Rhode Island Property Law : Rhode Island Real Estate & Environmental Attorney & Lawyer John Boehnert for Development & Permits in RI

That in effect was one of the questions facing the Rhode Island Supreme Court in its recent Champlin's Marina decision. Does a quasi-judicial hearing officer receive only a limited scope of judicial immunity? See Champlin's Realty Assocates v. Michael Tikoian et al.(PDF)

CRMC's Argument

The issue was first raised by the Coastal Resources Management Council in opposing an evidentiary hearing by the trial court to probe alleged procedural irregularities in the CRMC’s tie vote effectively denying a permit to expand Champlin’s Block Island marina.

CRMC argued that allowing such an inquiry would inevitably expose the Council members to questioning about their mental processes and decision-making, that such inquiries are barred of judges under judicial immunity and should be barred of administrative hearing officers under quasi-judicial immunity.

Protecting Hearing Officers

From my perspective in following the case, that was one of the most interesting issues raised.  Were these Council members, and others serving in quasi-judicial capacities, such as zoning board officials and members of administrative tribunals, often lawmen serving in part-time capacities, going to be protected like judges from being hauled into court and questioned about “what in the dickens were you thinking” when you voted for this or that.  And if they are not going to be protected, how are you going to get anyone to volunteer for those positions.

At the time CRMC raised the immunity argument, Rhode Island had recognized quasi-judicial immunity for administrative hearing officers only in the context of immunity from lawsuit, and not in the context of immunity in a judicial fact-finding.  Nevertheless, the trial judge clearly indicated she was aware of the potential problem and would ensure that boundaries would not be crossed.

The Supreme Court first found that the Administrative Procedures Act, R.I. Gen. Laws 42-35-15(f), provided the right to an evidentiary court hearing to explore alleged procedural irregularities.  But the Court was insistent that in any such hearing, inquiring into the mental process or decision-making of administrative hearing officers was out of bounds, for the first time formally recognizing the protections of quasi-judicial immunity in such evidentiary hearings in Rhode Island.

The Court found that the trial judge allowed questioning of the chairman of the CRMC and the chairman of the hearing subcommittee which in several instances delved into mental processes and decision-making and was therefore impermissible.

In fact, the trial judge's finding of bias against one Council member was reversed by the Supreme Court because it found that support for the finding of bias was rooted in questioning of the Council member that impermissibly intruded into quasi-judicial immunity.

So all in all, quasi-judicial immunity had a very good day in the Champlin's decision. 

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If there is a weakness in the Supreme Court’s thoughtful decision in the Champlin’s Marina case, in my judgment it is in the remedy imposed by a divided Court.  See Champlin's Realty Associates v. Michael Tikoian et al. (PDF)

Recall that the Coastal Resources Management Council denied Champlin’s requested permit to expand its Block Island marina because the Council voted 5 to 5 on the application; a tie vote was effectively a denial.

Trial Court Remedy

The trial court found, after 23 evidentiary hearings and one show cause hearing, that the decision-making process had been infected with impermissible ex parte contacts, and some of these contacts by Council members were found by the trial court to evidence bias. The trail court’s remedy was to disqualify the votes of the three members she found evidenced bias, leaving a vote of 4 to 3 in favor of a permit allowing expansion, albeit not of the magnitude the applicant requested.

Supreme Court Remedy

The Supreme Court rejected that remedy, holding that the proper remedy was remand to the CRMC for more hearings. The Court noted that one of the principal impermissible ex parte contacts, a compromise marina expansion plan prepared by CRMC staff at the request of the chairman of the subcommittee hearing the application, tainted the full Council vote on the application, yet that plan was never introduced nor subject to challenge.   Remand to the agency was thought to be the best remedy as it would allow for hearings on the compromise marina expansion plan.

