Lexington Approves Local Minimum Wage Ordinance

Lexington2Per the Bluegrass Hospitality Association:

“As you have probably already heard, the local minimum wage ordinance was approved by Council (9 to 6) at last night’s meeting.

The ordinance will increase minimum wage in Fayette County to the following on the below dates:

July 1, 2016                  $8.20

July 1, 2017                  $9.15

July 1, 2018                  $10.10

There was over two hours of public comment prior to the almost 9:00 PM vote.  As expected, there were passionate pleas and points both in support and against.

Several Council Members spoke prior to the vote.  The consensus is that raising the minimum wage does not ultimately solve the underlying issues long-term.  As such, Council will continue to work on programs to address long-term solutions to better wages like education, housing, transportation, childcare, etc.”

For more information on the vote itself:

http://www.kentucky.com/news/local/counties/fayette-county/article45566235.html

For more information on how this vote will affect your business, contact the attorneys at McBrayer.

IRS: Bad News for REIT Spin-off Conversions

In late September, the IRS sent up as large of a red flag as possible concerning Real Estate Investment Trust (“REIT”) spinoffs in IRS Notice 2015-59 and Rev. Proc. 2015-43. While these issuances did not change existing law, they did state a new no-rule policy with regard to tax-deferred PropCo/OpCo spin-offs under Section 355 of the Internal Revenue Code (In these types of transactions, a property-holding company (“PropCo”) which is a subsidiary of an operating company (“OpCo”), purchases real estate owned by OpCo, then leases it back to OpCo and claims status as an REIT). Under the latest word from the IRS, unless there are “unique and compelling” circumstances, IRS will not issue private letter rulings on these types of transactions if real property owned by either PropCo or OpCo is the basis for REIT election for either company. Coupled with statements from the agency that these spin-offs and conversions give the agency “significant concerns,” these proclamations create significant market uncertainty as to the validity of such transactions.

BUILDINGTo do such an REIT spin-off transaction, an existing company must qualify that the REIT has a 5-year history as an active trade or business. It became a matter of course that such a company would ask the IRS for a private letter ruling on this qualification. Now, however, the IRS feels that these types of transactions might pose problems under Section 355 when the transaction spins off an REIT from a C corporation.

For one thing, both PropCo and OpCo must both be engaged in an active trade or business, and a spin-off to merely hold property may fail this requirement. The IRS also expanded the exclusion on private letter rulings to include transactions where less than 5% of a corporation’s assets are relied upon to fulfill the active trade or business requirement, so the IRS takes this requirement especially seriously. The spin-off must also have a substantial non-tax business purpose – the transaction cannot be a mere tax avoidance measure. Finally, the transaction cannot serve mainly as a device for the distribution of earnings or profits for either company. To put it plainly, a company cannot spin off an REIT to a property-holding subsidiary merely for the tax benefit and expect the transaction to be tax-deferred, and the IRS is no longer going to give its seal of approval to such transactions up front.

The tax consequences of such a transaction failing to qualify under Section 355 can be significant, so this move on the part of the IRS injects a chill into the REIT marketplace. These releases suggest that the IRS will pay closer attention to such transactions in the future as well, so they should be structured with the utmost care and with significant emphasis placed on meeting the requirements of Section 355. For more information about REIT spin-offs and the tax treatment of such transactions after these IRS issuances, please contact the attorneys of McBrayer.

Preston WorleyPreston Clark Worley is an associate with McBrayer, McGinnis, Leslie & Kirkland, PLLC. Mr. Worley concentrates his practice in employment law, land development, telecommunications, real estate and affordable housing. He is located in the firm’s Lexington office and can be reached at pworley@mmlk.com or at (859) 231-8780.

This article is intended as a summary of  state and federal law and does not constitute legal advice.

Halloween Ghouls, Zombie Nativities, Toilets with Antlers, and other Offensive Holiday Displays: Zoning Law, the First Amendment and the Right to be Offensive

It’s that time of year again. Seasonal holiday displays are beginning to dot our subdivisions and public spaces. Although most will conform to mainstream cultural, religious and societal norms, the ones that don’t create discomfort or even outrage, spurring calls for government authorities to order them to be removed.  When governments do not act, it is not unheard of for citizens to take on the task themselves by removing or destroying the offensive display, risking criminal charges or even arrest in doing so.

