United States: Tennessee Real Estate Law And Practice – Chambers USA Regional Real Estate Guide 2018

1. GENERAL

1.1 Main Substantive Skills

Real estate law requires not only an understanding of buying and selling real estate, closing processes, real estate title, leasing and finance, but also experience in a variety of other areas that are important to many real estate deals and specific industries. In particular, law firms must have professionals who are familiar with environmental laws, land use and zoning matters, development and construction, joint ventures, complex financing structures, restructurings and workouts. In addition to good analytical, organizational and negotiating skills, effective real estate lawyers must have an understanding of their client's industry and business objectives.

Several current trends have had an impact on the skills required by real estate lawyers, including the popularity of large mixed-use projects and the increasing use of tax credits and other complex financing structures for large real estate projects. Many traditional real estate projects involve primarily the acquisition, sale or development of a single building, parcel or contiguous parcels of real estate by one owner, with financing from a single lender or lender group. By contrast, large mixed-use projects often involve the development of large areas and sometimes multiple blocks of non-contiguous real estate by multiple owners with various lenders and financing structures. These projects frequently have complex land use and entitlement issues and a variety of ownership structures that require greater experience with corporate and business laws. Likewise, the increased use of tax credits requires experience with tax law and the structuring of these credits and project financing in a manner compatible with the business interests of the owners, developers and lenders.

1.2 Most Significant trends

Some of the most significant trends in the Tennessee real estate market have been (i) the popularity of large mixed-use projects, both in urban cores as part of the redevelopment of blighted areas and in suburban areas as stand-alone projects;

(ii) the use of tax credits, including historic tax credits and new markets tax credits, in large redevelopment projects; and (iii) a construction boom in Nashville with a number of large office, hotel and residential towers.

The most significant real estate deals in Tennessee include the following:

• the 30-story Bridgestone Americas headquarters in downtown Nashville;
• the USD2 billion expansion of the St. Jude Children's Research Hospital, including a USD412 million research tower, in downtown Memphis;
• the Capitol View project in Nashville, a USD750 million, 32-acre mixed-use development in Nashville;
• the Central Station project in Memphis, a USD75 million, 17-acre mixed-use project in downtown Memphis that involves the redevelopment of historic Central Station and historic tax credits;
• the USD117.64 million acquisition of Fifth Third Center in Nashville;
• the conversion of the Peabody Place shopping mall in downtown Memphis into the 300,000 square foot corporate headquarters for ServiceMaster;
• the USD81 million acquisition of the Hilton Garden Inn in Nashville;
• the USD90 million TraVure development, which includes the headquarters tower for Mid-America Apartments (MAA); and
• the USD114.65 million acquisition of Providence Marketplace in Wilson County, Tennessee.

1.3 Impact of the new US tax Law changes

The primary effects from the recent Tax Cuts and Jobs Act (the "new tax act") on real estate investment and development are as follows:

• the allowance for non-C Corporation taxpayers to deduct up to 20% of their qualified business income earned through pass-through businesses;
• the increase in the long-term capital gains holding period to three years for taxpayers receiving a "carried" or "profits" interest;
• the limitation on a taxpayer's ability to deduct interest expenses up to 30% of the taxpayer's net income; and
• limiting interest deductions for home mortgage indebtedness and home equity loans to USD750,000 from USD1,000,000.

The new tax act also limits state and local tax deductions to USD10,000 per year for married taxpayers filing jointly. In certain circumstances, the 20% deduction is limited to 50% of the taxpayer's allocable share of W-2 wages or 25% of the taxpayer's allocable share of W-2 wages, plus 2.5% of the taxpayer's allocable share of the unadjusted basis of "qualified" property (to be "qualified," property must be depreciable), whichever is greater. The provision for 2.5% of the unadjusted basis is beneficial to real estate investors and developers in capital-intensive sectors with large capital investments and comparatively minor labor costs. In addition, taxpayers are allowed to deduct 20% of REIT dividends without being subject to the limitations being described above.

2 Sale and Purchase

2.1 ownership Structures

Purchasers typically acquire commercial real estate through the use of limited liability companies and corporations. Depending on the nature of the purchaser's business, the use of single or special-purpose entities that own solely commercial real estate is a common legal tactic to limit liability to such single or special-purpose entity, thereby protecting the assets of the purchaser's affiliates.

2.2 Important Jurisdictional requirements

No special jurisdictional rules apply to the transfer of title to real estate in Tennessee. Statutory law does not require specific language to transfer title, but does provide examples of conveyance language that is sufficient for the transfer of title by general and special warranty and quitclaim, and for purposes of a deed of trust (T.C.A. § 66-5-103). A deed of conveyance must be acknowledged in accordance with Tennessee law, or proved by two sworn witnesses (T.C.A.

