LEGAL/LEGISLATIVE UPDATE – DECEMBER 1, 2017

Published on: December 1, 2017

ENCOURAGING SIGNS

If you’re looking for encouraging signs in the housing market, you can find them in October’s existing home sales, which hit their highest pace in five months. Of course, if you’re looking for evidence that the market is stumbling, you can find that too. October sales fell below the 2016 total, notching their second consecutive year-over-year decline. “Robust” job growth and moderate wage gains are fueling demand, but limited inventories are undercutting it, Lawrence Yun chief economist for the National Association of Realtors (NAR) said.

The current inventory trend isn’t encouraging. The NAR calculated 1.8 million existing homes available for sale in October ─ that’s 3.2 percent below the September level and more than 10 percent lower than a year ago. “The housing market largely remains stuck in the same, predictable rut it has been in for the past two years or so,” Zillow’s chief economist, Svenja Gudell, observed. “Demand is high, inventory is low and nothing short of a dramatic shock – which nobody expects – seems likely to knock it off that track.” Although pending sales increased, reversing three consecutive monthly declines, the increase was modest, concentrated in the South, and “not enough to keep activity from declining on an annual basis for the sixth time in seven months,” the NAR’s Yun observed.

New home sales reflected more underlying strength in October than existing sales, posting a significant (6.2 percent) monthly increase, and an even more significant 18.7 percent year-over year gain. Construction starts soared by nearly 19 percent compared with September, and builder confidence, measured by a National Association of Home Builders-Wells Fargo index, reached its highest level since July 2005.
Looking ahead to the prospects for next year, “there is much to be encouraged about,” Gudell told Housing Wire. As rising land, labor, and lumber costs force builders to find development locales further away from urban centers, she predicts, first-time buyers can expect to find a larger pool of affordable options. Whether they will be interested in buying them is another question, however, she acknowledged. At least so far, Gudell said, “these farther-flung suburbs haven’t proven especially attractive to picky younger buyers.”

RATE CERTAINTY

There aren’t many economic certainties in life, but you can probably count another Federal Reserve rate hike before year-end among them. In what will probably be her final testimony to Congress before her term ends this year, Fed Chair Janet Yellen said the central bank remains on track to impose a series of gradual rate hikes, reflecting continuing improvement in the economy. Her nominated successor, Fed Governor Jerome Powell, echoed that view during his nomination hearing, saying the argument for a December rate hike “is coming together.”

Emphasizing the economy’s strong performance since June, Yellen repeated her view that the inflation rate, which has remained stuck in the 1 percent range, will eventually come closer to the Fed’s 2 percent target. But she also acknowledged the possibility that the inflation trend is not the result of “transitory factors” but “could reflect something more persistent.”

Emphasizing signs of economic strength, including a better than expected 3.3 percent third quarter growth rate, Yellen noted that the economic expansion increasingly is both broad and global, justifying the Fed’s belief that “gradual increases in the federal funds rate will be appropriate to sustain a healthy labor market and stabilize inflation.”

COSTS ARE REAL

Climate change doubters put evidence of global warming firmly in the “fake news” category. But the General Accountability Office (GAO), a nonpartisan federal watchdog, estimates that the federal government has spent more than $350 billion over the past decade on relief and recovery efforts resulting from climate-related disasters, not including this year’s major hurricanes and wildfires, which are expected to add billions to that total. The GAO report warns that if present trends continue, the government will be spending $35 billion annually to address climate-related damage – recurring costs for which, the GAO warns, the government is not planning.

“The federal government has not undertaken strategic government-wide planning to manage climate risks by using information on the potential economic effects of climate change to identify significant risks and craft appropriate federal responses,” the study report, Information on Potential Economic Effects Could Help Guide Federal Efforts to Reduce Fiscal Exposure, says. “By using such information, the federal government could take the initial step in establishing government-wide priorities to manage such risks.”

While the government response may be lagging, corporate executives have gotten the message about the need to adapt to the effects of climate change. Fog Creek, a technology firm based in storm-tossed Miami, is offering guaranteed paid time off to employees dislocated by major storms. Several other firms are reportedly considering similar policies, according to the Insurance Journal. Fog Creek had granted employees time off on a case-by-case basis, Anil Dash, the company’s chief executive, told IJ. But a formal, written policy provides the certainty they need. “There’s no reason not to make employees feel secure about this,” he said.

TAXING AFFORDABLE HOUSING

The shortage of affordable housing, already deemed critical by industry executives, will become more severe if the key provisions of the tax reform package are enacted. The final details remain in flux as lawmakers try to corral the votes needed to pass the massive tax overhaul, but affordable housing advocates are focusing on two provisions, both of which seem likely to survive the revision process.

The first ─ slashing the corporate tax rate from35 percent to 20 percent ─ would deliver an indirect blow by reducing the value of the low-income tax credits that provide a major financial incentive for affordable housing developers. An analysis by Novogradac & Co. estimates that this change alone would erase 300,000 units from the affordable housing total produced over the next decade. The second provision – eliminating the tax exemption for so-called “private activity bonds” ─ would take another huge bite out of affordable housing in large cities, like New York, that rely heavily on the bonds to produce low-income tax credits. Novogradac says that measure would reduce affordable housing production by another 700,000 units over the next 10 years.

Given the immense waiting lists for affordable rental units, “I can’t imagine having the supply being cut by this much,” K. Nicole Asarch, board president of the Texas Affiliation of Affordable Housing Providers, told the Wall Street Journal.

“I think there’s a way to bridge this [funding gap],” Rep. Tom Reed (D-NY) noted in the same article. “But finding that revenue is the trillion-dollar question.”