There are two broad categories of offensive displays, those on private property and those placed by governments on public property; each has differing legal considerations. Property owners have a broad first amendment right to free expression of their views, and governments are limited in their power to have seasonal displays removed due to their offensive content, no matter how controversial or upsetting to neighbors. Thus begets a resident who decorated his house on a busy street just down from an elementary school with a Halloween display that included the typical spiders and ghosts but also a gas mask wearing nun holding a crucifix, a skeleton, and scenes of graphic violence. Neighbors asked local law enforcement officers to shut it down, but they correctly determined that offensive as it was it did not violate local laws. The display was permitted to remain.

20151010_224354Officials unsuccessfully tried to order a home owner, a plumber, to remove ten toilets from his roof that he festooned with seasonal decorations such as reindeer antlers at Christmas, cupids on Valentine’s Day and leprechauns on St. Patrick’s Day.  A horror movie fan who placed a nativity scene in front of his home that included zombie representations for Mary, Joseph and the wise men as well as a little zombie Jesus was ordered to remove the display on the basis that the structure was an illegal accessory structure, despite the fact that such action was not taken for more traditional nativity scenes.

A home owner who erected a large, arrow pierced, heart shaped sign illuminated with pink lights for  Valentine’s Day was cited for illegally having holiday lights and decorations except from mid-November to mid-January. Not only did this raise Equal Protection issues for followers of religions that celebrate holidays that fall outside the allowable dates, but it also burdens the home owners’ protected right to express themselves on their own property free from governmental interference.

Seasonal displays that contain religious elements that are placed on public property must  allow the incorporation of symbols or themes of other religions. Otherwise such displays would unconstitutionally advance one religion over another. Traditional seasonal displays that contain Judeo Christian religious themes such as nativity scenes or menorahs must offer room for displays of less conventional religious beliefs.  Under recent Supreme Court rulings, governments are limited in their power to determine the sincerity of the proponents’ religious beliefs. Thus, around the country holiday displays of creches and menorahs have to make room, if requested, for displays by groups such as the Satanic Temple, the American Humanist Association, atheist groups, and Pastafarians (who profess to venerate the flying spaghetti monster).  Outraged citizens in several cases, such as a women in Florida wearing a “take a stand against Satan” t shirt destroyed a Satanic Temple display on the Florida state capitol grounds that depicted an angel flying in to the flames of Hell.  The display was restored and the woman was arrested. The spokesperson for the Christian group who arranged the traditional nativity scene on the capitol grounds stated that as much as she did not like the Satanic Temple display, it is a matter of free speech and should not be vandalized.

Over time it will be interesting to see how non-traditional seasonal displays, particularly on public property, are treated. Either many new and original manifestations of religious expression will be permitted to join the majority Judeo-Christian displays, or governments and the public will simply decide to prohibit all such displays.

CWestoverChristine Neal Westover is an attorney in the Lexington office of McBrayer. Ms. Westover has extensive experience practicing law in both the public and the private sector. The focus of Ms. Westover’s experience and area of practice is land use law since her assignment in 1991 as legal advisor to the boards, commissions and divisions of government within Lexington Fayette County on all matters related to planning, zoning and land use law. Ms. Westover has an extremely deep and broad expertise of the laws governing land use in Kentucky and the procedural and substantive complexities that underpin planning and zoning matters. She also has significant experience dealing with governmental divisions such as Building Inspection, Code Enforcement and other administrative bodies due to their regulatory authority in land use matters. Ms. Westover can be reached at cwestover@mmlk.com or (859) 231-8780, ext. 137.

Changes in Environmental Due Diligence in Commercial Real Estate Prevent Toxic Investments

Financial due diligence in a commercial real estate purchase is a necessity, but equally important to purchasers and lenders is environmental due diligence. Many properties may have environmental issues from prior use, and purchasers of those properties may be on the hook for risk of loss should those issues materialize after closing. The purchaser would likely bear the responsibility for cleanup of any contaminated site under Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). This can also pose a problem for the lender as well, as an extensive cleanup operation may impact the purchaser’s ability to repay the loan or impair the value of the property. Further, a lender on the purchase may be jointly and severally liable for cleanup costs. Luckily for both purchaser and lender, an environmental site assessment (“ESA”) on the site prior to purchase – environmental due diligence – creates a safe harbor for innocent landowners and lenders involved in the purchase of real estate after conducting an ESA that showed no concerns for hazardous substances on the site.

