Tuesday, October 7, 2014

No more "privacy" when it comes to transfer tax in CA

The custom and standard in commercial real estate in California is to have the deed state something like: "In accordance with Section 111932 of the California Revenue and Taxation Code, Grantor has declared the amount of the transfer tax which is due, DTT not of public record."  This makes it so that the purchase price cannot be computed from the amount of the transfer tax paid.  The formula for transfer tax in California is: $.55 per $500 of purchase price.  The purchase price is rounded to the nearest $500, then divided by $500, then multiplied by $.55 to compute the tax amount.  When the parties desire NOT to have this purchase price made public, they include the "non-public" election mentioned above.  Starting January 1, 2015, this option is no longer available meaning that all deeds will show the transfer tax and the public will be able to compute the purchase price based upon the above formula.  This is still not a "mindless" computation, however, in that the tax is on the "new value".  If the "purchase price" is $1,000,000 but is taken subject to a $1,000,000 existing first loan, then the "value" of that property would be $2,000,000 even though the tax would be computed on $1,000,000.  See: 

Some counties and cities impose additional transfer taxes, not all of which provide a reduction for the “continuing liens,” so further care is warranted.  See also California Real Property journal, Vol. 23, No. 2, A Practical Guide to Transfer Taxes in California by Dena Cruz and Scott Rogers which is a detailed analysis of the transfer tax issue.  It was published in 2005, so check the current statutes before relying on it.
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Saturday, April 26, 2014

Be careful in hiring.

"Like an archer who wounds everyone is one who hires a passing fool or drunkard." (Proverbs 26:10 ESV).

Someone once said, "Marry in haste, repent at leisure."  This could easily be adapted to hiring employees: "Hire in haste, repent at leisure."

If you make someone an archer who doesn't care about who he wounds, he might kill your own people or innocents as well as the enemy. Skill in shooting is not enough. The competence in shooting must be matched with the character and judgment to do what is right. PASSING implies that the hirer did not take the time to learn the character of the one he hired. He just hopes he isn't hiring a fool or a drunkard. An employer must be careful in hiring. The customer typically equates the character of the employer with that of the employee. If the customer trusts the employer, they may also trust the employee. If that trust is broken, whether by a breakdown of competence or character, then the customer will ascribe that defect/offense to the employer who did the hiring. Take time to examine competence and character before hiring and monitor them as time goes on to make sure problems don't arise. If you realize that you have hired "an archer who wounds everyone," act quickly and decisively.
Required Disclaimer: This is Attorney Advertising. This web site is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.  An attorney licensed to practice in the jurisdiction where the matter occurs must interpret the facts of any specific case and advise as to whether and how any of these concepts may apply to a particular case.

Tuesday, March 11, 2014

Game Theory in Contract Drafting

I participate in a Mac user group for attorneys.  One of the participants asked about the use of game theory in the practice of law.  Here are my posts and follow up answers:

I use game theory, of sorts, by using "baseball arbitration" when I use an arbitration clauses.  With baseball arbitration, each party (lets call them "Buyer" and "Seller") appoints an appraiser to come up with a value, and a third "independent" appraiser is also retained.  The "final" price for the property is either the Buyer's appraised value or the Seller's appraised value depending upon which one is closer to the third party appraiser's value.  In this way, each party have an incentive to be realistic if not conservative in its valuation (a Buyer won't go too low and a Seller won't go too high).  If they do, the other party's value will be chosen as the final price.  For instance, let's say the Buyer's appraised value is $1 mil. and the Seller's appraised value is $2 mil.  If the appraiser comes in at $1.7 mil, the Seller's $2 mil. becomes the price.  In the face of this, the Buyer has an incentive to come up with a higher value, and the Seller has an incentive to come up with a lower value since they don't know what the third party appraiser will do.  I find this beneficial because if the parties are close enough after their first two appraisals come in, they might just elect to forego the third appraiser and agree on a value.  In any event, it tends to reduce the chances of wild discrepancies.  I also try to correctly analyze incentives in creating contracts and attempt to incentivize the desired outcomes.  As for a particular book that influenced me, depending upon how you look at it, it is the entire field of economics, or law and economics, but the concepts are well written in many books on negotiation, business and other disciplines.  Posner is a good one to read if you can wade through it:
  
or 

Someone from the group emailed me and asked for some sample language of the baseball arbitration, and I posted:

