As Jamie C. Belgum reported in the Colorado Bar Association’s Business Law Newsletter, the Colorado Court of Appeals recently decided a case that gives broad interpretation to the Colorado Trust Fund Statute, C.R.S. § 38-22-127.

The Trust Fund Statute requires contractors to hold funds they receive for a project in trust for the payment of subcontractors.  That means if a contractor receives a disbursement from a construction loan or a payment from a home purchaser, the contractor has to use that money to pay subcontractors before paying any general business expenses.

construction - small.jpgThe question presented in AC Excavating, Inc. v. Yale is whether the Trust Fund Statute reaches a manager’s voluntary monetary contribution to his own construction company.  Mr. Yale loaned $157,500.00 to his construction company, Antelope Development, LLC, whose sole project was the construction of a retention pond for a golf course community.  Yale directed Antelope’s use of the funds to pay general business expenses, including interest on municipal bonds that secured Yale’s loan.  AC Excavating, a subcontractor, sued Yale under the Trust Fund Statute for misapplying the funds he himself contributed.

The Court took a broad reading of the statute saying that it reached all funds disbursed irrespective of the intent of the disburser.  The Court further held that since Antelope had only one bank account and one project it was clear that the funds were “for the construction project” for which AC Excavating did work.  Putting aside the question of whether the Court accurately interpreted the statutory language, there is still some hope for owners/managers seeking to recapitalize their construction company without subjecting themselves to trust fund liability:

  • Contractors should set up separate banking accounts for each project into which they can deposit disbursements made specifically for that project.  A subcontractor should only be paid from the account for the project for which that subcontractor did work.
  • A separate account should also be maintained for general business expenses (i.e., office materials, equipment leases, rent, pay-roll, and marketing).  Owners should deposit infusions of capital into the general business account when they plan on using such capital to pay general business expenses.
  • Any money left over in a project account after all subs have been paid can then be transferred to the general business account to pay general expenses and profits.

With cash flow tight it is easy to rationalize moving money around to help a struggling project, but to avoid liability under the Trust Fund Statute (which is often non-dischargeable in bankruptcy) contractors must maintain strict accounting practices.  Still, with ever broader interpretations of the Trust Fund Statute contractors can never be entirely safe from liability.

Photo from The Library of Congress (Flickr)

Last month the Town of Berthoud, Colorado approved a mixed use development known as PrairieStar.  The development is anticipated to contain residential housing, a school, a research and development facility, an equestrian center, retail and business components, and, most notably, a 25 acre solar farm.  Developers of the project, Scott Sarbaugh and partner Richard McCabe, anticipate that PrairieStar will ultimately reach “net-zero energy consumption” status as a result of the large solar component. solar.jpg

In addition to the solar farm, the PrairieStar development includes many additional green touches including a community garden, an irrigation system using nonpotable water and an energy center for recharging electric cars.

In negotiations between developers and local municipalities, this type of sustainable (and sustainably marketed) project is likely to shed a different light on the developer.  Not only does it appear that sustainable developments like PrairieStar are particularly marketable to the end user, but in the current green climate they should be appealing to the local jurisdiction for entitlement approval.

Photo by Foreign and Commonwealth Office (Flickr)

For landlords, a late or missed rent payment might be the first sign that one of its tenants’ businesses is struggling or even failing.  In this economy, a landlord facing this kind of situation should keep certain things in mind in order to minimize potential lost revenue and expense.  

Quick action is critical in this economyforrent.jpg

It is important for landlords to ensure that they understand the struggling tenant’s situation, and be able to quickly react.  If the tenant is in default for nonpayment of rent because its business is failing, a prompt eviction is typically appropriate.  Especially now, quick action in these cases is critical, since the passage of time may make it much more difficult for the landlord to recover its damages.  If the tenant’s business has failed, there will likely be little to recover from the tenant entity.  Additionally, if the only guarantors are the tenant’s principals, they will very likely also be facing precarious personal financial situations, making it difficult to recover from them.  Moreover, the longer the landlord waits to evict, the longer it will delay the landlord’s efforts to try to find a new, paying tenant.

Sometimes, eviction is not the best option

While it is appropriate in the case of a tenant with a failing (or failed) business for the landlord to quickly evict the tenant and attempt to re-let the premises, other situations may call for a more measured approach.  In some circumstances, the tenant’s business may simply be suffering a temporary setback, which the parties can often address through communication.  In other cases, the tenant’s business may be facing a permanent decrease in activity and resulting decrease in revenue.  Sometimes, this leaves a tenant unable to afford its rent payments. 

