Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

The Commonwealth of Virginia has been slow to apply for, award and perform contracts funded by the federal American Recovery and Reinvestment Act (ARRA, better known as the Stimulus bill).  As the construction industry has suffered through plummeting bidding numbers and 25% national unemployment, Virginia has lagged in even qualifying its projects for funding, let alone getting the money to work.  The bad news is this has slowed down much needed funding.  The good news is it looks like there is a lot more money coming down the pike into the economy in Virginia.

A recent report by Peter Bacque of the Richmond Times Dispatch indicated that federal legislation provided $694.5 million in federal transportation stimulus funding and that less than half that has even been awarded in contracts.  Mr. Bacque indicates the money spent to date has produced 454.4 full time jobs.  This contrasts with the reported job creation in Virginia for US Department of Transportation which sets jobs created or saved at 1,335.54.  Thus, the confusion over job creation and funding that we have previously discussed continues.  Based on the funding numbers, the USDOT funding is clearly not the only agency source of transportation funding for Virginia as there is a minimum of another $100 million in funding.

The more important story is that while half the projects may be under contract, most of the projects have not even begun yet.   The Virginia website reporting on stimulus projects indicates that the total figure for both direct and indirect transportation funding administered through VDOT is $812 million.  VDOT has its own separate site with an ARRA project tracking sheet updated on February 24, 2010.  Call me a glutton for punishment, but I translated that project tracking sheet into a Microsoft Excel document available here.  The tracking sheet describes the percentage complete and I did a calculation of spending of ARRA funds by percentage of project completion.  If that percentage tracks with dollars actually spent, the VDOT site documents only roughly $66 million spent. 

There is an additional $175 million in projects that are either managed by other agencies or do not include a percentage allocation from VDOT.  The roughly $57 million allocated to the Fairfax County Parkway appears allocated and contracted, but the construction appears in its early phases.  Another $52 million is associated with projects in Washington and Roanoke County which are described as having anticipated contracts in May and June 2010.  Finally, it appears that VDOT got a late certification for ARRA funds totalling $70 million for I-66 Pavement Rehabilitation and Reconstruction which clearly has not started yet.  Thus, it appears that little of the $175 million that was not classified by project completion percentage has been spent yet either.  For those in Fairfax, $120 million in future funding is obviously a boon to our transportation woes as well.

It may be that my rough estimate of funds spent based on project completion is not accurate; however, I think we can still draw some reasonable conclusions regarding stimulus transportation funding in Virginia:

• While Virginia was late to the table in applying and certifying its projects, it appears that it got its work done on deadline to qualify for the ARRA funding;
• Many projects have not started yet;
• The bulk of funding has not streamed into many projects yet, meaning the bulk of the stimulus funding impact may be felt over the next twelve months;
• Based on timing of payment applications, payment flow contractors, subcontractors, suppliers and manufacturers will lag even further behind;
• Based on the foregoing, we should view estimates of jobs created or saved by stimulus funding as pure estimates until the funds actually hit the street.

Image by Sarah Rifaat

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There are a number of important construction law and economic developments that I want to pass along to our readers.  Given timing and the plethora of topics to address, I wanted to share these developments in a more rapid fire format so these updates remained timely.

You should be on the lookout for more information on these topics in the future.  We may expand on some of these threads in the future here as well:

• The Supreme Court of Virginia will hear the appeal in AMEC Civil LLC v. VDOT.  This case is a very important case involving what is required for notice of claims on construction projects; any person or entity involved in Virginia construction needs to keep an eye on this case as it could have a major impact on future Virginia construction litigation
• As reported by our friend Chris Cheatham, the District of Columbia has attempted to fix their green building ordinance by no longer requiring a "performance bond" guaranteeing verification of green construction ... they will instead just require a "bond" guaranteeing verification of green construction.  Count me as a skeptic that this editorial change is meaningful or will fix the problem of lack of available bonds in the markets to cover this risk.
• The economy is sending some mixed messages.  Overall unemployment dropped from 10.0% to 9.7% in January according to the latest Bureau of Labor Statistics report
• Unfortunately, that improvement did not translate to the construction industry.  ENR reports a significant continued rise in construction unemployment, jumping from 22.7% in December to 24.7% in January.  The Bureau of Labor Statistics indicates that the construction sector lost 75,000 jobs in January bringing the total to 1.9 million since December 2007
• Associated Builders and Contractors released their latest Construction Economic Update.  The skinny: private non-residential construction spending rose 0.2% in December, but was down almost 18% year over year.

