USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
Parent (or Third-Party) Guarantees These are provided by the contractor’s parent com - pany (if it has one) or by a financially responsible third party, to guarantee the performance of the contractor. Escrow Accounts Escrow accounts may be used to hold funds by a third-party escrowee until the contractor meets cer - tain conditions or milestones, after which the funds are released to the contractor. Third-Party Surety This is a company that guarantees the performance of the contractor on behalf of the project owner. In the event of a contractor default, the surety is obligated to step in and make certain that the contractor’s obliga - tions are fulfilled, either by completing the work, hiring a replacement contractor or compensating the owner for any resulting losses. 7.6 Liens or Encumbrances in the Event of Non-Payment Contractors and designers will likely file “mechanics liens” to preserve their right to obtain compensation if the owner fails to pay their fees. In the commercial context, mechanics liens are typically filed by contrac - tors who have not been paid for work related to the project. Mechanics liens create a “cloud on title”, which appears as a matter of public record and may impair the ability of the owner to sell, transfer or mortgage the property until the debt is paid and the mechanics lien is discharged or “bonded” by the contractor – fre - quently a precursor to litigation. Some contracts include “lien waiver” provisions, requiring a contractor or subcontractor to waive their lien rights in exchange for payment. There are different types of lien waivers – conditional and unconditional, and partial and final – which are commonly used at each stage of construction as a condition of receiving progress payments. 7.7 Requirements Before Use or Inhabitation A Certificate of Occupancy (COO) must be issued by the local or municipal authority before the project can be used for its intended purpose. The issuance
of a COO is subject to various requirements such as an inspection or review of final plans prepared by a licensed architect or engineer. For example, in New York City, building permits must first be obtained prior to commencing any work on the project. Then, at vari - ous stages of the construction work, components of the project – such as the structural build, plumbing installation, electrical systems and elevator (if appli - cable) – must be inspected and “signed-off” prior to the issuance of a final COO. Frequently, the project’s “expediter” (often an architect) will seek to help short - en the timeframe in circumstances where the issuance of the COO has been delayed. The United States does not impose VAT on the pur - chase and sale of real estate. Certain jurisdictions impose a sales and use tax on commercial leases, as more fully discussed in 8.3 Municipal Taxes . 8.2 Mitigation of Tax Liability There are two commonly used methods to mitigate transfer taxes in connection with the acquisition of large real estate portfolios. One technique is to sell equity interests in the entity that owns the real estate as opposed to transferring the real estate outright. However, this option is not available in states that impose transfer taxes on such indirect transfers of a controlling interest in an entity owning real estate and where a controlling interest is transferred. Where states and local governments impose a mortgage recording tax, the use of a Consolidation, Extension and Modification Agreement (sometimes in connec - tion with a “spreader” agreement in order to have the mortgage cover multiple parcels) may be used to reduce mortgage recording taxes. This occurs by giv - ing the borrower a credit for previously paid mortgage recording taxes and including the existing mortgage with the new financing (consolidation), rather than paying off the existing mortgage and including the amount of the prior mortgage in the new mortgage (presumably for a larger amount), on which a recording tax must be paid. 8. Tax 8.1 VAT and Sales Tax
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