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LAW AND PRACTICE
1. GENERAL
1.1 MAIN SUBSTANTIVE SKILLS
Real estate law requires not only an understanding of buying and
selling real estate, closing processes, real estate title, leasing
and finance, but also experience in a variety of other areas that
are important to many real estate deals and specific industries. In
particular, law firms must have professionals who are familiar with
environmental laws, land use and zoning matters, development and
construction, joint ventures, complex financing structures,
restructurings and workouts. In addition to good analytical,
organizational and negotiating skills, effective real estate
lawyers must have an understanding of their client’s industry
and business objectives.
Several current trends have had an impact on the skills required
by real estate lawyers, including the popularity of large mixed-use
projects and the increasing use of tax credits and other complex
financing structures for large real estate projects. Many
traditional real estate projects involve primarily the acquisition,
sale or development of a single building, parcel or contiguous
parcels of real estate by one owner, with financing from a single
lender or lender group. By contrast, large mixed-use projects often
involve the development of large areas and sometimes multiple
blocks of non-contiguous real estate by multiple owners with
various lenders and financing structures.
These projects frequently have complex land use and entitlement
issues and a variety of ownership structures that require greater
experience with corporate and business laws. Likewise, the
increased use of tax credits requires experience with tax law and
the structuring of these credits and project financing in a manner
compatible with the business interests of the owners, developers
and lenders.
1.2 MOST SIGNIFICANT TRENDS
Landlords and tenants continue to exercise workout arrangements
(eg, deferred rent) in connection with the COVID-19 pandemic.
Interest rates have remained at historic lows in connection with
the COVID-19 pandemic.
Additionally, as brick-and-mortar retail continues to decline in
favor of e-commerce, traditional retail locations are seeing new
life as warehouses for online retailers. The COVID-19 pandemic has
also resulted in some office lease contractions as office tenants
have integrated remote working capabilities.
1.3 IMPACT OF NEW US TAX LAW CHANGES
Among other things, the CARES Act (Public Law No 116-136)
allowed small businesses to obtain forgivable SBA loans, which can
be applied toward certain operating expenses, including rent,
mortgage interest and utilities. The Act also imposes a temporary
ban on eviction of residential tenants in certain buildings secured
by federally backed mortgage loans.
The 2017 Federal Tax Cuts and Jobs Act continues to contribute
to a favorable environment for commercial real estate investment
and ownership. The Act added certain deductions for income from
pass-through entities, increased the ability to currently expense
certain items, and retained 1031 exchanges for real property. A
number of Opportunity Zone funds have been created, so there should
be capital available in the near term for projects that meet
Opportunity Zone guidelines.
2. SALE AND PURCHASE
2.1 OWNERSHIP STRUCTURES
Any legal business entity may own land in Mississippi, including
corporations, partnerships and limited liability companies (LLCs).
However, most of the transactions in recent years have utilized
LLCs. An LLC provides the limited liability of a corporation or
limited partner in a limited partnership, but allows the members
tremendous freedom to structure transactions with varying tax and
cash distributions scenarios.
The Revised Mississippi Limited Liability Company Act provides a
modern and flexible framework that generally follows many of the
provisions of Delaware LLC laws, and there have not been any recent
changes in common ownership strategy.
2.2 IMPORTANT JURISDICTIONAL REQUIREMENTS
With respect to “non-homestead” property, there are
no specific jurisdictional requirements to transfer title to such
real property other than the general requirements for a lawful and
proper transfer of title (eg, recording requirements). However, any
instrument purporting to convey an interest in a homestead,
including a deed of trust, must be signed by both spouses (with
limited exceptions).
2.3 EFFECTING LAWFUL AND PROPER TRANSFER OF TITLE
All conveyances of real property must be in writing, signed and
delivered by the transferor. In order to provide constructive
notice of delivery, a deed must be acknowledged and filed for
record in the office of the Chancery Clerk of the county where the
land is located. Real property may be conveyed by general warranty
deed, special warranty deed or a quitclaim deed.
2.4 REAL ESTATE DUE DILIGENCE
Buyers usually hire outside firms for certain aspects of their
due diligence. The extent and type of due diligence by the buyer
can vary widely depending on the size of the transaction and the
perceived risk for a particular category of property (eg,
industrial properties vs undeveloped agricultural land). An
environmental/geotechnical engineer would normally be engaged to
conduct appropriate reviews and testing of the property, and a
civil engineer is hired to handle the survey and any access
issues.
If the property is vacant land and the buyer plans to develop
the land into a subdivision or other large-scale development, the
civil engineer will be much more involved in the due diligence
phase to make sure the property can be developed in such manner.
Lawyers are hired to handle the ordering and review of the title
abstract and the preparation of the title commitment. Typically,
the lawyer representing the buyer will oversee all aspects of the
due diligence to make sure the land and improvements are in
suitable condition and that the property can be operated and/or
developed as proposed by the buyer.
