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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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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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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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Real Estate Law

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

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

Madison Shaner

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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 rule-making (“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 rule-making 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.

The existing disclosure framework under the BSA requires recordkeeping and disclosure of certain information by financial and other reporting entities in commercial and residential real estate transactions involving financing, and in all-cash residential transactions valued at over $300,000 in specific cities. The existing requirements are intended to assist in detecting and reporting suspicious transactions to aid in combatting money laundering and the financing of terrorist activity. According to FinCEN, the current reporting framework covers roughly 80% of real estate transactions. The proposed rules, however, would apply to non-financed real estate transactions and essentially target the remaining 20% by potentially expanding reporting requirements to include all real estate transactions “not financed via a loan, mortgage, or other similar instrument, issued by a bank or a non-bank residential mortgage lender or originator, and that is made, at least in part, using currency or value that substitutes for currency” which could include real estate transactions using cryptocurrency. Additionally, unlike the current regulations, the proposed reporting requirements are not geographically limited to certain metropolitan areas.

The proposed rules and questions in the ANPRM targeted the following topics through a series of over 80 questions: (i) to whom new requirements should apply; (ii) which transactions should be covered; (iii) the dollar-value reporting threshold; (iv)what information should be reported; (v) how information should be reported; and (vi) who should be responsible fore reporting that information.

Financial institutions, and in some instances title insurance companies, currently bear the burden of meeting reporting requirements in covered transactions. However, the ANPRM could expand the scope of service providers required to report transaction information as FinCEN sought input on which service providers should be required to collect information, maintain records, and report information on non-financed purchases, and whether it should employ a “hierarchical, cascading reporting obligations on different entities involved in the transactions to ensure there is always an entity required to report.

The proposed regulations are also coupled with the Kleptocrat Liability for Excessive Property Transactions and Ownership (the “KLEPTO Act”), the bi-partisan bill introduced by Senators Elizabeth Warren, Sheldon Whitehouse, Roger Wicker, and Bill Cassidy in April as a way to crack down on transactions by Russian President Vladimir Putin and his allies and to provide information as to who is purchasing assets, including real estate and aircrafts, as a way to launder funds.

Paired with the beneficial ownership reporting requirements under the CTA, any potential (additional) reporting requirements for real estate transactions will likely result in significant disclosure requirements for all real estate investors and owners in the future, even if real estate investment and ownership is accomplished using a third-party entity. While no final rule-making has been announced relating to real estate transactions, we can likely expect greater scrutiny and additional burdens to be imposed on real estate transactions in the future.

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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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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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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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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Categories
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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Work-Life Balance

Not All Who Wander are Lost

When I joined Milgrom & Daskam at the height of COVID, I wasn’t sure what the future would look like for me or this relatively young firm. We were giving up our physical office space in downtown Denver and embarking on a new vision for remote workers. Up until then, much of my professional work life was spent in an office environment, surrounded by colleagues My days were punctuate by in-person meetings–formal, over coffee or meals.in the hallways–and bookended by my daily commute between Denver and Los Angeles which ranged anywhere from just under 30 minutes to more than an hour.

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Estate Planning

Estate Planning for Women: Helping with Control

Let me get it out of the way…the elephant in the room after such a polarizing title. Estate planning is for everyone. Period. Regardless of your age, your marital status, your perceived wealth, or your family size, everyone benefits from preparing for the unexpected, covering essentials, ensuring a lifestyle, and ultimately leaving a legacy with minimal probate and family disputes.

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Miscellaneous

Dude, Diligence?

The due diligence process in the purchase and sale of a business can seem daunting and cumbersome. Any attorney or financial professional worth his or her salt will tell you that conducting adequate diligence is paramount and, despite what will almost certainly feel like an unnecessarily lengthy and intrusive process, serves to mitigate risks for buyers and sellers alike.
This post is meant to provide a very basic framework of the due diligence process in asset deals to assist buyers and sellers in understanding (a) what they are looking at, (b) what they should be looking for, and (c) setting expectations about how the process looks, and where it can go awry. This post should not be relied on as legal advice, and you should always engage counsel and other financial and tax professionals if you are considering buying or selling a business.

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Categories
Real Estate Law

The Lasting Impact of Covid-19 on Commercial Lease Negotiations

The Lasting Impact of Covid-19 on Commercial Lease Negotiations

Madison Shaner

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When COVID-19 struck businesses in March of 2020, many assumed the impact would be short-lived, that after a few weeks of shutdowns and lock-ins, business and life would return to normal. Now, well over a year later, and with new variants and surges emerging despite vaccines, the question is: when, how, or even if, a return to offices will occur. Employees are increasingly likely to seek other opportunities if their employers press a return to full-time, in-person work. Job seekers have also begun prioritizing remote work options when looking for new jobs. 

