February 22, 2016

West Coast Real Estate Update: Feb. 22, 2016

Holland & Knight Update
Susan Jennifer Booth | Stacie Andra Goeddel | Robert M. Haight Jr. | Karl J. Lott | Douglas A. Praw

ASTM Updates Property Condition Assessments Standard

The American Society for Testing and Materials (ASTM) published at the end of 2015 the latest version of the Standard Guide for Property Condition Assessments: Baseline Property Condition Assessment Process (ASTM E2018-15). ASTM regularly updates its standard in an effort to keep it relevant with the current market and other regulatory requirements. Property condition assessments (PCAs) allow buyers, sellers and lenders to evaluate the condition of their properties and assess their potential risks, and one of the most widely recognized standards is that of ASTM. This updated guide, while acknowledging that there are varying levels of PCAs and due diligence, strives to create an industry-wide baseline for such assessments of commercial real estate.

For the most part, the updates are not significant departures from the existing standard, as they serve to reflect what most consultants are currently doing within the industry. However, there are a few notable changes that clients should be aware of in ordering and analyzing their PCAs:

Revision of Accessibility Requirements

Previously, the standard for accessibility involved a tiered approach to the evaluation of the Americans with Disabilities Act (ADA) – Tier I being the most basic review and Tier III being the most extensive. Since the last edition of the ASTM standard, the U. S. Department of Justice implemented changes to the ADA in 2010. ASTM's response to such revisions in this latest update was to eliminate the tiered approach and compile a comprehensive checklist to reflect the latest version of the ADA. Clients may still discuss in advance specific degrees of work to be conducted under this review that satisfy their specific diligence needs.

FHA Compliance Checklist

The new ASTM standard similarly introduces a Fair Housing Act (FHA) checklist to evaluate improvements for compliance with FHA requirements. While Title III of ADA applied to areas of public accommodation, it did not extend to the apartment units themselves. This new checklist is consistent with the Fannie Mae and Freddie Mac guidelines for evaluating multifamily properties.

Modification of Certain Definitions

Some of the more notable definition changes in the standard include the definitions for the terms "good," "fair" and "poor" conditions based on the need for immediate or short-term repairs. Items in good condition do not require immediate or short-term repair; items in fair condition are in working order, but may require repairs; and items in poor condition require immediate or short-term repairs. Ultimately, these new definitions offer consistency with how these terms are currently defined and used in the industry.

$500 Million Earmarked for Southern California Light-Rail Projects

The Obama administration earmarked $500 million in the proposed federal budget for the next fiscal year for three Los Angeles County Metropolitan Transportation Authority (LA Metro) projects and Orange County Transportation Authority's (OCTA) OC Streetcar project.

LA Metro is expected to receive up to $375 million for its Regional Connector and Westside Subway projects. The Regional Connector and the first section of the Westside Subway extension already have full funding agreements with the Federal Transit Administration's (FTA) New Starts program.

LA Metro CEO Phillip Washington stated, "The federal funds that President Obama is recommending in his budget for Metro projects will keep thousands of individuals in Los Angeles County hard at work building and providing mobility to millions of local residents."

OCTA is expected to receive up to $125 million for the OC Streetcar project, which is a 4.1-mile streetcar project that would run from downtown Santa Ana to a new transit hub in Garden Grove. With construction scheduled to begin in late 2017, the federal endorsement puts the project on a path to obtain enough federal dollars to cover up to half its cost.

FIRPTA Tax Withholding Increased

The tax rate for withholding required by the Foreign Investment in Real Property Tax Act (FIRPTA) increased from 10 percent to 15 percent on Feb. 16. FIRPTA imposes federal tax on the sale of an interest in real property located in the U.S. by a foreign seller. To ensure that FIRPTA taxes owed are collected, buyers who are purchasing a real property interest from a foreign seller will now be required to withhold 15 percent of the purchase price. The increase in the withholding rate is the result of the recently enacted Protecting Americans from Tax Hikes (PATH) Act, which was signed into law in December 2015. When purchasing real property in the U.S., it is imperative that a buyer find out if the seller is a foreign person as defined by FIRPTA. A buyer who fails to withhold at the new 15 percent rate after Feb. 16 may be held liable for the taxes owed by the Internal Revenue Service (IRS).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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