Appeals Court Decision May Limit Construction Warranties in Georgia to Eight Years

A recent case from the Court of Appeals of Georgia could lead to significant changes related to construction warranties. In Southern States Chemical v. Tampa Tank & Welding, the appellate court appeared to disregard the effects of certain long-term contractual warranties, instead finding that any action for damages is precluded by the eight year period under the statute of repose.

The case involved claims of breach of contract and breach of express written warranties related to faulty renovation and testing of a sulfuric acid storage tank. Southern States Chemical, the manufacturer who brought the action, had an express one-year warranty in its renovation contract, but brought the claim ten years after renovation was completed. To argue that the damage was still covered by warranty, it claimed that calculations of system life expectancy in post-installation reports acted as an express 40-plus year warranty.

After finding that Southern would not be covered by the 40-plus year warranty because of an issue with consideration, the court went further and considered the statute of repose.  Southern argued that the statute of repose did not apply because its claim was based on breach of an express promise, not negligence or construction deficiency. However, the court found no distinction in the statute between negligence and contract claims. It stated, “[w]hether in tort or in contract, the statute broadly precludes any action to recover damages brought outside the eight year period of repose.” Ultimately, the court held that Southern’s contractual claims were barred by the statute of repose because the action was brought ten years after renovations were completed.

The case is raising concerns for building owners and contractors, who rely on the validity of their warranties. Attorneys speaking to Bisnow gave multiple interpretations, many confirming the building owners’ and contractors’ concerns. One attorney claimed that the language of the decision is clear in limiting any actions based on property improvements, even when there is a signed warranty between the parties. Another attorney also understands the case to cut off warranties at eight years, a decision he says will deny owners of commercial real estate “their fundamental right of contract.” On the other hand, one attorney interprets the case slightly differently, claiming that the court may have come to a different decision had they been considering a true 40-plus year warranty, rather than the unofficial 40-plus year warranty at issue in the case.

Whether or not the decision does, in fact, limit all actions to recover damages to eight years, there will be numerous lawsuits brought following this case based on the new uncertainties. Owners of commercial real estate should closely follow the fallout of this case.

About the author

Melanie Tate is a J.D. candidate at Emory University School of Law. Melanie earned her B.A. in literature from Louisiana State University. She is a 2019 – 2020 legal intern at Caiaccio Law Firm.

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The Commercial Real Estate Market in 2020… What Can We Expect?

The year is coming to an end, and there are a lot of questions about what to expect in the commercial real estate market as we kick-off a new decade.

As the fear of a recession wanes, most experts are predicting continued growth in the commercial real estate market. Hardy economic activity, strong property fundamentals, low-interest rates, and the attractiveness of real estate as an asset are the driving factors supporting the outlook according to the CBRE 2020 Real Estate Outlook report.

Here are some key predictions for 2020:

INTEREST RATE OUTLOOK

Slow economic growth caused the Federal Reserve to cut interest rates three times in 2019. The economic slow-down is expected to continue due to several issues creating higher levels of uncertainty including slowing global growth, ongoing trade wars, and the 2020 election. Experts predict at least two more cuts in 2020 as an attempt to stimulate the economy and prevent a recession. According to the CBRE 2020 outlook, the federal fund rate is expected to be reduced to a range of 1.0% – 1.5%.

PROPERTY FUNDAMENTALS

Property fundamentals are predicted to continue on an upward trend but slow from the past two years. According to the report published by CBRE, the tech industry will drive demand for leased space in the coming year. As with most of the commercial outlook, growth in the flex workspace is anticipated to slow.

RETAIL

More retail stores are expected to open than close in the new decade. The recognition of the importance of a physical store to enhance brand awareness has grocers, franchisers and health and beauty brands opening storefronts nationwide. Companies in the health and beauty sector, such as specialty fitness, are leveraging their social presence to increase memberships and drive demand for more physical locations.

ALTERNATIVES

The CBRE report points to the six-year growth in specialty sectors including self-storage, medical office space, senior and student housing, etc. Investor interest in these areas has steadily increased recently and will continue in 2020.

Barring any unforeseen risks, commercial real estate is expected to yield positive results in 2020.

About the author

Kevin Caiaccio, founder of Caiaccio Law Firm, has more than 25 years of experience practicing commercial real estate law. His cut-through-the-noise mentality encourages clients and colleagues to be selective and focus on big-picture solutions. He believes in fighting for what’s important and filtering through obstacles that distract.