Facing this rising desire to stay remote or move to a hybrid work model, employers must now determine what their physical workspace needs are in the post-pandemic world. A recent McKinsey study forecasts that roughly 38% of businesses will implement some sort of hybrid work arrangement in industries where remote work is feasible. This will likely result in a dramatic shift in the commercial real estate space, particularly where office spaces are concerned, as employers find they don’t want to be locked into a long-term lease, want more flexibility in their leased spaces, or that they need significantly less space than they previously required for their workforce. In a post-COVID world, many lease provisions will play a key role in future lease negotiations, and this shift may see tenants wielding more negotiating power than ever before.

1. Term

While negotiating the term of a lease is nothing new, we may see a trend toward shorter lease terms in the future. Previously, landlords were reluctant to grant leases for commercial spaces in less than five-year terms, particularly where there was build-out performed as part of a landlord’s lease obligations. However, given the shift in the real estate market, and the increases in vacant commercial space, landlords may have to accept shorter-term leasing arrangements from potential tenants who don’t want to get locked into leases given the uncertainty of the world and the shift toward hybrid work models.

2. Expansion/Contraction

Tenants may be seeking options that will allow them to adjust their space needs as they change in post-pandemic leases. Tenants may seek to expand their space as more employees come in for workdays, or to accommodate necessary physical distancing requirements. Conversely, as many employees continue to work remotely, tenants may only need a fraction of the space previously required because there are simply fewer bodies in the building at any given time. Landlords may have limited flexibility here but may also want to leave the door open depending on what their vacant space looks like, and whether trades can be made between tenants who are seeking more space with tenants who are seeking less space. Landlords may even elect to keep certain spaces open as short-term (e.g., daily, or weekly) rental options for tenants who only need more space for brief stretches of time.

3. Force Majeure.

Force majeure provisions were often the first contract provision everyone looked to when COVID hit to determine their liability and ability to avoid consequences for a lack of performance under the terms of the lease or contract. Pre-pandemic, force majeure clauses typically did not offer tenants relief from their obligation to pay rent, even if they may have offered protection from breaching their leases for failure to continuously operate their businesses out of the leased premises. Moving forward, landlords and tenants should expect force majeure provisions to be a more heavily negotiated lease provision, including specific language relating to government shutdowns, public health orders, and crises.

4. Subleasing and assignment.

When lessees become unable to meet their obligations under their leases due to either reduced business or shutdowns and government mandates, they may try to either sublease their spaces or transfer their leases to a third party by assigning the lease. Prior to the pandemic, many landlords, particularly in commercial leases, were reluctant to allow tenants to sublease or assign their leases. Lessees who could sublet or assign their spaces under the terms of their leases were able to defray their overhead costs by finding sublessees or assignees for spaces they either no longer needed or were no longer able to use during the pandemic. As such, assignment and sublease provisions became valuable focal points in existing leases and will likely be heavily negotiated in new leases.

Beyond the shift in lease provisions, it is likely that more and more tenants will seek flexible working spaces that allow people to work in person when desired or necessary. To capitalize on the new hybrid work models, landlords and owners must consider how to best transition their spaces and lease agreements to give tenants flexibility, or risk being stuck with empty commercial spaces.

The real estate team at Milgrom & Daskam is skilled at drafting and negotiating commercial leases, and whether you’re a landlord or a tenant, we would love to help craft the solutions that work best for you. Reach out to our team for a consultation if you’re looking for assistance in your upcoming commercial real estate transactions.

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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Uncategorized

DON’T GET NFTEASED

It’s 2022, and everyone from Snoop Dogg to the cashier at your local supermarket is creating or sponsoring their own NFT project, including many of our Firm’s clients. NFTs (non-fungible tokens) might be a revolutionary way for artists and collectors to control their work, but they are currently a Wild West. Before you get rich quick on this “21st Century Gold Rush”, consider some of the lessons we have learned through our practice.

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Miscellaneous

Running a Business – Remotely

About three years ago, I spent a year living and working remotely from Europe. My experience was unique and interesting enough that I was featured in a series called Digital Nomad Life in Croatia. Of course, many people had been working remotely for years, but it hadn’t really become mainstream. Then came the major disrupter of all life as we knew it – Covid-19. Almost immediately, everyone the world over got a taste of working remotely, or at least of realizing that the world of work could look very different from how we always thought it had to be.

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Real Estate Law

Giving Back to the Community: Getting to Know Sharing Connexion

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.

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