wind farm m.jpgA few months ago I wrote about how wind turbines could constitute a nuisance to adjoining landowners.  While that may be the case for residential neighbors, recent studies have shown that wind turbines might actually provide unexpected benefits to farmers.  The Denver Business Journal recently reported that wind turbines help plants grow by cooling them by day and warming them by night.  Organic farmers in particular stand to benefit from adjacent wind turbines because the wind from the turbines helps dry the plants thereby preventing the growth of harmful fungi and mold without the need for spraying. 

Teams of researchers in Iowa and Colorado are working to corroborate these initial findings.  If they do, there could be a rush by farmers to lease their land to energy companies to set up wind farms.

Photo by contemplative imaging (Flickr)

Anton Troianovski had an interesting article in the Wall Street Journal on how downtown office markets are currently improving faster than suburban office markets.  In part, Troianovski observes, this may be based on the types of businesses that tend to be in the two markets (mortgage companies and home builders in suburban markets, while downtowns tend to be home to government offices and big banks).  

City Photo.jpgBut he also notes that a possible “secular shift is under way in the American workplace” because younger people want to work in downtown markets.  Downtown Denver is specifically mentioned in this article as a beneficiary of this trend.  Whether this trend continues as the job market solidifies over the coming months and years will be worth watching.

Photo by paul (dex) (flickr)

A client recently raised concerns regarding a potential change in property tax assessment methodology that may be upcoming in the next Colorado state legislative session.  With revenues continuing to decline, local governments are seeking opportunities to capture property taxes from new sources.  The issue concerns residential property owners claiming an agricultural tax classification without having a bona fide agricultural operation on their land.

Colorado assessors classify real estate for property tax assessment purposes based on use, regardless of the underlying zoning designation.  Often, an agricultural classification results in a lower tax bill, because the actual value of agricultural land is based on its agricultural productive capacity.  A low productive capacity results in a low tax bill.    

HB10-1293, which became law last year, established the Land Assessment and Classification Task Force (the “Task Force”).  The Task Force’s nine members were charged with studying and evaluating assessment methodology for agricultural and residential properties and proposing statutory amendments to ensure that property is taxed in accordance with its actual use.  Under existing law, a residence on agricultural land is classified as residential, but the land is classified as agricultural.  

In October of this year, the Task Force released its Final Report.  In the Final Report, the Task Force agreed to focus its attention on a mixed residential/agricultural classification that would more accurately reflect the land’s use.  The Task Force proposed four recommendations as follows:

1. For any parcel that is more than 2 acres in size, assess a maximum of 2 acres as residential, when the residence is not an integral part of the agricultural operation.

2. For any parcel that is less than 2 acres in size, assess that portion of the land not used for agricultural operations as residential.

3. Require the division of taxation to establish guidance on the definition of “integral to agricultural operations” with certain guiding principles.

4. Require members of the Task Force to include recommendations 1 through 3 on any legislation carried
forward by Task Force Members. 

Because any changes to the historical tax classification methodology could have significant long–range consequences, it will be important to monitor the legislature’s interest and activity in this area.  I understand legislation on this matter supported by a number of Colorado counties has already been drafted.  Newspapers in Denver and Vail are already weighing in. 

Many lenders are taking back half-built projects that are subject to the Colorado Common Interest Ownership Act (“CCIOA”).  CCIOA governs planned communities, condominiums and cooperatives in Colorado and contains many detailed provisions regarding the ongoing right of a developer (or a “Declarant”) to develop the community and control the board of directors.  These rights are referred to as “Special Declarant Rights” under CCIOA. 

When entertaining a possible deed in lieu transaction or a foreclosure, lenders need to be aware of any Special Declarant Rights that exist under the project documents and should evaluate whether those Special Declarant Rights might be valuable to a future purchaser of the property.  In doing so, a lender also needs to be aware of its possible successor liability if it takes over these Special Declarant Rights and how the lender might avoid such successor liability.

Generally, Special Declarant Rights may be transferred only in a signed and recorded document.  However, CCIOA recognizes that in a foreclosure, it may not be possible to get the borrower/original Declarant to execute an assignment of Special Declarant Rights.  As such, CCIOA allows a foreclosing lender to unilaterally record an assignment of Special Declarant Rights.  This unilateral right to record an assignment of Special Declarant Rights does not apply in a deed in lieu situation. 

