The main skills required for the practice of real estate law are as follows:
COVID-19 of course had the largest impact on real estate in 2020, with particularly keen pain in the hospitality and retail sectors, with office not far behind.
There is very high demand for new industrial product and both build-to-suit and speculative warehouse and distribution center development has been very busy.
Two recent sales of note include, in Philadelphia, the Independence Blue Cross headquarters sold for USD360 million, and in the Pittsburgh of Cranberry Township, the Westinghouse campus in the Cranberry Woods Office Park sold for USD180 million.
Development potential in Opportunity Zones has garnered a lot of looks but not much action in Pennsylvania to date. Most Opportunity Zone development seems to have settled in primary markets. Government and philanthropic foundations are beginning to view Opportunity Zones as one arrow in the quiver rather than as a silver bullet to spur development in disenfranchised areas. Additional financial incentives like tax abatements, grants and tax increment financing are anticipated, coupled with Opportunity Zones, to catalyse economic activity in these Zones.
Commercial real estate is increasingly held in limited liability companies. Until a few years ago, limited partnerships were preferred in Pennsylvania because the state's Capital Stock/Franchise Tax applied to limited liability companies but not limited partnerships. That tax has now been phased out, so the barrier to using LLCs has been eliminated. LLCs are now preferred because only one entity is required.
Notable jurisdictional requirements include the following.
To effect and register a transfer of title:
Real estate due diligence typically comprises the following:
The division of labor between buyers and their attorneys on real estate due diligence varies by client and property, but buyer's counsel often takes the lead.
Buyer's counsel typically reviews the title commitment and survey, handles the title objection process with seller's counsel and the title company, reviews the zoning report and pursues zoning and land use approvals (with meaningful involvement from project architects), and reviews the environmental site assessment.
Clients often take the lead in reviewing engineering reports, abstracting leases and underwriting deal economics.
Typical representations and warranties for both parties include the power and authority to enter into the agreement and carry out the transaction.
For sellers, typical representations include:
In the event of a misrepresentation of seller prior to closing, buyer can typically terminate and get its deposit back.
Seller's representations usually survive closing, often for 12 months. The contract normally contains an indemnification for buyer's losses due to breach of a seller representation, often secured by a net worth covenant, parent guaranty or escrowed funds, with seller's exposure often such to a cap and basket.
The key areas are zoning, land use, transfer tax, ad valorem real estate tax reassessment risk, environmental and bulk sales. Changes to CFIUS regulations have not had significant impact in Pennsylvania.
Every owner in the chain of title has potential risk for environmental contamination whether they caused it or not. Environmental representations are often heavily negotiated. The typical resolution is for the seller to represent it has not received notice of any environmental violations and has no current knowledge of any. Buyers rely heavily on third party environmental site assessments to evaluate their risk.
Buyers typically order third party property zoning reports. For complex projects, land use attorneys usually provide an analysis of permitted uses under existing zoning and avenues for relief if needed, such as a conditional use, special exception, variance or rezoning. Depending on the type of relief, it is obtained from the municipal governing body, its zoning administrator or zoning hearing board. Development agreements do not provide this relief but rather govern construction-related issues like road repair, hours of construction and bonding requirements.
Condemnation by government bodies or public utilities is possible in Pennsylvania. The condemnor initiates the process by filing a declaration of taking in the county trial court. The process is often handled outside of court by the condemnor purchasing the property for an agreed upon price in lieu of condemnation. Where formal condemnation proceeds, the consideration is determined by agreement or failing that by litigation to set the property's fair market value.
The following taxes are applicable to transactions.
To own and operate real estate in Pennsylvania, a foreign entity must register with the Pennsylvania Department of State to do business in Pennsylvania.
The structure of commercial real estate finance transactions in Pennsylvania is similar to most other states.
Term loans, bridge loans, and construction loans, in each case secured by mortgages, are most common. Mezzanine loans are sometimes utilized in order to increase the overall percentage of the project financed by debt.
For income generating properties most loans are structured as loans to Single Purpose Entities (SPEs) with some level of guaranty support from the sponsor, based upon the credit-worthiness of tenants and operating history of the property.
Real estate investment trusts (REITs) are the most common publicly held entities whereby investors pool their money to invest in a real estate portfolio.
Types of Security
The most common security interests in favor of the lender in Pennsylvania are:
If funds are to be borrowed after the mortgage is recorded, such as for construction of improvements on the real estate, the mortgage should be an open-end mortgage. A statute provides that the lien of future advances under such a mortgage date back to the date such a mortgage was recorded, provided that the technical provisions of the statute are complied with. Such later advances may date back to the initial filing whether or not the lender was obliged to make such later advances.
