By: Marc B. Bergoffen

Bregman, Berbert, Schwartz & Gilday, LLC

As a new member on the Section Council, I am pleased to be taking the reins from Ron Deutsch as the editor of Ground Rules. So far this year, the economic climate has been rather stormy, especially in the real estate field; and it remains to be seen whether the coming months will bring more April showers than May flowers. In this spring edition, we feature articles on the General Assembly's new tax on the transfer of controlling interests in real property entities, a recent foreclosure case from the Court of Appeals, mold issues facing owners of real property, as well as others. We hope you enjoy this edition and if you have a topic of interest, please feel free to submit an article for the next edition.

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By: Bruce L. Benshoof

Ballard Spahr Andrews & Ingersoll, LLP

Although Maryland's recordation and transfer taxes were originally imposed in exchange for the numerous legal benefits derived from recording deeds and other instruments in the public records, such taxes soon will apply to a type of transfer that does not avail itself of those benefits. legislature Under §7 of the Tax Reform Act of 2007 (2007 Special Session, Ch. 3), beginning July 1, 2008, recordation and transfer taxes will be imposed on the consideration payable of any transfer of a "controlling interest" in a "real property entity." Depending on the county or counties in which the real property is located, the aggregate tax can range from approximately 1.2% to 3% of the "consideration payable" for such transfers. The stated intent of the new law is to close what the General Assembly has viewed as a loophole in the law by taxing the transfer of ownership of an entity which owns real property in the same manner as if the transfer was accomplished by conveying by deed the real estate owned by such entity. The following summarizes the key parts of the new law:

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By: Ronald S. Deutsch
Cohn, Goldberg & Deutsch, LLC

In a potentially landmark case, the Maryland Court of Appeals has decided not to change the foreclosure rules in the State. Specifically, in the recent case of Atta-Poku v. Friedman, 403 Md. 47 (2008), the Court ruled that a lender may foreclose on a home when the lender allegedly had possession of the funds to pay-off the mortgage through a settlement company; and that a homeowner can not successfully appeal a foreclosure when he or she has failed to make efforts to stay the proceedings and also failed to file a required bond. In general, the ability to appeal, and preserve claims against a lender continues to be difficult once a sale has been ratified and the property transferred.

The facts presented were as follows: Kwaku “Richard” Atta-Poku emigrated from Ghana in 1992. He attended computer classes in New York and subsequently relocated to Maryland, where he began a taxi cab business. On October 11, 2000, Atta-Poku purchased a townhouse in Columbia, Maryland and obtained a mortgage in the amount of $97,750.00. In March, 2001 he contacted his lender to refinance that mortgage, solely to obtain a lower rate, receiving no cash out. The original lender was a bank, while the refinancing lender was a so called home loan corporation. Both the bank and the home loan corporation bore the same name but at the time were separate free standing institutions with separate addresses and corporate identities. The settlement documents show that the Home Loan Corporation paid a fee to mortgage broker 1st Service Mortgage, Inc. who in turn directed Atta-Poku to a settlement company to conduct the refinance settlement. Settlement occurred but the Bank was never paid off. Although a copy of a “pay-off” check in the amount of $96,599.74 was produced, the reverse side of the check did not show that the check was ever negotiated. The settlement agent later went to federal prison for embezzlement (unrelated to this case).

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For 2007-2008

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By: Mark D. Dopkin
Tydings & Rosenberg LLP

As most of you know, the Real Property Records Improvement Fund (the “Fund”) was created in 1991 to aid the operation of the Clerks’ Offices to eliminate the backlog in recording and indexing documents in the Land Records. The 1991 enabling legislation provided the Fund only could be “used to repair, replace, improve, modernize and update office equipment and equipment-related services to the Land Records Office of the Clerk of the Circuit Court for each county.” It had a limited life span of five years and was to sunset in 1996. Since its inception, under the direction of the Administrative Office of the Courts (“AOC”), millions of dollars have been spent not only to eliminate the backlog in recording, but to computerize the process. In addition, with the exceptional assistance of the Archives, we now have web access to indexes from approximately 1972 forward, as well as access to almost all documents recorded in the Land Records and Plat Records in all of the counties and Baltimore City. As of this writing, 234,161 land record and index books are now available on line. This represents 167,335,768 images. The Fund is now financing the AOC’s pilot program for electronic filing of land record documents.

For the first half of the current fiscal year the Fund collected $13,000,000. The balance on December 31 was $77,898,000. However, the prospects for the Fund are not without concerns. The 1995 Budget Reconciliation and Financing Act substantially expanded the Fund’s limited purpose. Thereafter, the Fund was to be used “to pay the operating expenses of the Land Records Offices of the Clerks of the Circuit Courts.” The original five-year sunset was extended and an Oversight Committee was mandated. The sunset was extended to June 30, 2009, and the fee was raised from $5.00 to $20.00 per instrument. (The Oversight Committee is comprised of one representative from the Maryland State Bar Association, the Maryland Land Title Association, the Clerks of Court and the Maryland Archives and charged with reviewing the status of the Fund and its operation by the Administrative Office of the Courts).

