Relating to Real Estate

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Relating to Real Estate November 2014

In this issue:

THE MARYLAND – VIRGINIA BOUNDARY SHIFTS AND CHANGES

The Court of Special Appeals in Potomac Shores, Inc. v. River Riders, Inc., 219 Md. App. 29, 98 A.3d 1048 (2014), recently held that the boundary line between Maryland and Virginia, west of the District of Columbia, although fixed theoretically, actually shifts over time along with erosion and accretion of the south bank of the Potomac River.

Potomac Shores, Inc. owns property on the southern bank of the upper Potomac River, about one mile downstream from Harpers Ferry, West Virginia. Potomac Shores, Inc. claimed title through an 1873 deed in its chain of title which described the boundary as the dividing line between Maryland and Virginia “bounding the south shore of the Potomac River at medium water mark.” Since 1873, there has been accretion of the shoreline. Employees of River Riders, Inc. frequently crossed over the Potomac by using a strip of land to which Potomac Shores, Inc. claimed ownership. Potomac Shores, Inc. filed suit in Maryland, alleging a trespass. The Circuit Court of Washington County held that it did not have jurisdiction because the property in question is in Virginia. Potomac Shores, Inc. appealed.

The Court of Special Appeals heard oral arguments and then asked the Attorneys General of Maryland and Virginia to file amici curiae briefs. The Attorneys General filed a joint brief in which they agreed with the Circuit Court. The Court of Special Appeals did as well, and so it affirmed the Circuit Court decision.

MORE.

FANNIE MAE RELEASES IDOT RECORDATION TAX ESCROWS

Fannie Mae has recently authorized the release of funds held in escrow to pay the recordation taxes on indemnity deeds of trust (“IDOTs”) because of the determination that such taxes will never be due from the lenders under the circumstances for which the escrows were established.

An IDOT is a deed of trust which secures a guaranty or indemnification obligation, rather than a direct borrowing obligation. In the past, an IDOT would be used in a commercial mortgage refinance transaction which was structured as a loan to an entity other than the property owner. The property owner then would guarantee the loan and secure that guaranty by granting an IDOT on the property. Historically, regardless of the amount of the loan, an IDOT would not be taxable when it was recorded. In 2012, legislation limited IDOTs that could be recorded without incurring recordation taxes to those that secured loans of less than $1 million. That limit was raised to $3 million in 2013.

Recordation tax was not due on the recordation of IDOTs (and still is not due on the recordation of an IDOT securing a loan of less than $3 million) because under § 12-105(f) of the Tax Property Article of the Maryland Code, recordation tax is only due on a deed of trust to the extent that the amount of the debt is incurred. At the time when an IDOT is recorded the debt secured by the IDOT (that is, the obligation secured by the guaranty) has not come due; therefore, no recordation tax is then due. If and when there is a default under the promissory note, the default causes the liability under the guaranty to be immediately due and payable, and recordation tax becomes due.

MORE.

D.C. DEED OF TRUST MAY BE EXTINGUISHED ON FORECLOSURE SALE FOR FAILURE TO PAY CONDOMINIUM ASSESSMENTS

On August 28, 2014, the District of Columbia Court of Appeals held in Chase Plaza Condominium Association, Inc. and Darcy, LLC v. JPMorgan Chase Bank, 98 A.3d 166 (D.C. 2014), that a first deed of trust on a condominium unit may be extinguished by a foreclosure sale that is held to satisfy six months of unpaid condominium assessments.

In July, 2005, Brian York purchased a condominium unit at the Charles Plaza Condominium in Washington, D.C., which he financed with a loan for $280,000 secured by a deed of trust on the unit. The lender under the deed of trust was First Financial Services, Inc., and Mortgage Electronic Registration Systems, Inc. (MERS) was named as the beneficiary and nominee of First Financial. MERS assigned its interest in the deed of trust to Washington Mutual. JPMorgan Chase Bank, N.A. (JPMorgan) acquired the deed of trust when it purchased most of the assets of Washington Mutual in 2008.

Mr. York defaulted in his obligations to pay condominium assessments and in his obligations under the deed of trust. In April, 2009, the condominium association (Chase Plaza) recorded a condominium assessment lien against the property. It then began foreclosure proceedings against York, seeking to recover six months of unpaid assessments, being in the amount of $9,415. Chase Plaza took the normal steps to prosecute the foreclosure. Significantly, its notice of foreclosure specified that the sale would not be subject to the first deed of trust. Darcy, LLC purchased the property at the foreclosure sale for $10,000.

MORE.

