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Should Your Project Be Registered Under the Interstate Land Sales Full Disclosure Act?
HUD Office of RESPA/Interstate Land Sales To Be Part of New Agency
FHA Deadlines Extended
Court Decision I: Does Your Contract Comply with Improved Lot Exemption?
Court Decision II: Carefully Review Your Sales Contract Forms
Condominium Warranty Settlement Agreements: What Are Your Options?
Insanity: Doing Things the Same Way and Expecting Different Results
‘Hidden’ Tax Relief for D.C. Homebuyers
Is There a New Source of Liability for Real Estate Sales in Virginia?
Longer Developer Warranty Periods for Condominiums and HOAs; Mandatory Common Element Descriptions
New HOA Budget Requirements
Notice of Right to Appeal Tax Assessment
Clotheslines Must be Allowed in Single-Family Properties
Required Disclosures in Prince George’s County Regarding Community Amenities
Changes to Storm Water Management Regulations
Press Release: Ballard Spahr Helps Client Close Landmark $460 Million Real Estate Deal
Ballard Spahr Hosts Briefing on Rockville’s Pike Master Plan
Outlook on Federal Real Estate in Montgomery County—Impact on Growth, Job Retention and Private Sector Opportunities
Raquel Montenegro Joins Ballard Spahr

NATIONAL

Should Your Project Be Registered Under the Interstate Land Sales Full Disclosure Act?

The Interstate Land Sales Full Disclosure Act (ILSA) generally applies to the sale of unimproved real property, including new homes and condominium units. Unless a transaction is exempt, the registration and disclosure provisions of ILSA require registration of a Property Report with HUD and delivery of the Property Report to buyers of lots. However, before proceeding, the seller should consider the advantages and disadvantages of registration.

Advantages of Registration

Although registration is not an endorsement of a project, registration and the delivery of the Property Report, which will disclose substantial information about the project, may provide some level of comfort to prospective purchasers.

Registration also provides the developer more flexibility with construction and sales timing, and allows the sales contract to include more aggressive limitations on the purchaser’s remedies in the event of a seller default, which would not be permitted if the dwelling units were instead being sold pursuant to an ILSA exemption.

The substantial narrative description of the project and disclosure in the Statement of Record also provide some level of protection against purchasers’ claims that they were not provided material information about the project.

Properly completed and utilized registration materials eliminate the two-year rescission right and the right to compel a post-settlement buyback, which a purchaser would have if a sale were made under an inapplicable ILSA exemption.

Increasingly, lawsuits have attacked the use of ILSA-exempt contract forms, especially in condominium projects that were not built within two years of execution of the contract.

Finally, if the project is to be actively marketed outside of the state, ILSA registration can greatly simplify the time and cost of registering in other states. In addition, in some cases (not including within D.C., Maryland, or Virginia) a HUD Statement of Record may be accepted alone or with minimal supplemental materials in place of the disclosure materials and registration under state statutes.

Disadvantages of Registration

The main disadvantage of registration is the time and legal expense involved in preparing the Statement of Record and obtaining HUD registration.

During the registration process, disclosure of past sales activity by the developer or its affiliates may uncover actions that could prompt HUD to investigate whether ILSA violations were committed.

Where a purchaser is in default under the sales agreement, ILSA limits the seller’s retention of deposits to 15 percent of the total cash purchase price, unless greater damages can be shown.

ILSA imposes specific requirements regarding the Statement of Record filed with HUD and sales and marketing practices. Violation of these requirements could give rise to suits for misrepresentation and omission of material facts. In addition, recent lawsuits have surfaced in which disgruntled purchasers have alleged defects in the HUD registration material that give rise to rescission rights.

The Statement of Record must be amended for each new phase and each time there is a material change in the information to be provided. When there is a material change, sales must be suspended until the amendment is filed with HUD and a new effective date is issued. This, along with annual reporting requirements, creates an administrative burden.

Conclusion

In many cases, the developer may have no choice but to register. However, the use of possible exemptions, as well as the implications of registration, should be discussed with experienced legal counsel.

