When The Whip Comes Down

The municipality law trap

As a property investor, you need to be aware of obscure, little known local laws that can financially kill you in rental property investing.  And when that whip comes down, it can have devastating effects, and really turn you off from wanting to be in the property investing business.  Neil, a property investor friend I know, recently told me a tale of woe that befell him a few months ago.  It serves as yet another cautionary tale about how obscure local laws, possibly in your own municipality, can have devastating financial effects on small property investors.

Neil’s tale begins a long time ago – and, the seeds of his horrendous story about local property investing law were planted, unbeknownst to him.  He bought a mixed-use building in the downtown, historic district of Saranac Lake, New York, a small town in upstate New York near Lake Placid, in 1985.  The building housed his office on the main floor, as well as apartments upstairs.  Three years after purchasing the building, which was located on one of the main streets in town, the road was taken over by the state.  In so doing, the local village of Saranac Lake did not amend their local laws to account for this takeover of the street by the state.  Hence, local laws protecting a property owner on this stretch of road were not grandfathered along with the state takeover.

Fast forward to the present…

Cut to 2013.  Neil gets a call while on vacation.  He is told the sewer line is backing up in his rental units.  It is quickly is determined the  old main clay sewer line from the street to his building has collapsed.

I’ve owned enough investment rental properties to have had occasional run-ins with sewer back-ups.  And all my experience has taught me that the property owner is completely responsible for the sewer line from the curb into his building, regardless of the problem.  And as I’ve written here on a number of occasions, good property investment planning calls for a budgetary line for “contingencies” each year when preparing your pro forma income statement.  Something’s going to go at some point in any investment property, at any given time.  And keeping a slush fund available for these emergencies is standard operating procedure.

Legal responsibilities you’ll need to know

But in my friend’s case, turns out the sewer line collapse, since it was connected to the main line in the road just in front of his property – was HIS legal responsibility to make all necessary repairs all the way back to the main line in the road.  So, the road had to be torn up.  To the state highway department’s specifications.  Turns out when the state took over that portion of the road, and the village never grandfathered local law to include this state takeover, it left my friend holding the proverbial bag for the repair cost into the road.  Insane?  You haven’t heard the worst part…

For repairs to be made on a state-owned street (at least in New York, that is), you have to follow state regulations for digging, site maintenance, repair of the sewer line, and repair to the street.  This includes hiring union flagmen to control traffic while the work is being done.  What should have been a $5,000 project quickly ballooned to $20,000 due to state regulations.  Consider the specialized engineer to be hired, plans to be submitted and approved, and delays due to state regulations.  It was, of course, a nightmare.  And let’s not forget the potential loss of tenants during this period (though they eventually did stay with him at the end of the ordeal). 

Getting something for nothing

In essence, the state got something for nothing.  That’s local property investing law for you… Neil made an impassioned appeal to the Saranac Lake village board, to no avail.   Here is a portion of what he wrote (and spoke) to them: 

“I had not realized that I was also responsible to reconstruct a NYS Highway and
abide by all of the NYS Highway construction criteria and requirements, at my
personal expense. This has become an expensive educational learning experience for  me. We desired to expedite the repair of the sewer line as quickly as humanly
possible, however, we were impeded by NYS DOT regulations, which were followed  to the strictest interpretation of the Law. I was told that before I would be  issued a permit to open the Highway, that I was required to: develop an
engineering drawing, establish an earth restraining system, excavate a seven
foot deep trench below the Highway surface, protecting water supply mains and
fiberoptic lines, provide a ‘trench box’ for the protection of workers,
establish a traffic plan, hire ‘certified’ traffic flaggers, provide a road signage
package, have my road contractor provide a $10,000 bond, and provide an
alternate traffic plan. All this before I would be issued a permit. I was told
that if the work could not be completed within one work day, the trench would
have to be filled in, and again excavated the following day. I was told that to
request permitting for a road detour would add many more days to the permit
request process. All this extensive permitting process was required, before
work could be begun; before a toilet could be flushed or a bath provided.”

They still have not amended their law.  And other property owners on the very same street – the one with the crumbling infrastructure – are potentially on the hook for the same type of repairs in the near future as well.  Meanwhile, other adjacent towns and villages make allowances in their laws for this kind of financial trap.  Needless to say, it’s been a horrendous experience, and an extremely nasty and unforeseen financial hit for my friend.  Worse yet – if it had been the water line that had broken, and not the sewer line, the village would have picked up the tab from the curb into the street.  That’s because village law covers water line breaks – even for state roads within the village.  Make any sense?  Of course not.

The excruciating moral of the story

So what is the moral of this horrendous tale?  Never trust the government, of course! The fact that the road became a state road three years AFTER my friend bought the building strikes me as the cruelest blow of all…One minute you’re protected as the owner of an investment property.  The next, you’re not.

So how can you best protect yourself?  It’s not obvious (or logical) to read EVERY local law, or be able to predict EVERY possible bad event that could befall your property that involves governmental contact.  But you can at least learn from this horrendous lesson.  Go out and check now on your investment property…Who would pay if there’s a sewer collapse between the street and your building?  What about the property you’re thinking of making an offer on right now?  Have you done your homework on it yet?  What protections are afforded it in such a bad situation where the state takes over the roadway in front of the building?  And naturally, has your street been subject to a state takeover, or will it be soon?

Better make sure you know how that can adversely affect you in the event of a sewer collapse – or something else in the street – somewhere down the road.  Use my friend’s story as a true cautionary tale to help protect yourself now…After all, sometimes it’s best to do nothing – rather than get yourself into a potentially disastrous property investment trap.  Always be on the lookout for local law pitfalls like the one I’ve just described.  That’s the best way to fully protect yourself from the unexpected, and get to fully understand you local property investing law.

 

photos courtesy of wallpaperup.com, evergreenrealtymaine.com, dansuich.com, ci.new-brighton.mn.us, philadelphiaseweranddrain.com, greenvillesc.gov, umazuki.net