2.5 TYPICAL REPRESENTATIONS AND WARRANTIES FOR PURCHASE AND
SALE AGREEMENTS
There are no unique representations under state or local law. In
addition to customary fundamental representations (eg, authority,
enforceability, title), typical representations and warranties
requested of a seller include:
- there are no judgments or litigation against the property or
the seller; - the seller is not subject to a bankruptcy proceeding, is not
insolvent, and there have been no attachments, executions or
assignments of the property for the benefit of creditors; - the improvements are in good order and working condition;
- the property complies with applicable law;
- the property is properly zoned for its current use;
- there are no liens or recent construction on the property for
which the contractor has not been paid; - all permits and licenses have been obtained;
- access is current and insurable;
- the seller has no knowledge of any environmental hazards
present on the property; - any rent rolls or third-party reports are true and correct;
and - no leases or rights of first refusal have been granted, except
as disclosed to the buyer.
Most purchase and sale agreements provide for a claim for
damages and indemnification if the buyer discovers after closing
that the seller misrepresented an aspect of the property. The term
of the representations and warranties is negotiated in the purchase
and sale agreement, and normally survives between nine months and
two years after the closing. The seller will often negotiate a cap
on the amount of liability from a breached representation, which is
usually some percentage of the purchase price. It is also common in
Mississippi for the seller to negotiate a deductible that has to be
reached before a claim can be filed for indemnification.
2.6 IMPORTANT AREAS OF LAW FOR FOREIGN INVESTORS
Foreign entities that transact business in Mississippi must
register with the Mississippi Secretary of State, although mere
ownership of real or personal property does not constitute
“transacting business”.
In connection with any sale that is not considered an exchange,
exceeds USD100,000, and in which the property is owned by a
nonresident seller or an entity not qualified to do business in
Mississippi, 5% of the amount realized by the seller must be
withheld and paid to the Mississippi Department of Revenue to
ensure payment of income tax on any income realized from the
transaction.
Recent changes to CFIUS regulations have not had a major impact
in Mississippi, because investment in Mississippi companies by
foreign nationals, foreign governments, or other foreign entities
is minimal.
2.7 SOIL POLLUTION AND ENVIRONMENTAL CONTAMINATION
A buyer of a real estate asset may be responsible for soil
pollution or environmental contamination of a property even if it
did not cause the pollution or contamination. The owner of the
property is jointly and severally liable for environmental cleanup
with other potentially responsible parties (PRP). However, under
federal and state law, a buyer may establish any of the following
three “defenses” to being a PRP, and must establish and
meet all requirements to maintain the defenses against
liability:
- innocent landowner defense;
- bona fide purchaser defense; and
- contiguous landowner defense.
An innocent landowner is a person who conducted necessary and
appropriate environmental due diligence but later discovers an
environmental issue at the site. A bona fide purchaser is a person
who purchases the property clearly knowing that environmental
conditions exist on the property. A contiguous landowner is a
person who purchases property where environmental conditions exist
on an adjoining property and those conditions have moved or will
move onto the purchased property.
All three defenses require “all appropriate inquiry”
regarding the environmental condition of the property prior to
closing. The requirements to establish a defense are extensive and
fact-intensive. Since the failure to comply with even one
requirement could prevent a buyer from using a defense, buyers
should engage competent environmental counsel if a property has
suspected environmental issues.
Although each transaction is unique, it is customary for sellers
to represent that, except as otherwise disclosed to the buyer,
there are no contamination issues at the subject property, though
such representations are often subject to materiality and/or
knowledge qualifiers. In conjunction with those representations,
buyers expect sellers to provide indemnification for pre-closing
environmental liabilities.
2.8 PERMITTED USES OF REAL ESTATE UNDER ZONING AND PLANNING
LAW
The zoning ordinances for the applicable jurisdiction will
include the permitted uses for the parcel of real estate located in
each zone. If requested, local authorities will generally provide
written evidence of the applicable zoning classification.
It is possible to enter into specific development agreements to
facilitate development projects in Mississippi. These types of
agreements are found in larger, more complex transactions.
Agreements with governmental authorities can relate to economic
incentives such as Tax Increment Financing (TIF), infrastructure
improvements such as access roads, and a myriad of other areas.
The Mississippi Development Authority oversees many state-wide
economic development programs that could be applicable to a
project. There are also other types of economic development tools
that can be used by cities and counties, which may require the
developer to enter into an agreement with the applicable
authority.
Developers can also enter into contracts regarding environmental
issues. Programs include the Voluntary Environmental Program and
the Brownfield Program, which both offer expedited review of
environmental remediation plans for the site in order to allow
potential purchasers to quickly cleanup the site for redevelopment.
The Brownfield Program also offers certain financial incentives
related to environmental remediation of a site.
2.9 CONDEMNATION, EXPROPRIATION OR COMPULSORY PURCHASE
Condemnation and eminent domain proceedings are possible in the
state of Mississippi. The most common condemnation situation is
related to the construction or expansion of roadways. The risk of a
taking by public authorities is directly related to the location of
the property. Mississippi law provides for a “quick
take” process, whereby the condemning authority obtains an
appraisal and places a deposit with the courts.
The property is then taken, subject to the owner’s right
to appeal the valuation through a litigation process. The
governmental authority would pay the owner compensation at the
value ultimately determined by the court.