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Multifamily Investment Forecast 2020

The multifamily segment of commercial real estate remained strong in 2019, but what does the forecast look like for 2020? 

With recent rate cuts by the Federal Reserve the commercial real estate sector is in a wait-and-see period for how these cuts will impact investment in multifamily properties.  Additionally, the on-again, off-again trade war has created a headwind on the commercial real estate market that adds to the wait-and-see approach due to the uncertainty of the repercussions, if any, of a possible resolution to that issue.

According to the Marcus & Millichap Multifamily Investment Forecast for 2020, household formation will continue to outpace new construction.  Construction will continue to increase but the rate will not be enough to catch up to household formation.  This will lead to downward pressure on vacancy rates for multifamily. The forecast is that vacancy rates will remain low with a strong outlook for the coming year.  The leading regions in the US for household formation and population growth are the Southeast and Southwest. Multifamily investment in these regions is strong as the demand for housing increases with the population increase.

The increased demand for housing is especially strong for affordable housing.  However, the cost of construction has created a limitation on the multifamily market.  Current constructions costs are to a point that building anything but Class A apartments is unprofitable.  These high costs will continue to lead to an inability to keep up with demand for affordable housing.

Overall, the outlook for multifamily investment in commercial real estate looks to continue to be strong for 2020.  The impact of the recent rate cuts by the Federal Reserve and the current trade war remain to be seen, but the signs of continued growth in multifamily are still good with household formation continuing to rise and vacancy rates staying low.  2020 looks to be another good year for multifamily investment.

About the Author

Attorney Michael Gay joined Caiaccio Law Firm in 2017 as an associate attorney handling commercial real estate transactions.  Prior to that, he worked in the corporate world, in business management and accounting. During his studies to transition into law, Michael served as Secretary of the Older Wiser Law Students organization at Mercer Law School.

Michael is married and has one son. He is an Eagle Scout, an avid college football fan, and he enjoys exploring the outdoors.

He can be reached at michael@clf-attorneys.com and by calling 404.846.4990 x 7.

Real Estate Syndication – Entity Structuring, Legal Issues, & Tax Strategies

Are you on the brink of making a move on a corporate real estate venture? If so, it’s highly likely that you’ve encountered a myriad of questions and your research has quickly tripled or quadrupled in size. We’ve prepared some information that should help.

Contacting a Corporate Real Estate Attorney

One of the first issues you may face is deciding when to contact a corporate real estate attorney. Trey Chancellor of the Caiaccio Law Firm suggests to “bring us in when you’re comfortable you may have a deal so you can have us draft an early access agreement”. Named partner Kevin Caiaccio cautions about dead deal costs, “you don’t want to get into a deal, run up a legal bill and then it doesn’t pencil out the way you expect it and have to terminate.” 

There’s no question about it, legal issues related to acquiring and disposing of properties, entity structuring, and tax strategies tied to real estate syndication can be quite complex. 

Entity Structuring

Although there are some common characteristics such as dealing with LLCs; when it comes to entity structures “it’s certainly not one size fits all” explains Mr. Caiaccio. “Every structure has some nuances and unique qualities.” As a limited partner in a deal, Mr. Chancellor advises following the simple but extremely important step of “knowing who the syndicator or general partner (GP) is.”

Avoiding Legal Issues

From a legal expert’s perspective, “we approach when we are buying as if we could sell the property,” says Trey Chancellor. With this strategy in mind, plan ahead to mitigate any legal issues that may arise when it comes time to sell. Verify that titles, zoning, surveys, etc. are all clearly defined, accurate, and up to date. 

Planning Tax Strategies

Mr. Caiaccio and Mr. Chancellor both agree “there are a lot of attorneys out there who draft these operating agreements who do not fully understand the tax allocations.” They both advocate having a CPA in the “org chart from the outset.” Have your CPA make suggestions on how to word certain allocations as opposed to doing so when the first tax season rolls around after the deal is complete.  

For more information on this topic, check out the latest podcast from The Real Estate CPA with guests Kevin Caiaccio and Trey Chancellor. In the market for a Real Estate Attorney? Visit Caiaccio Law Firm at http://clf-attorneys.com/.