The continuing sluggish economy continues to place significant bidding pressure on the construction industry.  I still stand by my post last October that this bidding pressure will translate to serious claims issues over the next couple years.  Put on your seat belts, it will be a rocky ride here for a while.

Image by Ian Britton courtesy of Freefoto.com

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In 2002, Brenda Kersey received a $71,397 mortgage loan to purchase a home in Richmond, Virginia. The loan was a Federal Housing Administration (“FHA”) loan governed by FHA regulations. PHH Mortgage Corporation was the holder of the note in connection with Ms. Kersey’s loan.

Like so many unfortunate homeowners, Brenda Kersey fell behind on her mortgage payments. PHH appointed the Professional Foreclosure Corporation of Virginia (“PFC”) as substitute trustee on the Deed of Trust securing the mortgage and instructed PFC to foreclose on Ms. Kersey’s home. PFC scheduled a foreclosure sale without having or attempting to arrange a face-to-face meeting between PHH and Ms. Kersey.

The deed of trust allowed foreclosure only if the holder of the note complies with FHA regulations. One of those regulations is 24 C.F.R. Section 203.604 (b), which states in part:

The mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid. If default occurs in a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to-face meeting with the mortgagor, or make a reasonable attempt to arrange such a meeting within 30 days after such default and at least 30 days before foreclosure is commenced….

Based on PFC’s failure to schedule a face-to-face interview before initiating foreclosure, Ms. Kersey filed a complaint in the Circuit Court for Richmond City seeking a declaratory judgment that PHH failed to comply with the deed of trust sufficiently to go forward with the foreclosure. PHH removed the matter to the United States District Court for the Eastern District of Virginia, Richmond Division, and moved to dismiss the action under Rule 12(b)(6) for failure to state a claim.

In a memorandum opinion in Kersey v. PHH Mortgage Corporation, Judge Williams refused to dismiss Ms. Kersey’s complaint, concluding that there was a “distinct and ripe controversy” as to whether PHH owed Ms. Kersey a face-to-face interview prior to foreclosing on her home.

PHH’s first argued that Section 203.604 and the National Housing Act (“NHA”) do not grant a plaintiff a private cause of action. Judge Williams dispensed with this argument by concluding that Ms. Kersey was not bringing a claim under the NHA and Section 203.604, but rather was seeking a declaratory judgment based on a state law breach of contract claim. Interestingly, Judge Williams hinted to PHH that perhaps it could assert that Ms. Kersey’s failure to make timely payments constituted the first material breach between the parties that would have relieved PHH from the obligatory face-to-face meeting.

PHH’s second argument was that it fell under an exception found in Section 203.604 (c), that a

face-to-face meeting is not required … if [t]he mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.

PHH has loan origination branches, but no servicing branches, within 200 miles of Ms. Kersey’s property, and pointed to an interpretation of this exception on HUD’s website that Section 203.604 relates only to mortgagors living within a 200-mile radius of a servicing office. Judge Williams refused to be swayed by the interpretation on HUD’s website, finding the exception in Section 203.604 (c) to be unambiguous. According to Judge Williams, a lender could escape the face-to-face meeting requirement only if the following are not located within 200 miles of the mortgaged property:

1. the mortgagee;
2. the mortgagee’s mortgage servicer;
3. a branch office of the mortgagee;
4. a branch office of the mortgagee’s mortgage servicer.

Judge Williams found that PHH could not therefore escape its face-to-face obligation when Ms. Kersey’s complaint alleged that PHH maintains “branch offices” within 200 miles of the mortgaged property.

It will be interesting to see if PHH ultimately prevails by alleging that Ms. Kersey committed the first material breach when she fell behind on her payments.  However, stepping back from the legal analysis for a moment, maybe there is a point to these face-to-face meetings, even if they are time consuming.  In the right situation, such a meeting could enable lenders and borrowers to come up with a mutual plan to avoid painful and costly foreclosure proceedings. 

