Category Archives: Uncategorized

Why Your Charitable Organization Needs A Written Gift Acceptance Policy

Whether your non-profit organization has been operating for a few months or several decades, the board of director and senior leadership should ensure there is a carefully considered written policy governing the review and acceptance of donations and planned gifts. The practical reasons are evident: with a gift acceptance policy, your organization’s leadership and staff can better maintain clear standards and consistency for the evaluation and acceptance of gifts, especially non-cash donations, while allowing your organization to enhance donor relations and undertake targeted marketing initiatives. However, complex laws and rules apply to charitable donations and planned giving that have the potential to affect the amount of, or even completely deny, a donor’s charitable contributions tax deduction––depending upon the nature of the gift and property donated, the substantiation and valuation of the donation, and the type of the donee organization. For that reason, any gift acceptance policy should be created with specific reference to the interests and needs of your organization and in consultation with your organization’s professional advisors, including attorneys and accountants.

While the details of a gift acceptance policy will differ from one organization to the next, any such policy should include certain basic provisions. The purpose of the policy should be stated clearly. The policy should be designed to ensure that all donations and gifts to your organization are aligned with your organization’s charitable mission. The policy should also expressly reserve to your organization the right to retain independent professional advisors for the purpose of evaluating and advising on any proposed donation or gift.

While unrestricted cash gifts are seldom problematic, non-cash gifts can also bring unanticipated costs and risks to your organization.

The gift review process should be set forth in the policy, including the identification of the individuals who are responsible for rendering the final decision to accept or reject a gift, such as the Executive Director for all routine cash gifts or a special committee for all non-routine gifts. The policy should also delineate as between your organization and the donor the costs and responsibilities of obtaining any appraisals, valuations, and other documentation required for the donor to take a tax deduction for the contribution.

Your organization’s Board and leadership should determine whether there are any certain types of gifts that are, by definition, not aligned with your organization’s mission and whether there are any certain types of gifts that would pose unreasonable administrative costs or risks, and will therefore not be accepted under any circumstances or at least not without satisfying certain conditions. If there are any such restrictions, they should be stated in the policy in order to provide clarity to donors and avoid potential missteps during the evaluation process. Types of gifts your organization may consider when preparing a gift acceptance policy can include cash, tangible personal property (such as art, vehicles, equipment), publicly traded and marketable securities, restricted stock, closely held securities, real estate, life insurance benefits, retirement plan benefits, deferred gifts (such as charitable remainder trusts, charitable lead trusts, bequests, charitable gift annuities, deferred gift annuities, pooled income funds, retained life estates), bargain sales, and other miscellaneous gifts (such as memorials, honorariums, intellectual property). Whether and to what extent a donor can take a tax deduction for the charitable contribution depends upon complex laws and rules that differ depending upon the type of gift donated.

While unrestricted cash gifts are seldom problematic, non-cash gifts can also bring unanticipated costs and risks to your organization. Before accepting a non-cash gift, your organization should consider the non-cash gift’s marketability, whether there are any liens or restrictions that would impair or prevent its liquidation, whether there would be any carrying costs such as insurance or maintenance requirements, and whether the gift could result in your organization incurring potential liability to a third party (especially with respect to environmental contamination of real property). The extent of the evaluation will necessarily depend on the type of gift offered.

After the final decision on whether to accept or reject the gift, your organization should ensure that the decision is communicated to the donor in writing – especially if the gift is accepted. In order for the donor to take a charitable contributions tax deduction, your organization must provide a contemporaneous written acknowledgement stating your organization’s name, date, and location; stating whether the gift was cash or a description of the non-cash contribution; and stating that no goods or services were provided in exchange for the contribution, if so, or a description and good faith estimate of the value of goods or services, if any.

After your organization adopts a written gift acceptance and planned giving policy, the policy should be reviewed at least annually to ensure that it remains aligned with your organization’s mission and interests while continuing to account for changes in applicable laws and rules. By having such a policy in place, your organization will be better positioned to undertake a targeted marketing initiative by knowing what types of gifts to pursue and accept while controlling potential legal risks and fostering positive relationships with donors.

Internet Defamation Law - Online Reviews Defamation

Recent Developments in Internet Defamation Law

If you own a business, you likely rely on positive reviews on the internet to expand your clientele. And, to that end, one of your worst nightmares may be a review on a consumer review website labeling you something along the lines of a “crook,” “thief,” “scammer,” or “fraudster.”

