US Regional Real Estate 2022 Comparisons

The main skills required for the practice of real estate law are as follows:

• zoning and land use for new developments as zoning laws have become increasingly complex and end users need more flexibility in the post-pandemic landscape; 
• government relations expertise to build consensus for new developments and uses of existing buildings; 
• transaction structuring experience to protect parties from transfer tax and reassessment risk; 
• relationships with local real estate developers and investors; and
• detailed title and survey analysis as many properties in Pennsylvania have long, tangled title histories.

COVID-19 of course had the largest impact on real estate in 2021, with the pain being most keenly felt in the hospitality and retail sectors, with office not far behind.

There is very high demand for new industrial product, and both build-to-suit and speculative warehouse and distribution center development have been very busy.

Development potential in Opportunity Zones has garnered a lot of looks but not much action in Pennsylvania to date. Most Opportunity Zone development seems to have settled in primary markets. Government and philanthropic foundations are beginning to view Opportunity Zones as one arrow in the quiver rather than as a silver bullet to spur development in disenfranchised areas. Additional financial incentives like tax abatements, grants and tax increment financing are anticipated, coupled with Opportunity Zones, to catalyze economic activity in these Zones.

During the height of the COVID-19 pandemic, various government mandates imposed restrictions on in-person office attendance. While employees have begun to return the office, the market for large offices in metropolitan areas has understandably declined.  As a result, in cities with an overabundance of office space, like Philadelphia and Pittsburgh, developers have begun to consider converting older office space into market rate and affordable housing.  

Commercial real estate is increasingly held in limited liability companies (LLCs). Until recently, limited partnerships were preferred in Pennsylvania because the state's Capital Stock/Franchise Tax applied to LLCs but not limited partnerships. That tax has now been phased out, so LLCs are now preferred because only one entity is required.

Notable jurisdictional requirements include the following.

For deeds in counties with significant history of bituminous and/or anthracite coal mining, state law requires the deed to contain a prescribed form of notice regarding risks related to the ownership of the coal and potential subsidence. The grantee is required to sign the coal notice. 

Pennsylvania's bulk sales statutes require sellers conveying 51% or more of their assets to obtain tax clearance certificates prior to closing to protect buyers from successor liability for sellers' unpaid state tax. It is difficult to obtain tax clearances that quickly so buyer usually requires a "bulk sales indemnity" from the seller to protect the buyer from the responsibility of the seller's unpaid state tax. 

Pennsylvania prohibits "pre-acknowledging" recorded documents, meaning the date of the notary may not be earlier than the date of the document. This is often addressed by dating documents "as of" the date of the earliest acknowledgement "to be effective" the date of closing.

Where a deed does not state the actual consideration paid plus the amount secured by any liens existing before the transfer and not removed thereby, Pennsylvania requires that information to be disclosed on a realty transfer tax statement of value recorded with the deed to enable the county recorder to calculate the transfer tax. The transfer tax statement is also used to claim transfer tax exemptions. 

Realty transfer tax in Pennsylvania ranges from 2%-5%. This high tax encourages parties to structure transactions to minimize transfer tax exposure.

Some municipalities require "sewer dye tests" prior to transferring property, to ensure that storm sewer and sanitary sewer lines are not combined (which causes sewer overflow into rivers).

To effect and register a transfer of title:

• the parties will execute either a special warranty (the default), general warranty or quitclaim deed; 
• the grantor's signature must be notarized; 
• depending on the county, a grantee is often required to sign a statutory coal notice in the deed; 
• a certificate of residence is required in the deed to provide public notice of the grantee's address; in some counties the certificate must state both the grantee’s address and the address to which tax bills should be mailed;
• if the deed does not recite arm's length consideration (which included both the amount paid for the transfer and the amount of any secured debt continuing after the transfer), a transfer tax statement of value must be recorded with the deed, which sets forth the consideration or alternative basis of transfer tax; where the transfer is subject to existing liens it is sometimes desirable, to include a transfer tax statement of value; 
• the deed is recorded and transfer taxes are paid at the county recorder's office; and
• each of Pennsylvania's 67 counties has its own deed formatting requirements and recording fees; title companies typically vet the deed form with the county recorder's office for compliance.

Real estate due diligence typically comprises the following:

• a title commitment;
• ALTA survey;
• a property zoning report;
• zoning/land use approvals;
• Phase I and, if needed, Phase II environmental site assessment;
• engineering reports;
• a lease review; and
• a financial statement review.

The division of labor between buyers and their attorneys on real estate due diligence varies, but the buyer's counsel often takes the lead.

The buyer's counsel typically reviews the title commitment and survey, handles the title objection process with the seller's counsel and the title company, reviews the zoning report and pursues zoning and land use approvals (with meaningful involvement from project architects), and reviews the environmental site assessment.

Clients often take the lead in reviewing engineering reports, abstracting leases and underwriting deal economics.

Typical representations and warranties for both parties include the power and authority to enter into the agreement and carry out the transaction.

For sellers, typical representations include:

• indicating the property's zoning and that the current use is compliant with zoning;
• no pending litigation;
• no environmental contamination or no notice received of environmental non-compliance;
• no leases or other third-party property rights to purchase or lease other than those disclosed;
• no bankruptcy/insolvency;
• seller is a US person;
• Office of Foreign Assets Control (OFAC) compliance;
• no encumbrances other than those of record; and
• the property being sold should not constitute 51% or more of the seller's assets; if it does, the seller will comply with Pennsylvania bulk sales law.

In the event of a misrepresentation of the seller prior to closing, the buyer can typically terminate and get its deposit back. 

The seller's representations usually survive closing, often for 12 months. The contract normally contains an indemnification for buyer's losses due to breach of a seller representation, often secured by a net worth covenant, parent guaranty or escrowed funds, with the seller's exposure often subject to a cap and basket.

The key areas of law for foreign investors to consider are zoning, land use, transfer tax, ad valorem real estate tax reassessment risk, environmental and bulk sales. Changes to CFIUS regulations have not had a significant impact in Pennsylvania.

