Who Treats A Non-Recourse Loan As A Full Recourse Loan? Your Uncle Might.

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We very much doubt that the Internal Revenue Service took note of our the blog posting that follows, but on April 15, 2016, two weeks after we wrote about the significant change to the tax treatment of non-recourse carve-outs, it published a “backtracking,” some might call it a reversal, of its earlier position. You can see how it essentially reversed its earlier position by clicking: HERE.

So, the text that begins in the paragraph below the shaded one is mostly of historical significance, hopefully only an aberration. Nonetheless, we leave it posted not only to preserve history, but also for how it explains the effect of “recourse debt,” an arcane topic.

Here is the latest position of the Internal Revenue Service, as of March 31, 2016:

If a partner’s guarantee of a partnership’s nonrecourse obligation is conditioned on the occurrence of certain “nonrecourse carve-out” events described below, the guarantee will not cause the obligation to fail to qualify as a nonrecourse liability of the partnership … until such time as one of those events actually occurs and causes the guarantor to become personally liable for the partnership debt under local law.

If a partner’s guarantee of a partnership’s nonrecourse obligation is conditioned on the occurrence of certain “nonrecourse carve-out” events described below, the guarantee will not cause the obligation to fail to qualify as qualified nonrecourse financing … until such time as one of those events actually occurs and causes the guarantor to become personally liable for the partnership debt under local law.

Today’s blog posting was written with more than a little trepidation. Before we reveal its topic, Ruminations needs to emphasize two of our recurrent themes. The first is that the prime skill in counseling clients or bosses is not to know the answer, but to figure out the question – to identify possible issues, problems or opportunities. With the question in hand, most answers are easily found. Without knowing the question, the answer is useless even if in your own head.

The second highlighted theme is that you don’t need to know all of the answers or even all of the questions if you have an expert source available to you. We’ve touted the need to have a “Rolodex” (for those more recently arrived on Earth, that’s a trademark for a conveniently arranged set of cards holding names and contact information for easy retrieval). Your Rolodex should have contacts for construction issues, utility issues, insurance issues, and whatever other experts you can gather in your data base. After wading through the labyrinth of today’s technical and boring posting, you’ll want to find one or more tax experts to add to your Rolodex, probably a tax-focused accountant and even a (business) tax attorney. Today, our sole mission is to sensitize readers to a narrow tax issue brought to mind by an October 15, 2015 Tax Memorandum from your friend and ours, the Internal Revenue Service. Yes, there will be a useful, but (probably) esoteric, “fact” revealed someplace near the end of today’s posting. But, that is only to scare readers into yielding up their egos and get better connected with experts. [Read more…]

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Bargaining Power: If You Don’t Ask, You’ve Already Got Your Answer. It Is: “No.”

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In the course of preparing last week’s blog posting about small (bargaining power) tenants being entitled to assurance that their leased spaces are as physically accessible and visible as when the lease was signed, we got to thinking about “why this comes up in the first place.” No, we weren’t thinking as a philosopher might think; we were much more at the nuts and bolts level. Basically, we framed the question thusly: “What do tenants look for in landlord-form leases that just don’t seem to be there?” Today, we aren’t listing things that are commonly in such lease forms, but written in a way that should make a tenant unhappy. We’re talking about items tenants need to ask for. [This isn’t bait and switch our part.. We’ll tie this in with today’s blog posting’s title later.] [Read more…]

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Hippopotamuses And Site Plan Control In Your Lease

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Hippos are very territorial; ants, not so much. Large tenants are very territorial; small tenants, not so much. Protecting some sense of dignity, we’re not going to tell readers how hippos protect their chosen turf. Find out on your own. In the retail leasing context, we equate “territorial” with “site plan control.”

Though it hardly needs to be said, we’ll do so anyway. Landlords reluctantly allow tenants any right other than the right to pay rent. We don’t really mean that, and it isn’t actually true, but it gets an idea across. More fairly stated, landlords prefer maximum flexibility in the use of their property. Of course, that flexibility can be substantially achieved  by keeping the property vacant. That, of course, defeats the reason for owning rental property and, thus, landlords will compromise flexibility for money. [Read more…]

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All Damages Are The Consequence Of Something. So, What’s This Subset Called “Consequential Damages”?