2.10 TAXES APPLICABLE TO A TRANSACTION
Mississippi does not have transfer or recording tax for a
transfer deed (other than nominal recording fees), but does have
mineral documentary tax for the transfer of mineral interests in
the state. The tax is USD0.03 per net mineral acre for the
assignment of a mineral lease, and USD0.08 per net mineral acre for
a mineral deed. In a typical real estate transaction, the seller
usually pays for the preparation of the deed and recording fees,
and any costs related to delivering clean title to the buyer (eg,
release of any existing deed of trust).
The buyer will pay for the title commitment, title policy, any
desired title endorsements and any lender-related charges. The
parties will usually split any escrow fees. There are no transfer
taxes for a stock transfer, and the division of costs is usually
negotiated between the parties.
2.11 RULES AND REGULATIONS APPLICABLE TO FOREIGN INVESTORS
See 2.6 Important Areas of Law for Foreign
Investors.
3. REAL ESTATE FINANCE
3.1 FINANCING ACQUISITIONS OF COMMERCIAL REAL ESTATE
Generally, real estate acquisitions are financed with debt
secured by an interest in the real property. Sources of debt
include traditional bank financing, HUD and other
governmental-backed financing and insurance company financing, but
can also include funding from private equity or hedge fund type
lenders. Bank financing is typically recourse, but can be
non-recourse in some circumstances; owners and developers prefer to
obtain non-recourse financing if it is available. Large
transactions may involve debt and equity financing or multiple
layers of debt and equity.
3.2 TYPICAL SECURITY CREATED BY COMMERCIAL INVESTORS
It is customary practice in real estate loans for a deed of
trust to be granted by the property owner for the benefit of the
lender. Deeds of trust in Mississippi may be foreclosed
non-judicially. Mississippi law also allows for mortgages that must
be judicially foreclosed, so mortgages are rarely used in
Mississippi. Assignments of leases and rents are also typical,
whether included in a deed of trust or in a separate document. UCC
fixture filings are often included within deeds of trust, although
a UCC-1 fixture filing can be recorded in the land records as well.
Other personal property security interests are subject to Article 9
of the Uniform Commercial Code.
3.3 REGULATIONS OR REQUIREMENTS AFFECTING FOREIGN LENDERS
Foreign lenders are generally not obligated to qualify to
transact business, so long as they have no place of business in
Mississippi and the only business activities conducted by the
lender in Mississippi involve:
- creating or acquiring indebtedness, mortgages and security
interests in real or personal property; - securing or collecting debts; or
- enforcing mortgages or security interests in property securing
the debts, with title to any collateral acquired by the lender in
exercising its remedies under any security document being held only
for a reasonable period of time pending disposition.
Ad valorem taxes will be due and payable on any real or personal
property owned by a lender, and income, franchise, privilege and
other taxes may be due as the result of operating a business after
foreclosure or acquisition in lieu of foreclosure. The income tax
exemption for interest income received or accrued by foreign
lenders making loans secured by real estate in Mississippi does not
apply to the following:
- a foreign insurance company subject to certification by the
Mississippi Commissioner of Insurance; - a foreign lender qualified to do business in Mississippi;
- a foreign lender that maintains an office or place of business
within Mississippi; or - lenders that sold properties in Mississippi and financed the
sale and reported on the installment method.
In some cases, a foreign lender may be subject to the Finance
Company Privilege Tax Law as codified in Mississippi Code Sections
27-21-1 through 27-21-19, which levies a statewide privilege tax on
any lender other than a national or state bank lending money
secured by a lien on any tangible personal property and certain
specifically listed items located in the state. That tax is 0.25%
of the total indebtedness secured by the tangible property located
in Mississippi.
3.4 TAXES OR FEES RELATING TO THE GRANTING OF ENFORCEMENT OF
SECURITY
The granting or enforcement of a security interest in real
property is subject to only nominal recording fees in Mississippi;
there are no mortgage, transfer or documentary stamp taxes. There
is a documentary stamp tax on the transfer of mineral interests,
but a lien on the mineral interest is excepted from such tax.
3.5 LEGAL REQUIREMENTS BEFORE AN ENTITY CAN GIVE VALID
SECURITY
The entity must have the power and authority to grant a security
interest in its property, and it must have properly authorized the
grant. Consideration must be received by the grantor.
3.6 FORMALITIES WHEN A BORROWER IS IN DEFAULT
A deed of trust is used in virtually all secured real estate
transactions. After a default has occurred, the procedure to
foreclose is very straightforward, requiring publication of notice
in a paper of general circulation in the county in which the
property is located for three consecutive weeks (most practitioners
publish four times) and conducting a sale at the county courthouse.
The procedure in Mississippi is fast and low cost.
Unless contractually required, there is no obligation to notify
junior lien holders of the default or the sale. The debtor in
Mississippi has the right to “deaccelerate” a loan by
the payment of the amount due plus expenses at any time prior to
the conclusion of the foreclosure sale. A sale is final and there
is no redemption period after the foreclosure sale has been
completed. There are no additional steps necessary to give
priority: Mississippi is a race/notice state and priority of a lien
is established by filing with the Chancery Clerk in the appropriate
county.
3.7 SUBORDINATING EXISTING DEBT TO NEWLY CREATED DEBT
Generally, a properly recorded secured financing will not lose
priority to subsequently created debt, although a secured
construction loan can become subordinated to later-filed
construction liens in some circumstances. The construction lender
must be able to show that the funds from the loan went into the
construction, and that it used reasonable diligence in disbursing
the loan proceeds to assure they were used for construction.