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Shawn A. Goldfaden, Esq.
Division Manager for Asset Preservation, Inc.
Maryland State Counsel for Stewart Title Guaranty Company

Although IRC Sec. 121 permits taxpayers to exclude up to $250,000 if single and $500,000 if married filing jointly of the capital gain on the sale of the taxpayers primary residence if at least one of the homeowners has used the property as their primary residence for 24 out of the last 60 months, homeowners are increasingly seeing proceeds from sales in excess of such exemption. As such, homeowners must look for ways to defer the tax on gain. One method of accomplishing this goal would be for the taxpayer to establish a new primary residence, convert the existing property into an investment opportunity and hold on to it for the requisite period before utilizing a §1031 exchange (most tax advisors believe that renting the property for one or two years is sufficient). Once the one or two year rental term expires, the taxpayer can segregate their tax liability by using IRC §121 and §1031 to exclude the first $250,000 or $500,000 and defer taxes on the remainder of the proceeds by using the excess proceeds in a §1031 exchange transaction (ex.: home bought for $500,000, sold for $2 million, §121 exclusion on $500,000 and §1031 deferral on remaining $1 million). Of course the couple will have to follow the required rules of §1031 exchanges in order for them to leverage their capital gain tax deferral, substituting their property with a “like-kind” asset which will hopefully be worth considerably more than the tax on their gain.

Another opportunity exists for those taxpayers who own property as a home and as a business proportionately appurtenant. For instance, a duplex in which the owner resides in one section of the property, by rents out the remainder or uses that portion as a home office may qualify for a segregated §1031 exchange. IRS private letter ruling 2005-14 makes it clear that the exchange of a home can qualify for both the Code §121 home sale exclusion and Code §1031 like-kind exchange deferral. This can occur where the property was used as a principal residence and a business consecutively (e.g., use as a principal residence followed by rental of the property) or concurrently (a portion of the home used as a principal residence and a portion used as a home office). Make sure your clients understand that an accountant is generally needed to determine the value allocated to the residence portion and to the remaining units held for investment. A tax professional may use factors such as the square footage or the quality and value of improvements to each unit in determining what percentage is considered the primary residence and what percentage is allocated to the exchange portion. [Note: Proper closing techniques must also be applied.

Caveat: Private letter rulings are based upon very specific scenarios and are not to be interpreted or applied broadly.

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By: Raymond Daniel Burke

When mold was discovered in part of the Hilton Hawaiian Village in Honolulu, it ultimately resulted in the closing for more than a year of an entire 453-room 25-story tower. It is reported that Hilton spent some $20 Million on consulting and investigation costs, and an additional $35 Million in the remediation. This is one notable example among many of how the presence and growth of mold in homes and commercial buildings has developed into a serious issue that has potentially far-reaching consequences for residential and commercial property owners and managers, as well as for the construction and insurance industries.

Several states have established task forces to study mold and its effect on buildings and indoor air quality. However, the intelligent dialogue required for the development of proper standards for mold exposure and remediation has, in large part, been drowned out by extreme voices. On the one hand are those who summarily dismiss the issue as the fabricated product of a conspiracy between tort lawyers and a developing cottage industry of mold remediation consultants. On the other are those readily prepared to broadly attribute a wide variety of medical conditions to the unhealthy environment of “sick buildings.”

While it is true that mold is an ancient life form that has, throughout history, been the constant companion of humanity, its recent prominence as an indoor health issue is explained by two features of modern building techniques – the use of materials containing high concentrations of cellulose and other fibers upon which molds feed, and the employment of insulating materials and methods that restrict ventilation. Given the inviting food source provided by present day building material, all that is required for vigorous mold growth and amplification is the presence of water and a building assembly that prevents the moisture from escaping or drying out.
One need not establish any causal connection between the presence of mold and health issues in order to recognize the need for proper mold removal. Indeed, putting health matters entirely aside, molds deteriorate the building materials on which they feed, necessitating the repair of affected components. Where structural elements are involved, this can become a matter of building stability as well as function. Additionally, because of the manner in which they digest materials, molds give off undesirable odors and diminish aesthetic appearance, thereby degrading the indoor environment and decreasing property values.

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By: Jeff Zyontz, Esq.
Legislative Counsel for the Montgomery County Council

What is the relationship between traffic and zoning? Traffic issues have actually predated the promulgation of the first zoning laws by more than a century. As early as 1812, the courts have found that the obstruction of the King's highway constituted a public nuisance and was therefore indictable at common law. A nuisance is something that can be avoided by the use of a locality’s power to act on behalf of its health, safety, and general welfare. In 1889, traffic congestion which caused a traffic obstruction was determined to be a nuisance by the New York Court of Appeals. The zoning power grew out of a locality’s authority to abate public nuisances through its police powers. Through the zoning power, localities have attempted to regulate the impacts that traffic has on the use of land. Although

How is traffic considered when rezoning land?

Maryland courts have been particularly concerned about traffic when rezoning or special exception issues are presented. Traffic concerns may be a material consideration in any rezoning decision. When traffic considerations were ignored by the decision maker, courts have overturned the decision. The decision maker’s conclusion must be fairly debatable to avoid being arbitrary. The amount of evidence required to make an issue fairly debatable is not great. In one often cited case, witness testimony of long traffic queues and traffic accidents was sufficient to support a decision to deny a rezoning. In another case, evidence of dangerous traffic conditions and traffic counts by one witness was sufficient to warrant a denial of the requested rezoning.

Although an increase in traffic should be considered in rezoning cases, it is not controlling in all cases. More weight can be given to some testimony on the effect of a rezoning on traffic conditions than simply an allegation of increased traffic.

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