There are no regulations or requirements that a foreign lender must meet in order to finance the acquisition or development of real estate. However, Pennsylvania has a tax, known as the "Bank and Trust Company Shares Tax" which is imposed on certain institutions such as banks and trust companies doing business in Pennsylvania. "Doing business" is defined to include making loans secured by real estate located in Pennsylvania.
No taxes or fees, except for nominal recording fees, are payable on the granting, recording or enforcement of security over real estate. However, if a lender acquires possession of the real estate, or acquires it in foreclosure, certain state and local taxes may be imposed.
There are, in general, no legal rules or requirements that must be complied with before an entity can give valid security over its real estate assets. However, certain regulated entities may be subject to such rules or requirements.
Formalities before Enforcement
There are no procedural or other debtor protections to be overcome before the lender is able to enforce its rights over real estate against the defaulting borrower aside from overcoming any defenses the borrower may raise to enforcement.Nor are there any additional procedures that must be undertaken to give the lender's security interest priority over the interests of other creditors.
Collection of Rents
Upon default lender may notify the tenants to pay the rent directly to the lender if the mortgage contains an assignment of lease and rents or there is a separate assignment of leases and rents. A tenant who disregards the notice and pays the borrower would still be liable to the lender for the rent.
The lender may apply for the appointment of a receiver to collect the rents and manage the property. In many states a lender would have to prove that the property was being wasted or other equitable reasons for the appointment of a receiver. However, in Pennsylvania, a mortgage lender may apply for the appointment of a receiver to collect the rents and manage the property.
In many states a lender would have to prove that the property was being wasted or other equitable reasons for the appointment of a receiver. However, in Pennsylvania, if a mortgage provides for the appointment of a receiver on default, that provision will typically be enforced even without equitable reasons for doing so.
Procedures to Enforce a Mortgage
Mortgage foreclosure action
A lender may enforce a mortgage by a legal action in mortgage foreclosure against the mortgagor, and also the owner if different from the mortgagor. In that action the defendants may raise any defenses they may have. If lender prevails, a judgment for foreclosure of the mortgage will be entered on the basis of which a sheriff will sell the mortgaged property at a public auction known as a foreclosure or execution sale.
The sale divests liens, whether superior or inferior to the mortgage lien, except those liens which are protected from divestiture by statute. Mortgages prior in lien priority to the mortgage being foreclosed are not divested, nor are real estate taxes unless the sale brings sufficient proceeds to pay them. The sheriff distributes the proceeds of the sale to holders of liens divested by the sale and other parties in interest in order of priority.
Execution on money judgment on the secured debt
A mortgage may also be enforced by an execution sale on the basis of a money judgment obtained in a legal action against the borrower for the debt secured by the mortgage. If the debt is evidenced by a document which contains a warrant of attorney for confession of judgment, the lender may cause a judgment to be confessed against borrower and the sale may take place on the basis of that judgment. The procedural rules provide for the borrower to raise defenses by a motion to open or strike the judgment and for notices to the borrower relating to such rights.
Including personal property in the foreclosure
Where the mortgage covers both real estate and personal property it often a good practice to include personal property in the foreclosure complaint and the execution sale as permitted by section 9604 of the Uniform Commercial Code, 13 Pa.C.S.A. 9604(a) and Rules of Civil Procedure 1147(b) and 3180(b), applicable to a foreclosure judgment, or 3101.2, applicable to a money judgment. This approach could result in the buyer at the sale acquiring the assets essential for the operation of the real estate at the same time the real estate is acquired, and could minimize expense, risk and delay related to the deficiency judgment act.
Deficiency Judgment Act
If the property is sold at the execution sale directly or indirectly to the lender, it is deemed to satisfy the debt unless the lender obtains a court evaluation of the property in a deficiency judgment proceeding. The value so determined, less certain amounts such as undivested liens, is then credited against the debt and the lender is free to collect the balance. The lender must initiate the proceeding by filing a petition within six months of the sheriff's deed. Until that proceeding is complete, the lender may not collect the alleged balance of the debt from the borrower or any other person or collateral liable for the debt.
The lien priority of existing debt secured by real estate may be subordinated to that of newly created secured debt by an agreement. This is done by an acknowledged and recorded postponement agreement among the borrower, the existing mortgagee, the subsequent mortgagee or mortgagees and any other persons interested as owners of the real estate or as holders of liens thereon.
Taxes and mechanic's liens, in certain circumstances, may also take priority over a prior recorded lien.
A lender that has taken the action of enforcing security to protect collateral real estate is provided certain protections from liability by the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the secured creditor’s exemption of the Pennsylvania Hazardous Sites Cleanup Act (HSCA), and the Fiduciary and Lender Environmental Liability Protection Act (the “Lender Liability Act”). The lender’s protections afforded under CERCLA and HSCA are rooted in the respective statutory definitions of “ownership and operations”, while the Lender Liability Act outlines a fault-based standard that defines the management of a site and declares that a lender’s ownership or control of a property alone will not trigger liability.
