Indiana courts have issued several opinions in the last year that underscore the risk to a lender who does not make a physical inspection of the property before it loans money against it.  In these cases, the court ruled against lenders in various contexts for the reason that an inspection of the property would have revealed that there were parties in possession.  This knowledge then gives rise to a duty on the part of the lender to inquire as to what those rights might be.  Failing to take this step puts the lender at risk of being subordinate to any interest that the party in possession might have.

In one case in particular, a father was in possession of real estate that arguably had been conveyed to his son.  However, the father had disputed the title and had filed a quiet title action to determine actual ownership.  The father at all times remained in possession of the ground.  However, the failed to file in the public record a lis pendens notice.  This is a notice that alerts all other parties that there is a dispute relative to real estate title and cautions them that any action that they take with the real estate will be subject to that dispute.

The son borrowed money against the property.  The lender did a title search and did not see any evidence of the quiet title action.  However, the lender also did not inspect the property which the court indicates would have revealed that the father was in possession.

The son subsequently went bankrupt.  However, when the lender went to foreclose on the real estate, the father defended on the basis of its prior ownership claim.  The court ultimately found in favor of the father and that his ownership claim was superior to the son’s.  Then the court went on to invalidate the mortgage to the lender because the lender failed to make the inspection of the property.

Most lenders do not undertake an inspection of the property to ascertain whether they are parties in possession.  As this and other cases have illustrated this year, the failure to make this inspection and determine what parties might be in possession exposes the bank to risk and that its mortgage will be behind the prior rights of other parties.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

Lenders have always required evidence of good title to real estate as a condition to approving a mortgage loan.  This evidence is usually in the form of a title opinion or title insurance.  Whether to order a title opinion or title insurance will affect the amount of the borrower’s loan costs and the scope of protection afforded to the lender.  You should be aware of the differences before deciding on the form of protection.

Title opinions and title insurance policies are both based upon the review of underlying title evidence which may be in the form of an abstract of title.  An abstract contains a summary of deeds, mortgages, leases, and other documents and matters of public record which affect title to real estate.  After the title examiner reviews the abstract, he or she prepares an opinion or title insurance commitment which describes title defects or lists requirements necessary for the lender to acquire a valid mortgage lien against the real estate.

Title insurance has several advantages over title opinions and has consequently become the preferred method of protection for the lender.  Defects later discovered in the title are better handled by the submission of a claim with the title insurance company than by seeking to recover directly from the attorney who drafted the opinion.  In addition, title insurance has broader coverage than title opinions.  Unlike a title opinion, title insurance covers risks of forgeries in the chain of title, altered instruments, instruments obtained by fraud or duress, instruments executed by incompetence, and defects caused by mistaken identity.  Although borrowers will see slightly higher transaction costs by purchasing title insurance, the additional coverage of a lender’s title insurance policy will give greater protection.

Author: Jason P. Lueking (bio)
Phone: 317.464.1591
email: jlueking@bamberger.com

When purchasing real estate, you hire many professionals to inspect the property and provide you advice.  Various conditions are often reviewed including environmental contamination, termite damage, structural integrity, the operations of plumbing, electrical and mechanical systems, radon levels and boundary line encroachments.  The consultants often provide you with their form of service contract immediately before performing their work. 

Service contracts should be reviewed carefully before you agree to employ the consultant.  Service contracts often have very limited disclaimers.  These disclaimers may state that in the event the consultant makes a mistake, your liability is limited to the amount of the inspection or another limited dollar amount.  In addition, the contract may give you a very limited time frame in which to present a claim.  Such limited remedies could leave you in an unfortunate situation if a substantial defect is discovered after you own the property.  If you cannot recover from a third party for the defect, you could be positioned like the characters played by Tom Hanks and Shelly Long in the 1980’s movie The Money Pit. 

When contacting a real estate consultant, be sure to ask about the form of their service contract and whether the consultant carries professional liability or error and omissions insurance.  Ask to see a copy of the service contract well in advance of the property inspection.  In addition, you are entitled to obtain a current insurance certificate disclosing the amounts and types of coverages carried by the consultant.  Such background checks may prove invaluable if you later discover a mistake of the consultant.