We are frequently asked by clients what recourse is available to them in response to such derogatory postings, which are etched in the tableau of the internet – absent voluntary or judicial intervention – for anyone with a computer, tablet, or smart phone to see. But because internet defamation remains a somewhat nascent area of the law, there is, at present, some inconsistency between lower court rulings as the legal landscape in this area continues to form, and thus uncertainty among potential internet defamation plaintiffs.

Four recent lower court decisions in New York are illustrative, with three of them providing internet defamation plaintiffs with a glimmer of hope in the face of Appellate Division law adhering to the perhaps antiquated notion that “readers give less credence to allegedly defamatory remarks published on the Internet than to similar remarks made in other contexts.” Sandals Resorts Int’l Ltd. v. Google, Inc., 86 A.D.3d 32, 43 (1st Dep’t 2011).

In one case, the court denied the defendant’s motion to dismiss the plaintiff’s entire claim for defamation where, among other things, the defendant posted on a prominent consumer review website that the plaintiff “is an incompetent and dishonest person. He defrauded me out of 15K and has a trail of people to which he has bounced checks (including me) and caused harm.” Torati v. Hodak, 2015 WL 5578264 (2015).

Given the extent to which consumers and business alike rely on online reviews, it bears following how courts continue to grapple with the sometimes blurry line between actionable and non-actionable derogatory statements made on the internet – statements which justifiably result in nightmares for business owners and professionals.

In another encouraging case for internet defamation plaintiffs, following a trial the court found the following statements to be defamatory:

  • “do not use mr sand less of staten island matt is the name he will destroy you [sic] floor he is a liar and a con artist beware.”
  • “This guy mat the owner is a scam do not use him you will regret doing business with his company I’m going to court he is a scam . . . he is nothing by [sic] a liar he robs customers and promises you everything if you want shit then go with him if you like nice work find another he is A SCAM LIAR . . . .”

Technovate LLC v. Fanelli, 49 Misc.3d 1201(A) at * 2 (Civ. Ct. 2015).

Then, in a case emanating from Long Island, the court required the internet poster to take down a website he had created where, among other things, he compared a physician to “to the notorious nazi doctor, Joseph Mengele and asserts that he is anti-semitic.” The poster also wrote, “Beware, he is stubborn, act [sic] like a mule, and will discriminate against you if you are not Italian with a Mercedes Benz.” Sachs v. Matano, 004586/2015, NYLJ 1202741327174, at *1 (Sup., NA, decided October 28, 2015). There, the court pointedly noted that “[t]he tone of plaintiff’s statements, and the statements themselves, are nothing more than an attack on the defendants designed to injure their reputation and business.” Id. at * 2.

Finally, in a decision issued in December 2015, the defendant, a former employee of the plaintiff, was accused of posting comments labeling the plaintiff “crooks, liars, and thieves,” stating that the plaintiff does not provide loans as promised, and that the plaintiff’s business was a “scam.” While the defendant disputed making these remarks, the court nevertheless held they could not be deemed defamatory, even though the plaintiff alleged a 55% reduction in business since their posting, because, among other things, “a reasonable reader would view the internet postings as grievances of angry consumers who utilized an internet forum as a way to express their opinions.” SBC Telecom Consulting, Inc. v. Vega, 2015 WL 9851737, at * 7 (Sup. Ct. 2015).

Given the extent to which consumers and business alike rely on online reviews, it bears following how courts continue to grapple with the sometimes blurry line between actionable and non-actionable derogatory statements made on the internet – statements which justifiably result in nightmares for business owners and professionals. Because while freedom of speech for angry, jilted consumers is essential, it is undeniable that every day more and more consumers turn to the internet as their primary source for business referral – and that unfounded remarks made with the sole purpose of injuring another’s livelihood can – and do – cause real, if not irreparable, harm to business owners and professionals.

Trending Now – Moratoriums in Westchester

Many Westchester communities are experiencing an influx of residential development. However, a recent trend in Westchester County threatens to slow development growth. More and more municipalities are enacting moratoriums on certain types of residential development. Indeed, such moratoriums may prohibit an applicant from developing even a single family home. A land use moratorium is a temporary suspension of development to allow a local government to study specific land use problems and consider related zoning amendments. Moratoriums are based on the notion that current land use controls are not sufficient and must be amended.

