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Real Estate Law Uncategorized

1031 Exchange: Tax Deferral in Commercial Real Estate Transactions

1031 Exchange: Tax Deferral in Commercial Real Estate Transactions

John Daskam

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For commercial real estate owners, selling assets which have been fully depreciated, fully stabilized, or held long term, can be an attractive option given certain market conditions, or over-saturation of the given asset type within an investor’s portfolio.

Regardless of the reason, a 1031 exchange may be a good option to consider for the sale proceeds which may allow the investor to defer tax on the gain. A prospective seller may wish to continue to invest the proceeds from the sale, and may do so, while deferring the tax consequences, through a like-kind exchange, taking advantage of Section 1031 of the Internal Revenue Code.

By exchanging the proceeds from the sale, an investor may swap the investment property for another, and defer the capital gains tax that otherwise would have to be paid as a result of the sale.

There are a number of rules governing a transaction where 1031 exchange proceeds are being used to purchase a property or where the buyer is using such proceeds to fund a future acquisition. These rules relate to, among other things, the time during which an investor must identify the replacement property, how the sale proceeds must be held (i.e. through a qualified intermediary), the buyer’s corporate form before and after the sale occurs, and the types of property that qualify for an exchange.

The 1031 exchange can provide significant value to real estate investors and should be considered in any commercial real estate transaction. For questions about how to take advantage of this mechanism, reach out to the real estate team at M&D.

ABOUT THE AUTHOR

PARTNER

John Daskam joined Milgrom & Daskam as a Partner in January 2019. He focuses his law practice on real estate and corporate law. His real estate practice includes acquisitions and dispositions, landlord-tenant matters, leasing, financing, development, and contract preparation and negotiation.

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Employment Law

U.S. Supreme Court Hears Oral Arguments on Colorado Business’s First Amendment Speech Rights

The U.S. Supreme Court heard oral arguments last month in a case challenging the Colorado Anti-Discrimination Act (CADA) in a scenario similar to the Masterpiece Cakeshop decision of 2018. 303 Creative LLC, a Colorado based graphic design service is seeking to provide wedding website design services but only for opposite-sex weddings due to the owner’s religious beliefs that preclude her from providing the same services for same-sex couples.

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Estate Planning

Should I Consider an Ethical Will?

A Last Will and Testament seems to be on most people’s radar, especially individuals with young children, individuals who have lost a loved one, or just individuals who consider themselves to be “Type A” planners. But what about an ethical will? What is an ethical will and why might you consider executing one as part of your legacy planning?

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Real Estate Law

Giving Back to the Community: Getting to Know Sharing Connexion

Giving Back to the Community: Getting to Know Sharing Connexion

John Daskam

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In January 2017, I joined the board of Sharing Connexion, Inc. (“SCI”), a non-profit organization founded by Ed Anderson, a real estate professional with 30+ years’ experience in acquisition, management, finance, and joint venture. SCI is devoted to sharing its collective real estate expertise with other non-profits and affordable housing organizations to empower their ability and capacity to support their missions. We aid our community partners by maximizing their real estate portfolios through funding assistance for existing facilities ensuring long term sustainability Additionally, we educate on the structure of donated real estate gifts to obtain the most favorable outcomes. SCI is committed to the long-term viability of affordable housing, and has created an impact fund which is used when “at-risk” projects are identified (those where displacement may occur based upon the loss or expiration of an affordable component (e.g. land use or rent restrictions) to provide options to achieve long-term affordability.

In late 2021, SCI launched an exciting new venture, Sharing Connexion Hawaii with the goal to support the creation of affordable housing in a grossly underserved market. Hawaii has the second highest 2-bedroom fair market rent in the country. In Maui County, the estimated average wage for renters is $15.80/hour, but the estimated wage to afford a 2-bedroom at fair market rent is $34.08 (National Low Income Housing Coalition, Out of Reach Report, 2021). SCI Hawaii has created strong community partner relationships, and together, we will begin developing affordable housing for a community in dire need.

Milgrom & Daskam is proud to support SCI, as well as many other non-profit organizations, in their collective missions.

You can learn much more about SCI by visiting our website at https://sharingconnexion.org/ 

ABOUT THE AUTHOR

PARTNER

John Daskam joined Milgrom & Daskam as a Partner in January 2019. He focuses his law practice on real estate and corporate law. His real estate practice includes acquisitions and dispositions, landlord-tenant matters, leasing, financing, development, and contract preparation and negotiation.

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Data Privacy

Navigating and Complying with Colorado’s New Consumer Privacy Act

On July, 7, 2021, Colorado Governor Jared Polis signed the Colorado Privacy Act (CPA or “the Act”) into law. With that pen stroke, Colorado joined California and Virginia as the third state to enact comprehensive consumer privacy legislation. While the law does not take effect until July 1, 2023, Colorado businesses would do well to study up on the new law to ensure compliance when it does become active.

