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Prestige Title eNews
Issue 22: Spring 2014

 

Amended Not for Profit Corporation Laws May Ease Real Estate Transactions

Within the last few years New York City has seen a steady rise of sales of real property holdings by not-for-profit entities, looking to relieve their financial woes.  This trend is sure to continue with greater vigor on July 1, 2014, which marks the effective date of the legislative changes implemented under The Non Profit Revitalization Act of 2013.  The Act, which was signed into law on December 18, 2013, is intended to not only make New York more business friendly for existing not-for-profit entities, but also to encourage the new not-for-profit entities to operate in the State.  The Act reworks New York’s not-for-profit statutes, affecting forms of incorporation, conflict of interest policy, whistle blower procedures and regulation of related party transactions, to name a few.  This article will focus on the Act’s impact on real estate transactions, specifically matters affecting incorporation and the authorization to dispose of a not-for-profit corporation’s assets.

Simplified Incorporation Process

When engaging in the sale of property owned by a not-for-profit entity, proof of due formation must be established.  Prior to the Act’s implementation, section 201 of the Not-for-Profit Corporation Law categorized not-for-profit corporations into one of four possible types: A, B, C or D.

Type A included not-for-profit corporations formed for non-business purposes such as civic, patriotic, political, social, fraternal, athletic, agricultural, horticultural, animal husbandry, and for a professional, commercial, industrial, trade or service association. Type B corporations were formed for non-business purposes such as charitable, educational, religious, scientific, literary, cultural, or for the prevention of cruelty to children or animals. Type C was limited to corporations formed for business purposes that achieved a public or quasi-public objective. Finally, Type D described a not-for-profit corporation whose formation was authorized by any other corporate law of the State for any business or non-business, or pecuniary or non-pecuniary, purpose or purpose, including purposes in common with types A, B, C.  The existing law also addresses entities that have purposes that are within more than one type. If in both type A and type B above, it is a type B corporation. If within Type C and another type then the entity is deemed a type C corporation.

This statutory framework has been criticized as being inflexible and confusing, causing nascent not-for-profit corporations to incorporate in states having simpler incorporation laws.  The existing law will be streamlined under the Act by creating only two categories of not-for-profit corporations: charitable and non-charitable.  Charitable corporations will include those entities whose purposes are “charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals.”  All former Type A corporations will be considered non-charitable and all form Type B and Type C corporations will be deemed charitable.  Former Type D corporations will be reclassified depending upon whether they were formed for charitable purposes, or not. Certificates of incorporation for not-for-profit corporations must now state whether its purposes are charitable or non-charitable.

Lowered Hurdle for Board Approval

The Act also addresses the authorization and consent process for transfers of real property owned by not-for-profit corporations.  Under existing section 509 of the Not-for-Profit Corporation Law, any proposed purchase, sale, mortgage or lease of a not-for-profit corporation’s real property required the approval by two-thirds of the corporation’s board of trustees or directors.  If the board was comprised of 21 or more members, then the requirement was relaxed, requiring only a majority of the board’s approval. 
Effective July 1, 2014, the existing two-thirds board requirement would come into play only if the proposed transaction involved a purchase, sale, mortgage or lease of all, or substantially all, of the assets of the corporation.  If the proposed transaction is other than all, or substantially all, of the assets of the corporation, then approval from a simple majority of the board is all that is required.  The statute preserves the existing board majority requirement for boards with 21 or more members, regardless of whether the proposed transaction involves all, or substantially all, of the assets of the corporation. Finally, the amended statute allows the board to delegate this decision making process to a committee authorized by the board.

Attorney General Approval May Obviate Court Order Approval

Significantly, the Act provides charitable not-for-profits with a viable alternative to current requirement that Type B and Type C corporations obtain court approval for the sale, mortgage or lease of all, or substantially all, of the assets of the corporation, as required under Section 510 of the Not-for-Profit Corporation Law.  Starting July 1, 2014, a charitable not-for-profit corporation seeking to sell, mortgage or lease of all, or substantially all, of the assets now may do so with the approval of either the attorney general of the Supreme Court in the judicial district or of the county court in which the corporation has its office principal place of its operations. Notwithstanding, court approval will is required if (1) the NPC is insolvent; (2) would become insolvent as a result of the transfer; or (3) the attorney general indicates that a court order is required.

 

 

ADDITIONAL ITEMS OF INTEREST

Fewer Estates Liable for New York State Estate Tax under Amended Law

 

A recent change to the New York State estate tax law may make clearing the lien of NYS estate tax easier… for some.  Estates of persons who died in 2002 to April 1, 2014, that own real property in New York State are possibly subject to the lien of the NYS estate tax if the gross estate of the decedent is $1,000,000 or greater.   The NYS estate tax lien is a lien on real property for a period of 15 years running from the date of the decedent’s death.  Disposition of the lien can be had by providing an original release of lien issued by the NYS Dept. of Taxation and Finance (ET-117), which is recordable in the local recording office.  Obtaining the release of estate tax lien requires the filing of an application or estate tax return and can takes several weeks to process.   If the sole asset of the estate is real property having a fair market value that is less than the applicable filing threshold, then an estate may dispose of the lien by providing an affidavit stating that no NYS estate tax is due because the value of the decedent’s gross estate is less than the applicable exclusion amount.

