The Series Limited Liability Company

As an entrepreneur, multiple business owner or real estate investor, you probably own several investments, each through a different limited liability company (LLC), in an attempt to limit your liability with respect to each business or property.  For each LLC, you likely file a separate form 1065 with the IRS in April and business tax return with the State of Texas in May, and you have likely spent significant funds toward formation costs for each LLC.  With numerous LLC's, this can be a paperwork nightmare and quite expensive.

A series LLC is a new creation of the Texas legislature (as well as the legislatures of a handful of other states), that is designed to address these issues.  A series LLC is designed as a single umbrella entity, which is organized in units that each are separately accountable, housing their own level of liability protection, financial structure, managers and members.  For example, if you own a shopping center, a storage rental property, a construction company, and a cleaning service company, the series LLC is designed so that you can own all of those businesses through the same LLC, with the shopping center being categorized as Series A, the storage rental property being categorized as Series B, etc.  If someone is injured on the job in connection with your construction company (Series C), in theory, that injured party would not be able to pursue the assets or cash flow of the cleaning service business (Series D), for example.

On the other hand, if you are doing business with a series LLC, it is imperative that you understand that only the specific applicable series (e.g. series B) is on the hook for the obligations under your respective contract.  A potential solution is to require the LLC as a whole (or some other specific series) guaranty those obligations in order to improve your likelihood of having sufficient recourse in the event the business with whom you are under contract defaults.

The series LLC is a new legal creation, and the law surrounding it is somewhat unsettled and fluid, but it may soon become a very popular way of organizing businesses in Texas.  If you wish to form a series LLC or have concerns in doing business with one, please retain competent legal counsel to assist you with your legal concerns.

What Are Rollback Taxes?

Many land owners do not quite understand the nature of rollback taxes.  To understand rollback taxes, it is important to understand certain exemptions offered by local property taxing authorities, for example, the agricultural exemption (often referred to as the "ag" exemption).  Subject to varying qualification requirements (e.g. minimum land size) of different counties in Texas, a land owner who grows timber, raises cattle, grows a crop, etc., on their land for a certain number of years (e.g. the last 3 years) can file an application with the applicable county to be considered an agricultural producer, entitling the land owner to a significant property tax break.  Often, land owners with such a designation pay 1/4 or less of the property taxes applicable to non-exempt property.  It is also important to understand that an applying land owner need not be in engaged in an agrucultural business to be entitled to such an exemption.  For example, they could simply lease their land to a farmer, timber grower or rancher.

Land that is exempt is subject to a special tax, applicable at the time the use of the land changes.  This is a rollback tax.  Essentially, the rollback tax is the difference between the amount the land owner owed in property taxes and the amount the land owner would have owed had there been no exemption, for each of the five tax years preceding the change in use.  As most can imagine, that can be a very large tax.

The issue of rollback taxes often arises in the context of a purchase or sale of real property.  Take, for example, a property owner who leases 20 acres to a cattle rancher, the property is located on the corner of two major roadways in a rapidly developing area, and the landowner is considering selling the property to a major retail developer.  Who pays the rollback taxes?  Unfortunately, there is no clear answer to this question, as it largely depends on who technically changes the use of the property.  In the above example, if the land owner only removes the cattle and takes down his fence to bring water and sewer to the property to better market it for retail development, does this constitute changing the use?  The answer is "maybe", as it largely depends on the entire set of facts surrounding the land sale and subsequent use.  It is very important to retain competent legal counsel to negotiate provisions in your purchase and sell agreement to clearly allocate the burden of rollback taxes.

The Power of the Inspection Period

An "As-Is" transaction is one in which the buyer (whether it be a buyer of real estate, equipment or a complete business) gets no warranties from the seller relating to the property that is being purchased.  Though it would be nice to have those warranties, "as is" purchases are fairly common practice.  The key to protecting yourself as a buyer is to provide yourself with an ample "inspection period" (also called a "study period"), during which you will be allowed to perform inspections of the property, which might include the following:

1.  review financial statements of the seller relating to the property to verify that the income potential is as stated by the seller;

2.  hire a technical person to perform a physical inspection of the property;

3.  appraise the property, so that you will know its likely resell value;

4.  hire a third party to perform an environmental assessment of the property;

5.  review historical property tax records for the property; and

6.  if the property is real estate occupied by third parties, obtain copies of leases and estoppel certificates (ie. statements by the tenants that the landlord is not in default).

The list goes on and largely depends on the nature of the property you are purchasing, but remember that all of your inspections should be completed during the inspection period, as most inspection period provisions give you the right to terminate the contract for any reason during the inspection period (but not afterwards).

If possible, try to negotiate warranties from the seller, instead of having to take the property "as is".  Even if you get those warranties, however, they are only as good as the seller's bank account.  So, you still need to conduct your inspections.

The power of the inspection period lies is your willingness to walk away from the deal (or renegotiate price) when your inspections reveal negative information.  Always, retain competent legal counsel to negotiate your inspection period provisions.

Anatomy of Dispute Resolution

Four common methods of dispute resolution are mediation, arbitration, trial by judge, and trial by jury, and each can be assessed on the following criteria - relative speed of resolution, relative cost, possible variation of outcome, and whether the method is binding on the parties.  Below is my very short assessment of each dispute resolution method using those four criteria (based on experience only and certainly not legal dogma).

Mediation - quick/ low cost/ controlled outcome/ non-binding

Trial by Judge - lengthy/ medium to high cost/ undefined outcome, but probably less variable than jury trial/ binding

Arbitration - medium time frame/ medium to high cost/ probably less variable than trial by judge/ binding

Trial by Jury - lengthy/ high cost/ potentially highly variable outcome/ binding

Virtually every contract to which your company is or will become a party will contain one or more provisions that govern a dispute relating to your contract.  Defining the scope of dispute resolution can take on numerous forms.  For example, if you only desire to eliminate the potentially lengthy, costly and variable trial by jury, you would include a simple "Waiver of Jury Trial" in your agreement.  By contrast, your contract could contain a very lengthy arbitration provision that specifies virtually every detail of the dispute process, including the times and locations and names of possible arbitrators.  The degree to which your company desires to control the dispute process is largely determined by the resources that your company has available to devote toward dispute resolution, together with the degree of risk your company is willing to accept in terms of outcome.  Ultimately, that choice is a business decision, but once that decision is made, it is important to retain competent legal counsel to draft the appropriate provisions in your contract.

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.