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The Empire State Building retrofit project is reaching for rarefied air: improved energy efficiency,  reduced carbon emissions, and rapid and healthy return on investment.  Recent case study documentation for the project suggests this project will hit the ball out of the bark on all fronts.  Highlights include:

An estimated 38% energy savings compared to high level class A office space

A 3.1 year payback on the incremental cost increase to fund proposed energy efficiency measures

• An 9.2% estimated tenant space savings when increased project costs are weighed against the net present value of energy savings to tenant space fit-outs
• Reduction of well over 100,000 tons of CO2 emissions over 15 years

This project concept directly touches on the concepts of energy efficiency, performance and return on investment that formed the backbone of the recent Trends in Building Green seminar we discussed here.  The Empire State Building project also serves as not only a model, but a potential market game changer and advances many of our predictions for this next building cycle.

On a personal note, I spend a lot of work time looking "green" issues from a contracts, client or risk management perspective.  I spent a lot of personal time thinking about sustainability for its own sake in the context of raising a family and working towards a sustainable future economically and environmentally.  I like environmental sustainability for its own sake, but I love when creative and motivated people fuse the moral high ground with economic success.

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Virginia Delegate Mark Cole is up to it again, proposing another amendment to the business, professional and occupational (“BPOL”) tax laws. Delegate Cole sits on the House of Delegates Finance Committee, and represents the 88th District, spanning Stafford, Spotsylvania and Fauquier Counties and the Town of Remington. As you may recall from my last blog post on proposed business tax reforms in the Commonwealth, he sponsored HB 57, which would freeze BPOL tax rates, and prohibit those localities that do not have a BPOL tax from imposing one.

Currently, the BPOL tax is targeted at a business’s gross receipts, defined by Virginia Code Section 58.1-3700.1 as a company’s “whole, entire, total receipts, without deduction.” Delegate Cole’s proposal, HB 110, would allow localities to decide whether to impose their BPOL tax on a business’s gross receipts, or on its Virginia taxable income.  HB 110 provides two methods to calculate "Virginia taxable income," depending on which is applicable to the business -- a calculation under Virginia Code Section 58.1-322 (Virginia taxable income for residents) or under Virginia Code Section 58.1-402 (Virginia taxable income for corporations). 

Undoubtedly, localities may be skittish of these changes in the face of some very hard economic times and dwindling local budgets. However, businesses should view HB 110 as a welcome change to take the sting out of what many consider to be the harshest aspect of the BPOL tax – the notion of taxing gross receipts with no ability to consider adjustments or deductions.
 

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Tax reform means “Don’t tax you, don’t tax me, tax that fellow behind the tree.” – Russell Long, U.S. Senator from Louisiana, 1948-1987.

Despite the budget crisis facing the Commonwealth and local jurisdictions all around Virginia, the General Assembly is considering new tax credits and limits in its upcoming session.

HB 2 proposes a tax credit equal to ten percent of the eligible investments made by small business tax payers in personal property and real estate improvements used in the business. Acquisition of or expenses related to motor vehicles used in the business and purchase or rental of real estate will not qualify as eligible investments. Qualifying investments must be at least $10,000 and must be made beginning July 1, 2010 but before July 1, 2011. For purposes of this proposed tax credit, a business qualifies as “small” if it has 500 or fewer employees. The patrons of HB 2 are Delegate Manoli Loupassi of the 68th District, which includes parts of Chesterfield County and the City of Richmond, and Delegate Christopher Peace of the 97th District, which includes parts of Hanover, Caroline, Henrico, Spotsylvania, King William and King and Queen Counties.

HB 47 proposes a tax credit to employers for expenses incurred in allowing employees to telecommute pursuant to a signed telework agreement for taxable years beginning on or after January 1, 2011 but before January 1, 2013. Under this proposed tax credit, an employer is eligible for a credit of up to $1,200 per teleworking employee, depending on the number of days per month the teleworking employee teleworks and whether the employer’s primary place of business is located in a nonattainment area under the Federal Clean Air Act. The employer may also receive a 100% tax credit (capped at $20,000 per employer) for costs incurred for conducting a telework assessment in the year prior to implementing a formal telework program. There is a $1 million annual cap for taxable years 2011 and 2012 for the aggregate amount of tax credits to be issued. This seems like a good deal for the constituents of Delegate Scott Lingamfelter of the 31st District, who is sponsoring this bill. Delegate Lingamfelter is based out of Woodbridge, an area that could greatly benefit by an increase in telecommuting.