§ 66-5-106). Sellers of residential one to four-unit properties (including single-family homes) are typically required to deliver disclosure statements to prospective purchasers containing all items set forth in T.C.A. § 66-5-210. Transfers of residential real estate must also comply with applicable federal laws and regulations.

2.3 Effecting Lawful and Proper transfer of title

A purchaser can effectuate the transfer of title to real estate by recording its deed in the office of the register of deeds in the county where the acquired property lies. The register's office records and indexes the deed according to various methods, depending on the county (eg, grantor-grantee, parcel number, municipal address). Various registers' offices may provide electronic access to recorded instruments through an online database.

2.4 Real estate due diligence

In performing their due diligence on real estate, buyers typically rely on various third parties to determine the suitability of the property for their intended use. Engineers inspect various aspects of the existing structures on the property, environmental consultants test for the presence of hazardous materials and the potential for contamination from nearby sites, title agents and zoning consultants investigate the status of title to the property and its zoning compliance for the buyer's intended uses, and registered licensed surveyors prepare site surveys reflecting property and improvement dimensions, the presence of any encroachment onto or off the property, and any other material items noted by the surveyor. Attorneys for buyers will primarily be responsible for a detailed review of the survey and recorded instruments affecting title. A careful review of the survey and recorded instrument is critical, as the buyers' economic return on the property could be materially impacted by encroachments on the property, zoning or setback violations, or the terms of recorded instruments that may limit typical ownership rights by restricting permitted uses of the property, proscribing certain architectural designs, or permitting neighboring owners limited use of the buyers' property (eg, through access easements or runoff drainage rights).

2.5 Typical representations and warranties for Purchase and Sale agreements

Representations and warranties are some of the most heavily negotiated provisions of commercial Purchase and Sale Agreements, which typically contain representations and warranties with respect to:

• the seller's existence and authority to sell the property;
• the status of the seller's title to the property;
• pending or threatened litigation or administrative proceedings, including environmental or zoning violations;
• the seller's compliance with applicable laws;
• any leases in effect at the property;
• the accuracy of seller-provided property information; and
• the seller's absence from restricted lists maintained by the Office of Foreign Asset Control.

Implied and statutory warranties do not exist with respect to transfers of title to real property, but sellers commonly seek to disclaim any implied warranties and transfer property in "as-is" condition, subject only to representations and warranties expressly contained in the Purchase and Sale Agreement.

If the Purchase and Sale Agreement does not provide that a seller's representations and warranties will survive closing and delivery of the deed, then the terms of the Purchase and

Sale Agreement are deemed to merge into the deed, whereby the deed is deemed the final contract between the parties. Fraud and mutual mistake of the parties are exceptions to the doctrine of merger.

A buyer may generally terminate a pending Purchase and Sale Agreement prior to closing in the event of a seller's misrepresentation; assuming that the Purchase and Sale Agreement provided for post-closing survival of the seller's representations and warranties, a buyer may recover its actual damages as a result of losses resulting from the misrepresentation. Parties to a commercial real estate sale frequently negotiate threshold amounts for buyers to recover damages for misrepresentation and maximum amounts (anywhere between 1% and 10% of the purchase price) over which the seller will have no liability, but fraud or intentional misrepresentation of the seller are usually excluded from such contractual limitations.

2.6 Important areas of Laws for Foreign investors

Foreign investors purchasing real estate in the United States should carefully consider the impact of potential US tax liabilities and reporting obligations incurred in connection with the acquisition of real estate. Specific reporting obligations may stem from: (i) the choice of entity and jurisdiction of formation, as well as the transaction structure, which may also have important tax consequences and may determine the purchaser's potential liability with respect to the property and its intended use; (ii) anti-money laundering laws and associated reporting requirements of the Financial Crimes Enforcement Network ("FinCEN") of the US Department of the Treasury relating to the source of funds and method of payment; and (iii) sanctions administered by the Office of Foreign Asset Control (OFAC) of the US Department of the Treasury relating to the identity of the purchaser.

Tax consequences and additional specific reporting obligations may result from the following:

• any determination that income from the property is or will be "effectively connected" to a US trade or business;
• the imposition of branch profits on foreign corporations, if applicable;
• the provisions of the Foreign Investment in Real Property Tax Act (FIRPTA);
• the requirements of the US Department of Commerce Bureau of Economic Analysis, including the filing of either Form BE-15 Claim for Exemption or the appropriate annual report;
• the imposition of other US income tax return requirements and filings; and
• potential US gift and estate tax liability.