In addition, a lender can always contractually agree to
subordinate its lien through subordination agreements or
intercreditor agreements that establish the relative priorities
between the contracting parties.
3.8 LENDER’S LIABILITY UNDER ENVIRONMENTAL LAWS
There are situations in which lenders can be responsible for the
clean-up, removal, remediation or abatement of pollution, but they
are generally excused from liability if they meet two
requirements:
- the lender’s ownership interest must be primarily for the
purpose of protecting an interest in the property; and - the lender must not participate in the management of the
property or facility.
This generally aligns with federal laws that provide an
equivalent exception from liability.
3.9 EFFECTS OF BORROWER BECOMING INSOLVENT
If a borrower becomes insolvent and files for bankruptcy, a
security interest in real property will be subject to the same
bankruptcy law that would apply in any state. Following a
foreclosure, a borrower cannot grant a security interest in real
property because the borrower would be divested of all of its
interest in the property absent a defect in the sale. There is no
redemption period after a foreclosure is completed.
3.10 TAXES ON MEZZANINE LOANS
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.
4. PLANNING AND ZONING
4.1 LEGISLATIVE AND GOVERNMENTAL CONTROLS APPLICABLE TO DESIGN,
APPEARANCE AND METHOD OF CONSTRUCTION
Mississippi has adopted statutes to establish minimum building
codes, and has established the Building Codes Council, which is
tasked with adopting standards for construction. However, counties
and municipalities were given the opportunity to opt out of the
uniform system and establish their own regulations or to not
establish regulations. Therefore, some counties and municipalities
will have varying regulations related to construction.
Most counties and municipalities with larger relative
populations have adopted building codes that are typically in line
with the International Building Codes. In addition, design and
appearance issues are often covered by county or municipal zoning
regulations. The scope of these zoning regulations can vary widely
depending on the location of the project.
4.2 REGULATORY AUTHORITIES
Several different governmental entities may be responsible for
regulating development and designated use of parcels of real
property. On a state level, the Mississippi Department of
Environmental Quality (MDEQ) is involved in the enforcement of
federal and state environmental and public health laws and
regulations, including those dealing with permitting for water
usage, storm water discharge and air quality. Development projects
of more than five acres will typically trigger a permitting
requirement from MDEQ.
Specific uses of real estate are generally regulated at the
county and municipal levels. Most municipalities and counties will
have building codes, zoning ordinances and similar types of
regulations that must be complied with in order to move forward
with development projects. Some localities have subdivision
ordinances that require the filing of subdivision plats when real
property is divided into new parcels. Additional regulatory
compliance may be required for industrial facilities or other
specialized developments that are unique to their particular
usage.
4.3 OBTAINING ENTITLEMENTS TO DEVELOP A NEW PROJECT
The process for obtaining necessary entitlements for development
of a specific parcel of real property is generally handled at the
local and county levels, directly with the county or local
administration, unless a change such as a rezoning of the property
is required. In the case of a rezoning, the process requires notice
to be given to adjoining property owners, a published public notice
and a public hearing in front of the local or county governing
body.
Since this is a public process, other property owners and
members of the community at large have the ability to support or
object to the specific request being made in connection with a
project. Once the governing body has made a determination to grant
or deny the requested change, an aggrieved party can appeal the
decision to the courts. Appeals must be filed in a relatively short
period (ten days in many cases), so developers will quickly know
whether other parties intend to pursue action in the courts.
4.4 RIGHT OF APPEAL AGAINST AN AUTHORITY’S DECISION
An adverse decision related to the development or usage of real
property by municipal officials or the county board of supervisors
can be appealed to the circuit court in the applicable
jurisdiction. The deadline to file the notice of appeal is just ten
days from the adjournment of the meeting at which the decision
being appealed was made, so the appeal must be processed quickly or
the courts will not have jurisdiction over the matter.
The circuit court acts as an appellate court in such cases. The
court reviews the record made before the municipal or county
decision-making body. Therefore, it is vital to understand that a
proper record must be made at the local level in order for the
court to have some record with which to form the basis of an
opinion on the matter.
4.5 AGREEMENTS WITH LOCAL OR GOVERNMENTAL AUTHORITIES
Generally, it is not necessary to enter into specific agreements
with governmental entities related to the approval of a development
project. However, it is certainly permissible to do so if there are
aspects of the project – for example, an access road to be
built by the city – that would require the delivery of
certain services or improvements necessary for the viability of the
project. The use of governmental agreements would occur in very
large, extensive projects that require additional co-ordination
with local governmental agencies and officials.
In many cases, utility providers will enter into agreements with
developers in situations where the level of service or capacity of
service is over and above that which a typical development might
require. For example, a large industrial facility might enter into
agreements with utility providers to assure that the proper level
of service and quantity of supply is available to the site.
4.6 ENFORCEMENT OF RESTRICTIONS ON DEVELOPMENT AND DESIGNATED
USE
Restrictions on the development and usage of real property would
typically be enforced by the local governmental officials, and
often through the courts. If there are administrative remedies
available, the offended party may be required to seek a remedy
through an administrative process before turning to the courts.