Every owner in the chain of title has risk for environmental contamination whether they caused it or not. Environmental representations are often heavily negotiated. The typical resolution is for the seller to represent it has not received notice of any environmental violations and has no current knowledge of any. Buyers rely heavily on third-party environmental site assessments to evaluate their risk.

Buyers typically order third-party property zoning reports. For complex projects, land use attorneys usually provide an analysis of permitted uses under existing zoning and avenues for relief if needed, such as a conditional use, special exception, variance or rezoning. Depending on the type of relief, it is obtained from the municipal governing body, its zoning administrator or zoning hearing board. Development agreements do not provide this relief but rather govern construction-related issues like road repair, hours of construction and bonding requirements.

Condemnation by government bodies or public utilities is possible in Pennsylvania. The condemnor initiates the process by filing a declaration of taking in the county trial court. The process is often handled outside of court by the condemnor purchasing the property for an agreed upon price in lieu of condemnation. Where formal condemnation proceeds, the consideration is determined by agreement or, failing that, by litigation to set the property's fair market value.

The following taxes are applicable to transactions.

• State and local transfer tax varies from 2%-5% depending on the jurisdiction. Pennsylvania’s transfer tax rules apply to both the state and local tax in all jurisdictions except Philadelphia. 
• The statute imposes joint and several liability for transfer tax, but by longstanding custom it is shared 50-50 by the buyer and seller, though a different result can be negotiated.
• On an asset sale, transfer tax is imposed on the arm's length consideration for the real estate stated in the deed or an attached transfer tax statement of value. Consideration includes the amount paid and the amount of secured debt continuing after the transfer.
• Transfer tax also applies to the transfer within a running three-year window of 90% or more of the capital and profits interests in a "real estate company" (as defined in the statute). Most entities owning commercial real estate meet the definition.
• If more than 90% of the interest in a "real estate company" are transferred within three years, transfer tax applies based on the "computed value" of the real estate owned by the entity.
• "Computed value" is the product of the property's assessment for ad valorem real estate tax purposes multiplied by the "common level ratio" for the county where the property is located.
• The "common level ratio" is a county-specific statistic published annually by a state agency that adjusts on a countywide average basis between assessed value and fair market value.
• Leases for 30 years or more are subject to transfer tax based on the "computed value" of the property. In determining the length of the lease term for the 30-year test, renewal options are included unless rent in the renewal term is fair market value as determined by the parties at the time of renewal. 
• The transfer tax statute and regulations provide a number of exclusions from tax.

To own and operate real estate in Pennsylvania, a foreign entity must register with the Pennsylvania Department of State to do business in Pennsylvania. However, the passive ownership of real estate for investment purposes does not require registration.

The structure of commercial real estate finance transactions in Pennsylvania is similar to most other states. 

Term, bridge, and construction loans, in each case secured by mortgages, are most common. Mezzanine loans are sometimes utilized in order to increase the percentage of the project financed by debt.

For income generating properties, most loans are structured as loans to single purpose entities (SPEs) with some level of guaranty support from the sponsor, based upon the credit-worthiness of tenants and operating history of the property.

Real estate investment trusts (REITs) are common publicly held entities whereby investors pool their money to invest in a real estate portfolio.

Types of Security

The most common security interests in favor of the lender in Pennsylvania are:

• a mortgage on the real estate;
• security interests, usually included the mortgage, in equipment and fixtures and other tangible personal property located on the real estate or used in connection therewith, and intangible personal property such as contracts and deposit accounts related to the ownership or operation of the real estate;
• an assignment of leases and rents, often included in a mortgage, but a separate assignment is customary; and
• a leasehold mortgage, utilized to secure a lien on a tenant's interests under a lease.

Open-End Mortgage

If funds are to be borrowed after the mortgage is recorded, such as for construction of improvements on the real estate, the mortgage should be an open-end mortgage. A statute provides that the lien of future advances under such a mortgage date back to the date such a mortgage was recorded, provided that the technical provisions of the statute are complied with. Such later advances may date back to the initial filing whether or not the lender was obliged to make such later advances. Where at least 60% of the borrowed funds are intended to pay or are used to pay all or part of the cost of construction, the open-end mortgage has priority over all mechanics liens, even those that would otherwise have priority over the mortgage. 

Registration to Do Business

Most entities formed under non-Pennsylvania laws are required by the Pennsylvania Associations Code to register with the Pennsylvania Department of State before doing business in Pennsylvania. Specifically excluded, however, are:

• foreign insurance corporations;
• interstate banks;
• national banking associations;
• federal savings and loan associations and federal mutual savings banks;
• federal credit unions organized;
• any other federal association intended by the Congress to be treated for state law purposes as a domestic association of Pennsylvania; and
• certain foreign not-for-profit insurance corporations licensed to transact business in Pennsylvania.

The Associations Code does not define “doing business”, except in terms of what it does not include, however it provides that the following activities, among others, shall not constitute doing business in the Commonwealth:  “creating or acquiring indebtedness, mortgages or security interests in property” and “securing or collecting debts or enforcing mortgages or security interests in property securing the debts and holding, protecting or maintaining property so acquired.” 

Note that the apparent breadth of these exclusions may be restricted if the excluded activities are regular, systematic, or extensive. 

Consequences of Failure to Register

The penalty for failure to register is that the foreign lender may not maintain an action or proceeding in Pennsylvania until it does register. 

How to Register

Registration is easily accomplished by the filing a Foreign Registration Statement with the Pennsylvania Department of State, accompanied by a filing fee of USD250. The entity must have a registered office in Pennsylvania or retain a Commercial Registered Office Provider in Pennsylvania. Corporations must advertise their registration or intention to register. The Foreign Registration Statement is available on the website for the Pennsylvania Department of State and may be filed electronically.

Bank and Trust Company Shares Tax

Pennsylvania has a tax, known as the "Bank and Trust Company Shares Tax" which is imposed on certain institutions such as banks and trust companies doing business in Pennsylvania. 

