk managers and insurance brokers to review policies and coverage, and to assess new and ongoing liability risks.

Guidance for Businesses and Employers From a Real Estate Perspective

In general, all the major asset classes are experiencing and undergoing evolution in design and use. Office spaces are now more efficient with the use of space, reducing space demand. Multifamily projects are transforming from simple complexes to luxury-oriented locations with a focus on extensive amenities, and retail continues to evolve with an increased focus on experiences tied with food and other activities, in addition to shopping.

Although there were fewer updates on any policies concerning health safety practices in 2023 than in previous years, it is important for employers to keep in mind that the CDC has provided Interim Guidance for Businesses and Employers, which offers guidelines and recommendations for employers to protect their workers and clients. Specifically, the CDC has referenced the guidance provided in ASHRAE Standard 180-2018, Standard Practice for the Inspection and Maintenance of Commercial Building HVAC Systems. The best insurance building owners can have is to schedule and document an inspection of HVAC systems. Current and potential real estate investors should carefully study each particular law, as they vary greatly regarding the types of businesses covered and the extent to which local health department guidance must be followed to qualify for immunity. Office owners and managers will want to review the current construction start-up guidance, particularly for HVAC systems that have been shut down or put on setback, and possibly to consult with legal counsel to cover all of their bases.

Employee burnout in workplaces continued in 2023. The American Psychological Association provides five areas of focus for employers and companies:

  • employee involvement in decision-making;
  • work-life integration;
  • employee growth and development;
  • employee recognition; and
  • health and safety.

Employers would be wise to address these areas, and to show consideration for not only the physical health and safety of employees but also their mental health.

The Corporate Transparency Act

The Corporate Transparency Act (CTA) became effective on 1 January 2024, and now requires entities to report information, including specific beneficial ownership information, to FinCEN (the US Department of Treasury’s Financial Crimes Enforcement Network). While applying to most businesses, the CTA is likely also applicable to community associations, regardless of non-profit status. Business owners and those forming businesses should familiarize themselves with the new reporting requirements. In March 2024, the US District Court of the Northern District of Alabama declared the CTA unconstitutional; that decision is currently on appeal.

Remote Employees

The work-from-home model has now found its place in nearly every major business industry. On average, about 27% of US employees work remotely full-time, and 66% work remotely part-time. 36.2 million employees are expected to work remotely by the end of 2025. With this new norm comes new expectations and standards. Many companies who have invested in remote work state that they have no intention of requesting employees to return to the office, and with decreased expenses and many reporting higher productivity, this shift makes sense. The vast majority of employees who work from home state they experience a better work-life balance, reduced stress and improved morale, and companies are now intaking fewer sick days.

Birmingham’s office market ended the year at USD21.03 per square foot, which was slightly above the 2022 rate. While additional growth is expected in 2024, it will likely be minimal. Nonetheless, because Alabama has experienced varying levels of office building use, a trend over the course of the past few years has been to blend and extend leasing, with some tenants seeking a reduction in the square footage of their leased premises.

Industrial

Total e-commerce sales in the USA increased by 7.6% from 2022. E-commerce sales accounted for 15.6% of total sales, with an expected rise to 16.6% by the end of 2024. The authors believe that Alabama experienced similar trends. Consequently, the acceleration in online sales has boosted the demand for industrial logistics spaces. Amazon accounted for nearly 37.6% of all US e-commerce in 2023. In Alabama, the online giant continues to announce new projects, the most recent being a distribution center in Dothan expected to create up to 200 jobs.

Industrial spaces have only experienced a mild hit, with demand for these spaces holding relatively well. A notable trend during this time has been an uptick in legal work related to the rezoning and development of new warehouse and industrial projects, with sale-leasebacks being used as a financing vehicle. With the inflated cost of building supplies and labor shortages, construction continued, but at a slower pace than usual.

Traditional Retail

Alabama’s real GDP retail trade growth rate during the third quarter of 2023 rose to 24.7%. The primary thriving end users are grocery stores, home improvement stores, and dollar stores, as well as outparcel-like fast-casual and fast-food restaurants. While inflation rates have hit consumers hard, there is still strong evidence of successful growth in the retail space.

With retail moving from isolated stores to community integration, and with consumer preference for outdoor centers, the decline of popularity for indoor malls continued. There have been strong demands in the area from budget retailers who can more easily slide into suburban spaces. The enclosed mall spaces provide opportunities to rethink the properties’ potential; many suburban malls can be converted into office and professional spaces. The use of many consumer-focused spaces has also trended towards more experience-oriented entertainment activities such as:

  • Top Golf;
  • arcades;
  • venues featuring putting courses (eg, the new PopStroke location in Tuscaloosa, Alabama); and
  • new eateries that include family and group activities to enjoy.

Smaller retailers are finding their way back into consumer popularity, particularly in Birmingham and Huntsville. Even with smaller retailers facing much economic uncertainty, there has been continued success in the food industry in the metropolitan areas of Birmingham and Huntsville, proving the resilient nature of consumers today.