Remedy Urged by Former Chief Justice

Former Chief Justice Williams, who was sitting on this case because Justice Goldberg recused herself, concurred in the decision in part but dissented as to the remedy. First, Justice Williams phrased his objection as to “that portion of the majority’s opinion that suggests that our decision in Arnold v. Lebel…..requires the Superior Court to remand a case in which ex parte contacts are found to have occurred to the administrative agency in every instance.” (Emphasis in original.)

Chief Justice Williams was correct to refer to this as a suggestion, as the majority noted prior precedent where the Court had refused to remand a case which had been pending for seven years because the parties have a right to have a matter decided in a reasonable period of time. But the Champlin’s majority distinguished that case because it involved only a single family house lot as opposed to the far more environmentally significant issue of significantly expanding a marina in Block Island’s sensitive Great Salt Pond.

Chief Justice Williams found that the remand to CRMC would have resulted in the matter not being resolved in the seven year time period the Supreme Court had found excessive for a petitioner to wait for resolution. He would have upheld the trail judge’s decision, without the necessity for more hearings, bringing finality to the process.

What Right is Being Protected?

There are a lot of business owners and home owners who may well agree with Justice Williams. 

As lawyers are taught in law school, “Ubi Jus Ibi Remedium” – “Where There is a Right, There is a Remedy”.

But when the remedy is nearly endless hearings, one may question just what is the right being protected.

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as published in the Providence Business News, December 14-20, 2009

The implosion of the residential real estate market has forced sellers across the country to rethink how they market real estate in a down, if not devastated, market. Increasingly, the answer is to turn to auctioneers.

In the conventional model, sellers engage a real estate broker to advertise and market their property. Although marketing is done through the mass media, such as newspapers, the selling is often done one-on-one, through appointments with interested buyers or periodic "open houses". In a brisk market, this can result in multiple offers on desirable properties. But in a depressed market, properties can linger for months, and even years.

Enter the auctioneer, who specializes in "accelerated marketing", bringing numerous interested buyers together at one time to bid on a property. The result is that a property can be marketed and sold in a period of weeks, rather than months. Of course, the key question is "for how much".

That may in part depend on the type of auction. In the "absolute auction", there is no minimum price, and the property sells for the highest bid. Ideally, the property would sell for its fair market value, even in an absolute auction, but that depends in part on the skill of the auctioneer and the work done to market the property for the auction.

Many claim absolute auctions draw the highest bidder participation because of the possibility of getting a true bargain. This also generates excitement. The excitement and the higher participation can give the seller an advantage, and perhaps a higher price than may otherwise have been obtained.

Others claim the risk of a property selling far below fair market value outweighs the potential benefits of an absolute auction.

If a property is encumbered by a mortgage, the seller will likely need the lender’s consent to sell the property at an absolute auction.

The second type of auction is the disclosed "minimum bid" auction, in which the auctioneer starts the bidding at a predetermined price. While this does not ensure the property will sell at that price, as no bidder may elect to bid the minimum, it does ensure that if the property sells, the seller will get a predetermined and presumably acceptable amount, after the expenses of the sale have been deducted.

The third type of auction is the "reserve" auction, where the seller reserves the right to accept, reject or counter the highest bid. This gives the seller maximum flexibility but may be less likely to attract a wide range of bidders.

In recent years auctions have become increasingly popular with sellers of luxury homes as well as with owners of condominium projects.

The sale of luxury single family homes appears well-suited to the auction approach; although these homes carry price tags only a few buyers can afford, those limited buyers have the resources to close the sale.

In an October auction in a North Carolina second home enclave, a $4.8 million house sold at auction for $2.6 million. It was seen as a great deal for the successful bidder but also good for the seller, who had marketed the house unsuccessfully for 15 months before turning to an auctioneer.

According to the auctioneer, "we put a spotlight on the property and create urgency among buyers".

Rhode Island has seen luxury auctions as well. Lila Delman Real Estate, which focuses on high end properties, offers an online auction service and auctioned Newport’s Wrentham House with an opening bid of $6.5 million. The property sold at a private sale likely motivated by the auction for close to its proposed opening bid, according to broker John Hodnett. And a Watch Hill mansion, Treasure Hill, sold at auction in 2007 for a reported $5.5. million.