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Business & Corporate Law

The Small Business Reorganization Act and Its Prolonged Adoption Through June of 2024

Chapter 11 bankruptcy code generally provides businesses with avenues and protections to reorganize and restructure obligations. This form of bankruptcy is very often more favorable than chapter 7 bankruptcy because it allows business owners to stay in the driver’s seat while attempting to negotiate a plan that complies with the bankruptcy code. In contrast, filing a chapter 7 petition results in full relinquishment of control of the business and the appointment of a third-party trustee whose primary obligation to is to liquidate estate assets for the benefit of unsecured creditors.

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Business & Corporate Law

Beneficial Ownership Disclosure: New Reporting Requirements for Small Businesses

On September 30, 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its highly anticipated Final Rule establishing a beneficial ownership information (BOI) reporting requirement under the Corporate Transparency Act (CTA) of 2019. These rules significantly change the obligations of business entities to disclose previously private information regarding the ownership and control of these entities. The primary purpose of the CTA, enacted as part of the Anti-Money Laundering Act of 2020 is to protect the US financial system from being used for illicit purposes, including preventing corrupt actors, terrorists, and criminals from hiding assets in anonymous shell companies. Background for this rule was addressed in prior blog posts including The Corporate Transparency Act (1/31/22) and FinCEN and Real Estate (8/2/22).

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Real Estate Law

Commercial Real Estate Acquisitions: Key Considerations

Commercial Real Estate Acquisitions: Key Considerations

John Daskam

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When considering a real estate acquisition, prospective buyers will face a host of issues that must be vetted to ensure the transaction is successfully executed. This blog post will focus on a few of the key considerations during this process.

1. Due Diligence Period

A key component of the purchase agreement is the period during which a prospective buyer will have the right to inspect the property while also having the right to a return of the earnest money pending its investigation. A buyer will need to ensure that there is adequate time to review all the relevant information related to the asset and to coordinate and review any third-party reports that are advisable or required to consummate the deal. For example, if there is a debt component to the purchase price (which is almost always the case), the lender will likely require a survey, lender title policy, property condition report, and environmental study. Though a buyer would be wise to obtain these reports, as applicable, in the absence of a loan, irrespective, the preparation of these various documents will take time. A seller will want to limit the time during which the earnest money is refundable, but ultimately the parties will need to agree to a reasonable period for due diligence to run its course.

2. Title & Survey

During the due diligence period, two key items for review will be the title commitment and survey of the property. These two reports work together and will give a buyer clarity regarding the status of the property. The title commitment (commitment by the title company to issue the insurance policy should the buyer meet all requirements) will include all instruments recorded in the public records against the property. Examples of these instruments include the plat, CC&Rs (restrictive covenants), easements, lease memoranda, etc. The surveyor will then plot any of these instruments that can be shown in the depiction, and a buyer can review how these recorded rights affect the property. An example of this is where a surveyor draws the area on the survey where a utility easement encumbers the property, and as a result, any incoming owner would have limited rights (or no rights at all) to the use of that portion of the property. This brings along questions related to access to the utility, and obligations to repair the surface of the land after any maintenance or replacement of the utility. Ideally, these third-party rights and obligations will be explained in the recorded instrument itself.

3. Tenant Estoppels

Typically, a commercial trade will implicate the current user or users of the real estate asset, and a prospective buyer will need to understand the status of the lease or leases in place at the property. Buyers use a tenant estoppel to ensure that any lease in place at the property meets certain criteria. A typical estoppel will be signed by the tenant and the seller and will reflect that the lease is in full force and effect, that there is no continuing default under the lease, the amount of the security deposit being held, the term and amount of rent, and any tenant rights of first refusal or extension rights. Though this is not an exhaustive list, a buyer will want to review any existing leases to properly request a tenant estoppel (as the lease will typically set forth the mechanism for obtaining an estoppel from the tenant) and to push for as much information from any tenant as possible.

There is much to navigate when acquiring commercial real property, and it is in the best interest of any prospective buyer to ensure that they have the right team to advise through the transaction

ABOUT THE AUTHOR

PARTNER

John Daskam joined Milgrom & Daskam as a Partner in January 2019. He focuses his law practice on real estate and corporate law. His real estate practice includes acquisitions and dispositions, landlord-tenant matters, leasing, financing, development, and contract preparation and negotiation.

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Miscellaneous

When Shares are Not Cares

As attorneys representing startups, Milgrom & Daskam knows that early-stage businesses often have many needs and not much capital to meet them. This often results in startups bartering for services using whatever currency they have. Sometimes this results in interesting exchanges (two hundred pounds of Valencia oranges in exchange for a logo design being our personal benchmark); more often it results in founders giving away the most freely available form of credit they have—equity in their company.

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Copyright Law

Should You Seek Foreign Intellectual Property Protection?

If you plan to conduct business abroad or have an online business that reaches customers abroad, you should consider seeking international intellectual property protection. Intellectual property protection is often limited to the country where you conduct business and/or where you file for protection with the respective foreign intellectual property office. For example, a U.S. trademark registration will not protect you against trademark disputes that arise in other countries. As another example, a U.S. patent prevents others from making, using, selling, offering for sale, and importing your patented invention in the U.S., but does not prevent others from doing the same in other countries.