No taxes or fees, except for nominal recording fees, are payable on the granting, recording or enforcement of security over real estate. However, if a lender acquires possession of the real estate, or acquires it in foreclosure, certain state and local taxes may be imposed.

There are no legal rules or requirements that must be complied with before an entity can give valid security over its real estate assets. However, certain regulated entities may be subject to such rules or requirements.

Formalities before Enforcement

There are no procedural or other debtor protections to be overcome before the lender is able to enforce its rights over real estate against the defaulting borrower aside from overcoming any defenses the borrower may raise to enforcement. Nor are there any additional procedures that must be undertaken to give the lender's security interest priority over the interests of others.

Collection of Rents

Upon default, the lender may notify the tenants to pay the rent directly to the lender if the mortgage contains an assignment of lease and rents or there is a separate assignment of leases and rents. A tenant who disregards the notice and pays the borrower would still be liable to the lender for the rent.

Procedures to Enforce a Mortgage

Most Pennsylvania commercial mortgages provide that the lender has a right to possession of the mortgaged property upon default. Many such mortgages also contain a warrant of attorney to confess judgment in ejectment against the borrower on default. A confessed judgment can be opened for cause. A lender may bring a legal action for possession, but such an action can take months to result in a judgment. Often a lender will forego possessory remedies and exercise one or more of its other remedies.

Mortgage foreclosure action

A lender may enforce a mortgage by a legal action in mortgage foreclosure against the mortgagor, and also the owner if different from the mortgagor. In that action the defendants may raise any defenses they may have. If the lender prevails, a judgment for foreclosure of the mortgage will be entered on the basis of which a sheriff will sell the mortgaged property at a public auction known as a foreclosure or execution sale. Usually, the lender may credit bid at the sale.

The sale divests liens, whether superior or inferior to the mortgage lien, except those liens which are protected from divestiture by statute. Mortgages prior in lien priority to the mortgage being foreclosed and to all other liens except for other mortgages, ground rents, purchase money due the Commonwealth and certain taxes, municipal claims and assessments set forth in 42 Pa.C.S.A. 8152 are not divested; nor are real estate taxes unless the sale brings sufficient proceeds to pay them. The sheriff distributes the proceeds of the sale to holders of liens divested by the sale and other parties in order of priority. 

Execution on money judgment on the secured debt

A mortgage may also be enforced by an execution sale on the basis of a money judgment obtained in a legal action against the borrower for the debt secured by the mortgage. If the debt is evidenced by a document which contains a warrant of attorney for confession of judgment, the lender may cause a judgment to be confessed against the borrower and the sale may take place on the basis of that judgment. The procedural rules provide for the borrower to raise defenses by a motion to open or strike the judgment and for notices to the borrower relating to such rights.

Including personal property in the foreclosure

Where the mortgage covers both real estate and personal property, it is often good practice to include personal property in the foreclosure complaint and the execution sale as permitted by Section 9604 of the Uniform Commercial Code, 13 Pa.C.S.A. 9604(a) and Rules of Civil Procedure 1147(b) and 3180(b), applicable to a foreclosure judgment, or 3101.2, applicable to a money judgment. This approach could result in the buyer at the sale acquiring the assets essential for the operation of the real estate at the same time the real estate is acquired, and could minimize expense, risk and delay related to the deficiency judgment act.

Realty transfer taxes on sheriff’s deed

Realty transfer taxes must be paid based on “computed value” on a sheriff’s deed to a third party. No transfer tax is payable on a sheriff’s deed to the holder of the mortgage on which the sale is based. This would include a party to which the mortgage was transferred prior to the sale.

Receivership

The lender may apply for the appointment of a receiver to collect the rents and manage the property as ancillary relief in a mortgage foreclosure action or execution proceedings on a confessed money judgment on a promissory note secured by a mortgage. In some circumstances the receiver may also be authorized by the court to sell the mortgaged property.

In Pennsylvania, if a mortgage provides for the appointment of a receiver on default, that provision will typically be enforced even without equitable reasons for doing so. 

Deficiency Judgment Act

If the property is sold at the execution sale directly or indirectly to the lender, it is deemed to satisfy the debt unless the lender obtains a court evaluation of the property in a deficiency judgment proceeding. The value so determined, less amounts such as undivested liens, is then credited against the debt and the lender is free to collect the balance. The lender must initiate the proceeding by filing a petition within six months of the sheriff's deed. Until that proceeding is complete, the lender may not collect the alleged balance of the debt from the borrower or any other person or collateral liable for the debt.

The lien priority of existing debt secured by real estate may be subordinated by agreement to that of newly created secured debt. This is done by an acknowledged and recorded postponement agreement among the borrower, the existing mortgagee, the subsequent mortgagee or mortgagees and any other persons interested as owners of the real estate or as holders of liens.

A lender that has taken the action of enforcing security to protect collateral real estate is provided certain protections from liability by the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the secured creditor’s exemption of the Pennsylvania Hazardous Sites Cleanup Act (HSCA), and the Fiduciary and Lender Environmental Liability Protection Act (the “Lender Liability Act”). The lender’s protections under CERCLA and HSCA are rooted in the respective statutory definitions of “ownership and operations”, while the Lender Liability Act outlines a fault-based standard that defines the management of a site and declares that a lender’s ownership or control of a property will not trigger liability. 

CERCLA and HSCA place the liability of hazardous substance clean-up or the related costs of clean-up upon: 

• the current owner and operator;
• any owner or operator at the time of hazardous substances disposal;
• any person who arranged for the disposal or treatment of hazardous substances, or arranged for the transportation of hazardous substances for disposal or treatment; and
• any person who accepts hazardous substances for transport to the site and selects the site.

Owner Operator Definitions

CERCLA Section 101(20)(A) categorizes a person as an “owner or operator” of a facility if that person: 

• owns or operates that onshore or offshore facility; or
• owned, operated or otherwise controlled activities at that facility immediately before title to the facility, or control of the facility, was conveyed to a unit of state or local government due to bankruptcy, foreclosure, tax delinquency, abandonment or similar means.