More recently, an attempted auction of Watch Hill’s Clarmar Estate this summer was cancelled for lack of sufficient registered bidders. Prior to the scheduled auction, the property had been marketed for more than $16 million.

"Auctions don’t create magic", according to Hodnett, "it’s all about pricing and sellers must be realistic."

Developers and lenders are turning to auctions to sell inventory, particularly condominiums, sometimes with exceptional results. Witness October’s auction by Boston real estate consultants Accelerated Marketing Partners of the "uber luxury" Natick Nouvelle condominium project, where in two hours all 43 units up for auction were purchased and an additional 12 units were sold as a result of the enthusiasm generated by the auction.

But auctions are not without risks. In the next column we’ll look at what buyers, and sellers, must know to avoid getting whacked when the auction gavel comes down.

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as published in the Providence Business News, February 15-21, 2010

Sellers include owners of single family residences, usually high-end properties that have sat on a stagnant market for some time, given the limited buyers who can afford a multi-million dollar purchase price. But the largest group of sellers is owners of multiple units, usually condominiums. They may be developers unable to sell in a difficult market, investors who have taken over the developer's position in the project, or lenders who have either taken the property by foreclosure.

Buyers may be investors but are more likely than not ordinary purchasers who are attracted to auctions by the promise of a bargain.

And while auctions may result in owners finally selling properties they have unsuccessfully marketed for months, or even years, and buyers getting their dream house, perhaps at a substantial bargain, auctions are not without risk for both buyers and sellers.

The first question for a seller is whether or not an auction is the most advisable way to sell the property. Often the market answers that question. Months of unsuccessful conventional marketing often lead a seller to try an auction.

Sellers must then decide what type of auction to hold:

• an absolute auction, where the highest bid wins, with no minimum required;
• a minimum bid auction, where bids below a disclosed minimum will not be accepted;
• the reserve auction, where the seller has ultimate control, with the right to accept, reject or counter the highest bid.

The absolute auction appears the most risky for the seller, as the property could sell for far below its market value. However, many auctioneers say absolute auctions attract the most bidders and the most excitement for just that reason—the possibility of a spectacular bargain. And that excitement and enthusiasm among more bidders can lead to higher bids and a better sale price for the seller.

John Hodnett, who specializes in high end properties for Lila Delman's Narragansett office and whose firm has its own online auction service, claims absolute auctions are the most successful, although the seller obviously does not know what its selling price will be.

Stephanie Wilkinson, Executive Vice President of Boston's Accelerated Marketing Partners, which handles auctions across the country, favors the published reserve or disclosed minimum price auctions.

Selecting the right minimum reserve is critical, according to Wilkinson. It must be low enough to get buyers off the sidelines, but fair to the owner if the units do not sell above the minimum.

Auctioneers often set minimums at below what they believe the market will be.

Her company markets and auctions multiple unit projects, today almost all condominiums. In the past year her company has sold approximately 700 units at auction and another 700 units following the auction. She believes the published reserve method gives the best indication of market value, which is important for a seller in seeking to sell the remainder of the units that do not sell at the auction.

Sellers must also be careful to select the right auction company. As Accelerated Marketing Partners' Wilkinson notes, the success of the auction depends on careful and detailed pre-marketing of the auction, including several weeks of access to the units before the auction. The goal of the auctioneer is to drive a year's worth of traffic through the project in 3-4 weeks.

Buyers have their own risks. They must do their homework. They must read and understand the auction terms and conditions, as this will govern the sale. They must read and understand the purchase and sale agreement, as if they are the successful bidder they will be expected to sign it on the spot.

Buyers should decide whether to have an inspection of the unit done before the auction, which is an additional expense.