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HUD Office of RESPA/Interstate Land Sales To Be Part of New Agency

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the HUD Office of RESPA/Interstate Land Sales will be moved to the newly created Bureau of Consumer Financial Protection, which focuses on consumer protection issues in the financial products and services industries. It is unclear what impact this transfer will have on interstate land sales registrations and enforcement policies. The scheduled transfer date is July 21, 2011.

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FHA Deadlines Extended

On December 8, 2010, FHA updated the schedule for the expiration of condominium project approvals. Such approvals expire two years from the date they were granted. To retain FHA approval, the recertification process must be completed within six months of the expiration date to take advantage of a streamlined FHA recertification process. Failure to do so could disrupt the sale of FHA-financed units, and full project approval would be required for recertification.

The new schedule for project approval expirations is:

Initial Project Approval Dates            Current Expiration Date            New Expiration Date
1972 – 1980 December 7, 2010 December 31, 2010
1981 – 1985 December 7, 2010 December 31, 2010
1986 – 1990 December 7, 2010 May 31, 2011
1991 – 1995 December 7, 2010 July 31, 2011
1996 – 2000 December 7, 2010 August 31, 2011
2001 – 2005 December 7, 2010 September 30, 2011
2006 – 2008 (Sept.) December 7, 2010 March 31, 2011

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Court Decision I: Does Your Contract Comply with Improved Lot Exemption?

In An v. Leviev Fulton Club, LLC, U.S. Dist. LEXIS 83795 (S.D.N.Y. Aug. 10, 2010), the Court ruled, against the developer, that the purchase contract did not unconditionally obligate the developer to construct the condominium unit within two years, as required under the improved lot exemption to the Interstate Land Sales Full Disclosure Act. The language at issue provided that the anticipated first closing would occur by April 1, 2008, and “in the event the project commencement date of Condominium operation is twelve (12) months or later than the anticipated date of the First Closing, Sponsor will offer all Purchasers the right to rescind their Purchase Agreements and have their Down Payments refunded to them.” The language further provided, “Neither Sponsor nor its principals, managers, members, agents, designees, employees or affiliates, however, make any warranty or representation as to the date of substantial completion or the issuance of the first temporary certificate of occupancy.”

The Court found that these provisions did not provide an unconditional legal obligation for construction to be completed within two years, as required for the improved lot exemption. It held that eligibility for the exemption is determined based on whether the contract contains an unconditional legal obligation to construct within two years of signing—not based on whether the construction is completed within that time. As a result, it remains critical for developers to make sure that their contracts utilizing the improved lot exemption are carefully drafted to comply with that exemption.

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Court Decision II: Carefully Review Your Sales Contract Forms

In Bacolitsas v. 86th & 3rd Owner, LLC, et al., U.S. Dist. LEXIS 99642 (S.D.N.Y. September 21, 2010), the Court again ruled in favor of contract purchasers when interpreting the Interstate Land Sales Full Disclosure Act (ILSA). It held that the sales contract could be revoked because it did not contain “a description of the lot which makes such lot clearly identifiable and which is in a form acceptable for recording by appropriate public officials responsible for maintaining land records.”

ILSA requires that the lot be described “in a form acceptable for recording,” 15 U.S.C. 1703(d)(1), while the implementing regulation requires “[a] legally sufficient and recordable lot description.” The Court concluded that because a lot description alone generally would not be considered a recordable document, the description must be included in a form capable of being recorded.

The Court also found that the purchase agreement was not acknowledged before a notary in accordance with New York’s recordation requirements and so could not be recorded. In addition, paragraph 31 of the purchase contract provided that the “[p]urchaser may not record this Agreement or a memorandum thereof.” The Court found this anti-recordation provision to further indicate that the purchase contract was not in recordable form.

Although this decision has been appealed, the HUD Office of RESPA/Interstate Land Sales is considering its impact on pending registrations, and developers should determine whether it will affect their form of sales agreement.

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Condominium Warranty Settlement Agreements: What Are Your Options?

