San Jose Business Lawyers Blog

Articles Posted in Real Estate

Landlords and tenants may come head-to-head in property disputes when an occupant breaks the rules of an their lease agreement. Knowing how to navigate a potential breach of lease is important for landlords when dealing with tenant issues.

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What is Breach of Lease?

A real estate lease is a contract that outlines the landlord and tenant’s responsibilities regarding the occupancy of the property. Tenants are obligated to follow the rules of a lease agreement or the landlord has just cause to terminate the lease and evict them. A breach of lease is when activities occur that violate the terms of the lease agreement. Here are 3 tips for landlords experiencing issues with tenants. Continue Reading

Commercial real estate transactions can be lucrative investments, but there may also be high risk due to the amount of money at stake. The following are 4 examples of legal issues that sometimes arise during the sale or purchase of commercial property.

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  1. Accurate Property Valuation

When you are shopping for a product, it is often easy to compare the price and quality to a similar product. However, pieces of real estate are often unique with no exact comparison based on size, age, use, and/or state of the building or land, making accurate valuation significantly more challenging. In addition, any current income stream or potential future income associated with commercial property should also be a factor in determining a fair and reasonable price. Utilizing an experienced commercial appraiser can assist both buyers and sellers with determination of value. Continue Reading

An NNN Lease, commonly referred to as Triple Net, is a commonly used commercial lease structure that requires the tenant to pay, in addition to its monthly rent, all costs associated with the operation of the building. Here is an overview of Triple Net, or an NNN Lease, and key concepts to be familiar with.

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What Is Triple Net?

Any number of costs can fall under a net lease, but Triple Net generally refers to the payment of property taxes, maintenance costs and insurance premiums, in addition to the base monthly rent. A Triple Net lease differs from a gross lease in that a gross lease is for a flat monthly amount, inclusive of all operational costs. Continue Reading

Purchasing real estate for investment purposes can be an excellent decision for individuals and businesses alike. Real estate tends to appreciate over the long-term, and both residential and commercial investment properties can generate significant rental income while building equity. Unfortunately in spite of the benefits, investment properties can also expose investors to significant legal liability as well.

Whether your property is an apartment building or a retail lot, issues that commonly arise within a building all have the potential to cause serious injury or financial loss. Fortunately, forming an LLC can help limit real estate investors’ personal liability and protect them from potential financial disaster.

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LLCs Protect Investors from Personal Liability

An LLC, or limited liability company, is a type of business formation that combines the liability protections of a corporation with the flexibility afforded by a partnership. They are particularly attractive to smaller companies and individual investors. LLCs can be owned by individuals or other businesses. Continue Reading

5 Items to Include in a Real Estate Purchase Contract

When you make an offer on real estate you want to buy, there can be a lot of paperwork involved. Many additions to real estate purchase contracts are obvious, such as the address of the property, purchase price and owners. Here is a list of 5 things to consider and include when drafting a real estate purchase agreement.

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1. Legal Description of Property

Be sure to include a legal description of the property, including zoning information. In commercial real estate, this is more than just the mailing address of the property. Legal descriptions must include proper nomenclature used by the U.S. Public Land Survey System, including zoning codes. If the description is not included, the real estate contract may be invalid.

2. Closing Costs

You want to establish who pays closing costs in the real estate purchase contract. The buyer and seller should specify who is responsible for common fees such as escrow fees, title fees, title insurance, transfer tax and notary fees. If you want the seller to pay all or part of the closing costs, make sure to specify this in your offer. In California, the location of the property is used to determine how fees are divided.

3. Inspection Contingency

Make sure to include an inspection contingency in your purchase contract to protect yourself if a serious issue with the property comes to light after an inspection is conducted. This includes the buyer’s right to cancel the sale after conducting due diligence.

4. Closing Date

Common time frames for closing dates are 30 days, 45 days and 60 days. You should allow sufficient time for closing contingencies, including financing the transaction.

5. Right to Modify Purchase Agreement

Allow yourself room to amend or modify the purchase contract after its completion. By adding a clause allowing the right to amend of modify, both parties may amend the purchase contract after it has been completed. Keep in mind that this does not change the original contract and large amendments are usually better done by creating a new contract.

By including these essential items in your real estate purchase contract, both the buyer and the seller are protected and the purchase is transparent for both parties. Be sure to sit with an experienced real estate lawyer before making final decisions.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

lease.jpgWhether you’re starting a business or looking to expand, chances are you’ll encounter some kind of lease. The most common are the gross lease and the net lease. In this blog post we’ll take a look at the differences between the two and the benefits of each.

Gross Lease

In this scenario, the tenant pays a fixed amount each month. The landlord is responsible for the costs associated with property taxes, insurance and maintenance. A gross lease offers some flexibility because these properties are generally deemed as either Class B or Class C. They’re less desirable so the landlord may be willing to negotiate over things like who pays the utility bill.