Section 101(20)(A) goes on to exclude from the definition of an “owner or operator” any “person, who, without participating in the management of a [...] facility, holds indicia of ownership primarily to protect his security interest in the [...] facility.”

The HSCA follows the CERCLA owner/operator definition while providing a secured creditor’s exemption that applies to financial institutions, their affiliates, or parents that satisfy three conditions: 

• the site was acquired by foreclosure or by deed in lieu of foreclosure as a result of enforcing a mortgage or security interest held by the financial institution, its parent or affiliate;
• the site was acquired before the financial institution, affiliate or parent had knowledge that the site was on the NPL or the state counterpart to the NPL; and
• the financial institution, affiliate or parent did not manage or control activities at the site which contributed to the release or threatened release of hazardous substances.

The exemption includes a definition of “management” and under the definition excluded financial institutions from being considered management of a site when supervising the "finances or fiscal operations of a responsible person or an owner or operator in connection with a loan to, services provided for or fiscal obligation of that responsible person or an owner or operator or actions taken to protect or preserve the value of the site or operations conducted on the site”.

Priority Legislation

In 1995, Pennsylvania legislature enacted the Economic Development Agency, Lender Liability Act that identified that ownership or control of a property shall not trigger liability for a lender. Taking priority over inconsistent HSCA provisions or other state laws that impose liability on lenders or fiduciaries, the Lender Liability Act put a fault-based standard in place by repealing strict and joint liability for those holding indicia of ownership of a site, but not participating in the management of a facility. 

A lender who engages in “routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property" will not be liable under any state environmental laws or their common law equivalents, but the lender may lose its liability protection if it, its employees or agents:

• directly cause an immediate release or directly exacerbate a release of regulated substances on or from the property; or
• knowingly and willfully compelled the borrower to take any action that causes an immediate release or violate any environmental laws.

In the event that a lender were to lose the liability protection, the Lender Liability Act provides that the lender will only be liable for costs that the lender is directly responsible for as a result of the lender’s actions if those actions were the cause of the violation or release of hazardous substances. Furthermore, actions that occur exclusively from releases taking place prior to a lender’s foreclosure will not create liability for the lender. After foreclosure, a lender will only be responsible for the response cost caused by making a pre-existing release worse. A release found during due diligence investigation shall be considered a pre-existing release with the lender not responsible. 

General Effects

If the borrower files for federal bankruptcy, the lender's remedies will be stayed at least temporarily and there may be other adverse consequences that are beyond the scope of this chapter.

Voidable Security Interests

Pennsylvania has the Uniform Voidable Transactions Act (UVTA). The UVTA is identical in many respects to Section 548 of the Bankruptcy Code. 

The UVTA does not present an appreciable risk of avoidance of a security interest granted by a borrower to secure a loan to the borrower. It does, however, present well-known risks of avoidance of a security interest granted by a person other than the borrower, such as the borrower’s subsidiary, to secure a loan to the borrower, if the grantor is insolvent or meets certain other financial criteria specified in the statute. 

Effect of Borrower's Insolvency on Foreclosure

Deemed reasonably equivalent value

As stated in 3.6 Formalities when a Borrower Is in Default, a mortgage is foreclosed by a foreclosure or execution sale. The transfer by the sheriff as a result of such a sale could be challenged under the UVTA if the financial condition of the borrower met the criteria described above, or if there were an actual intent to hinder, delay or defraud creditors. This risk is substantially minimized by a provision of the UVTA to the effect that a person gives reasonably equivalent value if the person acquires an asset of a debtor at a regularly conducted noncollusive foreclosure or execution sale.

UVTA exception for enforcement of security interest under Article 9

Enforcement of a security interest in personal property pursuant to Article 9 of the Uniform Commercial Code (the provisions of which generally govern security interests in personal property) is not subject to attack under the UVTA unless the enforcement is by acceptance of the collateral in full or partial satisfaction of the obligations it secures, or there was actual intent to hinder, delay or defraud creditors.

Minimizing Bankruptcy Risks

Lenders can minimize bankruptcy risks by carefully examining the financial condition of a borrower and the effect of the transaction being financed on that condition. A solvency certificate is sometimes required, but it is no substitute for solid underwriting. 

Structuring the loan as a loan to a special purpose entity is designed to minimize bankruptcy risks.

It is important that the mortgage be recorded contemporaneously with the first advance of the loan, otherwise the mortgage might be successfully attacked as an avoidable preference should the borrower later file for bankruptcy. 

If the loan is being made to a party other than the mortgagor, a lender may include a provision the effect of which would be, in certain circumstances, to reduce the amount of the debt enforceable against the mortgaged property to an amount that would survive attack under the UVTA or similar provisions under the Bankruptcy Code. Such provision is sometimes known as a "net worth limitation clause". 

There are no existing, pending or proposed rules, regulations or requirements that lenders or borrowers pay any recording or similar taxes in connection with mezzanine loans related to real estate.

However, state and local realty transfer taxes are imposed on certain acquisitions of equity interests in real estate companies.

The design, location and appearance of new buildings and renovations to existing buildings are governed mostly by local municipality's zoning ordinance and land development ordinance. The Pennsylvania Municipalities Planning Code (MPC), which applies to all municipalities other than Philadelphia and Pittsburgh, authorizes, but does not require municipalities to adopt their own zoning and land development ordinances. If a municipality has not adopted its own zoning and land development ordinances, the county-wide zoning and land development ordinances (if the county has adopted such ordinances) will typically apply instead. Philadelphia and Pittsburgh have their own zoning codes, which are not subject to the MPC. 

Specific to construction plans, developers must also comply with the building codes (International Building Code, International Fire Code, etc) adopted by each municipality.

Government agencies are responsible for regulating the development and designated use of individual parcels of real estate in each municipality. In municipalities governed by the MPC, these include the governing body (Board of Supervisors, Borough Council, etc), the planning commission, and the zoning hearing board. If a use is permitted by right (ie, no zoning relief is required), then the applications for development are handled administratively by the municipality's planning department. 