5. INVESTMENT VEHICLES
5.1 TYPES OF ENTITIES AVAILABLE TO INVESTORS TO HOLD REAL
ESTATE ASSETS
See 2.1 Ownership Structures.
5.2 MAIN FEATURES OF THE CONSTITUTION OF EACH TYPE OF
ENTITY
Mississippi generally follows uniform and federal laws with
respect to the governance of entities. The primary characteristics
sought by investors are limited liability and the flexibility
within an entity to structure the governing terms to match the
specific transaction. General partnerships are used but do not
provide limited liability, so are rarely seen.
S-corporations and LLCs both provide limited liability and
pass-through tax treatment, but S-corporations are less flexible
with respect to the possibility to plan different internal tax and
cash treatments for different classes of equity ownership.
C-corporations provide limited liability, but do not provide
pass-through taxation treatment, which is often desired by
investors in real estate transactions. These differences are not
necessarily unique to Mississippi but are generally driven by
federal tax considerations.
5.3 TAX BENEFITS AND COSTS
The tax benefits and costs for entities are generally driven by
federal rather than Mississippi tax considerations. LLCs, limited
partnerships and S-corporations provide pass-through tax treatment,
so the entity itself is not subject to income tax at the state
level. The tax attributes are passed through to the members,
partners, or shareholders, respectively. C-corporations are taxed
separately from the shareholders in the same manner that a
C-corporation is taxed separately for federal income tax
purposes.
One advantage of having a Mississippi domestic entity holding
real property is the possibility of avoiding capital gains tax on
the sale of the equity interest in the entity. Therefore, a sale of
real property that can be restructured as an equity sale can
sometimes be a method to save state income tax.
5.4 APPLICABLE GOVERNANCE REQUIREMENTS
Governance requirements for different entities are typically the
same as those found in other states, and are not specific to
Mississippi.
Limited Partnerships
Limited partnerships must have at least one general partner,
which can be either an individual or an entity. The limited
partnership is under the control of the general partner(s). The
partnership agreement can require approval of the limited partners
in certain situations, although care must be taken not to give the
limited partners too much authority, which would risk creating a
general partnership instead of the desired limited partnership.
General Partnerships
General partnerships are under the control of all of the
partners, unless there is a written partnership agreement that
provides for the governance mechanisms of the partnership.
Limited Liability Companies
Limited liability companies can be either manager-managed or
member-managed; more sophisticated companies are generally
manager-managed. Managers do not have to be individuals and are
frequently other LLCs or entities. The managers or members can
appoint officers to serve the LLC, and can assign specific duties
to such officers or provide officers with powers that would be
similar to the powers of an officer in a corporation. If the LLC is
manager-managed, then the members, in their capacity as members,
cannot act on behalf of the LLC unless there is specific
authorization.
In a member-managed LLC, the members are agents of the LLC
absent specific language in the company’s operating agreement
to the contrary. In real estate transactions, title underwriters
and other parties will be looking for copies of the company’s
operating agreement as well as resolutions to clearly indicate the
persons authorized to act on behalf of the company.
LLCs are not required to have an annual meeting of the members.
However, if the LLC has not had a meeting in 15 months, then
members holding more than 20% of the voting power of all members
may call a regular meeting of the members, unless the LLC’s
certificate of formation or operating agreement provide
otherwise.
Corporate Governance
Corporate governance is, again, similar to other states. A
corporation is required to have at least one officer, but they
generally have a president and a secretary. A board of directors,
which can be one or more natural individuals, has ultimate control
of the affairs of the corporation. The board of directors can be
elected annually or for multi-year and staggered terms.
The board of directors appoints the officers of the corporation,
who have day-to-day charge over the affairs of the corporation.
Depending on the authority granted to the officers of the
corporation, real estate transactions will generally require the
approval of the board of directors. Title underwriters will want to
review articles of incorporation, bylaws and resolutions in
connection with the acquisition, encumbrance or disposition of real
property in Mississippi.
6. COMMERCIAL LEASES
6.1 TYPES OF ARRANGEMENTS ALLOWING THE USE OF REAL ESTATE FOR A
LIMITED PERIOD OF TIME
One type of arrangement allowing for use of real property
without an outright purchase is a lease, which is a real property
interest conveyed from an owner to a lessee in return for regular
rental payments.
Another type of arrangement is a license, which is granted by an
owner to another party and gives such party the right to use the
property under certain conditions. A license does not convey a real
property interest and is usually not for an extended term. Licenses
are normally used for the grantee to complete some type of project
or job, and the license will then terminate. Another type of
arrangement is an easement, which is a right to cross or otherwise
use another’s property for a specified purpose.
A common right transferred by easement is the right to access
the grantor’s property in order to gain access to the
grantee’s property. With an easement, the legal title to the
underlying land remains with the owner of the land.
6.2 TYPES OF COMMERCIAL LEASES
There are different types of commercial leases depending on the
use of the leased premises. There are different considerations,
protections for the landlord, representations and warranties, and
different ways to handle the charges to be paid by the tenant.
Types of commercial leases include build-to-suit, sale-leaseback,
absolute leases, percentage leases, synthetic leases, ground
leases, double net leases, and triple net leases.
