Category Archives: Real Estate Law

New Mexico Property

Title to property is one of the things that controls whether or not a probate is necessary.

There are many ways to title property:

1.  Sole name of a person (only decedent‘s name appears on bank account, house, or other assets).

2.  Tenants in common (each tenant owns his or her own portion as a separate, distinct interest in the property that cannot be transferred or legally destroyed by the other co-tenant(s). One tenant in common passes his/her share to his/her heirs or devisees at death. At decedent‘s death, decedent‘s tenant in common share requires a court probate proceeding. The decedent‘s heirs or devisees will then own the property with the surviving co-tenant(s).

The above two forms of property ownership require a court proceeding to pass ownership to a decedent‘s heirs or devisees. They are considered part of the decedent‘s probate estate. They are also part of the decedent‘s gross estate.

Other ways to title property include:

1.  Joint tenants with right of survivorship (at death of one joint tenant, property passes to surviving joint tenant(s) without a probate or court proceeding). Joint tenancy title may appear as ―joint tenants,‖ ―joint tenants with right of survivorship,‖ or ―jtwros.‖ Any of these is a permissible designation of a joint tenancy for deeds, financial accounts or other documents. In cases involving a joint tenancy deed to real property, the decedent joint tenant‘s death certificate should be recorded in the county clerk‘s office in the county where the property is located.

2.  Payable on death (POD) accounts (name a beneficiary for bank accounts or U.S. savings bonds; beneficiary automatically receives the property after the owner‘s death without a probate, see Sections 45-6-201 through 227).

3.  Other assets with named beneficiaries, such as life insurance, annuities, individual retirement accounts (IRAs) (owner names in writing a beneficiary and at owner’s death, the property passes automatically to the named beneficiary without a probate, unless the beneficiary has predeceased the owner). However, if the owner has named ― my estate as the beneficiary, a probate will probably be necessary,

4.  Transfer on death (TOD) accounts (name a beneficiary to receive stocks, bonds, and other investment securities; beneficiary automatically receives the property after the owner‘s death without a probate, see Sections 45-6-301 through 311).

5.  Transfer on death deeds (TODD) for real property (must be prepared and recorded properly before the owner‘s death to pass title to the real property automatically to the TODD beneficiaries after the owner‘s death without a probate, see Section 45-6-401).

6.  Trusts (trustor can create a written trust during his/her lifetime, transfer all property into the name of the trustee of the trust, and the trust property passes automatically to named trust beneficiaries upon trustor‘s death without a probate).

7.  Life estates (a person retains an ownership interest during his/her lifetime, then upon his/her death, the property passes automatically to designated remainder beneficiaries without a probate; life estates usually occur with real property and require a special deed to create this interest).

The above seven forms of property ownership usually do not require a court probate proceeding to pass ownership to a decedent’s heirs or devisees. Therefore, they are not considered part of the decedent’s probate estate, but are part of decedent’s gross estate.

Source:  New Mexico Probate Judges Manual (2013)

Ms. Wurman represents clients in court and administrative proceedings and helps clients with their legal matters. She has represented non-profit entities, schools, businesses, individuals and international companies.  For a consultation, e-mail dwlegal@comcast.net or call (505)506-9434.

Breach of Employment Agreement in Washington

In March 2014, the National Association of Realtors (NAR) sued one of its most highly compensated executives for misappropriation of trade secrets and breach of contract after he resigned and took a job at its chief competitor, Zillow.

Zillow, and NAR’s partner Move, are two of the top three consumer sites for the online U.S. residential real estate market. Move provides lead-generation, relationship-management and website development services. Move also operates an aggregation service providing Multiple Listing Service (MLS) and broker data to customers. In 1996, The National Association of Realtors (NAR) allowed Move to operate its website www.realtor.com.

Non-disclosure agreements between NAR and Move prevent sharing of confidential information outside of their partnership.

The lawsuit, Move Inc. vs. Zillow, Inc., alleges that Zillow’s act of hiring Samuelson, as Chief Industry Development Officer, was a threat which will eventually lead to misappropriation of NAR’s trade secrets, because he cannot perform without disclosing these secrets. The mere threat requires the court to intervene.

The other part of the argument is for breach of contract. While employed at Move, Samuelson signed a confidentiality agreement. The agreement prohibited Samuelson from directly or indirectly soliciting Move’s suppliers or customers if information about the supplier or customer relationship is a trade secret. The agreement also included a clause that even a threatened breach could cause irreparable harm entitling Move to court-ordered relief. There would be no need to prove damages, according to the agreement.

Other key facts in the complaint are Samuelson deleted all the files on his computers despite signing an agreement that this data belonged to the company and should be preserved. Move instructed Samuelson that there were litigation holds on documents stored on his company issued computers.

The trade secrets Move, Inc. seeks to protect were not reasonable ascertainable because Move:

• limited access to the executive team or smaller group of executives
• required confidential passwords
• required non-disclosure agreements in significant contracts
• quarterly certification of Code of Conduct

A cause of action has two parts: 1) a legal basis for the wrong the plaintiff claims to have suffered (e.g., misappropriation and breach of contract), and 2) a remedy which the plaintiff asks the court to grant (e.g., $250K plus attorney fees). NAR in this case is asking for damages, attorney’s fees and action by the court to protect its trade secrets.