CERCLA and HSCA place the liability of hazardous substance cleanup or the related costs of cleanup upon:
Owner Operator Definitions
CERCLA Section 101(20)(A) categorizes a person as an “owner or operator” of a facility if that person:
Section 101(20)(A) goes on to exclude from the definition of an “owner or operator” any “person, who, without participating in the management of a... facility, holds indicia of ownership primarily to protect his security interest in the... facility.”
The HSCA follows the CERCLA owner/operator definition while providing a secured creditor’s exemption that applies to financial institutions, their affiliates, or parents that satisfy three conditions:
The exemption includes a definition of “management” and under the definition excluded financial institutions from being considered management of a site when supervising the "finances or fiscal operations of a responsible person or an owner or operator in connection with a loan to, services provided for or fiscal obligation of that responsible person or an owner or operator or actions taken to protect or preserve the value of the site or operations conducted on the site”.
In 1995, Pennsylvania legislature enacted the Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act (the “Lender Liability Act”) that identified ownership or control of a property shall not trigger liability for a lender. Taking priority over inconsistent HSCA provisions or other state laws that impose liability on lenders or fiduciaries, the Lender Liability Act put a fault-based standard in place by repealing strict and joint liability for those holding indicia of ownership of a site, but not participating in the management of a facility.
A lender who engages in “routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property" will not be liable under any state environmental laws or their common law equivalents, but the lender may lose its liability protection if it, its employees or agents:
In the event that a lender were to lose the liability protection, the Lender Liability Act provides that the lender will only be liable for costs that the lenders is directly responsible for as a result of the lender’s actions if those actions were the cause of the violation or release of hazardous substances. Furthermore, actions that occur exclusively from releases taking place prior to a lender’s foreclosure will not create liability for the lender. After foreclosure, a lender will only be responsible for the response cost caused by making a pre-existing release worse. A release found during due diligence investigation shall be considered a pre-existing release with the lender not responsible.
A borrower's insolvency may jeopardize a lender's rights and remedies with respect to security interests.
If the borrower files for federal bankruptcy the lender's remedies will be stayed at least temporarily and there may be other adverse consequences that are beyond the scope of this chapter.
Voidable Security Interests
Pennsylvania, like many other states, has the Uniform Voidable Transactions Act (UVTA). The UVTA is identical in many respects to Section 548 of the Bankruptcy Code.
The UVTA does not present an appreciable risk of avoidance of a security interest granted by a borrower to secure a loan to the borrower. It does however present well-known risks of avoidance of a security interest granted by a person other than the borrower, such as the grantor's parent entity, to secure a loan to the borrower, if the grantor is insolvent or meets certain other financial criteria specified in the statute. These risks are no different from the risks in most other states.
Effect of Borrower's Insolvency on Foreclosure
Deemed reasonably equivalent value
As stated in 3.6 Formalities When a Borrower Is in Default, a mortgage is foreclosed by a foreclosure or execution sale. The transfer by the sheriff as a result of such a sale could be challenged under the UVTA if the financial condition of the borrower met the criteria described above, or if there were an actual intent to hinder, delay or defraud creditors. This risk is substantially minimized by a provision of the UVTA to the effect that a person gives reasonably equivalent value if the person acquires an asset of a debtor at a regularly conducted noncollusive foreclosure or execution sale.
UVTA exception for enforcement of security interest under Article 9
Enforcement of a security interest in personal property pursuant to Article 9 of the Uniform Commercial Code (the provisions of which generally govern security interests in personal property) is not subject to attack under the UVTA unless the enforcement is by acceptance of the collateral in full or partial satisfaction of the obligations it secures, or there was actual intent to hinder, delay or defraud creditors.
Minimizing Bankruptcy Risks
Lenders can minimize bankruptcy risks by carefully examining the financial condition of a borrower and the effect of the transaction being financed on that condition. A solvency certificate is sometimes required, but it is no substitute for solid underwriting.
Structuring the loan as a loan to an SPE, is designed to minimize bankruptcy risks.
It is important that the mortgage be recorded contemporaneously with the first advance of the loan. Otherwise the mortgage might be successfully attacked as an avoidable preference should the borrower later file for bankruptcy.
If the loan is being made to a party other than the mortgagor, a lender may include a provision the effect of which would be, in certain circumstances, to reduce the amount of the debt enforceable against the mortgaged property to an amount that would survive attack under the UVTA or similar provisions under the Bankruptcy Code. Such provision is sometimes known as a "not worth limitation clause". However this approach does not always succeed.
There are no existing, pending or proposed rules, regulations or requirements that lenders or borrowers pay any recording or similar taxes in connection with mezzanine loans related to real estate.