HB 57 seeks to prohibit localities from imposing a business, professional and occupational license (“BPOL”) tax if they have not already done so as of January 1, 2010. Additionally, the bill freezes BPOL tax rates in jurisdictions that have already chosen to impose BPOL taxes. This bill is being introduced by Delegate Mark Cole of the 88th District, which spans Stafford, Spotsylvania and Fauquier Counties and the Town of Remington. Unlike its neighbors, Stafford County had no BPOL tax until 2008, when the Stafford County Board of Supervisors narrowly voted to impose the tax by a 4-3 vote. The Stafford County Sun’s article shortly after that vote discusses how opposed Stafford residents were to the tax, and how controversial the vote was. In fact, Stafford County residents were not the only ones opposed to the tax. Some Spotsylvania residents, who were already subject to the BPOL tax, felt that the lack of a BPOL tax in Stafford not only gave Stafford a competitive edge, but also put political pressure on their local politicians to keep their taxes low. You can read one take on this theme in a blog post on the Spotsylvania Republican Committee’s blog, On the Spot.  For an overview of what jurisdictions have imposed BPOL taxes as of 2005, take a look at this chart meticulously pulled together by the University of Virginia's Weldon Cooper Center for Public Service.
 

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As we kick off 2010, it is a good time to make some predictions on the future of green building. While these predictions anticipate a longer time horizon than just the coming year, my bet is we will see some of these trends manifest during 2010. We can also expect that some of these topics will be the subject of a lot of discussion here and elsewhere over the coming year.

1. The marketplace will demand green buildings as the baseline building product. This is particularly true in markets that show signs of economic vitality where construction, redevelopment, or renovation are most likely to occur. (See for example the recent AGC article  highlighted by our friend Chris Hill).
2. Newly built buildings which are not designed and built using sustainable practices will struggle in the marketplace.
3. The marketplace will continue to struggle independently evaluating green building information and concepts. As such, rating systems such as LEED will continue to hold significant focus in the sustainability conversation for some time.
4. Energy efficiency will receive increased attention as the most important yardstick in measuring the sustainability of specific structures. (Here is an example of the discussion regarding the LEED energy debate).
5. The anticipated ASHRAE green code and other code based alternatives will gain traction in comparison to LEED ratings with respect to energy efficiency (see also Chris Cheatham’s recent post on local energy regulation and energy labeling).  LEED will continue to have a significant place for overall evaluation of projects; however, LEED will need to respond to energy performance concerns or risk losing attention to evaluations methods which are more focused on actual energy performance.
6. Longer term investment strategies in commercial property are more in vogue leading to owners who are more interested in operational expenses. Look for increases in renovations of existing buildings focusing on improvements to energy efficiency of older buildings.
7. Governmental bodies will continue to drive sustainable building as a prerequisite both through their own acquisitions and regulations. This trend will further fuel the feedback loop of the marketplace demanding green buildings.
8. Look for continued tension with regards to bonding requirements of green buildings, particularly where specific green performance bonds are required (such as DC’s bond requirement which takes effect in 2012, discussed by Kevin Kaiser at Best Practices Construction Law).

Do you think these are likely to happen?  Did I miss any other big ones?  We are interested in your thoughts, please comment!

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In 2004, 515 Granby, LLC proposed a $180.5 million condo development. With 34 stories and 327 units, Granby Towers would be the tallest building in Norfolk and would revitalize the northern part of the city. The following year, the federal government threatened to condemn the property, causing just enough of a delay for the ebbing economic tide to overtake the Granby Tower project and thwart 515 Granby’s ability to secure financing.

Fortunately for 515 Granby, the prime contract with Turner Construction Company had the following language:

This Agreement and any liability and obligations of the Owner…shall be subject to and expressly conditioned upon the closing by the Owner, and the initial funding by its lender, of the construction loan… and Owner shall have no obligation or liability to Construction Manager for any costs for the Construction Phase under this Agreement unless such construction loan closing is completed.