Since most of the auctioned properties are condominiums, it is critical that the buyer investigate and understand the financial health of the condominium association. Certain unit owner delinquencies may affect the ability to get an appraisal of the unit, which may adversely impact financing.

Buyers must also understand what rights the developer retains. Can the developer withdraw property from the project? Must all improvements and amenities shown on the project plan be built?

And both the seller and buyers must be concerned about whether or not the units can be financed through conventional sources.

All that being said, Accelerated Marketing Partners Wilkinson believes that auctions are good for sellers and buyers.

"There is a stalemate in the market today over what is market value", she says, explaining why it is so difficult to sell properties in this market. "Because of the uncertainty of where the market is, auctions give buyers confidence because they are bidding against other real buyers, in $1000 increments. Value is being confirmed by the other bidders."

With auctions, the watch words may be" Caveat Emptor" and "Caveat Venditor"—Let the buyer beware and let the seller beware. In which case, both may do well.

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 as published in the Rhode Island Bar Journal, November/December 2008

Bowing to budgetary constraints, the 2008 session of the Rhode Island General Assembly effectively terminated the Rhode Island Historic Tax Credit Program for all projects for which an application was not filed prior to January 1, 2008.

Rhode Island's Historic Tax Credit Program, established pursuant to R.I. GEN. LAWS §§ 44-33.2-1 to -6, provided a generous credit against Rhode Island state income taxes in an amount equal to thirty percent (30%) of qualified rehabilitation expenditures (QRE's) incurred in rehabilitating and placing in service certified historic structures. The tax credits were assignable, and therefore, saleable, allowing developers to sell the tax credits to generate equity for rehabilitation development projects.

Since its effective date, January 1, 2002, the historic tax credit program enrolled 277 projects through June, 2007, representing an aggregate investment of $1.53 billion in QRE's, according to a study released by Grow Smart Rhode Island on behalf of the 57 member Coalition for Neighborhood & Economic Renewal. See Grow Smart Rhode Island, "Rhode Island Historic Preservation and Investment Tax Credit, Economic & Fiscal Analysis" (2007)(Grow Smart Rhode Island is a state-wide non-profit organization which promotes alternatives to suburban sprawl and urban decay). The study concluded that as of June, 2007, the program is generating thousands of jobs and approximately $2.5 billion in economic activity for a state-estimated investment of $460 million through the year 2012. Id. Projects have been certified in 23 Rhode Island communities. Id.

Amendments

But the program became a victim of its own success, with the Governor and the General Assembly focusing on the annual cost to the State Treasury. For that reason, the program was effectively ended by the General Assembly, providing that eligibility in the program is limited to applicants who submitted a Part I application to be certified as a certified historic structure by the Rhode Island Historical Preservation and Heritage Commission through its historic tax credit application process prior to January 1, 2008. See 2008 R.I. Pub. Laws 6 (2008-H8016 Substitute A, AN ACT RELATING TO TAXATION-HISTORIC STRUCTURE-TAX CREDITS) (the "Amendments"); R.I. GEN. LAWS § 44-33.2-3(a)(2008). The thirty percent (30%) tax credit is now available only for projects that were completed on or before December 31, 2007. The Governor had proposed that projects participating in the tax credit program would also be subject to a limitation on the amount of credits available, but this retroactive approach was rejected by the General Assembly.

While the new legislation allowed applicants who certified projects prior to January 1, 2008 to participate in the program, the benefits of the program were substantially reduced. The tax credit was reduced from thirty percent (30%) minus a 2.25% processing fee, for an effective credit of 27.75%, to an effective credit of twenty-two percent (22%). The legislation establishes a processing fee which effectively is netted against the credit, since the credit is a percentage of QRE's and the processing fee is a percentage of QRE's. Accordingly, under the new program a developer may select either a twenty-five percent (25%) credit and pay a three percent (3%) processing fee, a twenty-six percent (26%) credit and pay a four percent (4%) processing fee, or a twenty-seven percent (27%) credit and pay a five percent (5%) processing fee, for an effective net credit of twenty-two percent (22%) in each instance. R.I. GEN. LAWS § 44-33.2-3(b)(1)(A)-(C)(2008). The different level of credits versus fees was designed to give developers some flexibility in controlling their expenditures prior to receipt of the credit.