Note, however, that state and local realty transfer taxes (which can be significant in Pennsylvania) are imposed on certain acquisitions of equity interests in real estate companies.
The design, location and appearance of new buildings and major renovations to existing buildings are governed mostly by each local municipality's zoning ordinance and land development ordinance. The Pennsylvania Municipalities Planning Code (MPC), which applies to all municipalities other than Philadelphia and Pittsburgh, authorizes, but does not require municipalities to adopt their own zoning and land development ordinances. If a municipality has not adopted its own zoning and land development ordinances, the County-wide zoning and land development ordinances (if the County has adopted such ordinances) will typically apply instead. Philadelphia and Pittsburgh have both adopted their own zoning codes, which are not subject to the MPC.
Specifically with respect to construction plans, developers must also comply with the pertinent version of building codes (International Building Code, International Fire Code, etc) adopted by each municipality.
Local government agencies are responsible for regulating the development and designated use of individual parcels of real estate in each municipality. In municipalities governed by the MPC, these include the governing body (Board of Supervisors, Borough Council, etc), the planning commission, and the zoning hearing board. If is a use is permitted by right (ie, no zoning relief is required), then then applications for development are usually handled administratively by the municipality's planning department.
If relief from the zoning ordinance is required, then the governing body and/or zoning hearing board will consider the applications during the course of public hearings. Although not governed by the MPC, Philadelphia and Pittsburgh both utilize similar local boards to regulate and administer local land use controls. In Pittsburgh and Philadelphia, the local zoning board is referred to as a "zoning board of adjustment," rather than a "zoning hearing board."
If no zoning relief or land development approval is required, then the development approval process can be completed administratively over the counter, usually in a matter of several weeks.
If zoning relief is required (through either a variance, special exception, or conditional use) then the process generally takes three to four months. An applicant will file an application with the municipality, which must hold an advertised public hearing to consider the application within 60 days of the application. The municipality must then issue a decision within 45 days of the last hearing. If the municipality does not comply with these timing requirements, then the application will be deemed approved. Although Philadelphia and Pittsburgh are not subject to these requirements, the zoning approval process in those cities follows a similar timeline.
If a developer seeks a re-zoning, there is not usually any required timeline in which the municipality must act on the application. However, if the municipality is willing to re-zone the property, the process typically takes four to six months. Because re-zoning is considered a legislative act, the decision to re-zone a tract of land is almost entirely within the discretion of the local governing body and there is little recourse if a municipality decides not to re-zone a parcel.
In addition to zoning approval, land development approval is also typically required where there will be construction of new commercial buildings or multi-unit residential buildings. Land development approval relates mostly to the site engineering, layout and design of a proposed development. This process also takes approximately three to four months, but can usually be accomplished concurrently with the zoning approval process.
For land development approval, the developer submits an application to the municipality, which will refer the application to its planning commission for review and recommendation. The application is then sent to the governing body, which must vote to either approve or deny the application at an advertised public hearing. The municipality must then issue a decision on the application within 90 days after the first regularly scheduled planning commission meeting following the date of application. Although Philadelphia and Pittsburgh are not subject to these requirements, the land development approval process in those cities follows a similar timeline.
Third parties with property interests near a proposed development are permitted to participate and object at any public hearing/meeting related to an application. In Pittsburgh and Philadelphia, developers are required to meet with registered community groups prior to any public hearing to consider an application.
The initial decision of a zoning officer or zoning administrator regarding an application is appealable to the zoning hearing board, or the zoning board of adjustment (if in Philadelphia or Pittsburgh).
After all local administrative remedies have been exhausted, a municipality's ultimate decision to approve or deny an application is appealable within 30 days to the Court of Common Pleas of the county in which the municipality is located. Either the applicant or a person with a sufficient property interest near the development may appeal the decision. There is no hard and fast rule, but Pennsylvania courts usually hold that landowners or residents within a quarter mile of the development have sufficient standing to appeal a decision.
An appellant has an automatic right to appeal an adverse decision of the Court of Common Pleas to the Pennsylvania Commonwealth Court, which is Pennsylvania's intermediate appellate court for cases involving local ordinance interpretation. The Commonwealth Court's decision is appealable to the Pennsylvania Supreme Court, which is not required to accept the appeal.
Larger land developments will usually require that a developer enter into a "Development Agreement" or "Developer's Agreement" with the municipality as a condition of final land development approval. The agreement will set forth various inspection and bonding requirements required for the construction of the development. Other types of agreements are sometimes also required with public utility companies to facilitate connection to the relevant utility (water, sewer, gas, etc). In addition, developers sometimes enter into "community benefit agreements" with local community groups, whereby a developer will agree to certain development conditions in exchange for the group's support.