Underscoring the concern about the tax bill’s negative impact on affordable housing, a broad coalition including housing advocates, state and local governments and housing industry trade groups, have signed a letter to Congressional leaders, urging them to use any savings derived from the elimination of tax deductions (the mortgage interest tax deduction particularly) to finance rental housing solutions for people with the greatest needs – not to offset the cost of tax breaks for the wealthy and corporations.”

DRUG DEALS

After Massachusetts voters approved a referendum legalizing the recreational use of marijuana in the state, several municipalities exercised their right to prohibit the sale of the drug in their communities, leading opponents of the referendum to predict that the proliferation of pot-free zones in the state would limit the impact of the law. That prediction may have been premature.

Eyeing the tax revenue retail marijuana sales will generate, voters in Dracut and Marshfield, who had opposed the statewide referendum, recently rejected proposals to ban marijuana sales in those communities. Brewster voters nixed a similar ban, as did voters in Amesbury, who rejected the ban by a 2-1 margin. “We got a lot of support from people who don’t use cannabis, but might want to someday,” Scott Winters, an Amesbury resident who led the move to block the ban in that community, told Insurance Journal. “From users to non-users to just folks who want revenue for the city, we had a lot of support,” he noted.

Despite the success of these recent pro-cannabis initiatives, opposition to retail sales remains strong. State officials estimate that more than 120 Bay State communities have banned or restricted marijuana-related businesses since the beginning of this year. Even in Colorado, the first state to legalize recreational marijuana, voters who think using marijuana in their communities is fine don’t particularly want it sold there. More than 60 percent of cities and towns have said no to retail sales, according to the Colorado Municipal League. Kevin Bommer, the League’s deputy director, thinks the statistics reflect an awareness that marijuana sales have fallen well short of predictions. “A lot [of the revenue] has to go into administration and enforcement,” Bommer told Insurance Journal. As a result, he said, “I don’t think marijuana has turned out to be the pot of gold that some folks [expected it to be.]”

IN CASE YOU MISSED THIS

The number of bathrooms in new homes has been increasing for the past decade – and so has the efficiency of the toilets and showers installed in them.

The median home price was $12,500 higher in November than in the same month a year ago.

The elimination of the deduction for state and local taxes – one proposal in the pending tax reform legislation – is expected to spur an exodus from high-tax states in the Northeast, to tax-friendly (read that – no-state-income-tax) states like Florida. The tax plan “is practically begging them to relocate,” a Bloomberg News article observed.

Bucking the national trend, a New Hampshire legislative committee has rejected legislation that would legalize recreational marijuana in the state. A commission appointed to study the question concluded that legalization wasn’t a good idea.

Government policies designed to encourage home ownership during the Depression and following World War II laid the groundwork for segregated housing patterns that persist today, a recent study has concluded.

LEGAL BRIEFS

FORGET YOU NOT

You can’t think of everything. But when drafting easement language, it’s best if you do. Failure to anticipate development delays and other changes left this Washington State developer without the access he needed to develop a property he had purchased. (Alpine Village, Inc., v. City of Oak Harbor and Pier Point Condominiums Association.)

The property at issue consisted of four of eight lots owned originally by Donna Mott, who planned to create a phased condominium development, with each lot representing one phase. Mott recorded the condominium declaration in 1992, to which she subsequently added an easement to permit access across the first lot to the other seven. The easement’s stated purpose was to benefit the Pier Point Condominiums (at the time, consisting of the first lot) “and to benefit each successive phase affecting lots 2 through 8.”

Mott’s building site plan anticipated that all eight phases of the condominium would be completed by 1996 and specified that the right to develop additional phases would expire in 1999 – seven years after the declaration was recorded.

As is often the case, development did not proceed smoothly. Only four of the lots had been developed in 2001, when Mott sold the remaining four to Alpine Village, Inc., which intended to complete the development. To comply with a city requirement, Alpine sued Pier Point, its owners, and the city, seeking a declaratory judgment affirming its right to rely on the easement granting access to the undeveloped lots. When the trial court concluded that the easement applied only to the four lots constituting the existing Pier Point Condominium, Alpine appealed.

The developer had two major arguments: The trial court’s interpretation of the easement language was incorrect; and even if correct, the court’s reading resulted in an illogical and unintended result.

On the first point, Alpine pointed to the expansive language of the easement, which stated its intent to benefit “the owners, present and future [of the property] and any legally subdivided portions thereof…” As an “owner” of the property to which the easement referred, Alpine said, it was entitled to benefit from the easement.

But the court pointed to language in a preceding paragraph, stating that the easement applied to the Pier Point Condominiums – at the time, consisting of lot one and subsequent phases completed pursuant to the building site plan. Because the four lots Alpine purchased “will not be part of the original Pier Point Development” and can’t be added to it (because the development rights have expired), the court ruled, “Alpine’s development is beyond the scope of [the easement’s] express intent language.”

While that result might well be “illogical” and unintended, as Alpine contended, the court said, it was not unforeseeable. “The development plans clearly stated that no further development was permitted after the expiration date. Thus, the risk was clearly evident that one or more of the proposed eight condominium lots might not be developed as condominiums, and would fall outside of the binding site plan at the expiration of the deadline,” the court noted. Mott could have added language providing explicitly that the easements would apply to lots still undeveloped when the development rights expired, the court said. That she did not indicates that “[she] did not intend the easement to extend to property other than that developed as condominiums” under the original building site plan. Finding the trial court’s ruling “correct as a matter of law,” the Appeals Court affirmed it.

WORTH QUOTING

“There are more ticking time bombs in this bill than a Road Runner cartoon.” ─ Martin Sullivan, chief economist for the nonprofit group Tax Analysts, describing the proposed tax reform legislation.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.