6.3 REGULATION OF RENTS OR LEASE TERMS
Rents are not regulated in the state of Mississippi. Mississippi
law requires that leases with a term of more than one year be
written, signed and delivered.
6.4 TYPICAL TERMS OF A LEASE
The customary length of a lease term in Mississippi is five to
ten years, but the lease term largely depends on the property
classification.
It is customary in Mississippi for a landlord to be responsible
for any common areas of the building or shopping center, for
structural aspects of the building/demised premises, and for any
utility lines to the boundary of the space. Tenants are responsible
for all maintenance within the demised premises.
The customary frequency of rent payments is monthly.
6.5 RENT VARIATION
Most rents in Mississippi are determined by the terms of the
lease agreement. Most rental rates increase during the term, but
the details of the initial rent and any escalation are subject to
the negotiation of the parties.
6.6 DETERMINATION OF CHANGES IN RENT
Most leases in Mississippi include an escalator, and the rent
increase is based upon either an agreed-upon percentage increase
(eg, 3% to 5%), the increase in fair market value, or an increase
in the Consumer Price Index.
6.7 PAYMENT OF VAT
VAT or other taxes are not payable on rent in Mississippi.
6.8 COSTS PAYABLE BY TENANT AT THE START OF A LEASE
In Mississippi, the tenant usually pays a security deposit to
the landlord at the commencement of the lease. If the lease is
triple net, the tenant will also pay the taxes, insurance and
common area maintenance costs for the property. These costs are
usually paid monthly by the tenant, along with the monthly base
rent payment.
In some leases, tenants are responsible for their own buildout
of the leased premises, whereby a tenant will construct the space
to the agreed upon plans and specifications between the landlord
and tenant. The landlord may only provide a “cold, dark
shell” to the tenant with no concrete floor, no ceiling or
walls and no electricity, and the tenant will be responsible for
providing such to the space. In other leases, a landlord might
provide an improvement allowance to the tenant to pay for the
buildout.
The amount is usually a negotiated rate per square foot of the
leased premises. In other cases, the landlord may provide the
premises in “move-in condition”, ie, ready for
occupancy. The condition of the premises and responsibility for
completion of the premises typically depends on the type of
property being leased.
6.9 PAYMENT FOR MAINTENANCE AND REPAIR
The maintenance and repair of the common areas (including
landscaping) is paid for by all of the tenants of a center or
building through a common area maintenance expense to be paid to
the landlord monthly. All of the common expenses for these areas
are customarily estimated for a lease year, and the landlord
determines how much each tenant should pay based upon the square
footage of the leased space. The landlord will be responsible for
making sure the common areas are in good working order and
condition, using the funds paid by each tenant through the common
area maintenance expense.
6.10 PAYMENT FOR SERVICES, UTILITIES AND
TELECOMMUNICATIONS
Most utilities can be separately metered for each tenant, and
such charges will be paid by each tenant directly to the utility
provider. In an office building context, tenants will pay a monthly
charge for these services or the landlord will just charge a gross
rental rate that includes the payment by the landlord to the
utility providers. In Mississippi, this is usually negotiated
between the landlord and the tenant during lease negotiations.
6.11 INSURING REAL ESTATE THAT IS THE SUBJECT OF A LEASE
If the lease is triple net, insurance is paid for by the tenant.
Most landlords make sure the insurance payments are made, and will
therefore collect an insurance expense from the tenant, on either a
monthly or annual basis, and will pay the insurance premium
directly to the insurance broker.
Depending on the policy, most events causing damage will be
covered by a standard property insurance policy.
6.12 RESTRICTIONS ON THE USE OF REAL ESTATE
Landlords often impose restrictions on a tenant’s use of
the demised premises. There are regulations and laws that impose
restrictions on how real property can be used (ie, environmental
regulations and zoning restrictions). These regulations are
specific to each city and county, and depend on the master planning
for such. Cities and counties can also set up development districts
that have other restrictions on the use, density, parking and the
specific look and feel of the area (eg, architectural review).
6.13 TENANT’S ABILITY TO ALTER OR IMPROVE REAL
ESTATE
Depending on the lease, a tenant is usually allowed to alter or
improve the real estate. A landlord usually specifies what work can
be performed to the demised premises, and can cap the work at a
certain dollar threshold. The alteration provision of a lease is
usually heavily negotiated between the landlord and the tenant,
depending on the use of the demised premises.
6.14 SPECIFIC REGULATIONS
There is a specific residential landlord tenant act in the state
of Mississippi. Residential leases have to comply with the statute,
which protects residential tenants from certain actions of a
landlord.
6.15 EFFECT OF TENANT’S INSOLVENCY
Most leases in the state of Mississippi will include a
“termination-on-bankruptcy” clause. However, these
provisions are rarely enforceable as federal bankruptcy law will
govern. Any interest of a debtor will become property of the
bankruptcy estate and the debtor will not lose the property or
contract right.
This being said, the bankruptcy of a lessee can terminate a
lease agreement. Section 365 of the Bankruptcy Code states that a
debtor may assume or reject an unexpired lease; assumption of the
lease is a decision to retain or continue the lease by the
bankruptcy estate, whereas a rejection is a decision to terminate.
