Notes on Zoning and Permitting Opinions in Real Estate Finance Transactions, Part 2 of 2

In the Fall 2018 issue of Opinions Matters, I discussed legal opinions addressed to lenders that deal with project zoning, permitting, other governmental approvals, and compliance with regulations affecting real estate, such as environmental matters. I concluded that such opinions have become relatively rare in recent years. However, these requests have not disappeared entirely. Below I discuss examples of these opinion requests in certain types of financing transactions and explain how our firm responded to these requests.

Types of Financings Where These Opinions are Requested and Given

So far it appears that zoning, permitting, and environmental compliance opinions are, with some exceptions, quite unusual (although not non-existent) in today’s practice, unless they result from, and are limited to, firm involvement in specific land-use or permitting exercises. Further, where they are occasionally given, both to lenders, and, sometimes apparently to other reliance parties such as title insurance companies, they are, and even in past practice were, given on a highly limited and carefully qualified basis. However, opinions in one or more of these general categories are still routinely asked by certain subtypes of opinion recipients, and these will be briefly touched on in the remainder of this article.

In the case of certain types of real property financing transactions, our firm still receives, fairly commonly, opinion requests dealing with permitting or other types of governmental requirements or actions relating to real property development and use. Based on our firm’s recent experience, certain legal opinions required in the context of governmental or government-related financing programs, including, for example, federal tax credit programs, ask for substantive opinions regarding the status of certain aspects of compliance with land use, permitting, ordinance- or statute-based regulation, or similar matters. Other types of specialized financings raise similar issues. Other attorneys may have analogous experiences in other types of financings, even though they practice in jurisdictions where the zoning, permitting, environmental, and similar opinions are not given or are rarely given in ordinary real estate financing transactions.

Some examples of recent opinions we have given are summarized below. Note that they are negotiated opinions in which we typically try to tailor and restrict the breadth of our opinions in a manner resembling the approach we used in past years when zoning or similar opinions were more frequently requested in regular loan opinions.

We are often asked to give opinions in Low Income Housing Tax Credit financings (LIHTC). In a recent transaction, we gave the following opinion (quoted in part) to the investor (i.e., the purchaser of a limited partnership or limited liability membership interest in the property owner—formally, a capital contribution as opposed to a loan, but raising analogous issues): “Based solely on our review of the express language of the Building Permit, a City of XXX Building Permit for real property identified as XXX was issued on 6/16/2017 by the Building Department.” Going further, we also paraphrased some of the content of the building permit language to the effect that “it is for new construction, that it expires 12/16/2017, that the legal use is Vacant Land, and that certain stated conditions and exclusions apply,” and that “to our actual knowledge [defined in the opinion, generally not involving independent investigation by us], the Building Permit remains in full force and effect and has not been amended.”

Note that the limited opinion quoted above, which, although it does deal with the status of a governmental permit for a particular project, does not go beyond a description of the permit, nor does it say that the permit is sufficient (or all of the permits needed) to construct the improvements. And, the full force and effect/not amended language is based solely on a circumscribed definition of actual knowledge (for example, as the opinion was phrased, we did not have to investigate or verify anything directly with the Building Department). Although the value and appropriateness of such actual knowledge opinions might be debated, this is the type of limited opinion that we have found best allows us to meet the financing party’s absolute requirement of an opinion while limiting our exposure and billable time.

In another LIHTC opinion letter addressed to the tax credit investor, we also opined that, “Assuming the PILOT ordinance [payment in lieu of taxes] was validly adopted pursuant to all applicable procedures of XXX Charter Township, based solely on our review of the PILOT Ordinance, the PILOT Ordinance is currently in effect, and to our actual knowledge, there is no action pending or threatened which would render the PILOT Ordinance invalid or ineffective . . ..” We further opined to the same investor, “Based solely on our review of the Zoning Letters and the Zoning Ordinance and without any other investigation or inquiry, the Development is located in a Planned Residential District (PR-1) . . . which zoning classification permits the use of the Development as multifamily dwellings of up to 3 stories by right without the need for a special use permit.” To render this opinion, some interpretation was required (as, for example, to distinguish by right from conditional use), but still fairly limited and basically a reading of a legal provision in an ordinance, which a law firm would consider to be within its competence. Another opinion was given based solely on knowledge and “review of the Opinion Certification” [from the developer], “there are no governmental permits, licenses, or approvals such as building permits, required or to be obtained as of this date that are necessary for the rehabilitation of operation of the Development or to carry on the business of Mortgagor that have not been obtained”—a common alternative to giving an undesirable “all permits” opinion—not ideal, but the best we could do because, in our judgment, an opinion dealing with this subject matter could not be avoided. Others may have different experiences as to the degree of limitation on an opinion that such a recipient will tolerate.

In several recent opinions relating to other Michigan developments, we gave zoning (use), permitting, and PILOT opinions very similar to those discussed in the previous paragraph, but in these cases, the opinion recipient was the Michigan State Housing Development Authority (MSHDA), which was funding portions of the costs of an affordable housing development. In another opinion to MSHDA, we gave a more elaborate zoning opinion in which we had to disclose that, according to the ordinance, the improvements were non-conforming in certain respects and what the legal implications of that circumstance might be. In one of the MSHDA opinions, we also opined that based on our knowledge and a borrower certification, the use of the project for the specified purposes “(i) does not violate any private covenants, conditions, restrictions, or easements affecting the Development, and (ii) does not violate any applicable laws or ordinances.” Now, this is a fairly broad opinion and hangs its hat, for better or worse, on expressly limited reliance on knowledge and a certificate. Frankly, I am concerned that if the opinion later became the subject of a disputed proceeding, such express limitations would effectively serve to totally eliminate an implied further duty of investigation or diligence. Accordingly, we would certainly prefer not to give such opinions at all; however, the specific expectations and non-negotiable requirements of these types of financing parties do not allow that.