Many condominiums developed and sold during the height of the condominium industry are now approaching the end of their warranty period or the end of their limitations period for bringing warranty claims. Almost every condominium association asserts some type of warranty claim during this time period, and developers consistently work toward achieving amicable resolutions of such claims, without arbitration or litigation. Most warranty claims are settled without a more costly adversary proceeding. There are many different types of settlements but most fall within certain categories. Before proceeding with a settlement, a developer should be aware of the benefits and drawbacks of each.

Cash Settlements. Cash settlements are the most desirable. Such a settlement results in a fairly simple agreement, the payment of money or other assets in exchange for a full release as to future claims of any nature and the end of the relationship. The downside to this type of settlement is the cost. Many associations are not focused on receiving cash but rather on correcting particular problems in the condominium. As a result, they often feel that the developer can implement corrective action more cost effectively through the use of its original contractors and subcontractors and, thus, the association will receive greater financial benefit if the developer performs the work. Therefore, the cost of a cash settlement may be higher for the developer than actually performing work.

Performance Settlement. This type of settlement agreement is more complex and prolongs the relationship between the developer and the association. Essentially, the developer performs certain agreed-upon remedial work in exchange for a release of all claims. Although this may be more cost effective for the developer, the continued relationship and the complexity can often make this approach less desirable. It is very difficult to achieve a performance settlement agreement without a review and approval process, which can result in additional adversity. Some particular components necessary for this type of settlement include the following:

  • A detailed, objective scope of work must be incorporated into the settlement agreement. This avoids disputes over expectations. Subjective standards of performance are undesirable because they leave too much room for potential dispute as to whether such standards have been achieved.
  • A review and approval process for use by the association for completed work must be included. A condominium association will rarely agree to the performance of work as a component of a settlement without such a process.
  • There should be various notice requirements and time frames applicable to the completion of work, inspection, and rejection. Without these requirements, the process could be unending.
  • There should be a dispute resolution procedure in the event there are disputes regarding whether the work complies with the specifications and standards outlined in the agreement. This procedure should have short time frames and a definitive resolution without litigation. Often there is a preselected arbiter to avoid delays and disputes on the selection process.
  • There must be a release that becomes effective upon completion of the work and no timely rejection.
  • It is preferable that the developer have no further obligations after the satisfactory completion of work. To the extent that this cannot be achieved through negotiation, any continued obligations or warranty must be specific and narrowly drafted.

Combination Cash Payment/Performance. Often the settlement agreement includes some combination of the two options discussed above. In such cases, all of the terms applicable to performance agreements must still be included.

Structured Settlements. Sometimes the particular facts of the matter may be conducive to other structured settlement arrangements. These types of arrangements may include the conveyance of property in lieu of making a cash payment or other performance. This is fairly common and sometimes includes the conveyance of a unit or units, including a unit to be used as a management office or other service location in the community, conveyance of amenities, and conveyance of parking spaces. In contemplation of using such potential assets for future settlement, it is often useful to make such space units in the condominium as opposed to common elements or limited common elements so that the property is easily conveyed without complexities and has a reasonably clear value.

There are many other factors that should be considered when negotiating settlement agreements. Subsequent articles will discuss the various types of legal provisions that should be included in settlement agreements in order to provide the best protection against further claims.

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Insanity: Doing Things the Same Way and Expecting Different Results

As the real estate community emerges from one of the worst recessions in recent history, it is a good time to reflect on “lessons learned” and to benefit from prior mistakes (The only real mistake is the one from which we learn nothing. ~John Powell). Three very recent examples illustrate the need to draft documents and agreements as thoughtfully and carefully as reasonably possible.

One situation involved an appellate case we argued earlier this month. The issue before the court was whether owners of multiple lots had to pay multiple fees. We firmly believe that the documents, drafted some 30-plus years ago, were abundantly clear on this point and we fully expect to prevail. However, the fact that we had to argue this case before the appellate court demonstrates the benefit of attempting to draft documents that can absolutely never be interpreted other than as intended. When it comes to money, people can come up with creative ideas for not paying it.