Rusty fuel and chemical drums on Arctic coastThe EPA set the original standard for these assessments – American Society for Testing and Materials (“ASTM”) E1527-05 – in 2005. Starting in December 2013, the Environmental Protection Agency (“EPA”) allowed purchasers to choose between using an old standard or the new ASTM International E1527-13, “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process” (“Phase I”). On October 6, 2014, however, the EPA published a final rule that phased out the old standard as of October 6, 2015. Buyers must now comply with the new Phase I as the All Appropriate Inquiries (“AAI”) standard in environmental due diligence.

There are three significant changes under this new standard that buyers should be aware of. First, all purchasers will need to evaluate potential vapor migration from contaminated soil or groundwater. Second, the new standard allows for contamination that is still in place but controlled to be designated as a “Controlled Recognized Environmental Condition” (“CREC”). Also, “Historical Recognized Environmental Conditions” (“HRECs”) are now defined to be past releases of hazardous substances that have been remediated and are now available for unrestricted residential use. Finally, the new standard imposes more rigorous file review requirements, requiring potential purchasers to search for any environmental liens or limitations on activity use against the property. Environmental consultants must conduct a review of relevant agency files when the property or adjacent properties are found in a regulatory database.

Commercial real estate purchasers and lenders no longer have a choice – the new Phase I standard is here to stay, so compliance is a mandatory facet of conducting due diligence on a sale. The new standard may create new headaches when the findings in a new Phase I report don’t jibe with the findings of a report under the old standard, creating barriers to finalizing the sale, so these assessments should be conducted as quickly as possible to allow all parties to review the results in advance of the closing. The attorneys of McBrayer can assist commercial real estate purchasers and lenders with the transition to this new standard of environmental due diligence, so don’t hesitate to contact us today.

E. CowlesEmily H. Cowles is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She joined McBrayer in 2015 after practicing for more than a decade for Morgan & Pottinger, P.S.C. Her law practice primarily focuses in all areas of creditor’s rights, the equine business in general, real estate, large and community banks, and businesses throughout Kentucky. Ms. Cowles also represents several Lexington based businesses in various capacities, including, but not limited to, the acquisition and sale of real property, litigation, transactions, leases, collections, and in their day-to-day operations. She can be reached at ecowles@mmlk.com or (859) 231-8780, ext. 216.

This article is intended as a summary of state and federal law and does not constitute legal advice.

Non-Conforming Uses

In its most basic form, a nonconforming use is the use of a property which is no longer a permitted use under current zoning regulations but was permitted under prior zoning (or, in some cases, before there was zoning). In effect, a prior permitted use is grandfathered in despite the current zoning status. For instance, imagine the neighborhood where you run a business is rezoned as a residential area. Does this mean you have to shut your doors? No. Non-conforming uses play a key role in real estate development as a creative solution to promote urban infill through reuse of existing properties, as it may allow a use that is not otherwise permissible

sketching of building construction on flying book over urban scene use for civil engineering and land development topic

There are two catches to non-conforming uses. The first catch is that the non-conforming use cannot substantially change the nature of the use in a more intense fashion. For instance, if an office building as non-conforming use has ten stories, the owner of the building cannot add two more stories to the building. The non-conforming use must be of the same type and intensity. The building owner could likely remove two stories from the building, making it an eight-story building. Once the building has been reduced, however, the building owner cannot then build two stories back on to the building, making it a ten-story building again. Once the non-conforming use has been reduced, it cannot be expanded again back to prior form.  In other words, non-conforming uses are a one-way street – you can stay where you are or de-intensify, but you can never expand.

The second catch is that the non-conforming use typically must be continuous. In Lexington, Kentucky, for instance, if a non-conforming use is discontinued for a year or more, the non-conforming use may not be resumed. If the non-conforming use becomes a permitted use, it cannot then revert to a non-conforming use.