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What is the effect of a provision, whether in a lease, purchase agreement or any other kind of agreement, when it says something like this:

Neither party will be liable to the other for any indirect, special, consequential, incidental or punitive damage with respect to any claim arising out of this agreement (including without limitation its own performance or own breach of this agreement) for any reason.

Yes, today’s blog posting will be about “law.” After all, Ruminations does its blog posting at “retailrealestateLAW.com.” We’re not going to dissect every aspect of that sample provision or ones like it. We’re not going to endorse it as one to use. We’re only going to Ruminate about two kinds of damages – “consequential damages” and “direct damages.” [Read more…]

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Is Adequate Parking An Unwritten Right?

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It’s easier to “say so” in a lease than to have a court tell you what you meant or wanted  to say. And, that’s true whether the court has ruled in your favor or against you. For one, rulings are usually not entirely favorable. Another is that uncertainty is an enemy. A third is that money is better spent at the outset, as painful as that may be to some. As is often said, “Pay me a little now or a lot more later.”

Today, we’ll introduce a simple California Court of Appeal ruling about the sufficiency of parking at a shopping center. We’re talking about the December 7, 2015 unpublished decision in a case titled: Gietzen v. Goveia. For those interested in seeing the written opinion, click: HERE.

Let’s get the lease’s relevant provisions out of the way. There wasn’t a lot, and here is what we’ve selected: [Read more…]

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How Do You Respond To An Initial Draft Of A Document?

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Today, we’ll put the conclusion right up front – there isn’t any one way to do it. Now, you’ll have to read on to learn what “it” might be. And, if you want to skip all of that, take a quick look at the end of today’s blog posting to get an update on something we wrote about a few weeks ago.

We’ve been thinking about the best way to respond to someone’s initial draft of an agreement. It could be a lease or a loan agreement or a settlement agreement or any other kind of “involved” document. How does one decide whether to do a comprehensive redraft and send it back before even making contact with the preparer? What about interlineating short narrative comments and questions inside that initial draft and flinging it back over the transom? Or, how about the phone call to point out significant points of disagreement? What about preparing a narrative, written response? How do you like the idea of preparing an elaborate matrix with a column showing the challenged provision alongside columns showing each side’s position? Then, there is always the drip, drip, drip approach of cryptic email messages objecting to one point after another without asking for anything specific in their places? [Read more…]

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Option Rights, Reasonable Expectations, And Traps For The Unwary

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A few weeks ago, we included the text of a common lease extension option clause in our blog posting. We didn’t endorse it; we only used it as an illustration. An astute reader pointed out a weakness (from the landlord’s perspective) of what, at first blush, looks like a landlord-friendly aspect of the cited provision. Today, Ruminations is going to disseminate that thought and explore some other related aspects. The general theme will be what happens when it is a condition of the tenant’s lease extension option that it not be in default. So, we’ll start by republishing the lease provision that triggered today’s thoughts: [Read more…]

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Does Experience Get In The Way Of Doing Deals?

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Today, we intend to serve up some food for thought. After re-reading it ourselves, we fear the offerings are probably for those who already have gotten the message. If, however, Ruminations recruits one more such person to the cause, we’ll be happy.

Experience is a valued trait for those who negotiate leases and other agreements – the more the better. Does anyone disagree? But, experience can serve as a straight jacket, limiting movement, making the “deal” fit the form, not the other way around. Creativity can solve problems and overcome negotiating bottlenecks, but the “untested” can be an invitation to later problems. Can a balance be struck?

We think that most leases and other agreements are handled by people who live in a box, the walls of which stopped moving a long time ago. They have a toolbox full of tools accumulated over the years, but stopped buying new tools a long time ago. So, they are only willing (and able) to work out problems if they have a tried and true “clause” or solution in their arsenal. What is more is that they don’t even understand the issues because they stopped buying new tools in 1995 (or whenever). [Read more…]

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