"If the BUYER has elected to have the then-current fair market value of the SELLER Parcel determined by appraisal, the value will be determined by three appraisers, one appointed by SELLER, one appointed by BUYER, and the third selected by the other two appraisers (hereinafter respectively “SELLER Appraiser,” “BUYER Appraiser,” “Third Appraiser,” and collectively the “Appraisers”).  Each of the Appraisers must be an MAI appraiser who is certified by the State of California, with at least 10 year’s experience in appraising businesses.  Within five (5) days of BUYER’s notice of its election to have the then-current fair market value of the SELLER Parcel determined by appraisal, BUYER and SELLER shall exchange the names of its respective appraiser, and those two appraisers shall select the Third Appraiser within ten (10) days thereafter.  If the SELLER Appraiser and the BUYER Appraiser cannot agree upon the Third Appraiser, then either party may apply to the Southern California Chapter of the Appraisal Institute for appointment of the Third Appraiser (or if no procedure then exists for such application, to the then-presiding Judge of the Superior Court of the State of California, in and for the County of San Bernardino, Central Branch).  Within thirty (30) days of the appointment of the Third Appraiser, each of the Appraisers shall complete an appraisal of SELLER’s Parcel to designate each of the Appraisers’ opinion of the fair market value, as of the date of the Exercise Notice, of the SELLER Parcel, as fully improved, using the Uniform Standards of Professional Appraisal Practice of the Appraisal Institute.  None of the three Appraisers shall share their opinion of value with any of the others, and the Appraisers shall confirm by telephone that they will deliver (by overnight delivery with proof of receipt) their respective appraisal on each other, SELLER and BUYER on a particular day not later than thirty-five (35) days after the appointment of the Third Appraiser.  The final price of the SELLER Parcel shall be either the appraised value of the SELLER Appraiser or the BUYER Appraiser, depending upon which of those appraisals is closest in value to that of the Third Appraiser.  In the event that the Third Appraiser’s opinion of value is: a) exactly between the other two; or b) greater than that of the SELLER Appraiser; or c) less than that of the BUYER Appraiser, then the Third Appraiser’s valuation shall be the final price of the SELLER Parcel, subject to the following minimum valuation.  In no event shall the fair market value of the SELLER Parcel be less than SELLER’s undepreciated cost basis in that property, including all acquisition, construction, development, permit, professional, costs, fees and expenses."

This is a bit different from the clause I described above and would need to be modified to allow for the possibility for the parties to come to agreement before the third party appraiser is chosen.  Also, this version increases  risk from being the odd appraiser out in that the floor and the caps are removed.  For example, with this clause, if the third party appraiser is higher than the Seller's price, the third party appraiser's value becomes the price.  Anything that increases the risk of having your appraisal NOT chosen creates an incentive to be very conservative in your valuation.  Another difference is that this provides for a floor price which the Seller cannot be required to sell below.  If I were drafting this today, I think that I would make the changes to make the clause look more like what I described yesterday, but each case is different.  You have to look at the transaction, the desired results, undesirable results and the incentives created by the agreements and the circumstances.  It is also good to draft it, walk away, look at it again, and look at it with the different markets you might face when the clause is exercised.  For example, does the clause work in an increasing market, a decreasing market, when the capital markets are flowing and loans are available, when not, etc.?  You can also consider particular clients.  For example, if you have a client that is so well financed that they could always cash out an obligation, that is treated differently than a client that finds it hard to pay their line of credit down to zero every year to meet the financial covenants of that loan.


Disclaimer: This web site is specifically for attorneys and is designed for general information only. The information presented above should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.  The above must be interpreted by a an attorney licensed in the jurisdiction it is to be used in.    

Tuesday, September 17, 2013

Ambiguous Letters of Intent


I have received questions over the years from clients relating to the status of their relationship with a potential buyer or seller of property where there was a signed “letter of intent” followed by some “due diligence” investigation, etc.  With real property, the contract must be in writing in order to be enforceable under California law, however, there are exceptions to this where there has been substantial part performance by one party or where there was substantial money spent on due diligence or other items in reliance on a verbal agreement.  Also, one party might claim that the other party cannot break off negotiations because of the “covenant of good faith and fair dealing” which might require a party to continue negotiating in good faith.  All of these theories, while they might be very difficult for a disgruntled party to actually prevail on, could lead to lawsuits, attorneys, delays, and in the case of a claim against a seller of real property, a lis pendens recorded against the property which could prevent it from being sold to a third party.

I believe that it is a good idea to have the general terms agreed to by the parties before money and time is spent on drafting contracts since you will sometimes learn of fundamental flaws in the deal early enough to save these costs, and it is easier to negotiate on 5-7 conceptual bullet points than it is to draft a lengthy contract.  One of the most common problems with letters of intent, however, is ambiguity.  Is it an offer or is it a non-binding letter of intent?  Many letters will contain elements of both which create the ambiguity.  For instance, a letter could state: “this letter is subject to additional terms to be contained in a final contract,” indicating that it is a non-binding letter of intent.  The same letter could conclude with the phrase, “this letter will be deemed rejected if not accepted by 5:00 p.m. on September ___, 2013.”  This is language of offer and acceptance, i.e. contract, not non-binding letter of intent.  Where a letter containing this type of ambiguity is signed, followed by substantial reliance or due diligence by a party, it could lead to litigation or other unpleasantness.