If relief from the zoning ordinance is required, then the governing body and/or zoning hearing board will consider the applications during the course of public hearings. Although not governed by the MPC, Philadelphia and Pittsburgh utilize similar local boards to regulate and administer local land use controls. In Pittsburgh and Philadelphia, the local zoning board is referred to as a "zoning board of adjustment."

Zoning

If no zoning relief or land development approval is required, then the development approval process can be completed administratively over the counter.

If zoning relief is required (through a variance, special exception, or conditional use) then the process generally takes three to four months. An applicant will file an application with the municipality, which must hold an advertised public hearing to consider the application within 60 days of the application. The municipality must then issue a decision within 45 days of the last hearing. If the municipality does not comply with these requirements, the application will be deemed approved. Although Philadelphia and Pittsburgh are not subject to these timing requirements and deemed approval provisions, the zoning approval process follows a similar timeline.

Re-zoning

For developers seeking re-zoning, there is a usual timeline in which the municipality must act on the application. However, if the municipality is willing to re-zone the property, the process typically takes four to six months. Because re-zoning is considered a legislative act, the decision to re-zone a tract of land is almost entirely within the discretion of the local governing body and there is little recourse if a municipality denies re-zoning a parcel. 

Land Development

Land development approval is typically required for the construction of new commercial buildings or multi-unit residential buildings. Land development approval relates mostly to the site engineering, layout and design of a proposed development. This process takes approximately three to four months, but can be accomplished concurrently with the zoning approval process. 

For land development approval, the developer submits an application to the municipality, which refers the application to its planning commission for review and recommendation. The application is then sent to the governing body, which votes to approve or deny the application at an advertised public hearing. The municipality must issue a decision on the application within 90 days after the first regularly scheduled planning commission meeting following the date of application. The land development approval process in Philadelphia and Pittsburgh follows a similar timeline.

Third parties with property interests near a proposed development are permitted to participate and object at any public hearing/meeting related to an application. In Pittsburgh and Philadelphia, developers are required to meet with registered community groups prior to any public hearing to consider an application.

The initial decision regarding an application is appealable to the zoning hearing board, or the zoning board of adjustment (if in Philadelphia or Pittsburgh). 

After all local administrative remedies have been exhausted, a municipality's ultimate decision to approve or deny an application is appealable within 30 days to the Court of Common Pleas of the county in which the municipality is located. Either the applicant or a person with a sufficient property interest near the development may appeal the decision. Despite no hard rule, Pennsylvania courts usually hold that landowners or residents within a quarter mile of the development have sufficient standing to appeal a decision. 

An appellant has an automatic right to appeal an adverse decision of the Court of Common Pleas to the Pennsylvania Commonwealth Court. The Commonwealth Court's decision is appealable to the Pennsylvania Supreme Court, which is not required to accept the appeal.

Larger land developments will usually require that a developer enter into a "Development Agreement" or "Developer's Agreement" with the municipality as a condition of final approval. The agreement will identify various inspection and bonding requirements required for the construction of the development. Other types of agreements may also be required with public utility companies to facilitate connection to the relevant utility (water, sewer, gas, etc). Additionally, developers sometimes enter into "community benefit agreements" with community groups, whereby a developer agrees to certain development conditions in exchange for the group's support.

Developers and municipalities should ensure that their agreements do not constitute "contract zoning," where a developer essentially makes payment to a municipality in exchange for requested zoning relief. Contract zoning is illegal in Pennsylvania.

Restrictions on development and designated use are typically enforced by a municipality's code enforcement officer. In Pittsburgh, the Department of Permits, Licenses and Inspections is responsible for enforcement. In Philadelphia, the Department of Licenses and Inspections is responsible. The enforcement agency will usually first issue a notice of violation, which gives the property owner time to abate the violation. If the notice refers to a zoning violation, then the property owner can begin the appeal process described in 4.4 Right of Appeal against an Authority's Decision.

If the violation is not abated or appealed, then the municipality will usually proceed to file a complaint with the local magisterial district court, which will hold a summary trial to consider the violation. The magistrate will either dismiss the case, or find the defendant guilty. The magistrate's decision is appealable de novo and as of right to the Court of Common Pleas of the county where the property is located. 

LLCs are the most common vehicle, following the phase out several years ago of the Pennsylvania Capital Stock/Franchise Tax, which historically led to commercial real estate being held primarily in limited partnerships. C-corporations are disfavoured in Pennsylvania for real estate ownership because they are subject to a 9.99% Corporate Net Income Tax. 

LLCs are the preferred entities for investing in real estate because they offer pass-through taxation and liability protection for investors and require only one entity. 

Limited partnerships also offer pass-through taxation and liability protection for limited partners, but require a second entity to act as a general partner, which does not have liability protection. 

S-corporations were used more widely in the 1990s and early 2000s before broad acceptance of LLCs, but are increasingly rare.

Pass-through entities including LLCs, limited partnerships and S-corporations all have full pass-through taxation. C-corporations are subject to Pennsylvania 9.99% Corporate Net Income Tax and, accordingly, are rarely used.

Governance requirements are addressed by Title 15 of the Pennsylvania statute. In general, parties have broad ability to address governance as desired in their governing documents: 

• LLCs are managed either by its members or by a separate manager or managers;
• limited partnerships are controlled by their general partners; and
• corporations are governed by their officers subject to their bylaws and with oversight from a board of directors.

Arrangements allowing for the occupation of real estate include the following:

• a lease provides a tenant exclusive use of the leased premises for a specified term and includes meaningful tenant protections against eviction; 
• an easement gives the beneficiary the right, usually non-exclusive, to access or use a portion of the owner's property for a specific purpose for a certain time period; and
• a license agreement typically provides the licensee a non-exclusive right to access or use some portion of a property.

In general, there are ground leases of land and other leases for space within buildings. Meaningful care is needed to make ground leases financeable by the ground tenant for construction loan purposes. Credit tenant leases for select tenants with exceptional credit, which offer superior financing terms for landlords, are becoming more common.