Legislation signed by Governor Cuomo on March 31, 2014, substantially raises the exclusion amounts so that fewer estates are subject to the NYS estate tax lien.  Starting April 1, 2014, the exclusion amounts have been increased to –

$2,062,500 for decedents having a date of death on April 1, 2014 to March 31, 2015;
$3,125,000 for decedents having a date of death on April 1, 2015 to March 31, 2016;
$4,187,500 for decedents having a date of death on April 1, 2016 to March 31, 2017;
$5,250,000 for decedents having a date of death on April 1, 2017 to December 31, 2019;
and for dates of death on January 1, 2019 forward, the exclusion amounts will mirror the federal estate tax exemption levels.

While the legislative change targets fewer estates for taxation, those estates with gross estates that are above the new exclusion amounts may or may not receive the benefit of the credit, depending upon how much greater the taxable estate is over the exclusion amount.  For estates that are between 100 and 105 percent of the NY exclusion amount, the exclusion amount acts as a credit against the amount of the taxable estate, that is applied on a phased-out basis. However, those estates that have taxable estates that are greater than 105% of the exclusion level are not entitled to the tax credit, and must pay estate tax on the entire taxable estate.

Reducing the taxable estate below 105% of the exemption levels is therefore an understandable goal of estate tax planning.  The new legislation may however limit efforts to reduce the taxable estate by including within the taxable estate any lifetime gift made after April 1, 2014 (and before January 1, 2019) that occurs within three years of the decedent’s date of death.  Excluded from the three-year look back are inter vivos gifts made to a charitable entity, and gifts that qualify for exclusion under federal laws such as a gift entitled to the annual gift tax exclusion.
The new legislation has not changed the tax rates however, and taxable estates continue to be subject to State estate tax rates that are capped at 16%.

 

Navigating the New TILA-RESPA rules
By: George S. Asllani, Esq.

Loan originators as well as settlement agents and attorneys will experience a drastic change in the way that critical loan documents are created by them and delivered to the consumer.

As it currently stands under Federal Regulation X (Real Estate Settlement Procedures Act - RESPA) and Regulation Z (Truth In Lending Act - TILA), the requirements are such that four separate forms must be issued to every consumer who obtains a mortgage. Those forms are (1) the Good Faith Estimate or GFE (2) the Estimated Truth in Lending or “eTIL”, which is required to be delivered at the beginning of the loan; (3) the Settlement Statement Form or HUD-1; and (4) a final Truth in Lending statement or TIL at the closing of the loan, alongside other disclosures required by law.

On November 20, 2013 the Consumer Financial Protection Bureau (CFPB) created and finalized a new regulation that provides a more streamlined creation and delivery of the above-mentioned documents, all with the intent to make the disclosures clear and understandable to the consumer. Starting in August of 2015 the GFE, TIL and HUD-1 will be revamped and consolidated into two distinct forms: the Loan Estimate Form, which combines and replaces the GFE and E-TIL, and the Closing Disclosure Form, which will replace the HUD-1 and final TIL.

The Loan Estimate form will be required to be delivered to the consumer within three business days of the application for a loan (similar to the current GFE delivery requirements under Regulation Z). Application is defined as the receipt of the following pieces of information by the bank from a consumer for the purpose of obtaining credit: (1) applicant’s name, (2) income, (3) social security number, (4) property address, (5) estimated value of property, and (6) mortgage amount sought. The form may be delivered by a loan officer of a financial institution, or by a duly licensed mortgage broker authorized to originate loans.

The largest and most significant change to the current settlement practices will come with the creation and requirements of the Closing Disclosure Form, which will replace the current HUD-1 Settlement Statement and final TIL. This form will be required to be delivered to the consumer three days prior to the “consummation” of the loan. “Consummation” is not necessarily synonymous with the “settlement date” or “closing date” of the loan. “Consummation” stands for the moment when the consumer becomes contractually obligated on a credit transaction. This period is governed by state law and in New York, it is well established that the consummation of a loan takes place when the consumer accepts the lender’s commitment letter, even if such acceptance is only on the essential terms. Murphy v. Empire of America, FSA (746 F.2d 931 (2nd Cir. (NY) 1984).

The current practice is for most lenders to approve a final HUD-1 in the last 24-48 hours prior to closing, and settlement agents present that same HUD-1 at or very close to the actual closing (sometimes hours before). The new requirement is going to force lenders and settlement agents to create and approve the Closing Disclosure Form earlier in the transaction, to allow for proper delivery to the consumer, and to allow the consumer to understand fully the actual charges for that particular loan.

The new regulation applies to all close-ended mortgages secured by real property, but excludes home equity lines of credit (HELOCs), reverse mortgages or mortgages secured by a mobile home or any dwelling not on real property. In addition to the above, the new rule requires lenders to retain certain records after the transaction has been closed. To be compliant, the creditor must retain original or electronic copies of the Closing Disclosure Form for five years after closing, and must keep the Loan Estimate Form for three years.

The new rule aims at simplifying the mortgage application and settlement practice. The most important result is the ability of the consumer to be well informed prior to entering into a commitment with a lender (by way of the Loan Estimate Form) and to be equally informed of the actual charges that are incurred as a result of the transaction (by way of the Closing Disclosure Form).

For the time being and until the new regulations take effect, loan originators, lenders and settlement agents can refer to a navigable guide of  Regulation Z (TILA) in an easy-to-read and easy-to-navigate format provided by the Consumer Financial Protection Bureau at the link below.

http://www.consumerfinance.gov/eregulations/1026

Note: If sample copies of either the new Loan Estimate Form or the Closing Disclosure Form are needed, please feel free to contact our office.

If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Keith Eng, Esq. (keng@prestitle.com) or Anthony Chiellino at (achiellino@prestitle.com) or (212)651-1200.

Also, if there are any topics that you would like us to include in future newsletters, please feel free to e-mail us with suggestions at info@prestitle.com.

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