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Categories
Entrepreneur & Startup

Understanding the LLC Structure: Key Considerations for Operating Agreements

Understanding the LLC Structure: Key Considerations for Operating Agreements

John Daskam

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Limited liability companies (“LLCs”) offer individuals a lot of flexibility when starting a new business while also providing the benefit of limited liability related to personal assets or assets that exist outside of the company structure. The LLC has become a favorite for forming new ventures due to its unique structure and single-level tax implications. However, when forming a new LLC, there are some key considerations to keep in mind related to its main governing document, the Operating Agreement (“OA”).

The OA for an LLC contains all of the rights and obligations of the individuals who are part of the LLC (“Members”). This blog post will focus on three main considerations for Members of an LLC when drafting the OA: 1) Management Rights, 2) Member Transfers, and 3) Deadlock.

1. Management Rights

As an initial matter, the Members will need to decide whether the LLC will be “member managed” or “manager managed.” In Colorado, this election will be included in the Articles of Organization which are filed with the Secretary of State. Typically, a “manager managed” LLC is advisable, as it provides for maximum flexibility for decision-making rights related to company matters. LLCs have two main associated rights: management rights and economic rights. Bifurcating the management rights from the membership base allows certain individuals to maintain control of the company’s major decision-making while allowing others to participate in ongoing company distributions (or required capital calls). Members who are Managers (though a Manager does not necessarily need to be a Member of the LLC) will want to think through what decisions can be made by an individual Manager and those that would require a majority or unanimous vote of all Managers (e.g., committing the LLC to a new loan or long-term contract).

2. Member Transfers

It is of the utmost importance that the Members understand how their interests in the LLC (“Membership Interests”) may or may not be transferred, assigned, hypothecated, or otherwise. Typically, there will be strong prohibitions on any transfer other than with some level of consent from the Members or Managers or for estate planning purposes. In almost all instances, the Membership Interests will not be registered securities, so it is important to avoid a triggering event that would require registration. Furthermore, the Members have entered into the LLC with a common goal, and finding themselves in the position of a unilateral transfer to an outside individual who may not have the same goal in mind can be highly problematic. Understanding that Membership Interests may never have a market value and are not readily saleable is a key foundational aspect of the LLC that Members must understand.

3. Deadlock

In closely-held LLCs (those with only a couple or few individual Members), it is vital that the Members are thoughtful about the scenario where there is disagreement over a major decision that will cause the business to struggle or fail (“Deadlock”). Typically, in a Deadlock scenario (which may further be defined in the OA), the Members will want to have a mechanism in the OA that allows for a path forward. One way that this scenario may be handled is a shotgun provision where the Members may elect to compel the buyout of the Membership Interests of the Member(s) who are withholding consent to a major decision. In this scenario, the withholding Member would have the option to sell or purchase the Membership Interests from the Members initiating the shotgun on the same economic terms. The buyout mechanism and triggering events would be built out specifically within the OA.

The considerations discussed in this blog are only a few of the many important aspects that must be addressed in the OA, and it is highly advisable to discuss with legal counsel when thinking about starting your new business.

ABOUT THE AUTHOR

PARTNER

John Daskam joined Milgrom & Daskam as a Partner in January 2019. He focuses his law practice on real estate and corporate law. His real estate practice includes acquisitions and dispositions, landlord-tenant matters, leasing, financing, development, and contract preparation and negotiation.

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Employment Law

Workplace Accommodations for Nursing Mothers

Many women choose to breastfeed their newborns, as the benefits of nursing are well-established. However, returning to work can present challenges to nursing mothers. Currently, twenty-eight states have laws related to supporting nursing women at work, and Colorado is among them.

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Real Estate Law

FinCEN and Real Estate: Additional Disclosure Requirements May Be On the Horizon for Real Estate Transactions

As part of the anti-money laundering regime under the Bank Secrecy Act of 1970 (the “BSA”), in late 2021, the Financial Crimes Enforcement Network (“FinCEN”) division of the Department of the Treasury issued an advanced notice of proposed rulemaking (“ANPRM”) seeking to address potential money laundering through real estate transactions. The comment period for the ANPRM closed on February 21, 2022. This ANPRM comes closely after the notice of proposed rulemaking related to the implementation of the Corporate Transparency Act (the “CTA”), which you can read more about here. Both the CTA and the proposed regulations under the ANPRM would require significant levels of disclosure regarding the beneficial ownership of companies and real estate in non-financed real estate transactions. These measures aim to reduce money laundering, and assets held by undisclosed foreign investors. It is estimated that between 2015 and 2020, at least $2.3 billion was laundered through U.S. real estate, though the actual figure is likely much higher Accordingly, both FinCEN and Congress are trying to limit the number of real estate transactions used to launder money.

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