Commercial rents and lease terms are not regulated in Pennsylvania. Residential leases are subject to significant requirements under Pennsylvania's Landlord Tenant Law.

The lease term, including extensions, is usually under the 30-year threshold that incurs transfer tax. Landlords typically seek lease terms of at least ten years for financing purposes. 

Responsibility for repair items is often negotiated in commercial leases, but a general dividing line is that landlords are responsible for the core and shell while tenants are responsible for interior maintenance and repair. 

Rent comprising both base rent and additional rent for net leases is typically paid monthly in advance, with an annual reconciliation of additional rent actual versus estimates. 

The rent schedule is negotiable, but typically it is paid monthly throughout the lease term with periodic increases, either annually or every five years.

Changes in rent are purely contractual. Leases typically state the method for calculating increases, either a set amount, a periodic percentage increase or an increase tied to a government-published consumer price inflation index.

There is no tax in the nature of a value added tax. However, leases are subject to transfer tax if the term including renewal options (unless at fair market value rent) is 30 years or more. Certain municipalities like the City of Philadelphia impose use and occupancy tax on properties used for business purposes. 

Tenants may be required to pay a security deposit at the start of the lease. Tenants typically pay the cost to build out their space subject to negotiable tenant improvement allowances from landlords. 

Landlords typically pay to maintain common areas in the first instance, subject to reimbursement by their tenants of their pro rata shares of common area maintenance expenses as additional rent.

Landlords will arrange for such utilities to be separately metered if possible, so each tenant can make direct payments to the applicable utility. If it is not possible to separately meter the utilities, each tenant will pay their pro rata share of the bill, based on their leasable area within the property.

In triple net leases, landlords pay the cost of insurance subject to pro rata reimbursement from tenants as additional rent. Tenants separately insure their premises. 

Landlords can impose use limitations in leases. This is subject to negotiation and often goes hand-in-hand with negotiating restrictions on assignment and subletting. Zoning laws, pre-existing exclusive rights of other tenants, restrictive covenants and other matters of records may impose additional restrictions.

The tenant's rights to alter the premises are wholly contractual. In general, tenants may make decorative and non-structural alterations without the consent of landlord. For more extensive improvements, landlords and their lenders typically have the right to review and approve plans and require lien waivers from the tenant's contractor.

Residential leases are governed by the Landlord and Tenant Act of 1951 (68 P.S. Sections 250.10–250.510-B), which provides enhanced protection for residential tenants. 

Tenant's insolvency is typically a lease default but US bankruptcy law pre-empts contract terms. A "debtor in possession" tenant in bankruptcy generally has the ability to accept or reject its lease obligations.

Landlords often require security deposits and/or a guaranty from the tenant's parent or owner. 

A tenant does not have the right to continue to occupy the real estate after expiration or termination of the lease. The lease may have a provision stating that should tenant become a holdover tenant after lease expiration, rent increases to an amount typically between 125%-200% of the base rent at lease expiration, and that landlord will not be obligated to continue performing any of its lease duties during the holdover term. 

Default continuing beyond the applicable notice and cure period would give a landlord or tenant the right to terminate a lease.

The typical landlord remedy for a tenant default that continues beyond the applicable notice and cure period is to terminate the lease and retake possession. Pennsylvania leases often include a "confession of judgment" provision for monetary damages and possession, which is a meaningful procedural tool benefitting landlords. A confessed judgment can be opened for cause but is a strong tool for landlords. 

In larger leases, the confession of judgment provision can be negotiated out by the tenant. A compromise position is to preserve the confession of judgment for possession but eliminate it for monetary damages.

A condemning authority can terminate a lease in connection with a condemnation. A lender may terminate a lease as part of a foreclosure, subject to any applicable subordination, nondisturbance and attornment agreement. Leases typically have mortgagee protection provisions. Allocating a condemnation award between landlord and tenant is subject to negotiation. Landlords typically take the position that the condemnation award should be the landlord's with the tenant permitted to pursue a separate claim for loss of its leasehold interest to the extent the tenant's award does not diminish the landlord's.

Fixed price, or "lump" or stipulated sum, is the most popular pricing mechanism across all types of construction (ie, residential, commercial, public). It can be used, to various degrees, with all project delivery systems, but is most common with traditional design-bid-build, where the owner separately contracts with the designer for the preparation of complete, ready for construction drawings and specifications, which they then put out to bid or negotiate a price to construct. 

Guaranteed Maximum Price (GMP) contracts are also used, typically on more complex projects. Under the GMP price model, the constructor accounts for and is reimbursed the actual cost of construction, plus a fee expressed in terms of a percentage of the cost of the work, up to a guaranteed maximum amount. The contractor bears the risk of costs exceeding the guaranteed maximum. 

If the cost of the work comes in below the guaranteed maximum, the owner and constructor may share in the savings as an incentive to the contractor to be cost-efficient. Reimbursement of the cost of the work, plus a fee, but without a guaranteed maximum price is, another pricing model, but is used less often due to its lack of budgetary certainty. This pricing model – essentially, time and material – is most appropriate for work of a piece meal or emergency nature, or where the contractor is unwilling to commit to a firm price or bear the risk of overruns.

Design-Bid-Build

Design-bid-build (DBB) is the most widely used project delivery system, typically referred to as "general contracting." The defining characteristic of general contracting is the division of responsibility between designer and builder. Responsibility for design lies solely with the architect, who is retained by and under separate contract with the owner. 

The plans and specifications are presented to the general contractor to build for a lump sum or fixed price. The contractor is responsible to build in accordance with the design. Should it deviate therefrom, it is liable for the cost to correct the non-compliant work. 

Conversely, if the contractor builds in accordance with the design, but the final product fails to meet the owner's performance needs, the contractor has no liability. Liability in this situation would fall on the designer, assuming the owner accurately conveyed their needs.

Design-Build

Under the design-build (DB) project delivery method, the owner enters into a single contract for design and construction. Rather than contract with the owner, the architect and constructor are subcontractors to the design-builder. While the design-builder can be either an architect or a contractor, it is contractually responsible for the performance of both. 