Regardless of the level of credit selected, two and one quarter percent (2.25%) of estimated QRE's was payable as a processing fee on May 15, 2008, with the remaining fee to be paid by March 5, 2009 (i.e. .75% of QRE's, 1.75% of QRE's, or 2.75% of QRE's depending on the level or processing fee selected). Payments made after March 5, 2009 accrue interest as set forth in R.I. GEN. LAWS § 44-1-7. R.I. GEN. LAWS § 44-33.2-3(b)(1)(D).

State's Contractual Guaranty

A unique feature of the Amendments is that an applicant participating in the new program enters into a contract with the Rhode Island Department of Revenue, through its Division of Taxation. The purpose of the contract is to provide the guaranty of the State to the applicant that, in fact, the tax credit would be available from the State. See R.I. GEN. LAWS § 44-33.2-3 (b)(1). The development community insisted on this contractual guaranty, given the prior proposals for retroactive elimination of the tax credit. The development community was concerned that without this guaranty, the amount of credits could be subsequently reduced.

The contract specifically provides, at Section 12(a), that if the applicant "has secured a Certification of Completed Rehabilitation from the Commission, the Tax Division guarantees delivery of one hundred percent (100%) of the amount of the Tax Credit to the Applicant, pursuant to R.I. GEN. LAWS §44-33.2-3(b)(1), as a party that incurred Qualified Rehabilitation Expenditures for the Substantial Rehabilitation of a Certified Historic Structure...or to the Assignees of the Applicant…." R.I. Division of Taxation, Agreement for Historic Tax Preservation Investment Tax Credit § 12(a).

The contract further provides that it "constitutes a binding and enforceable agreement between the Applicant and the Tax Division" and that the agreement "and the rights granted hereunder shall be enforceable by the Parties through all remedies available at law and in equity." Id. at § 12(c).

The Amendments specifically provide that both the contract and the credit itself may be assigned to an affiliate, without the consent of the State. For purposes of the contract assignment section, the term "affiliate" is defined as "any entity controlling, controlled by, or under common control with such person, firm, partnership, trust, estate, limited liability company, corporation (whether for profit or non-profit) or other business entity." R.I. GEN. LAWS § 44-33.2-3(b)(1)(F).

The Amendments also allow assignment of the contract to an entity that is providing the QRE's, but this assignment requires the consent of the Division of Taxation when assigned to a non-affiliate of the applicant, "which approval shall not be unreasonably withheld". Id. Accordingly, a developer selling a project to someone that would actually be incurring the QRE's would be allowed to assign the contract with the State to the new developer in order to facilitate the rehabilitation of the project. With regard to the assignment, in the event that a developer is selling the project and taking purchase money financing, the developer-assignor may wish to obtain some security for the payment of the remaining portion of the processing fee due March 5, 2009, and may also want to impose requirements to ensure that the new developer will do nothing that endangers the tax credits, such as violating the applicable regulations or failing to follow requirements for proper historic rehabilitation of the structure, in the event that the developer has to exercise its rights under its mortgage and take back the property.

With further regard to assignment of the contract with the State, no express assignment of the contract to a lender is allowed, and such an assignment would appear not to be explicitly permissible under the Amendments. However, the applicant could perhaps assign all its rights to the lender, including its rights to assign the contract, and this would appear to allow the lender which takes over the project to cause the contract to be assigned to a new developer who would incur the QRE's to complete the rehabilitation of the project.

With respect to the assignment of the credit itself, this right was unchanged by the Amendments and remains available to tax credit owners who seek to sell the credit in a private transaction for consideration. R.I. Gen. Laws § 44-33.2-3(e).

