The ReaList - Volume 1, Edition 3

A publication of Seyfarth Shaw's New York Real Estate Practice. The ReaList newsletter covers New York real estate news, events, and trends.

Construction:

James A. Farley Post Office Building Redevelopment Project
The project documentation for the redevelopment of the James A. Farley Post Office Building has recently been finalized. The Farley Building (the post office building opposite Penn Station) is being transformed by the Empire State Development Corporation into a mixed use facility consisting of a new train station and train hall (Moynihan Station) and commercial space (office, retail and hospitality). The redevelopment of the Farley Building is the first of two steps in implementing Governor Cuomo’s vision for the Penn-Farley Complex - the second step of which is the overhaul and renovation of the adjoining Penn Station.

A joint venture of the Related Companies and Vornado Realty will use Skanska USA for the design-build redevelopment of the Farley Building. The site will be become a world class transportation facility over the next several years. The existing façade of the Farley Building will be retained, while the internal area will feature, in addition to the commercial space, a 210,000 square foot train hall (roughly the same size as the Grand Central Station concourse). A key feature of the train hall will be a giant skylight roof. When completed, Moynihan Station in the Farley Building will be the new site for Amtrak’s and the Long Island Rail Road’s train services in and out of New York City.

Seyfarth Shaw represented Skanska, USA on the project.

If you have any questions please contact Bennett Greenberg or Alison Ashford.

Real Estate:

RPAPL Section 881: Access to Adjacent Property To Install Protective Measures
Property owners often need a license to enter an adjacent property in order to install protective measures in connection with repairs or improvements to their own properties.  In that situation, a license agreement is typically negotiated between the two adjacent owners.  However, if such an agreement cannot be reached, New York’s Real Property Actions and Proceedings Law Section 881 (“Section 881”) allows the owner seeking to perform the improvements or repairs to commence a special proceeding in New York Supreme Court to obtain a court-ordered license to enter the adjacent property.

Typically, Section 881 license applications to install protective measures on adjacent properties are granted.  The courts will grant an access license necessitated by elective developments and improvements on the adjacent property, not just mandatory work (such as façade repairs in connection with New York City’s Local Law 11). Courts have recognized the rights of owners to improve their property, not just their obligations to maintain it.  Accordingly, licenses to install protective measures on adjacent property pursuant to Section 881 have been granted for both maintenance and improvements.  However, courts have imposed various conditions on the grant of such licenses including, providing insurance, indemnities, undertakings and limiting the scope and duration of work.

In DDG Warren v. Assouline Ritz, the Appellate Division, First Department also recognized that the owner whose property needs to be accessed has neither sought the intrusion nor derives any benefit from it and, accordingly, should not have to bear the costs resulting from the access.  Those costs include attorneys’ fees, engineering fees, architectural fees and compensation for loss of, or diminished use of, parts of the property, such as yards, terraces, balconies and roof decks.

The Appellate Division, First Department in In re Van Dorn Holdings, LLC v. 152 W. 58th Owners Corp., recently reiterated the foregoing by affirming an award of a monthly license fee until work was completed to an owner deprived of the use of a portion of his property.  The Appellate Division also affirmed the award of attorneys’ fees and engineers’ fees, noting that an adjacent property owner “should not be put in a position of either having to incur the costs of a design professional to ensure [the] work will not endanger his property, or having to grant access without being able to conduct a meaningful review of [the] plans.”

If you have any questions please contact Adrian Zuckerman or Tom Gleason.

Real Estate Finance:

Purchasers of Real Property Should Carefully Consider Their Choice of Business Entity
Purchasers of real property should carefully consider the business entity they will use to acquire and hold such property.  Entity choice has important ramifications for a business and its owners, including but not limited to issues impacting management, taxation, distributions of property, limitations on ownership, and owner liability.  The following are some issues to take into account with respect to whether to acquire real property or other assets using (1) an S corporation; (2) a limited liability company (LLC); or (3) a limited partnership (LP).  These are some of the more common choices; however, there are other possibilities (e.g., C corporations and general partnerships) that are beyond the scope of this summary.  Because the optimal choice of entity will depend on a purchaser’s particular situation and plans, consultation with knowledgeable professionals is important before a final determination is made.
            