In the past, New York residents have experienced moratoriums on a larger scale, i.e. temporary suspensions on drilling for natural resources or large commercial developments (casinos or resorts). While certain types of moratoriums may be justified, more recent moratoriums on traditional residential development are a cause for concern. Notwithstanding the negative economic impacts, residential moratoriums can be susceptible to legal attack.

Recent Moratoriums on Residential Development

In early 2015 the Village of Scarsdale issued a moratorium on certain development projects, including residential, to study lot coverage concerns. The moratorium and proposed amendments were aimed at limiting residential development to address the “McMansion” concern. To the Village’s credit, the Scarsdale Board of Trustees quickly realized that the moratorium was unfair to those who had already obtained approvals. Thus, Scarsdale amended their moratorium to exempt any project that had obtained approval from any Village agency prior to the moratorium’s effective date. Ultimately, the Village Board of Trustees (who faced tremendous opposition) denied the newly created lot coverage provisions and repealed the moratorium. (View more information on the previously enacted Scarsdale moratorium).

Similarly, the Town of Mamaroneck sought to address the growing concern of oversized homes by prohibiting residential development on, among other things, vacant lots. Due to our advocacy efforts, the Town Board agreed to exempt certain newly approved subdivisions from the moratorium, yet continued to enact the prohibition regardless. The Mamaroneck case study demonstrates that, while a municipality may seek to continue with the enaction of a moratorium, an applicant may be able to seek an exemption from the moratorium prior to it going into effect. (See Town of Mamaroneck Moratorium.)

Case law has focused on several factors to determine the validity of a moratorium, including the reasonableness of the moratorium’s length, whether the local government has acted promptly and in good faith to respond to a development problem, and whether the moratorium has a valid public purpose.

Following suit, the Village of Larchmont enacted a moratorium applicable to all residential zoning districts that prohibits the Village from considering certain residential subdivision and demolition applications, including “pending” applications, unless specifically exempt from the moratorium. In reality, and due to certain exemptions from the moratorium, it appears that the Larchmont moratorium is not designed to address any zoning concerns, but purely tailored to block one pending demolition/subdivision application, which has already faced large amounts of community opposition. (See Village of Larchmont Moratorium.)

The trend is clear, Westchester communities are experiencing an increase in residential development and reacting quickly. Municipalities are turning to moratoriums in the face of vocal opposition to residential development. However, local governments must use discretion. Moratoriums on residential development can be overly board and therefore not tailored to a specific zoning concern. Such moratoriums seriously threaten community growth and may result in legal challenges.

Challenging a Moratorium

Cuddy & Feder has deployed various tactics to oppose moratoriums. For instance, in representing our clients, our Firm has advocated for exemptions, sought hardship variances, and facially challenged moratoriums. Each of these methods can be specifically tailored to achieve client goals and are designed to build an administrative record, which is necessary for any reviewing court.

Case law has focused on several factors to determine the validity of a moratorium, including the reasonableness of the moratorium’s length, whether the local government has acted promptly and in good faith to respond to a development problem, and whether the moratorium has a valid public purpose. Also, it has been held that certain moratoriums must be in response to a “dire necessity”, be reasonably calculated to alleviate or prevent a “crisis condition”, and a municipality must be presently taking steps to rectify the problem.

Conclusion

As moratoriums become more and more prevalent throughout Westchester County and the Hudson Valley region, it is important for developers to monitor local politics and participate where necessary to avoid being trapped by a local moratorium targeting new development. It is recommended that an Applicant develop a “record” as early as possible to establish that the moratorium is either improper, being unlawfully applied, and/or a hardship has been created to the point where an exemption is appropriate.

Estate Planning Check Up

Estate Planning Check Up

The New Year often brings reflection and goal setting. Many of us set business goals and health goals. But how many people set goals to review and update their estate plans?  Just as people make personal health related resolutions such as exercising more and losing weight, so too should people look at the health of their estate planning documents. Through the estate planning process, people are looking to provide for their immediate family, provide for other relatives and/or friends, pass property to beneficiaries quickly, ease the strain on the family following death, minimize expenses, reduce estate taxes, plan for retirement, plan for incapacity, achieve philanthropic goals and plan for business succession.

Many people create Wills when their first child is born. Perhaps they do a full blown estate plan at that time which includes powers of attorney and health care documents. But then they stick these documents in a drawer and do not look at them again until that baby is married.

Just as people make personal health related resolutions such as exercising more and losing weight, so too should people look at the health of their estate planning documents.

When documents do not reflect current circumstances, unwanted results can occur. The wrong people may inherit your assets. The wrong people may be taking care of your minor children or their money. You could be exposed to estate taxes on either or both of the federal or state levels. Additionally, you could be leaving assets to someone who is disabled and receiving government benefits who will lose those benefits because of the inheritance.

As part of your New Year’s resolution process, each one of us should review existing estate planning documents and all beneficiary designations to make sure that no changes are needed. As part of this process, consider the following:

  1. Have your assets increased/decreased since you last made your Will?  Have you acquired or disposed of a significant asset?
  2. Have there been any illnesses, deaths, births, adoptions, marriages or divorces in your extended family?
  3. Has getting older affected any named beneficiary’s behavior or lifestyle?
  4. Does anyone in your extended family have special needs
  5. Has anyone in your extended family moved?
  6. Are you still happy with whom you’ve named as Executors, Trustees and as Guardians?
  7. Has there been a change in employment for either of you?

If you have answered yes to any of the above questions, you may need to revise your current documents and you should contact your attorney to schedule a time to discuss your estate plan and any changes you may need to make.

Taking the time to review your plan and give it a “well baby checkup” can lead to starting the New Year off on the right foot!

New York Nonprofit Revitalization Act

Nonprofit Revitalization Act

Not-for-profit corporations continue to struggle with the extent to which they should engage in formally routine business dealings with their board members in light of New York’s groundbreaking “Nonprofit Revitalization Act of 2013” (the “Act”). Over a year and a half has elapsed since the Act went into effect, impacting every not-for-profit corporation in New York. Yet, despite this passage of time, not-for-profit executives, employees, and counsel are still grappling with the Act’s “conflict of interest” provisions which, among other things, govern transactions between a not-for-profit corporation and its directors. According to some, given the ambiguity of several portions of the Act, the dearth of interpretive caselaw, and the governmental oversight provided by the Act, the Act has had a profound chilling effect on mutually beneficial and overwhelmingly fair deals and contracts – including those for legal services, advisory services, insurance, goods, or commodities, all of which were often provided at a steep discount – between a not-for-profit corporation and its directors about which, prior to the enactment of the Act, the corporation and its directors would not have even thought twice.

But the discontinuance of these valuable business relationships does not appear to have been the desired intent of the Act. After all, the purpose of the Act’s conflict of interest provisions is to, at least superficially, ensure the fairness of transactions between the corporation and, among others, a director, any relative of his or hers, any entity in which he or she has a thirty-five percent or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of five percent (collectively, for purposes of this blog, such a person or entity is a “related party”).

The Act seeks to accomplish this goal by providing that no corporation shall enter into any transaction with a related party “unless the transaction is determined by the board to be fair, reasonable and in the corporation’s best interest at the time of such determination.” NY Not-for-Profit Corporation Law (“N-PCL”) 715(a). The Act also requires the director (or officer or key employee) to disclose all “material facts” regarding his or her interest in the transaction.

The Act is even more rigorous where the corporation involved is a “charitable” not for-profit-corporation (meaning, one whose purpose is charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals) and a related party has a “substantial financial interest” in the transaction.

While these provisions seem to make eminent sense, they have nevertheless left executives, in-house counsel, and directors scratching their heads with respect to what is “fair” and “in the corporation’s best interest.” Also, because of the ever looming threat of governmental scrutiny of such a transaction, the Act has curbed enthusiasm for compensated business relationships between corporations and directors. The Act has, perhaps inadvertently and perhaps only temporarily until all the definitions within the Act are fleshed out sufficiently, dampened the desire on both ends to continue those relationships.

For sure, the Attorney General’s Office is not seeking to eradicate all such mutually beneficial relationships between the corporation and a related party. In this regard, contained in the NYS Attorney’s General’s Guidance Document issued in April 2015 regarding “Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013” (the “AG Guidance”) are four (4) types of transactions between a corporation and related party that, according to the Attorney General’s office, are exempt from the Act (although they are still subject to other safeguards under law, as pointed out by the AG Guidance).

The Act is even more rigorous where the corporation involved is a “charitable” not for-profit-corporation (meaning, one whose purpose is charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals) and a related party has a “substantial financial interest” in the transaction.

The term “substantial financial interest” is not defined by the Act. Where such a “substantial financial interest exists” – and given the strict oversight under the Act, one would be wise to construe the term broadly until more guidance is provided thereon – the board of directors (not including the director implicated in the transaction) or authorized committee thereof shall, prior to entering into the transaction, consider alternative transactions to the extent available; approve the transaction by not less than a majority vote; and memorialize in writing the basis for the approval, including its consideration of any alternative transactions.

Perhaps the caution some not-for-profit corporations and their directors are presently exercising under the Act is ephemeral, and as time goes on related party transactions will return to their prevalence pre-Act. But it is also quite possible that the Act will permanently reduce the number of mutually beneficial, and, often times, dramatically discounted, transactions between corporations and related parties, with the corporation relying upon the expertise of its board members without any compensation – which may be a severe, unintended consequence of the Act.

 

New Regulations Seek Greater Transparency In New York Real Estate Transactions

Have you ever wondered who is buying those ultra-high-end apartments that have been appearing on the New York City market in record numbers over the past several years? As it turns out, an alarming number of purchasers have turned out to be foreigners with criminal ties who figured out that one of the easiest ways to launder their money was in the U.S. real estate market through the use of single purpose “shell” limited liability companies. In fact, nearly half of the residential purchases in the U.S. of $5,000,000 or more are purchased using shell companies and that percentage is even higher in Manhattan. In many states, including New York, the identities of the beneficial owners of the companies do not need to be disclosed, making it very difficult to track who is associated with these purchases and where the money is coming from.

As a result of a series of 2015 New York Times articles exposing this trend 1, the U.S. Treasury has enacted a temporary program that requires that title insurance companies must disclose the identities of the individuals who are the beneficial owners or holders of 25% or more of the direct or indirect equity or beneficial interests in the purchasing entity, which will apply to entities in “all cash” (i.e., where no lenders are involved) deals of more than $3,000,000 in the County of Manhattan and more than $1,000,000 in Miami-Dade County, Florida. (This program expands on previous requirements enacted by New York City’s Finance Department, which, in 2015, began requiring all shell entities buying real estate in New York City to report their members to the city.) The reporting requirement is in effect from March 1, 2016 – August 27, 2016 and may thereafter be extended and expanded into other markets.2

In February 2016, bills requiring greater transparency of shell companies were introduced in Congress, which would seek to expand on the efforts of the Treasury to hold not only buyers, but the professionals (e.g., bankers, accountants, lawyers and title insurance companies) behind U.S. real estate transactions to a higher accountability.

You may be asking, “if I’m a law-abiding citizen, what does this have to do with me?” For now, perhaps nothing (unless you are involved in a transaction that falls into the aforementioned requirements); however, this has sparked a greater interest by the U.S. government in the use of shell companies to transact business. In February 2016, bills requiring greater transparency of shell companies were introduced in Congress, which would seek to expand on the efforts of the Treasury to hold not only buyers, but the professionals (e.g., bankers, accountants, lawyers and title insurance companies) behind U.S. real estate transactions to a higher accountability.3 Whether these bills will pass and the impact they may have on the real estate market remains to be seen. Stay tuned.

Everyone Wants Power: Supreme Court’s FERC Decision and State Energy Initiatives

While our nation’s capital was recently socked in with one of its largest snowstorms in recent memory, the Supreme Court plowed on and announced its decision in the Federal Energy Regulatory Commission v. Electric Power Supply Association (577 U.S. ____(2016); Docket Nos 14-840 and 14-841) in which the Court upheld FERC’s authority to issue its “demand response rule”. In general, the Federal Power Act allows FERC to regulate the sale of electric energy as part of a system of wholesale, interstate commerce including both wholesale electricity rates and any practice that affects such rates. The regulation of any other sale, most notably any retail sale of electricity, remains, in theory, with the states. As the Court noted, though, electricity generation has changed dramatically from the days when a local utility company controlled its own power plants transmission lines, and delivery system to the modern day network of interconnected producers across the country and our modern grids.

This evolution in energy production and delivery are part of a new vanguard of state initiatives for the benefit of the retail consumer including New York’s “Reforming the Energy Vision” (REV): a state-level reform program to advance the deployment and use of clean energy to benefit of the environment and the economy.

This is where the demand response rule comes into play: energy suppliers must generate the amount of power necessary to meet demand from these operators (utilities and load serving entities) that buy wholesale power for purposes of resale to users. To meet spikes in demand these operators must generally accept bids that are more expensive and draw from a greater number of suppliers. Using an increased number of suppliers, however, means using more and more inefficient suppliers and paying more, overall, for the privilege. Wholesale demand response, and the FERC rule that supports it, induces (pays) consumers to reduce their use of power. This in turn curbs wholesale rates, prevents infrastructure breakdowns, and requires less reliance on the least efficient energy producers. Many therefore deem the Supreme Court’s decision a win for consumers and the environment.

But questions remain as to how this will play out moving forward. The analysis by the majority appears to clear a way for increased federal jurisdiction and regulation over matters that indirectly affect retail rates. What was at one time a “bright line” between federal and state authority in this arena has eroded over time, and this decision does nothing to halt that trend. Importantly, this decision comes at a time when advancements in technology offer new and exciting opportunities in renewable energy and localized distribution through initiatives such as micro grids and large-scale energy storage. This evolution in energy production and delivery are part of a new vanguard of state initiatives for the benefit of the retail consumer including New York’s “Reforming the Energy Vision” (REV): a state-level reform program to advance the deployment and use of clean energy to benefit of the environment and the economy. So: just as states have begun pioneering a new vision for energy generation and distribution for the benefit of the environment and retail consumers, the Supreme Court has provided a decision that arguably does the same: but does so by strengthening federal authority that in turn could greatly affect state initiatives and the retail customer. Large power consumers and those interested in developing or using renewable energy or localized delivery infrastructure will need to keep apprised of developments in this arena and seek good counsel to navigate the best path forward.

FINRA’s 2016 Priorities – Get Your Culture Right

On January 5, FINRA released its 2016 Regulatory and Examinations Priorities Letter. The Letter highlighted three broad areas of focus for the upcoming year: (1) Culture, Conflicts of Interest and Ethics, (2) Supervision, Risk Management and Controls, and (3) Liquidity. While Number 2 on this list is FINRA’s bread and butter and liquidity has been a major focus of regulators since the financial crisis, the reference to a focus on culture, while not necessarily surprising, is the most interesting of these areas.

The Letter notes that firm culture may mean different things at different places, but for purposes of its analysis, FINRA considers firm culture “explicit and implicit norms, practices, and expected behaviors that influence how firm executives, supervisors and employees make and implement decisions in the course of conducting a firm’s business.” It then states that in 2016, FINRA will “formalize our assessment of firm culture…” Which begs the question: what does that mean?

Specifically it will seek to “understand how “culture affects compliance and risk management practices at firms[,]” and such understanding “will inform our evaluation of individual firms and the regulatory resources we devote to them.”

The Letter indicates that FINRA does not intend to base enforcement actions and investigations on culture (yet), but that it will gather information about individual firms’ culture through the course of its normal reviews and examinations of its member institutions. Specifically it will seek to “understand how “culture affects compliance and risk management practices at firms[,]” and such understanding “will inform our evaluation of individual firms and the regulatory resources we devote to them.” A not very subtle indication that if FINRA has a negative view of a firm’s culture, that institution can expect a substantial increase in the regulatory inquiries it receives.

Finally, the Letter notes how this focus on culture ties into FINRA’s standard review of supervisory and risk management systems, stating that culture is “both an input to and product of [a firm’s] supervisory system” and that “compliance functions should be equipped with necessary resources to help firms navigate a complex and changing regulatory and market environment.”

While the message that firms need to prioritize a culture of compliance and provide adequate resources to its compliance and risk management functions is not new, the fact that FINRA is stating that it is formalizing the process by which firms that it identifies has having substandard compliance cultures will face heightened scrutiny moving forward, even without committing any formal violations, is notable. Thus, firms that have not yet done so need to face the reality that devoting meaningful resources to their compliance and risk management functions, and prioritizing the significance of those functions, is part of the cost of doing business in the current regulatory environment and that will not change any time soon. Without doing so, firms will find themselves wrapped up in expensive, resource-draining inquiries and investigations with little sympathy from their regulators.

The FINRA 2016 Regulatory and Examinations Priorities Letter can be found here.

“Mandatory” Approval Timeframes in Telecommunications Law – Myth or Reality?

The wireless industry scored a big victory in 2012 with Congress’ adoption of Section 6409 of the Spectrum Act, a portion of the Federal Middle Class Tax Relief and Job Creation Act of 2012 (which we will refer to here as Section 6409, mostly to avoid repeating its rather large name).1

Section 6409 requires municipalities to approve applications to add, replace or modify wireless transmission equipment currently on existing towers, buildings and other structures that contain transmission equipment (e.g., smokestacks or water towers with antennas). The goal of Section 6409 is clear – “to promote the deployment of wireless infrastructure. . . . by eliminating unnecessary reviews, thus reducing the costs and delays associated with facility siting and construction.”2 How does Section 6409 seek to achieve this goal? The answer is simple. Municipalities are limited in what documents they can ask for from 6409 applicants, and they are required to approve 6409 applications based on those documents within 60 days . . . “or else”.

Or else what, you ask? Good question. If a municipality fails to approve a complete application filed under Section 6409 within 60 days from its filing date, then the application is deemed granted. The “deemed granted” concept is a topic for another post (coming soon). We will need some extra time to walk through best practices for protecting applicants’ rights.

The 60 day approval period sounds great in theory. However, industry applicants know all too well that the realities of municipal understaffing and an ongoing misunderstanding by municipal officials as to how to handle these type of applications often leads to delays similar to those Congress and the FCC sought to eliminate. Think about it: You file a building permit application for a 6409 eligible modification. It sits on someone’s desk for two weeks. You get a phone call or an email two weeks later requesting an additional form or fee, or worse, a request for a planning or zoning application submission because that “is just what the zoning code says and that is what we have always done with wireless applications.” By this point it is too late to help the municipality set a path for 60 day compliance.

Remember, most municipalities rarely have the budget or staff to monitor developments in wireless regulations, and on average they may deal with a few 6409 applications over the course of an entire year.

I can tell you from experience in working with dozens of municipalities on 6409 applications that early education and an exchange of information are key elements in making Section 6409 work the way it was intended. Remember, most municipalities rarely have the budget or staff to monitor developments in wireless regulations, and on average they may deal with a few 6409 applications over the course of an entire year. So, although not required, applicants should include an outline or bullet point explanation in their application materials briefly explaining what 6409 is and how the project meets its narrow parameters. This is a simple, yet effective way to avoid gridlock and confusion at the municipal level. An outline, coupled with a pre-application phone call to the municipal attorney and/or building inspector from a team member (that has a clear understanding of 6409 and a good relationship with the municipality) just giving them a “heads-up” can be the difference between an applicant receiving an approval within 60 days (and being on-air soon thereafter), or being caught up in a long drawn out zoning process that the municipality committed the applicant to simply because it was unaware of the policy and proper procedures for 6409 applications.

By walking the municipality through the process before filing and then outlining it again in the submission, an applicant can manage everyone’s expectations appropriately and try to ensure the municipality’s understanding is consistent with yours. An applicant can also find out what, if any, unique forms or administrative items the municipality requires in order to ensure that your application is complete when filed. There is nothing more frustrating than when a 6409 applicant receives a planning or zoning approval within the 60 day period, but is then delayed for weeks or even months because the applicant didn’t submit the correct structural calculations, construction details, or number of plan sets, for example.

Section 6409 applicants should remember that the 60 day mandatory approval timeframe will only serve their goals of receiving a timely approval and providing service to their customers if both sides understand the basic mechanics and legal framework of the 6409 procedures. A little extra effort upfront can save a whole lot of time and money on the back end of the process.

To read Part 2, please click here.

What are HVCRE loans – What is High Volatility Commercial Real Estate

HVCRE Loans: What They Are and What You Need to Know

January 1, 2015 marked a dreadful day for certain borrowers and banks. On January 1, 2015, new regulatory capital rules, known as Basel III, went into effect for many banks that provide commercial real estate financing (“Qualifying Lenders”). These new banking regulations make it more costly and less profitable for Qualifying Lenders to finance certain acquisition, development and construction (“ADC”) loans, thereby making such loans more difficult to obtain and/or more expensive for borrowers.

Under the new regulations, all ADC loans will be classified as High Volatility Commercial Real Estate (“HVCRE”) loans, unless the loan secures one of the four types of collateral listed below. If an ADC loan is not used to finance one of the below and, therefore, the ADC loan is classified as an HVCRE loan, then, under the new regulations, the loan is considered riskier than a non-HVCRE loan. As a result, the new regulations require that all Qualifying Lenders maintain 50% more capital in their reserves against such riskier HVCRE loans. Qualifying Lenders will likely pass this increased cost on to their borrowers. Importantly, these new regulations also apply retroactively, therefore, Qualifying Lenders must evaluate their existing ADC loans to determine if such loans must be classified as HVCRE loans. If any existing ADC loans must be classified as HVCRE loans, then Qualifying Lenders who wish to pass on the newly incurred costs to their borrowers will need to review their loan documents to determine if this is permitted.

If the qualifying capital/assets are not timely contributed to the project, then the loan will be classified as an HVCRE loan for the life of the loan even if qualifying capital/assets are contributed to the project after proceeds have been advanced to the borrower.

If the ADC loan is used to finance one of the following, then the ADC loan will not be classified as an HVCRE loan:

  1. one-to-four family residential properties;
  2. real property that would qualify as a community development investment;
  3. agricultural land; or
  4. commercial real estate projects in which:

a. the project’s loan to value ratio is less than or equal to the maximum loan to value ratio set forth in applicable regulations (i.e., 65% for raw land; 75% for land development; 80% for commercial, multi-family and other non-residential construction; 85% for 1-4 family residential construction; and 85% for improved property);

b. the borrower has contributed capital to the project in an amount equal to at least 15% of the real estate project’s “as completed” appraised value before any loan proceeds have been advanced; and

c. the capital referenced above in item b., or capital internally generated by the project in the amount sufficient to maintain the 15% requirement, is contractually required to remain in the project throughout the life of the loan.

A borrower who plans to develop property for something other than one-to-four family residential, community development investment or agricultural, must satisfy the elements listed above at items 4.a. through c. in order to avoid the increased costs associated with HVCRE loans. U.S. federal banking agencies have provided further guidance on how a borrower may satisfy some of these elements:

A. Capital/Asset Contribution to the Project: the following are examples of capital/assets that borrower may contribute to satisfy the 15% requirement

  • land, purchased with cash, that is contributed to the project (note: the value of this land is determined as of the date the land was purchased; the borrower does not get the benefit of any increase in value);
  • out-of-pocket development expenses paid by the developer-borrower such as brokerage fees, marketing expenses and cost feasibility studies;
  • reasonable soft costs included in development expenses such as interest and fees related to pre-development expenses, developer fees, leasing expenses, brokerage commissions and management fees; and
  • cash expended by the developer-borrower to acquire a site, including engineering or permitting expenses directly related to the project.

Examples of assets that cannot be used to satisfy the 15% requirement include: borrower-owned real estate from an unrelated project pledged as collateral; financing from a third party lien-holder; assets contributed to the project after loan proceeds have been advanced; and cash received in the form of grants (whether from not-for-profits, municipalities or other government agencies).

Importantly, the qualifying capital/assets must be contributed to the project before any loan proceeds are advanced. If the qualifying capital/assets are not timely contributed to the project, then the loan will be classified as an HVCRE loan for the life of the loan even if qualifying capital/assets are contributed to the project after proceeds have been advanced to the borrower.

B.  “As Completed” Appraised Value: means the property’s market value as of the time the project is expected to be completed (note: this is different from “as stabilized” value, which means the property’s market value as of the time the property is projected to achieve stabilized occupancy). A Qualifying Lender may only consider the “as completed” appraised value for purposes of determining whether the ADC loan must be classified as an HVCRE loan.

C. Life of the Loan: the “life of the loan” expires when the loan is converted to permanent financing or the debt is paid in full. The loan documents must include terms that prohibit the borrower from withdrawing the contributed capital/assets (or internally generated capital in the amount required) until the expiration of the life of the loan.

Given that these regulations are still fairly new, we will continue to monitor any changes and provide updates and further information as it becomes available.