Where a deal is small and it is not anticipated that there will be much, if any, money or effort spent on due diligence before a contract is executed, a clause something like the following may be used to clarify the non-binding nature of the letter agreement: “This letter may form the basis of further purchase discussions, but it is not an offer capable of being accepted.  If you believe the terms outlined in this letter are acceptable, please let me know so the final terms can be included in a written agreement which will be effective only when executed by the parties.”  Of course, you have to make sure that the rest of the letter doesn’t conflict with this statement as mentioned above.  Where a deal is larger, or it is anticipated that the parties could spend a lot on due diligence before entering into a final contract, a more formal letter of intent is prudent.  For instance, some non-binding letters of intent will have “binding” portions, like confidentiality and insurance and indemnity for pre-contract “due diligence.”  This type of partially binding/partially non-binding letter of intent is usually best drafted, or at least reviewed, by an attorney, especially where the dollar values are high.  Although this focuses on real property transactions, similar principals apply to transactions involving asset purchases, stock sale or other transactions.

Here are other samples of non-binding letter of intent provisions, again, subject to the warnings above re: using ambiguous terms:

Option 1

This letter may form the basis of further settlement discussions, but it is not an offer capable of being accepted.  If you believe the terms outlined herein are acceptable, please let me know so I may reduce them to a ***contract or  settlement and release agreement***.  Nothing in this letter will be admissible in litigation pursuant to California Evidence Code §§ 1152 and 1154 and Rule 408 of the Federal Rules of Evidence.

Option 2

            This letter may form the basis of further settlement discussions, but it is not an offer capable of being accepted.  If you believe the terms outlined herein are acceptable, please let me know so our attorneys can write them into a ***contract or  settlement and release agreement*** which will only be effective when executed by all parties.  Nothing in this letter will be admissible in litigation pursuant to California Evidence Code §§ 1152 and 1154 and Rule 408 of the Federal Rules of Evidence.

Option 3

This letter may form the basis of further purchase discussions, but it is not an offer capable of being accepted.  If you believe the terms outlined in this letter are acceptable, please let me know so the final terms can be included in a written agreement which will be effective only when executed by the parties and approved by ______________, as necessary. [when third party approval is also necessary]

For the mutual protection of both of our clients, neither party will be bound until final written agreement is prepared and executed by the parties.  This letter may form the basis of further purchase discussions, but it is not an offer capable of being accepted.  If you believe the terms outlined in this letter are acceptable, please let me know so that we may prepare a formal ***contract or  settlement and release agreement***.  My client is interested in arriving at a mutually acceptable understanding as quickly as possible.  I look forward to your response.

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Sunday, August 4, 2013

Lunch Presentation to Christian Club at Loyola Law School (Part 3)


Practical 2:
Please God not man
"I tell you, my friends, do not fear those who kill the body, and after that have nothing more that they can do. But I will warn you whom to fear: fear him who, after he has killed, has authority to cast into hell. Yes, I tell you, fear him! Are not five sparrows sold for two pennies? And not one of them is forgotten before God. Why, even the hairs of your head are all numbered. Fear not; you are of more value than many sparrows." (Luke 12:4-9 ESV). 
In business I have found that putting too much stock, one way or another, in the affirmation or condemnation of another person is a snare. Praise of people can be addicting. If you don't keep it in perspective, then you do things that are not appropriate to continue receiving praise. In some cases that can be really bad like violating ethics or the law. It would never start out like that. It would usually start out with much smaller issues, like preferring a client's project goals above those of other clients, your own family and/or your own health when the objectively situation does not require or warrant it. Putting too much stock in the criticism of another person, will equally be a snare.
Objectively listen to and consider the criticism of other people.  Any messenger, even one who is very unpleasant, may have something that I need to hear. That unpleasant, angering, even exasperating person can be more loving to/positive for me than those who manipulatively flatter or who genuinely like me but don't care/risk enough to point out my flaws.
"Better is open rebuke than hidden love. Faithful are the wounds of a friend; profuse are the kisses of an enemy." (Proverbs 27:5, 6 ESV).
Only the fool rejects correction which is needed, whether that correction manifests itself in through the conviction of a Bible passage, the Spirit of God through prayer, circumstances or people. The one who persists in that rejection does so at his peril. "A man who remains stiff-necked after many rebukes will suddenly be destroyed—without remedy." (Proverbs 29:1 NIV84). 
            Rather than focusing on the roller coaster of the opinions of others, I have found it more healthy to focus on pleasing God, from whom we can receive genuine, untainted approval that matters:
"His master said to him, 'Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.'" (Matthew 25:21 ESV).
Required Disclaimer: This is Attorney Advertising. This web site is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.  An attorney licensed to practice in the jurisdiction where the matter occurs must interpret the facts of any specific case and advise as to whether and how any of these concepts may apply to a particular case.