Engineer-procure-construct (EPC) is a particular type of design-build, used mostly on industrial, manufacturing or energy projects. With both the DB and EPC model, the owner specifies what it needs in terms of form, function and performance, referred to as the Owner's Program or Basis for Design. The DB or EPC entity takes the Owner's Program and performs the design and engineering work to meet the owner's requirements, subcontracts with the appropriate trade contractors to construct to that design, and delivers the final, completed facility to the owner on a turnkey basis. 

The pricing model can be lump sum, or cost reimbursable subject to a guaranteed maximum price, with the later more common. It is also common for the contract to include testing and commissioning requirements tied to performance guarantees, and backed by repair warranties, cost adjustments and/or bonuses.

As a rule, risk should be allocated to the party best situated to avoid it and/or absorb any associated loss. There are contract clauses that serve this purpose. Unforeseen conditions clauses assign the risk of unknown and unanticipated subsurface or concealed conditions to the owner. If such conditions are encountered, the cost to address them is charged to the owner through the change order process. 

This allocation of risk serves the interests of both the owner and the contractor, as the contractor knows that it need not account for the risk of the unknown when pricing the work, and the owner does not have to pay for a contingency that may never materialize. Provisions regarding the discovery and abatement of hazardous materials such as asbestos or lead paint operate in the same fashion. Exculpatory clauses shifting the risk of unknown or unanticipated conditions to the contractor may be used and are generally enforceable, except where the owner has withheld or misrepresented information to which the contractor does not have access, in which case such clauses may be deemed unenforceable as a result of the owner's "constructive fraud." 

From the contractor's perspective, waivers of consequential damages and limitations on damages provide a safety net to ensure that the risk of loss does not outweigh the potential for profit. Warranties of repair, performance and payment bonds, and property and builder's risk insurance are additional risk management tools. The warranty of repair typically guaranties that the work will be compliant with the design and the materials used of the specified quality, and obligates the contractor to return and correct or replace deficient work at its cost. It also protects the contractor in that it gives it the right to perform the repairs with its own forces, which is far cheaper than having to reimburse the owner the cost of contracting with a third party. 

Bonds and insurance are additional important risk management tools. Payment and performance bonds protect the owner against the contractor's failure to complete the work and/or pay its subcontractors and suppliers. Builder's Risk, Commercial General Liability, Worker's Compensation and other insurances protect against damage to or loss of the work in progress, or damage to other property, or injury to workers or third persons caused by the contractor. Indemnification and additional insurance coverage, where the owner is named as an insured, provide added protection as they require the contractor, and its insurer, to defend and hold the owner harmless from third-party claims.

Schedule-related risk can be managed through a number of contractual provisions that address responsibility for, entitlement to relief from, and/or the obligation to recover delays to the schedule. The starting point for all such clauses is the notion that "time is of the essence" in the performance of the work. A "time is of the essence" provision identifies timeliness of performance.

Schedules

When time is of the essence, the contractor's failure to employ sufficient resources to progress the work to meet the schedule constitutes a material breach, which if not cured, may warrant termination. Short of termination, the owner may have the right to augment the contractor's labor or resources and charge the cost to the contractor, or direct the contractor to accelerate its work by employing additional labor or equipment, working additional shifts or overtime, and again charge such costs to the contractor. 

The owner typically has the right to direct such action and the contractor is obligated to comply, subject to the right to challenge the cause of the delays and/or the necessity of the additional efforts. If it is ultimately determined that the contractor was not responsible for the delay, it is entitled to recover the additional costs from the owner through a change order or equitable adjustment to the contract sum.

Conversely, "no damages for delay" clauses limit the contractor's right to relief from delays for which it is not responsible. A no damages for delay clause provides that, in the case of excusable delays such as weather, the contractor is entitled to an extension of time, but no additional costs. Such clauses are enforceable, except where the owner has caused the delay by failing to perform an obligation under the contract or has interfered with the contractor. 

Liquidated Damages

Liquidated damages clauses stipulate that the owner will suffer additional costs and/or losses if the project does not finish on time, and places an agreed upon value on ("liquidates") those losses. This avoids the owner having to prove its actual losses, but also limits its recovery to the stipulated amount. Early completion bonuses may serve as a counterweight to liquidated damages provisions; whereas, liquidated damages charge the contractor for each day it fails to reach completion past the contractual completion date, early completion bonuses provide an award.

Performance, payment, maintenance and/or warranty bonds are the most common form of security provided on construction projects. Payment and performance bonds issued by qualified sureties and naming the owner and subcontractors and suppliers as beneficiaries guaranty completion of the work and payment. Payment and performance bonds are typically written to provide that, if the contractor (the "Principal Obligor") fails to pay its subcontractors or suppliers, or fails to complete the work, the surety (as "Secondary Obligor") will pay what is owed and arrange for completion of the work.

When a surety is called to meet its guaranty, it "steps into the shoes" of the Principal Obligor and is entitled to any rights or defences it may have under the contract. Compliance with the contract provisions regarding termination are important where the owner intends to call on the surety to make payment or complete the work. The surety is also entitled to use all remaining contract funds, which must be retained for benefit of the surety. If those funds are insufficient to complete the work, the Surety is responsible for the excess cost up to the "penal sum" (limit) of the bond.

Letters of credit, parent corporation guarantees, or other forms of performance or payment security are used much less commonly.

Those providing labor and materials to a project have the right to file a mechanics lien, provided they comply with certain notice and deadlines. Generally, a lien must be filed within six months of completion of the work and a complaint to enforce within two years. Subcontractors (those not in direct privity to the Owner) must provide notice of their intention to file a lien thirty days prior to doing so. The owner's ability to require contractors to agree not to file liens such as no-lien agreements or advance lien waivers is limited. 