Net Lease

You’ll likely see a net lease in properties deemed Class A. These are typically high value structures in a popular part of town. As such, tenants can expect to pay a fixed amount along with maintenance charges, insurance and taxes. The benefit to you as a business owner is exposure and the possibility of working in a new, less problem prone building.

Letter of Intent

Before you sign a gross lease or net lease, it’s a good idea to craft a letter of intent. This document typically addresses issues like length of the rental, when the space is available and whether or not expansion is possible. You’ll want to have a lawyer look over any lease documents. The professionals at Structure Law Group can help you craft a suitable letter of intent that protects your interests.

There is plenty more to consider when crafting a lease. At least now you understand the key differences between the two main types of commercial leases. This information will help you when you’re coming up with a budget for your business. Knowing these costs up front eases some stress and makes it easier to get started.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

At a recent conference with San Jose and Silicon Valley real estate owners and lenders, Attorneys Jack Easterbrook and Tamara Pow presented their “Top 10 List” of issues that commonly arise in commercial real estate loan transactions. Having been involved in countless real estate and commercial loan transactions, Tamara and Jack developed the list to share with the participants key points to be attentive to when entering into a real estate transaction. The Top 10 List assumed that the basic business terms of the transaction had been decided, so the focus was on items that can arise in the documentation phase and create issues or obstacles in getting a deal to closing.

A previous blog presented three items from this Top 10 List, including: (1) inconsistency between a borrower’s state of registration and a lender’s requirement; (2) the special purpose entity and the independent direct/manager requirements of the lender; and (3) the personal guaranty. Here are three more items to keep in mind when negotiating a commercial real estate loan:

No. 4: Treatment of Other Creditors, Including Any Mezzanine Lender.

Comment: Are other creditors or lienholders involved, and will intercreditor or subordination agreements be necessary? If the answer is “yes,” these agreements will need careful scrutiny. The recent trend in the case law continues on the path of strictly construing the terms of such agreements. This includes Bank of America v. PSW NYC LLC, in which it was held that an agreement between a senior secured lender and a mezzanine lender prevented a foreclosure by the mezz lender until it cured payment defaults in the senior secured lender’s loan. The bottom line: other creditors of the owner/purchaser, whether new or existing when the deal is done, can significantly affect getting a transaction to closing. It is very worthwhile to have a strategy concerning them worked out early.

No. 5: Prohibition on Transfers, Including Transfers of Fractional Interests in a Borrowing Entity.

Comment: Standard loan documents often contain language that says that the borrower is in default if the property securing the loan, or any interest in the property, is transferred. However, an owner or borrower should not think it is safe from this provision if the title to the property is held in an entity, such as an LLC, just because the title is not changing. Many loan documents also provide that if an interest – perhaps even a small interest – in the ownership entity changes, a default is triggered. An owner or borrower is wise to not ignore these provisions. Borrowers should carefully consider whether they will need to (or want to) transfer partial ownership interests in the future and lenders should consider the magnitude of such changes that may be acceptable. A transfer of an ownership interest could occur as a result of estate planning needs, in connection with a management transfer, or perhaps the unforeseen death of someone in an ownership group, such as an LLC member. If the parties don’t address these provisions before loan documents are finalized, subsequent events may trigger an unexpected and immediate default with unknown future implications.

No. 6: Prohibition on Changes in Management of the Borrower.

Comment: Are the borrower’s short-and medium-term management plans prohibited by the loan agreement? Make sure the loan documents accommodate planned future changes in managers of the owner. For example, a family owned LLC may be intending to pass management to the next generation or a key employee long before the maturity date of the loan. Like prohibited transfers of ownership interests, loan documents may prohibit transfers of management power. Pay attention to these provisions and make sure intended changes are not prohibited by the loan documents. It may also be prudent to have potential future managers pre-approved by the lender.

Watch for our next blog for the remaining items addressed in the presentation.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

 

As a business and real estate attorney in California, I often assist clients in real estate transactions using Internal Revenue Code Section 1031 to defer the tax on the sale of their real estate by transferring the tax attributes of that property into a new, like-kind, property. IRC Section 1031 is a federal statute, but we can also take advantage of the tax deferral on the exchange of like-kind property for California income taxes.

However, historically, when the exchange was made into property in another state, it was difficult for California to track these exchanges and make sure the state eventually got its share of deferred taxes. For example, if a real estate investor were to sell a shopping center in Sunnyvale, California and buy a shopping center in Incline Village, Nevada, and the real estate investor satisfied all of the IRC 1031 requirements, both federal and California taxes could be deferred until the later taxable sale of the Nevada property (or any other property into which it had been exchanged). The problem was that part of those deferred taxes were California income taxes, and California had no system in place to make sure the FTB was aware of the eventual tax recognition event. A new rule now provides the Franchise Tax Board with the information it needs to keep track of these transactions and the deferred taxes so that it can collect them when the time is right.