However, developers and municipalities should take care to ensure that their agreements do not constitute so-called "contract zoning," where a developer essentially makes payment to a municipality in exchange for requested zoning relief. Contract zoning is illegal in Pennsylvania.
Restrictions on development and designated use are typically enforced by a municipality's code enforcement officer. In Pittsburgh, the Department of Permits, Licenses and Inspections is responsible for enforcement. In Philadelphia, the Department of Licenses and Inspections is the responsible party. The enforcement agency will usually first issue a notice of violation, which gives the property owner time to abate the violation. If the notice refers to a zoning violation, then the property owner can begin the appeal process described in 4.4 Right of Appeal against an Authority's Decision.
If the violation is not abated or appealed to the zoning board, then the municipality will usually proceed to file a complaint with the local magisterial district court, which will hold a summary trial to consider the violation. The magistrate will either dismiss the case, or find the defendant guilty and impose a fine. The magistrate's decision is appealable de novo and as of right to the Court of Common Pleas of the county where the property is located.
Limited liability companies are the most common vehicle, following the phase out several years ago of the Pennsylvania Capital Stock/Franchise Tax, which historically led to commercial real estate being held primarily in limited partnerships. C-corporations are disfavoured in Pennsylvania for real estate ownership because they are subject to a 9.99% Corporate Net Income Tax.
Limited liability companies are the preferred entities for investing in real estate because they offer pass-through taxation and liability protection for investors and require only one entity.
Limited partnerships also offer pass-through taxation and liability protection for limited partners, but require a second entity to act as a general partner, which does not have liability protection.
S-corporations were used more widely in the 1990s and early 2000s before broad acceptance of limited liability companies, but are increasingly rare.
Pass-through entities including limited liability companies, limited partnerships and S-corporations all have full pass-through taxation. C-corporations are subject to Pennsylvania 9.99% Corporate Net Income Tax and, accordingly, are rarely used.
Governance requirements are addressed by Title 15 of the Pennsylvania statute. In general, parties have broad ability to address governance as desired in their governing documents:
Arrangements allowing for the occupation of real estate include the following:
In general there are ground leases of land and other leases for space within buildings. Meaningful care is needed to make ground leases financeable by the ground tenant for construction loan purposes. Credit tenant leases for select tenants with exceptional credit, which offer superior financing terms for landlords, are becoming more common.
Commercial rents and lease terms are not regulated in Pennsylvania. Residential leases are subject to significant requirements under Pennsylvania's Landlord Tenant Law.
The lease term, including extensions, is usually under the 30-year threshold that incurs transfer tax. Landlords typically seek lease terms of at least ten years for financing purposes. The effect of the rise of co-working space and COVID-19 on lease terms have not yet been fully felt.
Responsibility for repair items is often negotiated in commercial leases, but a general dividing line is that landlords are responsible for the core and shell while tenants are responsible for interior maintenance and repair.
Rent comprising both base rent and additional rent for net leases is typically paid monthly in advance, with an annual reconciliation of additional rent actual vs estimates in the first three to four months of the following year.
The rent schedule is negotiable, but typically it is paid monthly throughout the lease term with periodic increases, either annually or every five years.
This is purely contractual. Leases typically state the method for calculating increases, either a set amount, a periodic percentage increase or an increase tied to a government-published consumer price inflation index.
Leases are subject to transfer tax if the term including renewal options (unless at fair market value rent) is 30 years or more. Certain municipalities like the City of Philadelphia impose use and occupancy tax on properties used for business purposes.
Tenants may be required to pay a security deposit at the start of the lease. Tenants typically pay the cost to build out their space subject to negotiable tenant improvement allowances from landlords.
Landlords typically pay to maintain common areas in the first instance, subject to reimbursement by their tenants of their pro rata shares of common area maintenance expenses as additional rent.
Landlord will arrange for such utilities to be separately metered if possible, so each tenant can make direct payments to the applicable utility. If it is not possible to separately meter the utilities, each tenant will pay their pro rata share of the bill, based on their leasable area within the property.
In triple net leases, landlords pay the cost of insurance subject to pro rata reimbursement from tenants as additional rent. Tenant separately insure their premises.
Landlord can impose use limitations in leases. This is subject to negotiation and often goes hand-in-hand with negotiating restrictions on assignment and subletting. Zoning laws, pre-existing exclusive rights of other tenants, restrictive covenants and other matters of records may impose additional restrictions.
The tenant's rights to alter the premises are wholly contractual. In general, tenants may make decorative and non-structural alterations under a certain monetary threshold without the consent of landlord. For more extensive tenant improvements, landlords and their lenders typically have the right to review and approve plans and require lien waivers from tenant's contractor.
Residential leases are governed by the Landlord and Tenant Act of 1951 (68 P.S. Sections 250.101 – 250.510-B), which provides enhanced protection for residential tenants.