Turner and its subcontractors, who were owed over $13 million for construction on the project, challenged this language in a two-day evidentiary hearing in the Circuit Court for the City of Norfolk. In a letter opinion issued by Judge Martin, Judge Martin rejected this challenge, finding that 515 Granby “made great efforts to secure financing for the project,” but was unable to do so due to the current conditions of the credit market. Judge Martin concluded that 515 Granby would have had to pay Turner only if and when it had received initial funding of the construction loan.  For an in-depth look at the court's reasoning, and what you can do if you face such a contractual provision, go to Yes, Virginia, Contract Terms Do Matter:  Financing Term Offers Owner an Escape Hatch, by my colleague, Tim Hughes, guest blogging on Construction Law Musings. 

Fortunately for Turner, its subcontracts contained the following language:

The obligation of Turner to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner.

One of the subcontractors, Suburban Grading & Utilities, claimed this language was unenforceable. In a second letter opinion, Judge Martin upheld this provision as well, noting that the Supreme Court of Virginia finds “pay if paid” clauses enforceable “where the language of the contract in question is clear on its face.” This language was an unambiguous “pay if paid” clause that Judge Martin had no choice but to uphold, leaving Suburban to eat the costs of $575,928 for labor and materials and another $245,662 for dewatering.  For a great and very timely discussion of this opinion and advice about "pay if paid" clauses, I urge you to read Chris Hill's Construction Law Musings post, Pay if Paid, Pay Attention Subs.

Don’t go away thinking there will be no winners in this debacle! The federal government has since conveniently renewed its desire to condemn the property in order to expand the federal courthouse next door.  It offered a paltry $6.1 million to seize the Granby Tower property, an offer that no one is jumping at yet.  If you’re interested in reading more on this very likely end to the Granby Towers saga, take a look at Harry Minium and Tim McGlone’s recent article in The Virginian-Pilot.  
 

Image by:  Hyunsoo Leo Kim/The Virginian-Pilot 

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The construction industry is receiving somewhat mixed economic signals lately. On the good news front, the home building industry which has been mired in recession far longer than the rest of the economy is showing signs of life. Bloomberg reported that sales of new homes climbed in August to a high for the year. The news was tinged with some contrary news that pricing reflected competition from large numbers of foreclosures of existing homes in the marketplace. Bloomberg also reportedly separately that estimates of new home sales for 2010 may increase substantially as well, particularly if Congress extends the tax credit for first-time buyers.

On the other hand, reports on pricing and cost figures in the commercial and government sectors do not appear as rosy. Engineering News Record recently described (subscription only) the “sharp and prolonged decline in construction costs” in our current economy as unparalleled since the Great Depression. In particular, the article by Tim Grogan and Tom Nicholson pointed to year-to-year decreases in construction pricing of 10.8% in the Turner Construction building cost index. Karl Almstead, the vice president of Turner who is responsible for their building index, is quoted in ENR as stating:

This is the largest drop in costs for a given year that we have seen in our index since the Great Depression of the 1930s. Materials prices recently have been fairly level, and labor costs are pretty flat too. It is market conditions that are driving costs down.

In the absence of much activity in the commercial markets, many firms are flocking towards the government contracting arena. Initial reports over the summer indicated that GSA was receiving bids that were as much as 15% lower than expected on projects funded with stimulus dollars. The official GSA press release couched the level at costs 8-10% lower than expected. We are anecdotally hearing of some players bidding jobs below their actual costs simply to try to generate modest cash flow in the short term.

The availability of some increased government funding in a tight market, a highly aggressive bidding environment, and the nature of competitive government low bidding delivery methods collectively appear to create the perfect storm for claims and litigation. This environment leads to a number of conclusions:

• Unreasonably low bids translate to far more change order claims.
• Subcontractors or contractors who cannot profit based on their bids are more likely to fail
• This translates to terminations, defective workmanship, takeovers and claims
• The smart money will sit and wait rather than chase unreasonable numbers
• Our prediction is that we see a huge increase in delay claims, change order claims, and general litigation chaos over the next 2-4 years in the construction industry.

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