In another opinion, also in the LIHTC arena, we were asked to opine to investor parties that were part of the syndication transaction, that, based solely on the Permit Letter and without any current actual knowledge to the contrary, all necessary permits, licenses, and approvals for the project work had been received and that the syndication partnership had secured an annual reservation of low income housing tax credits.

Further, I would note that although outside the specific scope of this article, in the same opinion letter, and, in the same transaction, in a first mortgage loan opinion letter on the HUD form addressed to the loan parties including HUD, we were required to give opinions (although called in the HUD form, “confirmations”) along the following lines: “[b]ased solely on the Title Policy, assuming it reflects the state of title of the Project as of the date hereof and without any current actual knowledge to the contrary, the Partnership [that the investor is joining as limited partner] owns an interest in the Project free and clear of all liens and encumbrances except as set forth in the Title Policy.” This is one of those opinions that really should not be asked for or given, but (at least in our experience) it is impossible to bring one of these types of transactions to closing without doing so.

In addition to the affordable housing financing opinions described above, we have recently seen opinion requests in other types of financings that call for similar subject matter relating to governmental permitting. For example, in a Freddie Mac financing of a manufactured housing community that operates a private waste water treatment plant, or where the private water system is integrated with a public water supply, we were asked for very specific and detailed opinions stating that the property currently held certain specific types of related governmental permits, and the term of their validity. Also, we were asked to give a very specific kind of narrative opinion relating to the issuance of a certain permit following transfer of ownership of the property, i.e., what individual submitted the application for the permit on a certain date, what additional information was requested, the status of the application on the involved agency’s website, and, that “upon administrative approval, Borrower anticipates the issuance of the XXX Permit in the name of Borrower within 90 days after the closing, and Borrower knows of no reason why the XXX Permit might be denied,” and, finally, that in the interim, “Borrower is able to legally operate the Property, including the XXX Permit, on the date of the acquisition of the Property and during the pending transfer of the XXX Permit.” A very similar additional opinion was also requested regarding the transfer of a Safe Drinking Water Act permit and legal operation in the interim. Interestingly, it turns out that after further negotiation, these opinions were eventually waived by the lender and by Freddie Mac (likely, I am told, because the client is a large, regular customer of the loan originator and has sufficient financial strength and credibility). Nonetheless, and regardless of the ultimate outcome, we see that requests for such detailed, fact-specific permitting opinions still appear in the standard form for this type of project.

We have also given equivalent types of permitting opinions over the years and continue to do so, in connection with the financing of specialized regulated health care facilities, such as skilled nursing facilities. Although the opinions fundamentally cover the usual scope of ordinary real estate financing opinions, including authority/building block opinions and enforceability, they also then detour into regulatory/permitting opinions dealing with issuance of a Certificate of Need, status of transfer of or application for certain operating permits and the like, with requisite assurances. These are drafted by our health care colleagues and then, including what appear to be appropriate assumptions and qualifications, are integrated into the opinion letter. Giving these opinions requires a degree of due diligence—for example telephone conversations with state officials which are cited in the opinion letter—even though the firm was not necessarily involved in the permitting process itself (although, as other counsel have noted in the listserv comments with respect to certain specialized zoning and land use opinions, there is a greater degree of comfort if we are actively involved).

Another interesting type of opinion we have given recently relating to a publicly supported financing problem relates to Michigan’s Property Assessed Clean Energy Act (the “PACE Act.”) In PACE financings, the opinions are addressed to the lender (the firm’s own client, so not a third party opinion, although in principle the same opinion could be given by the borrower’s counsel). Assuming the validity and currency of municipal ordinances implementing the PACE program and establishing a specific special assessment district for the project being financed by our client, and subject to additional assumptions and exceptions, especially exceptions related to aspects of the financing where we think the statute is ambiguous or contains gaps, we opine that the assessment agreement: is sufficient under the PACE Act to create a valid special assessment on the real estate parcel in question; is consistent with statutory provisions allowing repayment obligations to be characterized as special assessment payments; that the mechanisms used by the private lender for imposing and collecting actual payments are consistent with the PACE Act; and that the municipality’s action in entering into the special assessment agreement is consistent with the PACE Act. We also opine that pursuant to the PACE Act, the particular special assessment for the amount of the loan, interest, and other charges will constitute a lien commensurate with other tax liens, will run with the land, and other similar matters, including with respect to the municipality’s right to foreclose the lien following default. That is, our opinion is fairly wide-ranging, but it is based, essentially, on close reading of the statute and comparing its express requirements to the express content of the special assessment agreement that implements the PACE Act financing. In a way, although the legal judgments required are more extensive, the process of analysis leading to getting comfortable with the opinion is not too different from what we have used in the past to give limited zoning opinions based on matching the property location and specific use contemplated to the particular zoning district and then reciting the applicable permitted as of right and conditional uses that pertain to that district.

In sum, as stated in the first article of this series, legal opinions addressed to lenders that deal with project zoning, permitting, other governmental approvals, and compliance with regulations affecting real estate such as environmental matters have become relatively rare in recent years. But although such opinions are rare, they have not completely disappeared. This is especially true in certain areas discussed above relating to tax credit financed transactions, certain other specialized loans under the aegis of HUD and Freddie Mac, and loans to specific types of borrowers in regulated industries, such as the owners and operators of health care facilities. In all cases where permitting and governmental regulatory compliance opinions are given, the issuers should be careful to limit the scope of the opinions and qualify them to the extent acceptable, which efforts, we find, are generally acceptable to the recipients so long as they reasonably touch on the subject.