A second situation involved the settlement of a dispute with a condominium association. We had not drafted the proposed settlement agreement with the association but were provided a draft someone else prepared. Although the proposed draft would have likely led to a quick settlement with the condo association, it was far from sufficient to meet the “bulletproof” objectives of the client (although, in our litigious society, one can never really achieve bulletproof). With a bit of effort, we were able to suggest changes that significantly increased the protection afforded the client. Having negotiated dozens of similar agreements for many others, we were well aware of the pitfalls of hastily prepared settlement agreements. (Getting the job done right is far more important than merely getting the job done.)

The final, most recent example involved a mixed-use condominium project. Mixed-use projects are becoming very commonplace and provide a great means of achieving high-density smart growth. But thoughtful and well-conceived documentation for these projects is critical. The “dispute” with this project involved a ground-floor retail use and the residents above. The residents were concerned about the “nuisance” caused by the retail use. What are the reasonable expectations of residents for “quiet enjoyment” in a mixed-use project, and can those expectations be modified by well-drafted documents to allow retail tenants to operate their businesses in a commercially reasonable manner? (Of course, the answer is yes!)

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‘Hidden’ Tax Relief for D.C. Homebuyers

Although the nationwide $8,000 tax credit for first-time homebuyers expired in summer 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed by the President in December 2010, extended a $5,000 federal tax credit for first-time homebuyers in Washington, D.C., for another two years. The credit applies to home purchases in the District by taxpayers who did not own a principal residence there during the previous year. Although the credit expired in 2009, it was renewed retroactively for 2010 and renewed for 2011. The credit was included in the tax deal extending income tax rates across the board to their current levels.

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VIRGINIA

Is There a New Source of Liability for Real Estate Sales in Virginia?

In Walton v. Aguiliar (Hogshire, J.) No. 2010-106, October 28, 2010; Charlottesville Cir. Ct., the Court allowed a complaint to go forward that alleged a real estate agent’s breach of statutory duty to disclose material adverse facts, even though the statute does not create a specific cause of action and in spite of Virginia’s traditional theory of caveat emptor, or buyer beware.

In spring 2009, the plaintiffs purchased a Charlottesville, Virginia, townhouse from the defendant, who was a licensed real estate agent and part owner of the townhouse. Less than a year after closing, the residence flooded. The plaintiffs alleged that the seller knew of the flooding problem and failed to disclose the flooding condition to them, in accordance with Virginia Code Section 54.1-2131(B), which requires licensees (defined as real estate brokers and salespeople) to “disclose to the buyer all material adverse facts pertaining to the physical condition of the property which are actually known to the licensee.”

The Court, in relevant part, found that the flooding was subject to the statutory disclosure requirements and rejected the defendant’s attempt to dismiss the complaint in the initial pleadings stage. By doing so, the Court, at least at the initial pleading stage, permitted a claim based on a statutory violation, despite the fact that the statute does not expressly create a cause of action for such a violation.

Virginia courts previously held in Della Monica v. Hottel, 64 Va. Cir. 439, 440 (2004), that statutory duties of real estate brokers and salespeople do not serve as the basis for an independent cause of action, but that tort remedies may be available and the broker or salesperson would be held to the duty standard imposed by the statute. Although the Court’s final decision in Walton v. Aguiliar is yet to be determined, sellers should be aware of this potential independent cause of action.

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MARYLAND

New laws that recently went into effect in Maryland that affect residential developers include the following:

Longer Developer Warranty Periods for Condominiums and HOAs; Mandatory Common Element Descriptions

The Maryland Condominium Act was amended to require that a developer’s warranty on common elements extend until the later of (i) three years after the first unit closing, or (ii) two years from the date the developer transfers control of the condominium association. Previously, common element warranties ran for three years after the first unit closing, regardless of when the developer transitioned control of the condominium association.

Similarly, the Maryland Homeowners Association Act was changed to require that the developer warranty period on HOA common areas shall generally run until the later of (i) two years after the first home closing in the HOA, or (ii) two years from the date the developer transfers control of the HOA. Before this recent change, a developer’s common area warranties generally extended for one year after the first home closing, regardless of when the developer transitioned control of the HOA.

For purposes of these new laws, transition of control is defined as the date that owners other than the developer and its affiliates first elect a controlling majority of directors on the condominium or HOA board.