Tenant's insolvency is typically a lease default but US bankruptcy law pre-empts contract terms. A "debtor in possession" tenant in bankruptcy generally has the ability to accept or reject its lease obligations.
Landlords often require security deposits (one to three months' base rent is common) and/or a guaranty from the tenant's parent or owner.
A tenant does not have the right to continue to occupy the real estate after expiration or termination of the lease. The lease will usually have a provision stating that should tenant become a holdover tenant after lease expiration, rent increases to an amount typically between 125-200% of the base rent at lease expiration, and that landlord will not be obligated to continue performing any of its duties under the lease during the holdover term.
Default continuing beyond the applicable notice and cure period would give a landlord or tenant the right to terminate a lease.
The typical landlord remedy for a tenant default that continues beyond the applicable notice and cure period is to terminate the lease and retake possession. Pennsylvania leases often include a "confession of judgment" provision for monetary damages and possession, which is a meaningful procedural tool benefitting landlords. A confessed judgment can be opened for cause but is a strong tool for landlords.
In larger leases, the confession of judgment provision can be negotiated out by the tenant. A compromise position is to preserve the confession of judgment for possession but eliminate it for monetary damages.
In the absence of a confession of judgment provision, the eviction process typically takes three to six months and requires litigation in the local trial court.
A condemning authority can terminate a lease in connection with a condemnation. A lender may terminate a lease as part of a foreclosure, subject to any applicable subordination, nondisturbance and attornment agreement. Leases typically have mortgagee protection provisions. Allocating a condemnation award between landlord and tenant is subject to negotiation. Landlords typically take the position that the condemnation award should be landlord's with tenant permitted to pursue a separate claim for loss of its leasehold interest to the extent tenant's award does not diminish landlord's.
Fixed price, or "lump" or stipulated sum, is the most popular pricing mechanism across all types of construction (ie, residential, commercial, public). It can be used, to various degrees, with all project delivery systems, but is most common with traditional design-bid-build, where the owner separately contracts with the designer for the preparation of complete, ready for construction drawings and specifications, which they then put out to bid or negotiate a price to construct.
Guaranteed Maximum Price (GMP) contracts are also used extensively, typically on more complex projects. Under the GMP price model, the constructor accounts for and is reimbursed the actual cost of construction, plus a fee expressed in terms of a percentage of the cost of the work, up to a guaranteed maximum amount. The contractor bears the risk of costs exceeding the guaranteed maximum.
If the cost of the work comes in below the guaranteed maximum, the owner and constructor may share in the savings as an incentive to the contractor to be cost-efficient. Reimbursement of the cost of the work, plus a fee, but without a guaranteed maximum price is, another pricing model, but is used less often due to its lack of budgetary certainty. This pricing model – essentially, time and material – is most appropriate for work of a piece meal or emergency nature, or where the contractor is otherwise unwilling to commit to a firm price or bear the risk of overruns.
Design-bid-build (DBB) is the most widely used project delivery system, typically referred to as "general contracting." The defining characteristic of general contracting is the division of responsibility between designer and builder. Responsibility for design lies solely with the architect, who is retained directly by and under separate contract with the owner.
The plans and specifications are then presented to the general contractor to build for a lump sum or fixed price. The contractor is responsible to build in strict accordance with the design. Should it deviate therefrom, it is liable for the cost to correct or replace the non-compliant work.
Conversely, if the contractor builds in accordance with the design, but the final product fails to meet the owner's performance needs, the contractor has no liability. Liability in this situation would fall on the designer, assuming the owner accurately conveyed their needs.
In contrast, under the Design-Build (DB) project delivery method, the owner enters into a single contract for both design and construction. Rather than contract with the owner, the architect and constructor are subcontractors to the Design-Builder. While the Design-Builder can be either an architect or a contractor, it is contractually responsible to the owner for the performance of both.
Engineer-Procure-Construct (EPC) is a particular type of Design-Build, used mostly on industrial, manufacturing or energy projects. With both the DB and EPC model, the owner specifies what it needs in terms of form, function and performance, referred to as the Owner's Program or Basis for Design. The DB or EPC entity takes the Owner's Program and performs the design and engineering work to meet the owner's requirements, subcontracts with the appropriate trade contractors to construct to that design, and delivers the final, completed facility to the owner on a turnkey basis.
The pricing model can be lump sum, or cost reimbursable subject to a guaranteed maximum price, with the later more common. It is also common for the contract to include testing and commissioning requirements tied to performance guarantees, and backed by repair warranties, cost adjustments and/or bonuses.
As a rule, risk should be allocated to the party best situated to avoid it and/or absorb any associated loss. There are myriad contract clauses that serve this purpose. Changed or unforeseen conditions clauses assign the risk of unknown and unanticipated subsurface or concealed conditions to the owner. If and when such conditions are encountered, the cost to address them is charged to the owner through the change order process.