Author: Jason P. Lueking (bio)
Phone: 317.464.1591
email: jlueking@bamberger.com

New Law Releases Confidential Information Concerning Oil and Gas Lease Production and Ownership

Prior to July 1 of this year, Indiana Code provided that all information related to earnings, income, profits, losses, or expenditures given to an assessing official is confidential.  This confidential information included earnings, income, profits, losses, and expenditures related to production of oil and gas.  This oil and gas production information is—and continues to be—reported to the assessing officials on a form called a Form G&O-1 by the purchaser of the mineral.  This form aids the assessor in determining the total taxes due and owing on producing oil and gas leases.  The form includes information concerning a lease’s percentages of ownership and productivity.  It also includes the names and addresses of those with an interest in the leasehold.  Prior to July 1, the G&O-1 was a confidential document not subject to disclosure to the general public.  It is no longer confidential.

The problem with the general prohibition against disclosure of financial information relating to production of an oil and gas lease was that it made it very difficult for potential tax sale purchasers to measure the value of such interest.  Unlike surface real estate, the value and production potential of an oil and gas lease are difficult to determinate without information that is usually unavailable to the public.  While a city lot to be sold at tax sale can be visually inspected and appraised prior to the sale, a potential purchaser of an oil and gas interest usually does not have that luxury.  The critical information needed for valuing an interest– production history and future production potential– is rarely available to the public.  Many potential tax sale purchasers are unwilling to take such an uncalculated risk.

The result is that counties inSouthwestern Indianaoften had difficulty in disposing of oil and gas interests on which taxes were delinquent.  The interests remain unproductive, which means that they did not generate income for producers or property taxes for the public.

Presumably, the new law relaxing the confidentiality of this information was passed to resolve this problem.  It provides,

“Confidential information concerning an oil or gas interest . . . may be disclosed by an assessing official if the interest has been listed on the delinquent property tax list . . . and is not otherwise removed from the property tax sale . . . .  A person who establishes that the person may bid on an oil or gas interest in the context of a property tax sale may request from an assessing official all information necessary to properly identify and determine the value of the gas or oil interest that is the subject of the property tax sale. The information that may be disclosed includes the following:

(1) Lease information.

(2) The type of property interest being sold.

(3) The applicable percentage interest and the allocation of the applicable percentage interest among the owners of the oil or gas interest (including the names and addresses of all owners).”

The apparent purpose of this new law was to lift the prohibition against disclosure as it relates to oil and gas interests on the delinquent tax list.  It was not intended for the release of information concerning earnings, income, profits, losses, and expenditures for other oil and gas interests.  Those owners current on their property taxes arising from their oil and gas interests should remain protected from the disclosure of such information.

As practical matter, the new law creates an immediate problem for assessing officials.  Interests in oil and gas leases are almost always fractionalized.  Multiple individuals or businesses often undivided interests in an oil and gas lease.  The Form O&G-1 contains information related not only to those interested holders in a lease with delinquent taxes, but every other interest holder as well.  How does an assessing official make a disclosure of earnings, income, profits, losses and expenditures for an oil and gas interest on the delinquent tax list, while protecting the same information for the remaining fractional interests that are not on such list?

As of August 22, based on its interpretation of the Indiana Public Access Counselor’s Advisory Opinion dated August 17, 2011, the Indiana Department of Local Government Finance Assessment Division Director has taken the position that assessing officials must turn over all of the information contained in the Form O&G-1—including production information, names and addresses of interest holders, and applicable percentages of ownership.  This complete disclosure must be made upon request if any of the interest holders on the lease has delinquent taxes related to that lease.

This means that if a person owns a fractional interest in an oil and gas lease along with 50 other interest holders, and just one of those interest holders fails to make timely payment of taxes, any information contained in the Form O&G-1 is available for public consumption—including your percentage of ownership, the production figures of the lease, and the person’s name and address.

The new law makes valuable information available to oil and gas producers and prospective tax sale purchasers.  If craftily used, it can also provide a competitive advantage to oil and gas prospectors in the area who can analyze and apply this information.  Presumably, more oil and gas leasehold interests will be purchased at tax sales by eager producers who will generate income and property taxes.

But the drawbacks are considerable.  Assessing officials are already being inundated with requests for volumes of O&G-1 forms, creating an administrative burden and expense for the counties.  But more importantly, the new law severely erodes the privacy that a person had in his or her financial information in an oil and gas lease.