These new warranty period requirements apply to residential condominiums and HOAs created on or after October 1, 2010. Developers should be aware of their potential extended warranty liability and the need to make adequate plans to timely and adequately transition control of associations in order to avoid prolonged warranty obligations.

For condominiums created on or after October 1, 2010, the Maryland Condominium Act also now requires that certain improvements shared by or serving more than one unit or any portion of the common elements shall be included as part of the common elements. These improvements include roofs; foundations; external and supporting walls; mechanical, electrical, and plumbing systems; and other structural elements. This new legislation apparently aims to ensure that these components fall within the longer common element warranty period.

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New HOA Budget Requirements

The Maryland Homeowners Association Act was amended to provide for budget procedures and requirements for HOAs that are similar to those that have been in effect for condominiums under the Maryland Condominium Act. The new law requires that a proposed HOA budget be provided to homeowners at least thirty days before the budget is adopted and that it be adopted at an open meeting of homeowners. The budget is required to itemize expenditures for income, administration, maintenance, utilities, general expenses, reserves, and capital expenses. Except for budget changes required because of conditions threatening health, safety, or significant property damage, any other proposed increase in HOA expenses of more than 15 percent from the previous budget must be approved at a special meeting of homeowners.

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Notice of Right to Appeal Tax Assessment

A contract for the sale of single-family property in Maryland must include notice of the purchaser’s right to appeal the assessed value of the property. The contract notice must be in substantially the following form:

If any real property is transferred after January 1 and before the beginning of the next taxable year to a new owner, the new owner may submit a written appeal as to a value or classification on or before 60 days after the date of transfer.

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Clotheslines Must be Allowed in Single-Family Properties

No condominium or HOA covenant, lease provision, deed, agreement, or any other document may prohibit the installation or use of clotheslines within single-family properties in Maryland. Any provisions in existing condominium or HOA covenants, leases, deeds, or other documents that prohibit the installation or use of clotheslines in single-family properties are void under the new law. However, the law does not apply to a property that includes more than four dwelling units or any single-family property listed or eligible for inclusion in the Maryland Register of Historic Properties. Reasonable restrictions on the size, appearance, and placement of clotheslines are permissible for protecting aesthetic values and persons and property in the event of fire or other emergencies. Before adopting any clothesline restriction, the homeowners association or landlord must hold an open meeting of homeowners and tenants, with advance notice of the meeting’s time and place, and give homeowners and tenants an opportunity to be heard at the meeting regarding the proposed restriction.

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Required Disclosures in Prince George’s County Regarding Community Amenities

Under a new Maryland law that applies only in Prince George’s County, a contract for the sale of a new home that includes an agreement by the home builder to provide a community amenity must include a disclosure statement signed and dated by the purchaser and the home builder that identifies the community amenity provided in the sales contract and specifies when the amenity will be completed in accordance with a recreational facilities agreement recorded with the Prince George’s County Planning Department. For purposes of this disclosure requirement, a “community amenity” is defined to include the following: country club, golf course, health club, park, swimming pool, tennis court, and walking trail. A purchaser who is entitled to receive the disclosure statement, but who does not receive the disclosure statement at the time of entering into the sales contract, may rescind the sales contract at any time before receiving and within five days after receiving the disclosure statement. In addition, the statute provides that any advertising for a community development in Prince George’s County that will include a community amenity shall include disclosure of the requirements described above.

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Changes to Storm Water Management Regulations

In 2007, the State of Maryland adopted new standards for storm water management. The state Department of the Environment published the first draft of the regulations in 2009; final model regulations were promulgated in spring 2010. Nearly all jurisdictions implemented their versions of the regulations between spring and summer 2010.

All counties and municipalities (including Baltimore City) had to adopt new Storm Water Management Ordinances conforming to the model regulations, but could adapt them to address local needs. In certain cases, this resulted in stricter standards and/or more difficulty in meeting standards for a waiver.