This allocation of risk serves the interests of both the owner and the contractor, as the contractor knows that it need not account for the risk of the unknown when pricing the work, and the owner does not have to pay for a contingency that may never materialize. Provisions regarding the discovery and abatement of hazardous materials such as asbestos or lead paint operate in the same fashion. Exculpatory clauses shifting the risk of unknown or unanticipated conditions to the contractor may be used and are generally enforceable, except where the owner has withheld or misrepresented information to which the contractor does not have access, in which case such clauses may be deemed unenforceable as a result of the owner's "constructive fraud."
From the contractor's perspective, waivers of consequential damages and limitations on damages provide a safety net to ensure that the risk of loss does not outweigh the potential for profit. Warranties of repair, performance and payment bonds, and property and builder's risk insurance are additional risk management tools. The warranty of repair typically guaranties that the work will be compliant with the design and the materials used of the specified quality, and obligates the contractor to return and correct or replace deficient work at its cost. It also protects the contractor in that it gives it the right to perform the repairs with its own forces, which is far cheaper than having to reimburse the owner the cost of contracting with a third party.
Bonds and insurance are additional important risk management tools. Payment and performance bonds protect the owner against the contractor's failure to complete the work and/or pay its subcontractors and suppliers. Builder's Risk, Commercial General Liability, Worker's Compensation and other insurances protect against damage to or loss of the work in progress, or damage to other property, or injury to workers or third persons caused by the contractor. Indemnification and additional insurance coverage, where the owner is named as an insured, provides added protection as it requires the contractor, and its insurer, defend and hold the owner harmless from third party claims.
Schedule-related risk can be managed through a number of contractual provisions that address responsibility for, entitlement to relief from, and/or the obligation to recover delays to the schedule. The starting point for all such clauses is the notion that "time is of the essence" in the performance of the work. A "time is of the essence" provision identifies timeliness of performance – ie, completing the work within the allotted time or by the identified deadline – as a material obligation.
When time is of the essence, the contractor's failure to employ sufficient resources to progress the work as needed to meet the schedule constitutes a material breach, which if not cured, may warrant termination. Short of termination, the owner may have the right to augment the contractor's labor or other resources and charge the cost to the contractor, or direct the contractor to accelerate its work by employing additional labor or equipment, working additional shifts or overtime, and again charge such costs to the contractor.
The owner typically has the right to direct such action and the contractor is obligated to comply, subject to the right to challenge the cause of the delays and/or the necessity of the additional efforts. If it is ultimately determined that the contractor was not responsible for the delay, it is entitled to recover the additional costs from the owner through a change order or equitable adjustment to the contract sum.
Conversely, "no damages for delay" clauses limit the contractor's right to relief from delays for which it is not responsible. A no damages for delay clause provides that, in the case of excusable delays such as weather, the contractor is entitled to an extension of time, but no additional costs. Such clauses are enforceable, except where the owner has caused the delay by failing to perform an obligation under the contract or has interfered with the contractor in the performance of its work.
Liquidated damages clauses stipulate that the owner will suffer additional costs and/or losses if the project does not finish on time, and places an agreed upon value on ("liquidates") those losses. This avoids the owner having to prove its actual losses, but also limits its recovery to the stipulated amount. Early completion bonuses may serve as a counterweight to liquidated damages provisions; whereas, liquidated damages charge the contractor for each day it fails to reach completion past the contractual completion date, early completion bonuses provide an award. Both are typically expressed as per diem – or per day – amounts.
While liquidated damages may be subject to challenge as an unenforceable penalty if they do not represent a good faith effort to estimate, and do not bear a reasonable relationship to, the actual losses suffered, early completion bonuses are not similarly subject to challenge.
Performance, payment, maintenance and/or warranty bonds are the most common form of security provided on construction projects. Payment and performance bonds issued by qualified sureties and naming the owner and subcontractors and suppliers as beneficiaries guaranty completion of the work and payment to those supplying labor and materials. Payment and performance bonds are typically written to provide that, if the contractor (the "Principal Obligor") fails to pay its subcontractors or suppliers, or fails to complete the work, the surety (as "Secondary Obligor") will pay what is owed and arrange for completion of the work.
When a surety is called on to meet its guaranty, it "steps into the shoes" of the Principal Obligor and is entitled to any rights or defences it may have under the contract. Thus, compliance with the contract provisions regarding termination are critically important where the owner intends to call on the surety to make payment or complete the work. The surety is also entitled to use all remaining contract funds, which must be retained for benefit of the surety. If those funds are insufficient to complete the work, however, the Surety is responsible for the excess cost up to the "penal sum" (limit) of the bond.