A debtor may not assume the lease unless it can cure defaults and
provide adequate assurance of future performance of the lease.
6.16 FORMS OF SECURITY TO PROTECT AGAINST TENANT’S
FAILURE TO MEET OBLIGATIONS
A tenant can be asked to provide a security deposit of several
months of rent payments, which can be liquidated in the event of
default. A tenant may also be required to provide an irrevocable
letter of credit from a financial institution, which the landlord
can draw upon to satisfy outstanding rental obligations if the
tenant defaults. Landlords typically also take a security interest
in the tenant’s personal property located at the leased
premises and obtain one or more guarantees from the tenant’s
principals or affiliate entities.
6.17 RIGHT TO OCCUPY AFTER TERMINATION OR EXPIRATION OF
LEASE
In Mississippi, a tenant does not have the right to holdover and
occupy the leased premises after the expiration or termination of a
commercial lease. However, most commercial leases will contain a
holdover provision that converts the tenancy to a tenancy at
sufferance (at will) upon expiration with an increased rental
amount. Otherwise, a landlord has a statutory action for damages
equal to double rent during the period of the holdover. If the
landlord accepts normal monthly rent from a holdover tenant,
however, a month-to-month tenancy is created.
Self-Help Eviction
Self-help eviction is allowed only when the lease agreement
expressly gives the landlord such right and even then, only when
such eviction can be accomplished peaceably. Otherwise, eviction of
a commercial tenant requires landlords to remove the tenant by the
process described in Mississippi Code Section 11-25-1, et seq
(unlawful entry and detainer) or Mississippi Code Section 89-7-1,
et seq (landlord-tenant), each of which requires notice and a
hearing. Eviction of a residential tenant is governed by the
Residential Landlord and Tenant Act (Mississippi Code Section
89-8-1 et seq).
Unlawful Entry and Detainer Action
An unlawful entry and detainer action is a summary proceeding
that must be brought within one year after the landlord has been
denied its right of possession. The statute requires filing a
complaint and issuance of a warrant and allows for witness
subpoenas and the taking of depositions.
Eviction Action
An eviction action under the landlord-tenant statute requires
the landlord to, by sworn affidavit that, among other things,
describes the facts supporting eviction and confirms that proper
notice was given. Upon receipt of that affidavit, the court will
issue a summons for the tenant to show why eviction is improper,
and a hearing must be held between three to five days after the
summons date (adjournments not to exceed 45 days after the date the
eviction action was filed). If the tenant fails to demonstrate
sufficient cause to remain on the premises, the tenant will be
removed from the premises and possession delivered to the
landlord.
6.18 RIGHT TO TERMINATE LEASE
An event of default that could result in termination of the
lease is governed by the terms of the lease. Events of default are
typically breach of any material provision in the lease, including
nonpayment of rent. Upon an event of default, a lease will often
require the non-defaulting party to notify the defaulting party and
allow a reasonable cure period. Failure to pay taxes, material
changes to, or termination of, insurance and unauthorized or
illegal uses of the premises will ordinarily provide a right of
termination.
It is also common to have anti-assignment provisions that cause
termination of the lease. Leases typically also specify rights to
termination upon certain casualty or condemnation events.
6.19 FORCED EVICTION
A landlord may evict a commercial tenant through one of the
processes cited in 6.17 Right to Occupy After
Termination or Expiration of Lease (including
self-help if allowed under the lease) upon the occurrence of any
event calling for eviction in a lease.
6.20 TERMINATION BY THIRD PARTY
A lease can be terminated by a government or municipal authority
in a condemnation or eminent domain proceeding. The process for
determining the allocation of the condemnation proceeds between a
landlord and tenant is negotiated in the lease.
See 2.9 Condemnation, Expropriation or Compulsory
Purchase.
7. CONSTRUCTION
7.1 COMMON STRUCTURES USED TO PRICE CONSTRUCTION PROJECTS
Commonly used pricing structures for construction include
guaranteed maximum price (GMP), cost plus and fixed price
contracts.
7.2 ASSIGNING RESPONSIBILITY FOR THE DESIGN AND CONSTRUCTION OF
A PROJECT
Design and construction functions are typically divided between
architects and contractors. However, any number of different
arrangements for dividing responsibilities is possible.
7.3 MANAGEMENT OF CONSTRUCTION RISK
Construction risk is managed through contractual provisions
between the parties, who are generally free to allocate the
relative risks in any manner and through whatever mechanisms they
deem appropriate. The mechanisms include waivers, indemnification,
retainage, pricing bonuses or penalties, scheduling and performance
bonuses and penalties, and other methods that are generally
available in other states. Generally, the owner cannot require the
contractor to prospectively waive its lien rights.
7.4 MANAGEMENT OF SCHEDULE-RELATED RISK
Schedule-related risks in construction projects can be managed
with contractual provisions, which allocate the risk of delays
between the owner and the contractor. These mechanisms can include
penalties for missing milestones as well as incentive payments for
performance and achieving milestones set forth in the contract. The
contract will typically determine which party is responsible for
delays that are not the fault of either party, such as weather
delays.
7.5 ADDITIONAL FORMS OF SECURITY TO GUARANTEE A
CONTRACTOR’S PERFORMANCE
In public projects, bonding is usually required to secure
performance of the construction job. Payment and performance bonds
are available in private jobs but are used less frequently because
of cost considerations. Many lenders will require construction
bonds when the lender is providing the construction financing.