S corporations and LLCs offer their owners protection from personal liability for the entity’s obligations.  LPs offer such protection to their limited partners, but not their general partners.  In addition, S corporations and LLCs offer their owners the opportunity to actively participate in the management and operation of the business; however, LPs require their limited partners to assume passive roles while the general partner assumes the management role.  S corporations and LLCs may be formed and owned by a single shareholder or member (in such case, an LLC will be disregarded as a separate entity for federal income tax purposes but still considered a separate entity for liability purposes) while a limited partnership must have at least two partners, with at least one partner as a general partner.  There are restrictions relating to S corporations (e.g., with respect to who may be shareholders, and issuing more than one class of equity) that are not applicable to LLCs and LPs.
 
All three entities considered offer pass-through tax treatment to their owners such that no federal income taxes are paid at the business level.  Rather, profit or loss passes through to the tax returns of the entity’s owners.  S corporations may offer advantages over LLCs and LPs because shareholders can be treated as employees (which is not possible in a tax partnership) and paid a reasonable salary.  Earnings in excess of any salaries generally will not be subject to self-employment tax.  Other important tax issues that should be considered include relevant state taxation, and the possibility of special allocations of profit and loss (not available in S corporations).

In many instances, LLCs and LPs will offer more flexibility for their owners than an S corporation with respect to investments in real estate (and LLCs will frequently represent the most flexible option).  While S corporations, LLCs and LPs all allow for tax-free contributions of property to such entities by their shareholders, members, or partners, respectively, S corporations generally cannot distribute such property to their shareholders without giving rise to a taxable event for such shareholders if the value of the property exceeds its basis.  LLCs and LPs, on the other hand, offer the potential for tax-free distributions of assets, including real property, to their members/partners.  There are, however, certain circumstances in which an S corporation may nevertheless be preferable to an LLC or an LP.  For all of the foregoing reasons, and more, it is important to be attentive to choice of entity and consult with advisors as needed.

If you have any questions, please contact Stan Bloch or Josh Lake.

Litigation:

Additional Insureds May Be Covered Only As To Injuries “Proximately Caused” by the Named Insured
Many in the construction industry have accepted that insurance policies providing coverage to additional insureds for bodily injury caused in whole or in part by the named insured include coverage for injuries arising from any act or omission by the named insured that contributed in some way to the injury.  However, a recent decision by the New York Court of Appeals indicates that, at least for some insurance policies, only acts or omissions that would give rise to legal liability on the part of the named insured are covered.

In The Burlington Insurance Company v. NYC Transit Authority, et al., the New York City Transit Authority (“NYCTA”) and other New York City entities were listed as additional insureds on an insurance policy taken out by a private contractor, Breaking Solutions, Inc. (“BSI”) in connection with a construction project.  The policy provided NYCTA and the other additional insureds with insurance coverage for bodily injuries “caused, in whole or in part, by” the “acts or omissions” of BSI.  During construction, an NYCTA employee was injured when a BSI machine touched an electrical cable and set off an explosion.  BSI had not acted negligently, and was not liable to the employee, because there was no way BSI could have known about the cable -- it was buried as a result of NYCTA’s negligence.  NYCTA nonetheless argued that the insurance policy should cover the employee’s injury because the injury would not have occurred but for BSI’s operation of its machine. 

The Court of Appeals, with one judge dissenting, concluded that, based upon the language of the insurance policy, it was not enough for BSI’s actions to be a “but for” cause of the injury.  To be covered by the insurance policy, the named insured’s actions would have to be a “proximate cause” of the employee’s injury -- in other words, the named insured must have acted in a manner that would make the named insured legally at fault for the injury, such as by acting negligently. 

The Burlington decision is based upon specific policy language.  It is accordingly critical to review the policy language at issue in a particular case.

If you have any questions, please contact Jonathan P. Wolfert or Owen R. Wolfe.