Articles Posted in Real Estate

Late last year Philadelphia enacted a new lead paint disclosure law that changes the way residential landlords do business in Philadelphia. Under the Lead Paint Disclosure and Certification (LPDC) ordinance effective later this month, a tenant in targeted situations must be given a lead paint certificate when the lease is first signed. This certificate, prepared by a certified lead inspector, must state that the apartment is either “lead free” or “lead safe”. With respect to a sale as opposed to renting, the seller of real property needs to be presented with either of the two lead designations specified above, or a lead based paint disclosure form prepared by the Philadelphia Department of Public Health.

As alluded to above, there are two types of lead based certificates. A lead free certificate mean just that, there is no lead contaminated dust, paint, or soil in the property. Lead free certificates have no termination date, but due to a change in the definition of lead free under the new LPDC, lead free certificates that were obtained prior to the effective date of the ordinance will not work. Alternatively, lead safe certificates are issued when there may be lead contaminated material in the property, but it’s not currently a danger. Usually, this happens when it’s suspected there may be lead paint on the walls, but it’s been coated over with so much latex paint that it’s effectively sealed off from causing a problem for the tenants. Lead safe certificates have a limited life span because, for example, top coats of paint that cover the underlying lead based paint can peel away, or lead contaminated soil that is buried or cover by “clean” soil can push up to the surface over time. As a result, the rules require that “lead safe” certificates be no more than 24 months old when the lease begins. In either event, the certificates need to be signed by the tenant and also filed with the Philadelphia Department of Public Health.

In addition to the certificates, the LPDC also requires certain informational brochures and statements be provided in a Philadelphia residential lease. Many of these rules apply in the case of lease renewals as well, so you do not avoid the costs merely by keeping the same tenants in place.

Not surprisingly, there are significant penalties if a landlord fails to comply with the LPDC. Penalties include exemplary damages up to $2,000 per day, attorneys’ fees, punitive damages, and injunctions to enforce. In addition (and this is the kicker) if rent was already paid by the tenant, the tenant will be entitled to a refund of the paid rent for the entire period of time the landlord was not in compliance with the LPDC.
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If you recently transferred real property in Philadelphia between July 1, 2012 and January 5, 2013, you may be entitled to a refund in the amount of transfer tax paid. For clear cut real estate transaction where property is being conveyed by a deed at fair market value, the transfer tax is based upon the purchase price of the property. However, when the purchase price is not fair market value, or the deed recorded relates to a long term lease, for example, the common level ratio (CLR) comes into play.

Typically the CLR is updated each year, but due to Philadelphia’s tax assessment issues, the State Tax Equalization Board (STEB) did not establish for Philadelphia County a CLR for the period July 1, 2012 to June 30, 2013. Since the ratio in effect for this period remained “to be determined”, the CLR from the previous period remained in effect. This amount, 3.97, was used to determine a property’s computed value until the updated CLR was published.

Recently, the CLR for July 1, 2012 through June 30, 2013 was determined to be 3.27. Since the new CLR is lower than the previous CLR (3.97), taxpayers are entitled to refunds for transfer taxes paid relating to real property transfers made after June 30, 2012 from both the Pennsylvania and Philadelphia revenue departments (if they used the 3.97 CLR).

This has the potential to amount to a significant refund. For example, if a property has an assessed value of $1,000,000, the computed value with the old CLR would be $3,970,000. The resulting realty transfer tax would then be $158,800. With the new CLR the realty transfer tax would $130,800, with a difference and refund of $28,000.
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On December 17, 2010, President Obama signed into law a two year extension of former President Bush’s tax cuts that were set to expire at the end of this year. Remaining in effect till the end of 2012 are all of the Bush-era reductions on income and capital gains taxes. A fix to the estate tax, which temporarily expired this year, was also a hot topic between the Republicans and Democrats. The Republicans won this battle, with a reduced top rate of 35% next year, the lowest rate since 1931, and applies on estates larger than $5 million per person. For a married couple with the simplest of planning, that means estate under $10 million can be made free from estate tax. The Democrats had wanted the top rate to be 45% and the exemption to be applied after $3.5 million per person. This reduction is sparking fears in the non-profit community that charitable giving may drop substantially if there is no longer a tax benefit for the contributions.