Letters of credit, parent corporation guarantees, or other forms of performance or payment security are used much less commonly.
Subcontractors and suppliers providing labor and materials to a project have the right to file a mechanics lien, provided they comply with certain notice and filing deadlines. Generally speaking, a lien must be filed within six months of completion of the work and a Complaint to enforce within two years. The owner's ability to require contractors to agree not to file liens such as no-lien agreements or advance lien waivers is limited.
No-lien agreements and lien waivers are enforceable only if a bond is posted to secure payment, and a Notice of Limitation is filed in the appropriate court office before the work commences. Owners can also limit a subcontractor's or supplier's right of recovery to the remaining unpaid balance on the general contract by filing a notice of the pertinent contract payment provisions prior to the start of the work. Validly filed mechanics liens relate back to the first date on which work was performed for priority purposes.
Liens may be removed by "bonding off," substituting a bond as security, or by payment and discharge. Owners typically include a provision in the contract for construction obligating the general contractor to timely pay its subcontractors and suppliers, keep the project free of liens, and to remove any liens (through bonding or discharge) if filed. If the contractor allows a lien to be filed and fails to have it timely removed, the owner will have the right to bond off or discharge the lien by settlement of the claim and may withhold the monies from any monies owed the general contractor.
A certificate of use and occupancy is required prior to occupation of any newly constructed or substantially renovated building, or upon change of use. Certificates of Occupancy are issued by the municipality in which the building is located.
The certificate of occupancy establishes the "class" of approved use for the property, such as single family or multifamily residential, retail, mixed use, commercial, or industrial.
A certificate of occupancy serves as proof that a property has complied with all standards and codes and is fit for occupancy.
The need for other specific approvals and certifications required prior to occupancy depend on the nature and use of the structure. All structures will require a building permit prior to the start of construction, and specific elements, such as electrical, plumbing, mechanical and HVAC may require inspection and certification as compliant with the applicable building codes. Certain facilities, such as hospitals or nursing homes, may also require certification by state licensing agencies.
Seller (or its owners for a pass-through entity) will be subject to federal capital gains tax on the sale of real estate, with possible taxation at ordinary income to the extent of depreciation recapture, and Pennsylvania state tax on the gain as well, unless the tax is deferred by a 1031 like-kind-exchange or investing the capital gain in a federal Opportunity Zone. The seller and buyer will also be responsible for payment of state and local transfer tax, which ranges from 2%-5% and by custom is split 50-50 between the parties.
Parties commonly undertake share transfers rather than asset transfers to mitigate transfer tax.
The purchase price can be allocated between real property and personal property, sometimes supported by a cost segregation study prepared by an accounting firm (though note the difference in the definition of real property for federal tax purposes and state law purposes).
Ownership structures are available to largely mitigate transfer tax on exit, which need to be established at acquisition.
Some municipalities like the City of Philadelphia impose a use and occupancy tax on the use of real estate for business purposes. There are exemptions depending on the jurisdiction, which may include portions of property occupied by non-profit businesses, businesses subject to hotel occupancy tax, vacant portions of buildings and certain other items.
In general, when a foreign person sells a US real property interest, 15% withholding is required. There are certain exemptions related to the sale of a personal residence.
Real estate tax abatements are available for new construction on a jurisdiction-by-jurisdiction basis under the state's Local Economic Revitalization Tax Act, which permits a maximum abatement of ten years and 100% of incremental assessment resulting from new construction. Jurisdictions may provide lesser benefits but not greater. The property must have been determined by the municipality to be blighted and deteriorated to be potentially eligible and each of the three taxing jurisdictions (school district, municipality, county) must separately pass a tax abatement ordinance.
Tax increment financing is also available on a municipality-by-municipality level supported by ordinances from each of the three taxing bodies. Where available, tax increment financing (TIF) financing supports borrowing to fund a portion of development costs secured primarily by the pledge by the taxing bodies of a portion (eg, 65%-75%) of incremental tax revenue resulting from development. The borrowing is often secured by a developer guaranty as well (typically called a "minimum payment agreement"), and may involve a prohibition on appealing the property's ad valorem real estate tax assessment below the level needed to support debt service payments on the TIF bonds.
A TIF district may be further supported by a "Neighborhood Improvement District" that permits supplemental assessments on properties in the District to pay debt service on the TIF bonds if for any reason the pledged incremental tax revenue is insufficient.
Real property and other taxes may be abated for a period of time for properties located in a state "Keystone Opportunity Zone" or related program.
The ability to defer capital gains tax on capital gain invested in Opportunity Zones is an attractive tool but one that has not yet been widely used in practice in Pennsylvania due to the effects of COVID-19 and time limits and the ongoing evolution of federal tax regulations regarding Opportunity Zone rules and procedures.