The practical upshot of non-conforming use is that land use attorneys can help businesses identify properties with non-conforming uses that are ripe for reuse. For instance, a legal non-conforming restaurant may find new life from a new proprietor, and the practical effect of the updated zoning precludes other restaurants from setting up shop in the immediate area. Non-conforming use is a practical and creative way to give new life to existing structures even after zoning regulations change. The attorneys of McBrayer can help identify potential properties with legal non-conforming uses for businesses and other organizations ready to expand in otherwise inconveniently-zoned areas.

Jacob C. WalbournJacob C. Walbourn is an associate in McBrayer’s Lexington office. Mr. Walbourn focuses his area of practice on planning and zoning law handling a wide variety of land use matters for clients in the private sector. His responsibilities include attending Planning Commission and Board of Adjustment hearings and working with developers, business owners, and government agencies on land use applications, zoning ordinance text amendments, comprehensive plan updates and other land use issues. He can be reached at jwalbourn@mmlk.com or (859) 231-8780, ext. 102.

How to Evict a Tenant

The ideal situation in a landlord-tenant relationship is the timely adherence to the provisions of the lease, producing mutual benefit for both parties to the contract. Unfortunately, sometimes this relationship deteriorates and a landlord must step in to reassert her or his right to receive cash flow from the leasing of real estate. While an eviction may seem like a harsh step, landlords should understand that it is a business decision made in the course of renting property, one that they should not hesitate to take when necessary. Luckily, the process is not overwhelmingly difficult, even if it must be done according to very specific steps.

Tenancy AgreementThe first step in eviction is understanding the laws surrounding the process, which generally set out the requirements for the process in detail. In Kentucky, the Uniform Residential Landlord and Tenant Act (“URLTA”) governs the eviction process for residential evictions in the local jurisdictions that have adopted it.

In those jurisdictions, the residential tenant must be provided a different type and period of notice of noncompliance with the lease depending on the type of breach. This notice can be mailed or physically posted on the tenant’s door. For nonpayment for rent, the notice must state the total amount past due, when it became due, and a demand that it be paid within seven days from the date of the notice. For other material noncompliance, the notice must state the nature of the breach, whether or not the same breach has occurred in the past six months, and a demand to remedy the breach within fourteen days. The notice for both must also contain the tenant’s name and address of the property, as well as a date on which the lease will be terminated otherwise – again, seven days for non-payment, and fourteen days for other material noncompliance. These periods allow for the tenant to remedy the breach. In the case of other material noncompliance, if the same breach occurred within the previous six months, the landlord still has to provide fourteen days’ notice, but the landlord does not have to allow the tenant to remedy the breach. Month-to-month leases may be terminated for any reason with a thirty day notice to the tenant.

Just because the waiting period elapses does not mean that the landlord can then unilaterally eject the tenant from the property. When the waiting period has passed without a remedy of the breach, the landlord must then file a “forcible detainer” action against the tenant to regain possession of the property. Forcible detainer is defined by KRS 383.200, and is the refusal of a tenant to give possession of a property back to the landlord after the lease has expired.

For those landlords in counties not following the URLTA, 30-day notice is required unless a shorter term is specified in the lease.

Commercial tenant evictions require a minimum of three days notice, per KRS 383.215, before an action for forcible detainer can commence. Commercial tenants do not have the same protections in tenancy that residential tenants do, so the process is more expedient. The terms of the lease, however, will likely specify the necessary amount of notice required before seeking the eviction remedy. It should be noted that a forcible detainer action in and of itself is merely an action to regain possession of the property. It is not an action to recover rent or damages by itself.

Finally, and maybe of crucial importance – if the landlord is incorporated or organized in some form of business entity, it MUST be represented by a licensed attorney in any legal proceedings. For instance, if Jane formed an LLC that is the official owner and landlord of the rental property, even if Jane is the sole owner of that LLC and acts as the de facto landlord, she cannot represent the business in a legal proceeding.

The eviction process can be nerve-wracking for landlords, but the attorneys at McBrayer can both assist landlords with the eviction process as well as prepare leases and other real estate agreements for both residential and commercial property that provide clear provisions for a breach of the agreement. Contact us today.

BMacGregorBrittany MacGregor Roethemeier is an associate attorney practicing in the Lexington office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She is a graduate of Transylvania University and the University of Kentucky College of Law. Ms. MacGregor’s practice focuses on real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, and lease negotiation and preparation. She may be reached at bmacgregor@mmlk.com or at (859) 231-8780.