Tourism and Entertainment

Tourism is an important industry in Alabama. With close to 29 million visitors last year, tourism for the state generated nearly USD4.3 billion in direct earnings. Alabama’s Gulf Coast is heavily reliant on tourism and was ranked fifth among most-searched summer getaways in 2023. Baldwin County saw 8.3 million tourists in 2023 alone (similar to 2022), and such consistency has had a ripple effect on many businesses and individuals in that part of the state.

Tourism spending in Alabama increased by 4.8% in 2023. Any lingering restrictions on leisure and recreational activities, as well as crowd limitations, are no longer felt by the tourism industry in Alabama. Alabama’s Tourism Department Director Lee Sentell credits Alabama’s tourism success to its moderately priced destinations, including its beaches, lakes, state parks, and museums. The Space and Rocket Center in Huntsville, being the top paid attraction in Alabama, draws roughly 850,000 visitors a year. Madison County was listed as the second most-visited region in Alabama, with Baldwin County being the most visited and boasting destinations such as Orange Beach and Gulf Shores. In total, approximately 240,000 jobs are generated from tourism in the state, and that number is expected to grow.

Construction

Some major issues in construction continued in 2023, as the length of time on construction projects increased, despite prices for steel, lumber, and other materials finally plateauing. In these projects specifically, there is not necessarily a labor shortage; rather, contractors and subcontractors have been so busy that delays are practically inevitable. These factors, coupled with inflation and disruptions in supply chains, have and will continue to have an impact on project timelines. Furthermore, construction litigation has increased, largely due to delays and surprising cost increases.

In practice, real estate owners will need to continue considering safety compliance and prompt payment of contractors, emphasizing regular communications between all involved on a building project and co-ordinating with material suppliers to avoid unnecessary delays, all of which create additional work and stress for owners. There may be an uptick in mediations and arbitrations, due to construction delays; litigation attorneys should be prepared to deal with the increased flow by updating their knowledge on ever-evolving compliance laws.

It is also important to note that, while climate change is not a huge factor in Alabama real estate transactions, the authors are seeing more climate-friendly amenities being included in projects, such as car-charging stations, window and roof updates, and so on.

Conclusion: Looking Ahead in 2024

2023 saw resiliency in the commercial real estate market reduced and limited to certain asset categories and markets. Developers needed to be able to thread the needle when planning to make projects work financially. Construction pricing and interest rate lines reduced new project acquisitions and debt/equity closings. Higher interest rates and stricter loan-to-cost and loan-to-value requirements have impacted on transaction flow. For private equity, dictated by equity investors, there has been an overwhelming surge toward preferred equity over common equity. While preferred equity offers investors return opportunities with less downside than common equity, a developer’s/sponsor’s other source of funds (equity) has also become more challenging in today’s environment. 

These factors appear to be impacting on all market segments of development, including multifamily, industrial, and retail. Alabama has felt the effects but has showed resiliency through the periods of extremely high interest rates, and has maintained its above-average status in the homeownership market and its below-average unemployment rate. While the Federal Reserve claimed that three rate decreases would occur in 2024, none have yet occurred, which has caused some concern as to whether the projected cuts will occur as planned or be pushed to the end of 2024 (or even 2025). However, more letters of intent (LOI) for transactions are being seen, even before the first promised rate decrease, which is a positive sign. When rates do go down and permanent refinancing goes up, the authors believe that construction credit will become more available, and this will drive further development going forward.

Dentons

2311 Highland Avenue South
Suite 500
Birmingham, Alabama 35205
USA

+1 205 930 5100

+1 205 930 5101

marketing.us.dsp@dentons.com www.dentons.com
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Law and Practice

Authors



Dentons is a global law firm with a team of over 1,000 real estate lawyers in more than 80 countries across the globe, including more than 180 real estate lawyers spread across 45 locations in the United States, and 19 real estate lawyers throughout the state of Alabama. Dentons’ team of real estate lawyers is adept at handling the myriad of needs pertaining to real estate developers and investors, including assisting clients in procuring capital and credit, often combining construction, permanent, mezzanine and tax credit facilities with equity participations. The team is also well equipped to handle zoning and other land use matters, as well as litigation and controversies, including eminent domain, design and construction, environmental regulatory enforcement, ejectments, and dealing with insolvent counterparties.

Trends and Developments

Authors



Dentons is a global law firm with a team of over 1,000 real estate lawyers in more than 80 countries across the globe, including more than 180 real estate lawyers spread across 45 locations in the United States, and 19 real estate lawyers throughout the state of Alabama. Dentons’ team of real estate lawyers is adept at handling the myriad of needs pertaining to real estate developers and investors, including assisting clients in procuring capital and credit, often combining construction, permanent, mezzanine and tax credit facilities with equity participations. The team is also well equipped to handle zoning and other land use matters, as well as litigation and controversies, including eminent domain, design and construction, environmental regulatory enforcement, ejectments, and dealing with insolvent counterparties.

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