Guaranties, letters of credit and other mechanisms for providing
security are available, but are used less frequently.
7.6 LIENS OR ENCUMBRANCES IN THE EVENT OF NON-PAYMENT
Contractors, material suppliers, design professionals and others
have statutory lien rights related to work on a project. A secured
construction loan will generally maintain its priority over
subsequent liens as long as the funds from the construction loan
are actually used for purposes of construction of the project and
the lender uses reasonable diligence in the application of the
proceeds of the construction loan. Once a lien has been filed, the
owner can remove the lien by posting a bond in the amount of 110%
of the amount of the lien.
7.7 REQUIREMENTS BEFORE USE OR INHABITATION
The process of final approval before occupancy depends on the
locality of the project. Typically, the local jurisdiction has
inspection requirements that must be satisfied before the local
authorities will issue a certificate of occupancy.
8. TAX
8.1 SALE OR PURCHASE OF CORPORATE REAL ESTATE
There are no transfer or documentary taxes, so the sale or
purchase of real estate does not itself trigger payment of a tax.
If the seller has a gain on the sale of the property, it may be
liable for income tax on the gain.
8.2 MITIGATION OF TAX LIABILITY
There are no transfer, recordation or stamp taxes. The fees for
recordation of documents in Mississippi are nominal, so mitigation
is not necessary.
8.3 MUNICIPAL TAXES
There are no occupancy taxes or taxes paid on rent in
Mississippi.
8.4 INCOME TAX WITHHOLDING FOR FOREIGN INVESTORS
When a non-US person disposes of an interest in US real estate,
the proceeds are subject to 15% withholding under the Foreign
Investment in Real Property Tax Act (FIRPTA). The amount of
withholding can be adjusted by obtaining a withholding certificate
from the Internal Revenue Service.
Pursuant to Section 27-7-308 of the Mississippi Code, when a
non-resident of the state of Mississippi sells Mississippi real
property and associated tangible personal property for a sum in
excess of USD100,000, the seller is required to withhold and pay
over to the Mississippi Department of Revenue 5% of the amount
realized by the seller on the sale. If the amount required to be
paid to the Department of Revenue exceeds the net proceeds payable
to the seller, the seller is required to pay to the Department of
Revenue only the net proceeds otherwise payable to the seller. A
corporation registered to do business in the State of Mississippi
is considered a resident of the state.
If the seller determines that the 5% required to be paid will
result in excess payment on any gain required to be recognized from
the sale, they may provide the Department of Revenue an affidavit
signed under penalties of perjury stating the amount of the gain
required to be recognized from the sale, and may then pay the
applicable percentage of the amount of the gain required to be
recognized as stated in the affidavit rather than the 5%. Likewise,
if the seller makes a payment that results in an excess payment,
they may file a claim for a refund of the excess payment with the
Department of Revenue, which includes an affidavit signed by the
seller under penalties of perjury stating the amount of the gain
required to be recognized from the sale, and the department will
refund the difference.
Other than the withholding requirements above, foreign sellers
and Mississippi sellers are taxed in the same manner.
8.5 TAX BENEFITS
Property taxes paid are deductible for federal income tax
purposes. While land is not depreciable, improvements to land are
subject to depreciation, which is deductible on the owner’s
federal income tax return. Owners may also take advantage of the
IRC.
Section 1031 exchange rules, assuming all conditions are
satisfied. Mississippi income tax law does not recognize capital
gain, and all gain on property dispositions is ordinary income. In
addition, Mississippi income tax law does not recognize federal
bonus depreciation or the federal investment tax credit. In order
to qualify for a tax-free exchange, both pieces of property must be
located in Mississippi.
In Mississippi, local governing authorities may grant eligible
businesses a property tax exemption on real and tangible personal
property being used in the state for up to ten years. Certain
eligible businesses making certain investments in the state may be
eligible to pay a fee in lieu of property taxes under a fee in lieu
agreement having a term of up to 30 years, but the fee in lieu on
any particular item of property during the term of such an
agreement is limited to no more than ten years. These fee in lieu
agreements are negotiated between the eligible company and the
local governmental authorities.
Additionally, by locating in or expanding into certain counties
in Mississippi, companies may be eligible for property, income,
franchise, and sales and use tax incentives under the Growth and
Prosperity (GAP) Program.
Finally, there are a number of state-sponsored incentive
programs that are available in connection with real estate
development projects, including:
- sales tax tourism rebate, which provides a tax rebate to
qualified applicants of new tourism-oriented projects within the
state; - historic tax credits;
- new market tax credits;
- tax increment financing;
- bond financing and other related incentives offered through the
Mississippi Business Finance Corporation; - use of an urban renewal agency (in cases where the local
jurisdiction has such an agency in place); and - health care industry zone incentives, which provides tax
incentives to qualified health care-related businesses that locate
or expand in Mississippi and create new jobs for state
residents.
8.6 KEY CHANGES IN FEDERAL TAX REFORM
See 1.3 Impact of New US Tax Law
Changes.
Originally Published by Chambers USA Regional Real Estate
Guide
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.