Bankers, Real Estate Loans, and the Unauthorized Practice of Law: A Refresher

Back in 1968, the Kentucky Bar Association (“KBA”) released Unauthorized Practice of Law Opinion KBA U-6 (“U-6”), opining that bank officers and lending institutions could not draft loan documents such as mortgages, security agreements or financing statements without violating the provisions of Kentucky law that prohibit the unauthorized practice of law. It is entirely within the province of attorneys in the Commonwealth of Kentucky to draft legal documents, and this KBA opinion merely reinforced that idea. So far, so good, right? Opinion U-6 was not the last word on where the role of the lender can dovetail with the practice of law, however, and all lenders should take heed of where potential landmines of the unauthorized practice of law in violation of KRS §524.130 still exist.

Business - meeting in an office; lawyers or attorneys (only hands) discussing a document or contract agreement

The KBA subsequently narrowed the scope of U-6 with Unauthorized Practice of Law Opinion KBA U-31 (“U-31”) in March of 1981. This opinion answered the question of whether a mortgage lender or title insurance company operating on behalf of a lender would commit the unauthorized practice of law by performing “ministerial acts” in the closing of a real estate loan with…a qualified no. Although U-31 did not exactly provide a straight answer, it did suggest that purely ministerial matters, such as a lay person conducting a real estate closing, would not violate Kentucky law so long as the non-lawyer did not give any legal advice at the closing.

In September of 1999, the KBA issued Unauthorized Practice of Law Opinion U-58 (“U-58”), which nakedly prohibited title agencies, title companies or any non-lawyer that is not a real party in interest to the real estate transaction from conducting a closing without the direct supervision of a licensed attorney. U-58 explained that an attorney’s presence is not mandatory, but the loan closing must be conducted under an attorney’s supervision and control – the “responsible attorney” must be familiar with the loan documents and be readily available should one of the real parties in interest seek legal advice during the closing. U-58 also clarified that a lender’s employee may still prepare, select or complete “form” loan documents so long as no fee is charged to the borrower.

It would be an understatement to suggest that U-58 upset the real estate, title and banking industries. The response from all sides was immediate and visceral, and in 2003 led to the holding in Countrywide Home Loans, Inc. v. Kentucky Bar Association. We won’t hold you in suspense –in Countrywide the Kentucky Supreme Court vacated U-58, adopted the reasoning of U-31, and held that it is not the unauthorized practice of law for non-lawyers to conduct real estate closings. The Court also affirmed its prior rulings declaring that drafting real estate mortgages constitutes the unauthorized practice of law. As the court noted from the evidence, closings have become increasingly standardized, with more and more documents taking nearly identical forms. In fact, one of the witnesses in that case testified that as much as 95 percent of all documents are the same at closings. Closings are now mostly ministerial, and thus U-31 carries more weight in the realistic conduct of a loan closing. This is not necessarily the end of this debate, however. In March of 2006, the KBA issued the Unauthorized Practice of Law Opinion U-63 (“U-63”), and further clarified U-6 and U-31 relating to “ministerial” acts. As illuminated by the Court in the Countrywide case, it is very common for lenders to use “form” or preprinted loan documents. This is not only a cost-savings benefit for lenders, but as provided in U-63, the “purely ministerial” acts of filling in the “blanks” on commercially available preprinted forms does not constitute the unauthorized practice of law. Yet, still, there are circumstances where lenders may fall into the trap of the unauthorized practice of law, and they should still avoid drafting mortgages or title opinions, or giving legal advice at a loan closing. When questions of legal importance or ramification arise, lenders and title agencies should still pause and defer to the guidance of a competent attorney.

E. CowlesEmily H. Cowles is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She joined McBrayer in 2015 after practicing for more than a decade for Morgan & Pottinger, P.S.C. Her law practice primarily focuses in all areas of creditor’s rights, the equine business in general, real estate, large and community banks, and businesses throughout Kentucky. Ms. Cowles also represents several Lexington based businesses in various capacities, including, but not limited to, the acquisition and sale of real property, litigation, transactions, leases, collections, and in their day-to-day operations. She can be reached at ecowles@mmlk.com or (859) 231-8780, ext. 216.

This article is intended as a summary of state and federal law and does not constitute legal advice.