No-lien agreements and lien waivers are enforceable only if a bond is posted to secure payment, and a Notice of Limitation is filed in the appropriate court office before the work commences. Owners can limit a subcontractor's or supplier's right of recovery to the remaining unpaid balance on the general contract by filing a notice of the pertinent contract payment provisions prior to the start of the work. Validly filed mechanics liens for erection of construction of an improvement have priority as of the date of the visible commencement upon the ground of the work of erecting or constructing the improvement.

Mechanics liens are inferior to purchase money mortgages as defined in 42 Pa.C.S. paragraph 8141(1) and open-end mortgages as defined in 42 Pa.C.S. paragraph 8143(f), where at least 60% of the proceeds of the loan secured by the mortgage are used to pay all or part of the costs of construction of improvements to the mortgaged premises. The term “costs of construction” is broadly defined as “all costs, expenses and reimbursements pertaining to erection, construction, alteration, repair, mandated off-site improvements, government impact fees and other construction-related costs, including, but not limited to, costs, expenses and reimbursements in the nature of taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees, architect fees, engineering fees, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commissions, payment of prior filed or recorded liens or mortgages, including mechanics liens, municipal claims, mortgage origination fees and commissions, finance costs, closing fees, recording fees, title insurance or escrow fees, or any similar or comparable costs, expenses or reimbursements related to an improvement made or intended to be made to the property.”

Liens may be removed by "bonding off," substituting a bond as security, or by payment and discharge. Owners typically include a provision in the contract for construction obligating the general contractor to timely pay its subcontractors and suppliers, keep the project free of liens, and to remove any liens (through bonding or discharge) if filed. If the contractor allows a lien to be filed and fails to have it removed, the owner will have the right to bond off or discharge the lien by settlement of the claim and may withhold the monies from any monies owed to the general contractor.

A certificate of use and occupancy is required prior to occupation of any newly constructed or substantially renovated building, or upon change of use. 

The certificate of occupancy, issued by the municipality of which the building is located, establishes the "class" of approved use for the property, such as single family or multifamily residential, retail, mixed use, commercial, or industrial. 

A certificate of occupancy serves as proof that a property has complied with all standards and codes. 

The need for other approvals and certifications required prior to occupancy depends on the nature and use of the structure. All structures require a building permit prior to the start of construction, and specific elements, such as electrical, plumbing, mechanical and HVAC may require inspection and certification as compliant with the applicable building codes. Certain facilities, such as hospitals or nursing homes, may also require certification by state licensing agencies. 

The taxation of a corporation on sale of real estate depends on whether it is a C-corporation or an S-corporation. A C-corporation is subject to a flat 21% federal income tax. By contrast, an S-corporation is generally treated as a pass-through entity. A corporation that elects to be treated as an S-corporation for federal income tax purposes is generally treated as an S-corporation for Pennsylvania tax purposes. As such, an S-corporation generally does not pay federal or Pennsylvania income tax but the shareholders, who are often individuals, pay tax on their share of the S-corporation’s income. Likewise, a partnership (or an LLC) is also a pass-through entity and its partners (or members) pay tax on their share of its income. Individuals will be subject to federal capital gains tax on the sale of real estate (20% maximum rate plus a possible 3.8% net investment income tax), with possible taxation at a 25% rate to the extent of real estate depreciation recapture, and Pennsylvania state tax on the gain will also apply, unless the tax is deferred by a 1031 like-kind-exchange or investing the capital gain in a federal Opportunity Zone. The seller and buyer will also be responsible for payment of state and local transfer tax, which ranges from 2%-5% and by custom is split 50-50 between the parties.

Parties commonly undertake share transfers rather than asset transfers to mitigate transfer tax.

The purchase price can be allocated between real property and personal property, sometimes supported by a cost segregation study prepared by an accounting firm (note the difference in the definition of real property for federal tax purposes and state law purposes).

Ownership structures are available to largely mitigate transfer tax on exit; the structures need to be established at acquisition.

Some municipalities like the City of Philadelphia impose a use and occupancy tax on real estate used for business purposes. There are exemptions depending on the jurisdiction, which may include portions of property occupied by non-profit businesses, businesses subject to hotel occupancy tax, vacant portions of buildings and certain other items.

In general, when a foreign person sells a US real property interest, 15% withholding is required on the gross sales price. The withholding tax may be reduced to the actual tax due on sale if filings are made with the Internal Revenue Service prior to the sale. There are possible exemptions related to the sale of a US real property interest by a qualified foreign pension fund. Tax may be imposed on the sale of stock of a US real property holding corporation or a partnership whose primary assets are US real property.

Real estate tax abatements are available for new construction on a jurisdiction-by-jurisdiction basis under the state's Local Economic Revitalization Tax Act, which permits a maximum abatement of ten years and 100% of incremental assessment resulting from new construction. Jurisdictions may provide lesser benefits but not greater. The property must be determined by the municipality to be blighted and deteriorated to be potentially eligible and the school district, municipality, and county taxing jurisdictions must separately pass a tax abatement ordinance.

Tax increment financing is also available on a municipality-by-municipality level supported by ordinances from the three taxing bodies. Tax increment financing (TIF) financing supports borrowing to fund a portion of development costs secured primarily by the pledge by the taxing bodies of a portion (eg, 65%-75%) of incremental tax revenue resulting from development. The borrowing is often secured by a developer guaranty, typically called a "minimum payment agreement", and may involve a prohibition on appealing the property's ad valorem real estate tax assessment below the level needed to support debt service payments on the TIF bonds.

A TIF district may be further supported by a "Neighborhood Improvement District" that permits supplemental assessments on properties in the district to pay debt service on the TIF bonds if for any reason the pledged incremental tax revenue is insufficient.

Real property and other taxes may be abated for a period of time for properties located in a state "Keystone Opportunity Zone" or related program.

Based on tax reforms, the ability to defer capital gains tax on capital gain invested in Opportunity Zones is an attractive tool worth considering. The Biden administration’s 2023 Budget Proposals introduced in March 2023 include changes that may reduce some tax benefits relating to real estate. Tax-free like kind exchanges may be significantly curtailed, and capital gains tax rates may rise as well as the tax rate applicable to real estate depreciation recapture income recognized on a sale of real estate.