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Why would anyone need a real estate attorney to handle the transfer of commercial real estate and business assets? Real estate attorneys are accustomed to coordinating and managing multiple responsibilities to ensure that a transaction closes in a timely fashion and fulfills the objectives of the parties. I was recently engaged to assist a client with a $3,800,000.00 purchase of a well-established operating business in Ocean City, Maryland, Nick’s Original House of Ribs. The stated goals of the parties were to transfer the commercial real estate and business assets from the seller to the buyer seamlessly with a minimum amount of disruption to the business and existing customers.
How is this type of transaction structured? For the initial step I drafted a letter of intent (“LOI”) on behalf of the seller. An LOI is a summary of the key terms of an offer. It is where all the preliminary negotiations occurred as to price, financing terms, inspection, details of the due diligence period, and other main points of the transaction. Once the buyer and seller came to terms on the LOI, these terms were integrated into a detailed and comprehensive Contract of Sale (“Contract”). Contracts can range anywhere from five pages in a simple transaction to hundreds of pages in more complicated transactions. Multiple rounds of negotiation occurred in this matter before the parties agreed to a final Contract. The terms of the Contract were broadened to include provisions concerning the sale of furniture, fixtures and equipment, the transfer of a liquor license and non-compete restrictions.
Once the Contract was fully signed a series of events were put into motion that culminated in a successful settlement. As the real estate attorney I assumed a central role in identifying, engaging and coordinating the activities of the third parties who were to play a role in the transaction. These parties included: institutional and private lenders; insurance agents; title abstractors; settlement companies; IT professionals; attorneys; accountants, and surveyors. The activities of each of these parties required tight coordination and oversight to ensure that their work product was prepared and delivered in a timely fashion so as to meet all deadlines. If any of these parties missed a deadline the buyer and seller would have experienced delays, an interruption in the operation of the existing business and loss of income.
In addition to managing the activities of third parties, a real estate attorney frequently assumes the role of a problem solver. In large transactions such as this one, issues often arise during settlement preparations and the due diligence period that must be identified and remedied. For example, in this transaction the survey that was prepared revealed an unused alley that ran along one side of the property. While no permanent structures were built in the alley, this discovery resulted in the buyer purchasing less property than he had originally intended which led to further Contract negotiations. Additionally, an unreleased deed of trust was discovered in the chain of title and a remedy had to be crafted and negotiated with the institutional lender so that the transfer could occur without delay. These types of issues, while distressing, need not be fatal to a settlement schedule. A diligent real estate attorney can often identify issues early and work with the parties to prepare a solution in order to move the transaction to closure.
A real estate attorney will not only keep all these activities moving forward, but they will also prepare the majority of the documents to memorialize the transaction. Some of the documents such as the Bulk Transfer Sales Tax Return and Bill of Sale serve a dual purpose of documenting the sale and giving notice to the State thereby providing a clean exit from the business for the Seller. Where seller financing is being provided, buyer’s counsel may be tasked with preparing the documents to secure the lender such as a deed of trust, promissory note, assignment of rents and leases and other security instruments. Other documents cover actions and activities that go far beyond settlement. For example, a Non-Compete Agreement is a frequent component of this type of transaction as this document prevents a Seller from immediately opening a competing business. Additionally, in this matter, the liquor board’s calendar of hearings did not allow a liquor license transfer to occur prior to settlement, and so an interim management and escrow agreement was prepared. There are a myriad of other documents that may need to be drafted to cover the distinctive terms of a transfer.
When all of the parts of a transaction are managed properly, the culmination is a real estate settlement and personal property transfer occurring on the exact date anticipated by the parties. Here, all activities were managed so that there were no delays in the target settlement date. The Seller operated her business on a Monday evening, closed the business and conducted inventory on Tuesday, and settled on Wednesday. By Thursday, the restaurant was open and running under the new owner. By Saturday every table in the dining room of the establishment was full. The entire transaction took 90 days, the business continued operating without interruption throughout the entire process, and a seamless transition was made to the new owner. The end result was a very smooth transition and an exceptionally pleased client.