Starting January 1, 2014, if you exchange California property for out-of-state property you will be required to file an information return with the FTB for the year of the exchange and every subsequent year that the gain is deferred. Regardless of your state of residency at the time of the exchange, if you are a California resident when the out-of-state property is later sold, all of the gain is taxable in California. But don’t think that moving to Nevada can get you out of theses deferred taxes. If you were a California resident at the time of the exchange but you are a nonresident when it is sold, the previously untaxed California gain is still taxable to California. Also, if you exchange out-of-state property for California property you must reduce the California basis on the property by the amount deferred, even if you were a nonresident at the time of the exchange. [Source: Spidell’s California Taxletter, Vol. 35.7, July 1, 2013]. The new filing requirements will help the FTB track these exchanges.

For more information on California Taxation of Nonresidents and Individuals Who Change Residency, see FTB Publication 1100.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

The personal guarantee has long been used to bolster the quality of a commercial loan, real estate loan or business loan. Often the personal guarantee is a full guarantee, extending to all obligations of the borrower and giving a lender potential recourse to all property of the guarantor in an enforcement action. Sometimes, however, the lender and guarantor agree that the guaranty will be more limited. A recent case out of the Bay Area, Series AGI West Linn of Appian Group Investors DE LLC v. Eves, 217 Cal. App.4th 156 (2013), dealt with such a limited guarantee , which carved-out the guarantor’s home and exempted it from the lender’s reach under the guarantee. The personal guarantee was very broad, but for the specific exclusion for the house. After the guarantee was signed, but before the loan soured and the lender demanded payment, the guarantor sold the exempted house for cash and put the proceeds of the sale in segregated accounts. Once defaults occurred under the loan, the question at issue was whether the carve-out under the guarantee exempted only the asset named, a house in Como, Italy (but for our purposes it could have been a home in San Jose or Palo Alto as well!) or extended to the proceeds from the cash sale of the house.

In the AGI West Linn case, the lender sued the guarantor and also asked the court to enter a right to attach order and writ of attachment to lock up the cash from the sale of the house. The guarantor opposed this, arguing that the money was simply proceeds of the excluded residence and, as the house itself was excluded from lender’s recourse, the direct proceeds of the sale of the house should be excluded as well. The lender countered that the guarantee did not say anything about “proceeds” being excluded, only the house.

The court held for the lender, taking a strict reading of the guarantee.

So what is the take-away? Careful drafting is a must if parties wish to exclude certain specific assets from the otherwise broad scope of a personal guarantee. The court here read the plain language of the guarantee and stated that if the guarantor intended to include proceeds of the sale of the asset as part of the exclusion, he should have expressly put this in the guarantee , and it was not the court’s job to save a party from the ugly implications of the plain language of a contract. One gleans from the court opinion that the strategy of strictly construing the guarantee would also likely apply if other limitations, such as a limitation on the scope of the guaranteed obligations, existed and required analysis.

Another point is to be aware that when analyzing the guarantee, this court rejected the approach of applying the UCC formula for treatment of proceeds of collateral, which extends a lien on an asset to a lien on proceeds of the asset if it is liquidated (subject to certain tests). If the UCC’s formula was being followed, segregated proceeds of the sale of the exempted house would have naturally been included with the carve-out of the house. The court in the AGI West Linn case dismissed this avenue of analysis and instead applied principles of strict contract interpretation.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

Last November, I was working closely with one of our clients and their real estate lender to purchase a large property in the San Francisco Bay Area. I formed two California limited liability companies for the transaction. One LLC was the investment entity that was going to own the property, and the other was the management entity that was going to hold the sponsor interests in the deal. Both entities had to be properly and fully formed so that we could obtain good standing certificates from the Secretary of State and be in position to issue legal opinions for the lender. During the due diligence period, our client discovered something about the property that was not what had been represented to them by the seller of the property. As a result of this information, the purchase fell through.

Fortunately, despite all of the other costs expended on pursuing this property, the client had not yet paid the $800 franchise taxes for each of the two LLCs we formed. In California, if an LLC meets certain requirements it may cancel its Articles of Organization within 12 months of the filing by filing a Short Form Certificate of Cancellation with the Secretary of State, and avoid paying the first year’s franchise taxes. These requirements include:

– The California LLC has no debts or other liabilities (other than tax liability);
– The assets, if any, have been distributed to the persons entitled to them;
– The final tax return has been or will be filed with the Franchise Tax Board;
– The California LLC has not conducted any business since filing the Articles of Organization;
– A majority of managers or members, of if there are no managers or members, then the person who signed the Articles of Organization, voted to dissolve the LLC and

– If the LLC has received any payments from investors for LLC interests, those payments have been returned to the investors.

Source: Spidell’s California Taxletter, Vol 34.11, Nov. 1, 2012.

Because our client met all of these requirements, we were able to cancel the LLCs without paying the $1600 ($800 x 2) in California franchise taxes. If, on the other hand, the client had already paid the taxes, we would not have been entitled to a refund. With this in mind, sometimes when forming an LLC it may be better to wait until the last minute before the franchise taxes are due before paying them to make sure the business is going forward, as long as you either pay them before late fees would be imposed, or you are willing to incur late fees in the event your LLC does not qualify for the short form cancellation.

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