In addition, US lenders providing any amount of financing for the purchase of real property may impose their own loan underwriting requirement as a condition of the loan. Such requirements may include, but are not limited to, the provision of additional documentation relating to the identity of the purchaser (borrower), the intended use of the property and the source of non-loan funds being used to fund the acquisition, as well as cash or security deposits to be held by the lending institution.

Although Tennessee has experienced an increase in foreign investment in real estate, none of the housing markets in Tennessee is currently subject to the additional disclosure requirements the Financial Crimes Enforcement Network has imposed through Geographic Targeting Orders on title companies when foreign buyers are paying cash for high-end residential properties in certain markets, such as Manhattan, Los Angeles, Miami and San Francisco. However, FinCEN encourages title companies, financial institutions, brokers and other professionals to voluntarily file suspicious activity reports (SARs) in order to report any suspicious transactions or activity. Also, a SAR is required to be filed for currency and similar transactions in excess of USD10,000.

2.7 Soil Pollution and environmental contamination

Under both (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the 1986 amendments to CERCLA, known as the Superfund Amendments and Reauthorization Act ("SARA"), and (ii) the Tennessee Hazardous Waste Management Act of 1983, the state equivalent to CERCLA and SARA, after a buyer takes title to property, it becomes a potentially responsible party ("PRP"), even if the buyer did not cause or contribute to the existing pollution or contamination. However, in some cases, CERCLA and SARA allow the apportionment of liability for site clean-up (see T.C.A. § 68-212-207). A buyer may prevent being declared a PRP by establishing one of the following:

• the buyer purchased the property, conducted necessary environmental due diligence, and later discovered an environmental issue at the site (the innocent landowner defense);
• the buyer purchased the property clearly knowing that environmental conditions existed on the property (the bona fide prospective purchaser defense); or
• the buyer purchased the property, and the environmental conditions existed on an adjoining property and have or will have moved onto the purchased property (the contiguous landowner defense).

In all cases, the buyer must conduct "All Appropriate Inquiry" prior to purchasing the property, and comply with any continuing obligations related to the allowable use of the property and the management of existing pollution.

2.8 Permitted Uses of real estate under Zoning or Planning Law

Even though local jurisdictions often maintain zoning maps, zoning ordinances and development codes online that permit a buyer to research and identify the permitted uses of a parcel under zoning or planning law, a buyer should also contact the relevant zoning authority to obtain a zoning letter confirming those uses for the subject parcel. Alternatively, buyers often engage a third party service to prepare a planning and zoning report for the target property, which is often more informative than zoning letters and will include information on zoning compliance, special use permits and other details that might prove helpful in the due diligence process. Larger urban jurisdictions will have capable planning staff that are able to assist with technical compliance with the zoning and planning laws. Smaller and rural jurisdictions ordinarily do not have extensive planning and zoning restrictions. Tennessee and its local jurisdictions enjoy wide latitude to approve developments, including entering into development agreements with developers, and provide public development incentives.

2.9 Condemnation, expropriation or compulsory Purchase

Tennessee permits eminent domain by a condemning authority (eg, the Tennessee Department of Transportation, public utility) and, in certain limited situations, a person or corporation, for public purposes or internal improvements, but not a private purpose. Eminent domain is commenced by filing a petition in circuit court against all persons with an interest in the property. Notice must be given upon the filing of a petition. Just compensation based on the fair market value of the property will be determined in court or by agreement. Overall, Tennessee is fairly permissive regarding the condemning authority's exercise of the power of eminent domain.

2.10 Taxes applicable to a transaction

In the case of a warranty deed transferring title to real property, the recording of the deed requires payment of a recordation tax (sometimes referred to as a transfer tax) equal to USD0.37 per USD100 of either the consideration for the transfer or the fair market value of the property, whichever is greater. The recording of a quitclaim deed requires payment of a tax equal to USD0.37 per USD100 of the actual consideration given for the conveyance. Register offices also assess nominal per-page recording fees, which vary by county. Buyers pay the transfer tax on sales of real property in Tennessee but seek to offset the transfer tax by negotiating other closing cost divisions, particularly in commercial transactions. The deed tax does not apply in limited situations, such as transfers between spouses or deeds from executors of estates. Mergers, changes of control or transfers of equity ownership in property-owning entities are not subject to transfer tax.

2.11 R ules and Regulations Applicable to Foreign Investors

See 2.6 Important Areas of Law for Foreign Investors.

To view the full article click here

Previously published in Chambers and Partners

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.