Changes In Project Costs

At the time that the applicant enters into its contract with the State, it must estimate the QRE's it anticipates incurring in its rehabilitation project. It is this estimate which forms the basis for calculation of the processing fee and the tax credit. For example, estimated QRE's of $2,000,000 would result in a $60,000 processing fee and a $500,000 credit if a 25% credit was selected. What happens if the estimates are poor, and the QRE's are either higher or lower? What happens if the applicant abandons the project?

The Amendments provide that the tax credit shall be the lesser of (i) the amount of tax credit identified in the contract with the Division of Taxation on or before May 15, 2008, and (ii) the actual QRE's multiplied by the tax credit percentage selected by the taxpayer on or before May 15, 2008. R.I. GEN. LAWS § 44-33.2-3(b)(1). Accordingly, if the developer selected a 25% credit and paid a processing fee of $60,000 based upon QRE's estimated to be $2,000,000, expecting a net credit of $440,000 ($2,000,000 x 25%= $500,000 - $60,000 (3% processing fee)), and the QRE's actually incurred were $1,000,000, the actual credit payable would be $250,000 ($1,000,000 x 25% = $250,000). In the event that the QRE's were higher than had been estimated at the time the contract with the State is entered, the developer would receive the lower level of credit (i.e. the credit actually paid for with the processing fee).

That being said, all is not bleak for the developer. The Amendments provide that if the processing fee paid is greater than the amount of actual qualified rehabilitation expenditures multiplied by the percentage processing fee chosen, the differential shall be refunded to the applicant without interest. R.I. GEN. LAWS § 44-33.2-3 (b)(1)(E). So in the case where the actual QRE's were less than the estimated QRE's which formed the basis of the processing fee, the amount of processing fee overpaid is refundable. Id. In the prior example, where estimated QRE's were $2,000,000 and actual QRE's were $1,000,000, and the credit payable (at the 25% level) was $250,000, one half of the $60,000 processing fee would be refunded.

The contract with the State addresses the second question. The contract, at Section 5(b), provides that refund of the processing fee shall be granted if the applicant has abandoned the project and indicates in writing to the Tax Division that it no longer desires a tax credit. R.I. Division of Taxation, Agreement for Historic Tax Preservation Investment Tax Credit § 5(b).

Trust Fund

Finally, the Amendments established a historic preservation tax credit trust fund which is to be maintained outside of the State general fund "for the purpose of reserving funds for tax credits issued under this section." R.I. GEN. LAWS § 44-33.2-4.1. All processing fees are to be deposited in this tax credit trust fund, and the legislation further provides that the General Assembly "may cause sufficient amounts to be deposited into the fund equal to the amounts of credits under contract no later than September 1, 2008." Id. (emphasis added). Note that the General Assembly is not obligated to make such deposits. The General Assembly also authorized the Governor to borrow such funds as are necessary to guaranty all obligations incurred under the contracts with the State. Id.

Impact of Amendments

At the time the legislation was signed into law by the Governor on April 12, 2008, it was unknown how the legislation would be received by the development community, although representatives of the development community did work closely with the General Assembly leadership in crafting the Amendments. Based upon information provided by Grow Smart Rhode Island, it appears that many developers opted to salvage their credits rather than try to develop the projects without them. See Grow Smart Rhode Island, Chairman's Report For June 19, 2008. According to the Grow Smart report, processing fees were paid on 82 projects in 18 different communities (with 48 of these projects being located in Providence). Id. Bristol had the highest number of projects (5) but Central Falls ranked second in the total aggregate dollar value of projected QRE's. Applicants in the revised program estimated an aggregate of slightly over $1 billion in QRE's, which would obligate the State to pay approximately $255,000,000 in credits. Id.

Grow Smart has also made it a legislative priority to seek rejuvenation of the tax credit program in the next session of the General Assembly.

We will see if history does, in fact, repeat itself.

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