If a lender takes an assignment of Special Declarant Rights from a borrower, it remains liable for the liabilities and obligations imposed on the borrower/old Declarant under CCIOA or the project declaration, except:

  • misrepresentations;
  • warranty obligations;
  • breach of fiduciary duties; or
  • any obligation that is imposed on the borrower/old Declarant after the date of the assignment.

In a foreclosure situation, a lender can avoid this successor liability if the unilaterally recorded document states that the lender is only taking these Special Declarant Rights for the purpose of transferring them to a third party (such as some future buyer of the property).  If that limitation is included, the lender can still exercise the rights to appoint board members, but cannot exercise any other Special Declarant Right.  While the lender’s liability will be limited under that approach, any future buyer who takes an assignment of the Special Declarant Rights will have the successor liability described above.  Because the unilateral right to record an assignment of Special Declarant Rights does not apply in a deed in lieu situation, lenders who take a deed in lieu do not have the ability to limit the effect of the assignment and thus limit their successor liability.

Because lenders are not in the development business, utilization of this procedure makes sense.  It allows a foreclosing lender to preserve the Special Declarant Rights for a future buyer of the remainder of the project, and doesn’t force a lender to take on liability.  It is important to remember that the right to unilaterally record an assignment document and limit liability does not apply in a deed in lieu transaction.  When a lender is deciding whether or not to foreclose or take a deed in lieu, this fact should be considered.

The two most common types of lease expansion options are rights of first refusal and rights of first offer.  When negotiating these expansion rights, landlords and tenants should understand the factors involved.

What’s the Difference?  A right of first refusal provides that when the landlord receives an acceptable offer from a third party for certain space, then the landlord must offer such space to the tenant on the same business terms.  A right of first of offer requires the landlord to offer any “available” space covered by the right to the tenant before the landlord offers the space to the market generally.

Some of the factors that are common to both types of rights are as follows: 

  • Both rights should cover a finite area, although it is possible to have these rights apply to an entire building or project.  The lease should specify what space is covered by the right. Use a diagram or other clear method of defining the space.  Beware that the configurations of a suite can change over time, so suite numbers can be problematic. 
  • Both types of rights are encumbrances on the landlord’s ability to lease the space.  Landlords need to track and monitor these rights carefully to avoid violations.  The landlord’s failure to honor a tenant’s right can result in the landlord incurring liability.
  • Landlords should try to protect the right to negotiate extensions of existing leases with other tenants of the encumbered space without triggering the right, even if those other tenants do not have a renewal right.
  • Once the landlord makes the offer to the tenant, and if the tenant declines, does the tenant have an ongoing right to further offers?  Or is it a one-time right?

Factors particular to rights of first refusal are:

  • Because there is a third‑party offer involved, the tenant can be reasonably assured that the business terms of the offer approximate the fair market value for the space. 
  • Because the landlord has to identify a prospective tenant and negotiate a deal before making an offer to the tenant, these rights are more cumbersome for the landlord’s management of its property.
  • Consider whether the existing tenant has to accept the agreed-upon deal, or does the tenant have the right to adjust the offer to be more similar to the terms of the tenant’s lease?  For instance, the term of the offer may be shortened or extended to be “coterminous” with the tenant’s lease term.  Landlord’s should try to avoid any requirement to modify the agreed-upon deal. 

Factors particular to rights of first offer are:

  • Rights of first offer are easier for the landlord to manage because it can offer the space to the existing tenant before negotiating with any other potential tenant.
  • A right of first offer is less attractive to tenants because it can be difficult to know if the landlord’s offer is fair.  On the other hand, the offer that can be easier to customize to the existing tenant’s needs, such as requiring a coterminous term or the same rental rate as the tenant’s existing space.
  • When is the space “available” and therefore subject to being offered by the landlord?  Is it available when the space is actually vacated? Or, when the occupant of the encumbered space is otherwise obligated to vacate the space?  Landlords will want to preserve flexibility in case the existing occupant wants to renew its lease, or if the occupant holds over in the encumbered space.
  • How can the tenant know the offer is fair?  One method is to require that the landlord “re-offer” the space to the tenant if the landlord actually offers materially more favorable terms to a third party (and the parties should agree on what the phrase “materially more favorable terms” means).  Also, if a certain period of time elapses after the offer and the landlord has not found a tenant, then the landlord may be required to re-offer the space.

Whatever the parties decide to do, they should be aware of the various issues involved in right of first refusal and right of first offer.