Employers will benefit with deduction rules which allow businesses to write off 100% of certain capital investments made from September 9, 2010 through the end of 2011, instead of over the investment’s useful life. Employees get a 2 percent reduction in their payroll tax for the next year, which will mean more money into their pockets every week. This is a benefit that will positively affect sole proprietors and small business owners as well, and may require a rethinking of the traditional bonus vs. dividend analysis made during the year. The plan also continues extended unemployment insurance benefits through 2011.

Experts estimate the total cost of the tax cuts to be $858 billion over the two year life of the extension.
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It’s been discussed for years (decades?) and the subject of numerous mayoral campaign debates, but it looks like major changes to Philadelphia business taxes may be in the works. The Philadelphia Inquirer is reporting that a majority of City Council has signed onto a plan to shift the business tax burden away from profits towards gross receipts. All at first blush this seems to be a counterintuitive move since our firm, like many others, has for years advised clients who located their businesses outside of the city because of the onerous gross receipts tax. However, there are provisions which may make this shift not only palatable, but beneficial to small businesses in the city.

The Inquirer is reporting that the first $100,000 of sales will be exempt from the gross receipts tax. Further, certain industries such as manufacturing and retail will be taxed at preferential gross receipts tax rates, some as low as 0.10%. for other businesses, the proposed 0.53% tax, on receipts over $100,000, is targeted to hit out of town operations harder than local mom-and-pop’s. Whether that holds true or not, or if Mayor Nutter even goes along with the plan, is something that remains to be seen.

One thing the does seem to be certain is that we’re going to see a major shift in the compensation packages paid to owners and principles of small businesses in Philadelphia. For years the business privilege tax pushed owners to take their income as salary and bonus, rather than profits and distribution, unlike their colleagues in the rest of the country. With the abolishment of the Business Privilege Tax we’re nearly certain to see small business owners in Philadelphia making a change to pay themselves a distribution, subject to the lower capital gains tax rate, rather than the higher taxed bonuses we’ve seen over the past few years.

If this bill goes through, savvy business owners will start to think about establishing secondary entities outside the city limits to reduce the gross receipts subject Philadelphia taxes.
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With the upcoming deadline fast approaching, we wanted to follow-up our April 15, 2010 post titled “New Lead Paint Rules for Contractors” with a timely reminder. As most people are aware, lead based paints were banned from residential construction in the late 1970’s because of the harmful affects to individuals and particularly, the developmental issues it created in young children.

Renovation firms/contractors and workers will have until September 30, 2010 to obtain the necessary training/certifications; or at least be enrolled in these classes to avoid violating the new Renovation Repair and Painting Rule. Requirements include, among others items, new training guidelines, new certification processes for paint disturbances where lead may be present and that each project must have a designated certified renovator that is responsible for overseeing the project and insure compliance with the new RRP Rule. The rule imposes requirements where a failure to comply can result in a substantial fine of $37,500 for a single violation! We know the costs of those new approved HEPA vacuum and filtration systems are high, but they don’t approach the level of the potential fines for most small to mid-sized jobsites.
While we don’t yet know exactly how expensive the new regulations will be in regards to lawsuits, we are working closely with many of our landlord clients to prepare for this new liability. We’ve already seen instances of contractors and property owners attempting to nod and wink their way out of compliance as a cost saving measure. From the landlord’s perspective, even if the fines aren’t enough of a deterrent, the potential lawsuits should be terrifying.

Going forward, we are advising our contractors, property managers and other clients who own and rent/lease real estate that this will be a major issue and that their contracts will need to be reviewed to allocate for this new liability. In addition, clients need to talk with their insurance adjuster as well to make sure they have coverage as well.
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