All new development must conform to Environmental Site Design (ESD): small-scale storm water management practices, nonstructural techniques, and better site planning to mimic natural hydrologic runoff characteristics and minimize the impact of land development on water resources (Section 2.0(17) of the DEP model SWM Ordinance). In practice, this requires smaller drainage areas. One large facility at the site low point is no longer permitted, demanding more thoughtful integration of storm water management techniques at the start of the site-design process. The site layout and, ultimately, the yield may be driven by ESD requirements, even in urban redevelopment projects.

Certain projects with varying levels of entitlements may be grandfathered under the new regulations; each jurisdiction treats these in-progress projects differently. In most jurisdictions, if a final storm water management plan was approved before May 4, 2010, (certain jurisdictions have adopted different dates), even if construction had not begun, the project is automatically grandfathered. The jurisdiction has the discretion to grandfather projects that, as of a particular date, had preliminary or concept approvals. If a project is granted grandfathered status, it generally has until May 4, 2013, to obtain “final” approval, and construction must be complete by May 4, 2017.

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Press Release: Ballard Spahr Helps Client Close Landmark $460 Million Real Estate Deal

Ballard Spahr represented the buyer of a $460 million portfolio of eight apartment complexes in Maryland and Virginia known as the “Magazine Portfolio.” The deal is being called the largest multifamily real estate transaction in the nation since 2008. The properties, totaling more than 2,500 units, are located throughout the Washington, D.C., metropolitan area in Northern Virginia and suburban Maryland. Ballard Spahr served as lead counsel for the buyer in connection with the acquisition and the assumption of the debt financing the properties.

“This is a significant transaction for our client, the industry, and the region,” said partner Marci Gordon, who led the Ballard Spahr team. “We believe it illustrates the continued performance of the multifamily market, both nationally and in greater Washington, D.C.”

The buyer was a 50-50 joint venture between Pantzer Properties and Dune Real Estate Partners.

“This deal is the fourteenth investment that our fund, the Panco Strategic Real Estate Fund I LP, has made in two and a half years, and we are delighted to add such a terrific group of assets to our portfolio,” said Edward Pantzer, CEO of Pantzer Properties. “We have worked with Ballard since 1982 as our general counsel, and their efforts, led by Marci Gordon, to close this transaction were extraordinary.”

Ballard Spahr’s real estate practice advises clients nationwide in the acquisition, financing, leasing, sale, and restructuring transactions. Ms. Gordon was assisted by Ballard Spahr attorneys Jamie B. Bischoff, Richard S. Perelman, Morton P. Fisher, Jr., Eben C. Hansel, Emily J. Alt, Marlene S. Gomez, and Michael C. Duffy.

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Ballard Spahr Hosts Briefing on Rockville’s Pike Master Plan

On January 13, 2011, Ballard Spahr, in cooperation with Rodgers Consulting, Inc., hosted a breakfast briefing, “Rockville’s Pike Master Plan: Seeking Opportunity in Change.”

With the City of Rockville poised to release its updated Rockville’s Pike Master Plan, this event provided a forum to discuss the Plan’s recommendations, highlight its opportunities, and identify the challenges presented by the Adequate Public Facilities Ordinance (APFO).

Participating speakers included Susan Swift, Director, City of Rockville Department of Community Planning & Development Services; and Matthew Leakan, Principal, Rodgers Consulting, Inc.

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Outlook on Federal Real Estate in Montgomery County—Impact on Growth, Job Retention and Private Sector Opportunities

Recognizing the importance of federal leasing activities to the economic vibrancy of our region, the Montgomery County Department of Economic Development held this event on February 2, 2011, to inform members of the community about the County commitment to federal facility retention and growth, federal facility expansion strategy, and public-private sector opportunities. A panel discussion, moderated by Ballard Spahr partner David L. Winstead, featured an overview of the U.S. General Services Administration policy implications and their effect on the County.

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Raquel Montenegro Joins Ballard Spahr

Raquel Montenegro has joined the Bethesda office as a Real Estate Business Development and Government Affairs Specialist. Raquel most recently held the position of Associate Director/Legislative Affairs for the Maryland-National Capital Building Industry Association. Many of our lawyers are aware of her excellent work for and on behalf of the MNCBIA and its membership.

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