If the tenant’s business could remain viable if it were paying a lower rent, it may be in the landlord’s interest to consider restructuring the lease.  This is especially true for tenants with leases that were entered into prior to the economic downturn, since these leases may provide for a rental rate that is significantly higher than current market rates.  Considering that the tenant is “locked-in” at a high rent rate, some landlords may be inherently reluctant to even consider decreasing the tenant’s rent.  However, there are at least two reasons why it might be appropriate to restructure a lease for a tenant who, in absence of a rent reduction, will default and vacate the premises.  First, if the tenant is forced to vacate the premises, it may cause the tenant to fold completely, precluding it from generating any revenue.  This carries with it the risk that the landlord’s collection of damages will be very difficult.  Second, if a judgment based on the higher rate will be very difficult to collect, and if current market rates are significantly below what is provided for in the lease, the landlord may have little to lose by agreeing to decrease the lease rental rate to the current market rate.  Any new tenant would only be willing to pay current market rates, and keeping the existing tenant in place after restructuring the lease may allow the landlord to keep a paying tenant in the premises without having to go through a potentially long vacancy period.   

Obviously, the right approach will ultimately depend on the circumstances, and it is often helpful, even at the early stages, to involve an attorney with experience in landlord/tenant disputes and evictions to help the landlord best protect its interests.  For example, lease amendments and concessions should be carefully documented to ensure that the landlord does not inadvertently waive any of its rights, and it may be appropriate to address a number of contingencies when dealing with these situations. 

Regardless of the landlord’s chosen course of conduct, it is clear that, in the difficult leasing market we are currently experiencing, it is important for landlords to be very diligent at the first signs of problems with their tenants.  If a landlord does nothing in the face of months of unpaid rent, it may already be too late for the tenant’s business to survive, and the landlord will have missed out on months of time during which it could have marketed the premises to potential new tenants.   

This is the first part in a series in this blog on commercial/retail evictions.  In the next part, I will discuss the basic procedures for evictions under Colorado’s unlawful detainer statute. 

Photo courtesy of http://passionatephoto.com

 

Late last week, there were two news stories reporting on important developments for real estate in the Denver area.  Given the continued state of the economy and commercial real estate, I was pleased to see these reports.  While actual development resulting from these events may be some time off, important ground work is being laid now. 

First, the Denver Business Journal reports that Regional Transportation District (RTD) has adopted a more flexible policy for transit‑oriented developments (TOD), which are anticipated to be constructed along RTD’s FasTracks expansion.  Four pilot projects will be selected by RTD to test this new policy. 

According to the DBJ, RTD’s new policy:

  • gives developers more flexibility with regard parking requirements for TODs;
  • allows RTD to take a combination of up-front cash and a deferred payment (profits interest or revenue participation for instance) for the sale of property to a developer; and 
  • encourages cooperation with developers in an effort to bring in more federal and non‑profit funding. 

Second, the Denver Post reports that Greyhound is looking to move its bus station from its current location at 19th & Curtis Streets (right across the street from The Ritz‑Carlton) to somewhere in the metro area near a major RTD bus or rail station.  This certainly is good news for The Ritz‑Carlton and also for downtown.  This is a key area of downtown, in close proximity to the Arapahoe Square redevelopment area.  In fact, the boundaries of the Arapahoe Square urban renewal area are being redrawn to include the Greyhound site.  The redevelopment of the Greyhound site could have a tremendous impact on the central part of downtown, and with its inclusion in an urban renewal area, the economics of such a redevelopment might actually make sense sooner rather than later.

I am a firm believer that being proactive during the downturn will mean we are better poised to be one of the first markets to really see a rebound.  It is good to see RTD, DURA and others making decisions today that will hopefully attract new development to Denver when the market starts its recovery. 

Whether caused by the failure to follow precise escrow instructions or inattention to detail by one or more of the parties to a closing or payoff, the indebtedness secured by a lien on real property is often satisfied, but such lien is not released of record.  Title companies conducting closings often close on a payoff letter from the holder of the debt, without having obtained a lien release on the date of closing.  Many times, such lien release is not subsequently obtained and recorded, leaving the property owner with a cloud on its title.  Fortunately, Colorado law offers some guidance and leverage for those who find themselves in that situation.

C.R.S. 38-35-124 requires that the creditor or holder of an indebtedness secured by a lien on real property release that lien of record with ninety days following the satisfaction of such indebtedness and receipt of reasonable costs to release the lien unless: (i) the debtor requests that the lien not be released, or (ii) the person satisfying the indebtedness requests in writing that the holder of the debt deliver to him or her the cancelled instrument of indebtedness (e.g. the promissory note) at the time of satisfaction, in which case the creditor is relieved of any further obligation or liability under C.R.S. 38-35-124 after such delivery has been completed.  Any creditor or holder of the indebtedness who fails to comply with Section 38-35-124 is liable to the owner of the real property encumbered by such indebtedness and to any other person liable on such indebtedness for all actual economic loss incurred enforcing the rights provided under Section 38-35-124, including reasonable attorney fees and costs.

If nothing else, “reminding” a creditor that fails to release its lien of the foregoing statutory requirements will likely persuade an otherwise unmotivated (former) creditor to aid in clearing title to your property.