When an election looms, we often hear how much the Federal Government does wrong, but sometimes they get it right, and when they do the benefits can be huge. For example, if you suffer the loss of your spouse, the tax code has certain provisions that provide relief in this difficult time. Some of these benefits are set out below.
- Selling the Family Home. Single homeowners can take $250,000.00 of profit on the sale of a home tax free. For married homeowners $500,000.00 of profit on the sale of a home may be taken tax free. To qualify for this tax break you must live in the home for two of the last five years. So long as you and your spouse meet the ownership and use tests before his or her death, you may use the full $500,000.00 exclusion if you sell within two years of your spouse’s date of death. The stepped-up basis analysis above may be availed of if you do not wish to sell within the two-year period.
- Life Insurance. The proceeds received from a life insurance policy of a deceased spouse are income tax free and should not be reported as taxable income.
- Filing Status. If your spouse died this year you may still file a joint return for the year allowing you to avail yourself of the most favorable tax rates and largest standard deductions (if you don’t itemize).
- Inherited IRA. If you are named as a beneficiary of an IRA, you can claim that IRA as your own. Where it is a traditional IRA you will not be required to take minimum distributions until you reach age 70 ½. If it is a Roth IRA you may never have to take distributions. Where funds are needed you may elect to treat the IRA as an inherited IRA rather than your own and withdraw funds without paying the 10% penalty for early withdrawal.
- Stepped-up Basis. The taxable basis of most assets inherited from your spouse is stepped up to the property’s value on the day he or she died (certain exceptions apply to retirement accounts). The basis is the amount from which gain or loss is calculated when you sell an asset meaning that tax on any appreciation prior to the death is forgiven. For example, if your spouse had stock that he or she originally paid $10,000.00 for but the value increased to $50,000.00 at the date of his or her death, your basis would be $50,000.00 and you could sell at that price without incurring a tax liability.
- Rental Property. Where you inherit rental property from your spouse, the step-up in basis will increase the depreciation deductions you may claim on the property. The stepped-up basis will also serve to reduce capital gains when you sell the rental property.
This is merely a sample of certain tax benefits you may take advantage of in a difficult time and you should consult with an attorney for a more comprehensive analysis of the benefits you may enjoy.
Kiplinger, Tax Breaks Soften the Blow of Losing a Spouse, January, 2016, Kevin McCormally
Just before the holidays the House and Senate passed the Protecting Americans from Tax Hikes Act of 2015 (“Act”). President Obama signed the Act into law on December 18, 2015. The Act renews several important extenders for two years covering tax years 2015 and 2016.
What does this mean for you? It means that if you short sold a principal residence in 2015, or short sell a principal residence in 2016, the cancellation of mortgage debt will not be treated as taxable income and you will likely suffer no tax liabilities. The exclusion applies up to Two Million Dollars of forgiven debt, or One Million Dollars if you are a married taxpayer filing separately, on the sale of a principal residence.
1. Short Sales may take a long time to complete. If you intend to submit an offer on a property being short sold patience is an absolute necessity. If your moving situation requires you to be in a property by a certain date (start of school, job relocation, etc.) this type of transaction may not be right for you.
2. Short Sale Approvals tend not to be short in nature. Even though lenders may take quite some time in issuing approvals, the time allowed for you to close can be very short. It is best to be somewhat prepared by keeping your financials updated with your lender and providing them with progress reports frequently.
3. Pursuing a house subject to a short sale may cause you to miss out on other buying opportunities. Because short sales can potentially take so long other houses in which you may be interested will come on and off the market. It is best to do some your inspections early to avoid losing other purchasing opportunities.
4. You should be getting regular updates. You will want to make sure that your offer is being diligently pursued by whoever has been selected to handle the short sale. Our policy is to work on a file 3-5 times a week and send out updates every 5-7 business days. We have found that these timelines give us the opportunity to make progress on a short sale so each update has actual substance.
5. Short Sale Lenders May Counteroffer Your Offer. Just because your offer has been accepted by the seller does not mean you are home free. Lenders involved in a short sale will secure their own appraisal or broker price opinion, or sometimes, both. Where their value comes in at an amount greater than your offer they will counteroffer. Don’t get angry when this happens, the seller usually has nothing to do with this occurrence and it is something that can be worked through in different ways.