Do you suspect your employee has breached an agreement? Call (505) 506-9434 for a confidential consultation.

Proposed Development in Albuquerque’s Bosque

The City of Albuquerque’s improvement plan for the Bosque reveals the complexities of commercial development of natural areas. “Bosque” is Spanish for woodlands, and in Albuquerque, it describes the forest found along the Rio Grande River.  Many U.S. cities with rivers passing through their downtown area promote access to the river’s edge.  But the Bosque in Albuquerque has edges that are not like those found in most cities.  Its meandering banks are carved by water and its middle is punctuated by islands covered in willows.

This wild character of nature is a quality that is difficult to quantify.  Its value is one that that the law protects through a conservation “easement” or “servitude.” This vests a private land conservation organization such as a “land trust” with certain duties.  For example, the obligation to grow healthy forest, maintain and improve wildlife habitat and protect scenic vistas visible from roads and other public areas.

The Bosque’s preservation raises complicated issues of who holds the rights to control its various parts.  Parties with river jurisdiction in the Bosque include: the City of Albuquerque, Bureau of Reclamation, US Army Corps of Engineers, Middle Rio Grande Conservancy District, Albuquerque Bernalillo County Water Utility Authority, U.S. Fish and Wildlife Services, and the Albuquerque Metropolitan Arroyo Flood Control Authority.

With regard to the City of Albuquerque’s jurisdiction, the management of the Bosque is governed by the Bosque Action Plan. This was adopted by the City Council and signed in to law by the mayor in 1993. Generally, a sector development plan includes zoning regulations, design guidelines, transportation, streetscape recommendations, and capital project priorities.  In its current version, the Plan’s improvements include boardwalks, viewing platforms at the river, five new pedestrian bridges over the river, picnic tables and shelters, lighting, boat ramps, hardened trails, and artwork.

One might argue whether planning guidelines have a place in the Bosque at all. The Plan itself recognizes that there are challenges to visual and physical access, safety and public perception.  The key to solving these issues may be rooted in welcoming the public to view its unique habitat without compromising its natural integrity.  More broadly, this issue reveals the complexity of developing natural spaces in an urban environment.

Dena  Wurman is a  practicing Attorney at Law specializing in legal issues surrounding land, real estate and housing. For a confidential consultation call 505 506 9434.

 

Deferring Tax through a 1031 Exchange

real-estate

Deferring Tax on a Gain in Property Value through a 1031 Exchange

July 2, 2013

By Dena Wurman

This article will review two recent cases in U.S. Tax Court regarding use of an Internal Revenue Code (IRC) 1031 exchange.  A 1031 exchange allows one to escape paying tax on a property when it sees a gain in value during a sale. The purpose in allowing for the deferral of gain in a “like-kind exchange” is to avoid imposing a tax upon a taxpayer who, while changing his/her form of ownership, is continuing the nature of the investment. A key factor is the property must be held for business or investment.

In the first case, Reesink v. Commissioner of Internal Revenue, (2012 TC Memo 118 – Tax Court 2012) the court said the exchange was successful.  In the Reesink case, two San Francisco brothers purchased a six-unit apartment building from their parents. Each acquired a 50% tenancy in common ownership interest in the building.  Over time, a dispute arose over rental income and in 2005 one brother forced a partition and sale. Later, the same brother and his wife decided to perform a 1031 exchange with the sale proceeds and purchased an investment property in Lake Tahoe.  The brother tried to lease the Tahoe property and could not find a tenant.  Eventually, after eight months, he sold his home in San Francisco and moved into the Lake Tahoe property.

The government sued the Reesink’s and alleged they made the purchase of the Tahoe (replacement) property contingent on the sale of their former personal residence in San Francisco and that as taxpayers’, their rental efforts were insufficient to qualify as a business for purpose of Internal Revenue Code 1031. Further, the government said the replacement property was purchased without investment intent at the time of the exchange.

In 2012 the case was decided in the Reesinks favor. The court disagreed with the government’s argument and found that the Reesink’s sale of the apartment building followed by their purchase of the Tahoe property qualified as a section 1031 like-kind exchange, and they were not required to recognize gain on the sale of the apartment building for 2005.

In the second case, Yates v. Commissioner of Internal Revenue, (2013 TC Memo 28 – Tax Court 2013), the court ruled against the taxpayer, finding an unsuccessful exchange.  Here, there were three properties. The first was a primary residence where the family lived since 1992.  In 2006 the family exchanged this property, along with a restaurant property, for a new property. The purchase contract indicated that “The buyer is doing a 1031 exchange. The buyer requests the seller apply to town for approval as [sic] use as bed and breakfast at buyer expense.”  In 2006, the Yates closed on the purchase of the new property. Three days later, the Yates sold their then residence and moved into the new property. