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Real Estate Tips: Short-Term Rentals, Dying Malls, ADA, and Mechanic's Lien Law

Real Estate Tips: Short-Term Rentals, Dying Malls, ADA, and Mechanic's Lien Law

Posted on October 16, 2018

Originally published October 2018

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

Any U.S. federal and state tax advice contained in this communication is not intended or written by the Knox Law Firm to be used, and cannot be used by you, for the purpose of: (i) avoiding penalties under the Internal Revenue Code that may be imposed upon you, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Zoning For Short-Term Rentals - Airbnbs

Enterprises such as Airbnb have expanded the possible uses of single-family dwellings. It begs the question: Does rental of a single-family home for a period of less than 30 days make the use of the home “commercial” as opposed to a single-family residence?

Courts are grappling with outdated zoning ordinances that do not address the new “uses” that property owners are engaging in. Cases turn on definitions of words and phrases in zoning ordinances such as “family”, and “dwelling”, and tourist home”, and “transient use.” As a practical matter none of these terms or phrases were intended to regulate the short-term use of single family residences offered by enterprises such as Airbnb.

Municipalities need to enact new short term rental ordinances, providing a specific definition for “short term rentals” and that:

Make short term rentals permitted uses in identified zoning districts within the municipality,
Require licenses and provide for inspections of short term rentals,
Regulate issues such as capacity, length of stay, parking and other matters relevant to short term rentals,
Require an owner or manager to be responsible for a short term rental and be available to promptly respond to inquiries and complaints, and
Provide for penalties for violations of the ordinance.

Repurposing Space and Adaptive Reuse: A New Life for Dead and Dying Malls

Developers rapidly overbuilt malls in the 1970s and 1980s. The United States has twice as much square footage in shopping centers per capita than the rest of the world and six times as much as countries in Europe.

As shopping trends have changed, enclosed malls continue to close at an alarming rate. Anchor brands such as JC Penney, Sears and Macy’s continue to close stores in malls. In many areas of the country developers are finding new uses for dead or dying malls:

Medical centers
Colleges and elementary schools
Churches

Developers are also finding ways to rehabilitate or redevelop malls:

The repurposing of retail space into lifestyle and activity centers - example: On September 1, 2018, Round One Entertainment opened a family entertainment center located above the mad Mex restaurant at the Millcreek Mall. It offers arcade games, bowling, table tennis, darts, billiards and karaoke with a 162-seat café that serves pizza, wings, wine and beer.
Separate outside entrances and added greenspace.
A city will be built on top of an old mall at Oakridge Centre in Vancouver, British Columbia.

Retailers that are willing to adapt to changing times are enjoying a “Retail Renaissance” of sorts. Sprucing up stores, adding e-commerce delivery options and improving service with better-trained employees has had a very positive effect on large retailers. For example, in August 2018, Walmart posted its best quarterly sales in a decade as did Target. Nordstrom and Kohl’s also outpaced analysts’ projections.

Public Accommodation Under the Americans With Disabilities Act (ADA)

Among other things, the ADA prohibits discrimination against individuals in any place of public accommodation. 42 U.S.C. §12182. A “public accommodation” is a privately owned facility whose operations fall into at least one of the following categories:

An inn, hotel, motel, etc.;
A restaurant, bar or other establishment serving food or drink;
A movie theater, concert hall, stadium or other place of exhibition or entertainment;
An auditorium, convention center, lecture hall, or other place of public gathering;
A bakery, grocery store, clothing store, hardware store, shopping center, or other sales or rental establishments;
Shoe repair service, funeral parlor, gas station, office of an accountant or lawyer, pharmacy, insurance office, professional office of a health care provider, hospital or other service establishment;
A terminal, depot or other station used for public transportation;
A museum, library, gallery or other place of public display or collection;
A park, zoo, amusement park or other place of recreation;
A nursery, elementary, secondary, undergraduate or postgraduate private school or other place of education;
A day care center, senior citizen center, homeless shelter, food bank, adoption agency or other social service center; and,
A gymnasium, health spa, bowling alley, golf course or other place of exercise or recreation.

As it relates to real estate development, to comply with the ADA, a public accommodation must:

Remove architectural and structural communication barriers in existing facilities where readily achievable; and
Follow ADA guidelines in new construction or alterations of existing facilities.

Removal of an architectural barrier is readily achievable if it is “easily accomplishable and able to be carried out without much difficulty or expense.” What is readily achievable is determined on a case by case basis in light of:

The nature and cost of the modification;
The overall financial resources of the business in question;
The number of persons employed at the facility; and
The impact of removing the barrier on the operation of the facility.

Examples of exterior barrier removal measures include the installation of ramps, marking curb cuts at sidewalks and entrances and restriping parking lots to provide for handicap parking spots.

To prevail on a discrimination claim, a plaintiff must prove:

He/she is disabled within the meaning of ADA;
The defendant is a private entity that owns, leases or operates a place of public accommodation; and,
The plaintiff was denied public accommodations by the defendant because of his/her disability.

Four categories of legal claims:

United States Department of Justice enforcement actions;
Single plaintiff suits;
Class action suits; and,
Suits brought by advocacy groups.

Private individuals may only request injunctive relief in the form of remediation to stop discrimination and reasonable attorneys’ fees.

Pennsylvania Mechanic's Lien Law

General Concept of Mechanic’s Liens

Mechanic’s liens are creatures of state law designed to give contractors and subcontractors assurances of payment on construction projects. A filed mechanic’s lien grants a contractor/subcontractor a lien on property for labor or materials furnished in the erection, construction, alteration or repair of an improvement.

How do mechanic’s liens work?

Must be filed within 6 months of the completion of work.
For new construction the lien relates back to the visible commencement of construction.
For alteration and repairs the lien attaches on the date of filing.
Contractor/subcontractor must then file a complaint within 2 years of the filing the mechanic’s lien.
If successful, the mechanic’s lien turns into a judgment against the property.

2007 Amendments

Mechanic’s lien waivers were deemed to be void as against public policy.

Mechanic’s lien waivers are valid for residential real estate transactions less than $1,000,000.
Mechanic’s lien waivers are valid if given for payment received or in exchange for a bond posted by a contractor guaranteeing payment to subcontractors (will only bar claims made by subcontractors).

Expansion of the definition of subcontractor to include sub-subcontractors.

Extension of the time to file mechanic’s liens from 4 to 6 months.

New mortgage lender protections that made mechanic’s liens subordinate to:

Purchase money mortgages
Open-end mortgages, the proceeds of which are used to pay all or a part of the cost of completing erection, construction, alteration or repair of the mortgaged premises.

Purchase Money Mortgage: Taken by a mortgagee to secure repayment of money actually advanced by such person to mortgagor at the time mortgagor acquires title to the property and used by mortgagor to pay all or part of the purchase price. Must expressly state that the mortgage is a purchase money mortgage.

Open-End Mortgage: Secures advances up to a maximum amount of indebtedness outstanding at any time stated in the mortgage. Must be identified at the beginning of the mortgage as an “open-end mortgage” and must clearly state that it secures future advances.

Kessler decision – Pennsylvania Superior Court – 2012 (46 A.3d 724)

PA Superior Court held that a mechanic’s lien took priority over an open-end mortgage because not all of the proceeds were used for the erection/construction of the mortgaged premises. Portions of the loan proceeds were used to pay for closing costs, satisfaction of an existing mortgage lien and other judgment s and liens. Of the roughly $256,000 in loan proceeds disbursed at the closing, approximately $95,000 was used to pay for things other than “erection or construction.”

2014 Amendments

Imposition of “60% Rule”: Open-end mortgage recorded after the commencement of construction will have priority over a mechanic’s lien id at least 60% of the loan proceeds are used to pay all or part of the costs of construction.

“Costs of construction” is broadly defined in the amendments to include all costs, expenses and reimbursements pertaining to construction, including off-site improvements and government impact fees, as well as other construction-related costs such as real estate taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees, architect fees, engineering fees, consulting fees, accounting fees, management fees, utility fees, origination fees and commissions, finance costs, closing fees, recording fees, title insurance, escrow fees.

Certain changes affecting the impact of mechanic’s liens on residential property. Provides a means by which a mechanic’s lien can be discharged from residential property where an owner has paid the full contract price to the contractor, and provides that a subcontractor does not have a right to a claim with respect to residential property if the owner has paid in full the contract price to the contractor.

Mechanic's Lien Law - Conclusions & Take-Aways

No Construction in Last 6 Months

Mechanic's lien exception will be removed from lender's title insurance policy upon receipt of an affidavit from the owner/seller affirming that no construction has taken place.

Purchase Transaction/New Construction

Mechanic’s lien exception will be removed from lender’s title insurance policy if it is clearly a purchase money mortgage being given by the borrower even if construction has already commenced.

Expressly stated to be a purchase money mortgage;
Should be recorded within 10 days of closing; and,
All of the mortgage proceeds should be used to acquire the property.

Construction Loan – No Construction Has Commenced

Mechanic's lien exception will be removed from lender's title insurance policy upon confirmation that:

The subject mortgage is an open-end mortgage; and
Sufficient evidence that work has not commenced - photograph of property along with photo affidavit and an affidavit signed by the borrower and contractor that no work has commenced.

Construction loan – Work Has Commenced

60% Rule:

Loan Agreement
Construction Budget - Construction Contract
Project's Sources and Uses
Indemnity from Owner/Borrower

State Construction Notices Directory

Eligible for projects over $1,500,000. Owners file a Notice of Commencement with a centralized internet-based State Construction Notices Directory. A copy of the Notice of Commencement must also be conspicuously posted at the project site before physical work commences at the site.

If an owner files a Notice of Commencement, any subcontractor must file a Notice of Furnishing with the directory within 45 days after first performing work or services at the job site in order to be eligible to file a later mechanic's lien claim. Any potential lien claimant that fails to file a Notice of Furnishing within the allotted time forfeits the right to file a mechanic's lien claim.

General contractors do NOT need to file a Notice of Furnishing to preserve lien rights.

Author: Timothy M. Zieziula

Originally published October 2018