Wednesday, December 16, 2009

Let a Small Town Subsidize Your Relocation and Development Costs

With our increasing reliance on email, the internet, overnight couriers, and improved highway systems, many service and manufacturing companies are able to establish their base of business outside of the expensive “big city” and still serve the “big city” market. Oftentimes, an important incentive for such a move is the Chapter 380 Economic Development Agreement (Chapter 380 Agreement). A Chapter 380 Agreement is an agreement pursuant to which a small to medium size municipality (and sometimes even large cities) offers incentives to businesses to locate locally (often with the cooperation of counties and utility providers). The town benefits from the future jobs for its residents, the increased sales tax revenue on purchases made within the town by the business’s employees, and the increased future real and personal property tax revenue on what would otherwise be an undeveloped parcel of land.

The types of incentives typically offered vary widely, but some examples are:

· Abatements of real and/or personal property taxes.

· Highway infrastructure improvements.

· Utility infrastructure improvements.

The incentives offered are often contingent, to a varying degree, on certain actions by or achievements of the business. Some examples of contingencies are:

· The business must spend a minimum amount on the development.

· The business must maintain a certain minimum number of employees.

· The business must agree to purchase a percentage of its building supplies from local businesses.

Obviously, the incentives offered and the contingencies required are highly negotiated terms. If your company anticipates relocating, consider the Chapter 380 Agreement, and retain competent legal counsel early in the negotiation process.

Financial Belts and Suspenders

It is often easy to so focus on the technical provisions of a particular contract (e.g. a lease, a service contract, a purchase agreement, or a partnership agreement) that we lose sight of the importance of the credit-worthiness of the party with whom we are contracting. Too many times a company spends thousands of dollars in legal fees in drafting the perfect contract, only to find out the hard way that the contract is not worth the paper on which it is written.

A contract is meaningless when the party on the other side of the contract is judgment proof (ie. has no resources). However, this does not necessarily limit the landlord, seller, service provider or other company to doing business with only the wealthy. The following are methods to hedge against the financial instability of the party with whom you are contracting:

· Require the other party to a contract to obtain a written guaranty of its obligations under the contract from a third party that has a proven credit record.

· Require the other party to deliver a letter of credit from a financial institution.

· Obtain a security interest in, lien against or pledge of the assets or real estate of the other party to secure its payment obligations under the contract.

· Require a money deposit or an advance payment of the obligations under the contract.

Obviously, before determining whether any of the above are necessary, perform a legal credit check on another party to a contract before entering into any agreement pursuant to which your company is entitled to any material monetary payment. If the other party’s financial wherewithal is not commensurate with its obligations under the agreement, have competent legal counsel incorporate one or more of the above (or other) financial protections.

The SNDA

A Subordination, Non-Disturbance and Attornment Agreement (commonly referred to as an SNDA) is a somewhat infrequently used, but highly recommended, arrangement among a tenant, a landlord and a lender. It is intended to provide some protection to both the tenant and the landlord’s lender. The provisions of an SNDA usually take effect upon a default by the landlord under its loan and mortgage and generally provides that (i) the tenant will subordinate its lease to the mortgage, (ii) the lender will not disturb the tenant if it does foreclose on the landlord’s property, and (iii) the tenant will attorn to the lender (ie. acknowledge its relationship with the lender as its new landlord).

As a tenant, whether you lease commercial, industrial or retail space, an SNDA could be a great way for you to hedge any risk relating to your landlord’s financial failure. Without the protection of an SNDA, after any foreclosure by your landlord’s mortgage holder, you may find yourself looking for new space, as the landlord’s mortgage holder is probably not obligated to uphold your lease. A properly drafted SNDA will require the landlord’s mortgage holder to become the landlord under your lease.

As a landlord, a properly drafted SNDA will have little or no consequence to you. The concern for the landlord with respect to an SNDA is over-estimating its ability to have its lender actually agree to give an SNDA to any given tenant. It is likely that your loan documents do not require your lender to provide an SNDA, so a landlord should be careful in making a promise to provide an SNDA to its tenant – perhaps better options are obtaining the SNDA prior to lease execution or promising only to make an attempt to obtain an SNDA from the lender.

As a lender, agreeing to an SNDA necessitates an understanding and degree of comfort with the lease itself (as the lender may inherit the obligations of the landlord upon a foreclosure).

With the recent increase in foreclosures, the SNDA could be an important document for your business, whether you are a tenant, a landlord or a lender. We strongly suggest that you engage competent legal counsel to negotiate and/or prepare that document.