Tax abatement is an incentive tool used by local government to attract private investment, economic development, and job creation by phasing in all or a portion of new or increased assessed value resulting from such investment from taxation.  Tax abatement can apply to both real and personal taxation.

The tax abatement procedure is governed by state law.  Taxes arising from new investment are reduced and phased in according to a set schedule.  In order to receive such reduction, the taxpaying investor must apply for the abatement, make the investment, and finally demonstrate the benefit from the investment by the creation of jobs, alleviation of environmental concerns, or otherwise.  Because tax abatement is meant to be an incentive— as opposed to a reward— for investment, the taxpaying investor must apply for the abatement before making the actual investment.

Property tax abatement continues to be the one of the few— but effective— economic development tools used by local government today.  Any business contemplating investment that may result in new or increased property tax assessment (real and/or personal) should consider abatement as an opportunity to facilitate the new investment.  Likewise, any local governmental entity should consider this tool if it hopes to be a serious player in an increasingly competitive world market for jobs and investment.

Reusing land and recycling materials are more than socially responsible business decisions.  Businesses that reuse and recycle are saving money.  Indiana’s Brownfield and Recycling Programs provide technical assistance and funding resources to help identify opportunities and develop cost saving solutions.

Reuse

Indiana has many abandoned or underused properties due to an actual or perceived environmental condition, also known as Brownfields. Indiana communities know that despite a property’s great location, bottom-dollar price, existing infrastructure, and available work force, it takes closing the loop on the environmental unknowns to attract businesses to Brownfield properties.  In the 2011 grant round, EPA awarded Indiana communities over $5 million—more than any other state in the Region– for environmental assessments at Brownfield properties. Your community may have a real estate opportunity at a prime location where the environmental unknowns have already been identified or even addressed.  The Indiana Finance Authority also has funding available for below-market interest rate loans at cleanup sites.  Additional information on funding and financing Brownfield Redevelopment and success stories are available through the Indiana Finance Authority.

Recycle

Waste and left over raw material handling and disposal are costly to business and improper waste handling may lead to costly environmental cleanup.  Through Indiana’s Recycling Market Program, a total of $500,000 in grant funds has been made available for businesses interested in purchasing equipment for remanufacturing recyclable materials into products or feedstocks.   A 50% match is required and the deadline to apply is September 26, 2011. Additional information and the application may be found through the Recycling Market Development Program’s website.

Author: Jamie B. Dameron (bio)
Phone: 317.464.1591
Email: jdameron@bamberger.com

With the recent flooding of the Mississippi River System, including our neighboring Ohio and Wabash Rivers, Hoosiers are reminded that while our rivers are vital natural resources, they can also cause devastating loss when their waters leave their banks.  Flood control and prevention are necessary to protect property from damage and to keep people safe from rising waters.

There are generally three methods of flood prevention and control:  drainage, storage or retaining reservoirs, and levees.  Of the three methods of flood control, the use of levees is the most critical in dealing with the flooding of natural watercourses like rivers and streams.

Levees can be constructed and maintained for flood control by both private landowners and federal, state, and local government.

Generally, a private landowner can construct and use levees to protect his or her land from flooding so long as the levee does not obstruct the natural channel and flow of the river or stream.  Such private levees are, however, subject to regulation.  The Indiana General Assembly has given the Department of Natural Resources and the Natural Resources Commission jurisdiction over the use, maintenance, and repair of all levees along the rivers and streams of Indiana, as well as authority to regulate the maintenance and operations of private levees.  Furthermore, the construction of levees is often regulated by county building commissions, which often treat levees as regulated improvements under the local building code.

A number of federal, state, and local governmental entities are also afforded the right to construct and use levees to protect the public from flooding.  The Federal government, through its U.S. Army Corps of Engineers, has had authority to construct and maintain levees to control flooding of U.S. rivers since the passage of the first Flood Control Act in 1917.  The Indiana Natural Resources Commission is vested with the power to construct flood control works, including levees.  Many local levee associations continue to exist and operate, in spite of the repeal of the statute establishing them.  Municipal works boards and flood control districts also have the authority to construct or improve levees to benefit the lands located within the municipality.

Whether the construction and use of a levee is carried out by a private landowner or a governmental entity, the diversion of floodwaters to protect the lands in one area can often have a detrimental impact on neighboring lands.  Unfortunately for those aggrieved, there is often little hope of recovery of any damages suffered as a result of the use of levees.