NO RECORDATION OR TRANSFER TAXES ARE DUE ON THE FINAL STEP OF A REVERSE 1031

Background

Under Section 1031 of the Internal Revenue Code, a taxpayer may exchange one real estate property for another and defer capital gains on the transaction. This is called a “1031 exchange.” A “reverse like-kind exchange” or a “reverse 1031” is where the taxpayer acquires the replacement property prior to selling the current property (also called the “relinquished property”). In a reverse 1031, the new property is held by, or, as referred to by tax professionals, “parked with” a third party (the qualified intermediary or “QI”) until the relinquished property is sold. Simultaneously with the sale of the relinquished property, the QI transfers the newly acquired property to the taxpayer.

Question

Will there be a second Maryland transfer tax or recordation tax on the transfer of the replacement property to the taxpayer from the QI?

Short Answer

Whether the transfer of the newly acquired property is by deed (or through an assignment of the membership interests in the LLC that the QI forms to own the property in order to avoid personal liability), it will be tax exempt.

Detailed Answer

The transfer which is highlighted in the question refers to the last step of a series of transactions that are designed as a “reverse like-kind exchange.”

MORE.

NO ACTIONABLE NUISANCE FROM LIGHTS SHINING ON DRIVE-IN MOVIE

In Blue Ink, Ltd. v. Two Farms, Inc. d/b/a Royal Farms, Inc., 218 Md. App. 77, 96 A.3d 810 (2014), the Court of Special Appeals affirmed the order of the Circuit Court for Baltimore County which had set aside a jury verdict finding that the lights at a Royal Farms store in Essex constituted a private nuisance to the Bengies Drive-In Movie Theatre. This is because in Maryland to recover for a private nuisance, the plaintiff needs to prove that the interference with the plaintiff’s property rights is both unreasonable and substantial. Moreover, the damage created by the interference must be “objectively reasonable” to an ordinary person.

The Bengies, Maryland’s last remaining drive-in theater, is located in a developed part of east Baltimore County. When the Royal Farms convenience store opened nearby, the owner of the Bengies, Jack Vogel, filed a complaint with the Baltimore County Department of Code Enforcement and then a lawsuit in the Circuit Court for Baltimore County. The suit included counts of negligence, trespass, and private nuisance relating to the lights at the Royal Farms which can be seen from the drive-in.

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DEED WAS NOT EFFECTIVE WHEN HUSBAND PUT IT IN A CABINET

In Daniels v. Daniels, 217 Md. App. 406, 94 A.3d 121 (2014), the Court of Special Appeals held that constructive delivery of a deed did not occur where the grantor kept the executed deed in a filing cabinet, and therefore maintained control over the deed such that he could revoke or destroy it.
The grantor, who had fee simple title to the subject property, executed a deed naming himself and his wife as tenants by the entirety. The grantor did not record the deed, but instead told his wife that he added her to the deed and put it in a bedroom filing cabinet that contained all of the couple’s important papers. On the day of the grantor’s death, his wife was looking through the filing cabinet and discovered the unrecorded deed. Upon consulting with counsel a few weeks later, she recorded the deed.

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SPEAKING OF REAL ESTATE

AWARDS / RECOGNITION

Jeff Spatz was honored as one of the 2014 Power Players by Baltimore SmartCEO Magazine, including top attorneys, bankers, and accountants, on September 18, 2014 at the Grand Historic Venue of the Tremont Hotel in Baltimore. In the picture below, Searle Mitnick (left) and Ed Levin (right) joined Jeff when he received his award.

PRESENTATIONS AND PUBLICATIONS

Tim Chriss and Ed Levin were panelists at the 25th Annual Advanced Real Property Institute sponsored by the Maryland State Bar Association, which was held in Columbia, Maryland on October 1, 2014, on the topic “SNDAs – Who Needs Them and What Should They Say (Subordination Non-Disturbance and Attornment Agreements)?”

Jeffrey Spatz chaired the Advanced Tax Institute - Day 1 - Current Tax Issues & Business Tax Update - New Legislation, Cases, Regs, Rulings, Procedures, Notices & Announcements, sponsored by the Maryland State Bar Association, Inc. (the “MSBA”) and the Maryland Association of Certified Public Accountants, Inc. (“MACPA”), on Monday, November 3, 2014 at Martin's West.

Ed Levin wrote “The Maryland-Virginia Boundary Shifts and Changes” published in The Daily Record, Baltimore, Maryland (September 24, 2014); a version of that article is included in this issue.

Ed Levin wrote “D.C. Condo Assessment Can Extinguish Deed of Trust” published in The Daily Record, Baltimore, Maryland (October 14, 2014); a version of that article is included in this issue.

Ed Levin will be a panelist on “Subordination, Non-Disturbance and Attornment Agreements in Commercial Leasing and Real Estate Finance,” Strafford Webinar, November 13, 2014 (with John Matthew Trott of Cox, Castle & Nicolson LLP in Los Angeles).