With respect to private levees, the general rule is that once floodwaters leave the banks of the river or stream, they become “surface waters.”  A landowner is usually entitled to take necessary measures to divert the surface waters from his or her property, even if that means that the waters escape onto neighboring property causing damage or loss.  Surface waters are treated under the law as a “common enemy” of everyone.  The law affords each landowner the right to take reasonable steps to protect his or her property from this common enemy.  Often the only available remedy for the aggrieved landowner is to construct and maintain his or her own flood control works.

Governmental entities likewise enjoy significant protection under the law for construction and operation of levees.  The Flood Control Act gives the federal government absolute immunity for any damages or bodily injury arising from its public levees.  Indiana state and local governmental entities are likewise protected by qualified and absolute immunity for numerous many claims arising from acts or omissions of government or governmental employees.

The laws governing levees are designed to aid individuals and the public in their use of levees for the protection of lands and lives.  Any landowner who is considering the construction, repair, or improvement of a levee should be familiar with the relevant federal, state, and local regulations.  Anyone whose property or safety is placed at risk because of the use or operation of a levee should likewise know his or her rights and options.

The legislature has recently expanded the Indiana Residential Real Estate Acquisition of Licensee Information and Numbers Database program, which mandates the electronic reporting of certain information to the Indiana Department of Insurance (“IDOI”) regarding certain real estate transactions.  Most significantly, cash sales of certain rental or investment properties will be covered, starting next year.

Since January 1, 2010, anyone who closes a first lien purchase-money mortgage on single-family residential real estate, or a refinance of such a loan, has been required to gather and report to the IDOI certain information, including the professional state license numbers of the loan broker, real estate sales person and appraiser involved in the transaction.  Monetary fines are imposed on a closer who fails to submit the information and on the professionals if they fail to provide their license numbers to the closer.

Effective immediately, the reporting obligations under that program have been expanded to cover additional types of loans and to require reporting of additional information.   Effective for closings occurring after December 31, 2011, reporting will also be required for leases or cash sales of real estate where a dwelling is located, if the real estate is classified as residential for property tax purposes.  The requirement does not specify that the buyer must use the dwelling as his own residence, so rental and investment properties may be covered.

Transactions involving commercial real estate and land sale contracts are not subject to the reporting requirements.  Consult a Bamberger attorney if you are unclear as to your potential reporting obligations in connection with a real estate loan or sale.

The awarding of public works projects in Indiana is about to undergo profound changes for taxpayers, construction-related businesses, governmental entities and beyond.  New laws going into effect July 1, 2011 greatly reduce the number of public works projects which will have to comply with the common construction wage and local government will now be mandated to award public works contracts to “local businesses,” giving preferential treatment to local contractors. These changes will completely alter the process of bidding on and being awarded public works projects.

Join the attorneys at Bamberger on Tuesday, June 28th from 11:30-1:00 pm as we discuss the parameters of these legislative changes.  Trent Van Haaften will bring his legislative insight to the background and details of the new laws.  Rounding out the panel are Herb Davis and Tom Bodkin, who will share their insight on the local business mandate and the impact it will have on contractors and governmental entities.

The complimentary seminar will be held at the Bamberger Conference Center on the 10th floor in the Hulman Building.  Lunch will be provided.  If you’d like to attend this informative seminar, please RSVP by Tuesday, June 21, 2011 by calling 812.452.3567 or email us at rsvp@bamberger.com. 

Author: Kim Jewell (bio)
Phone: 812.452.3588
email: kjewell@bamberger.com

Bamberger is hosting a seminar in its Evansville office on Wednesday, May 11, 2011 from 11:30 am – 1:00 pm.  In this seminar, the Bamberger team of real estate attorneys will discuss various forms of governmental incentives available for real estate development, such as TIFs (tax increment financing), tax abatement, and funding and financing Brownfield redevelopment.  We will give real-life examples of these types of financial incentives and tell you how these measures can help you in your business development.

The complimentary seminar will be held at the Bamberger Conference Center on the 10th floor of the Hulman Building. Lunch will be provided.  If you’d like to attend this informative seminar, please RSVPby Wednesday, May 4, 2011 by calling 812.452.3567 or email us at rsvp@bamberger.com.

Author: Kim Jewell (bio)
Phone: 812.452.3588
email: kjewell@bamberger.com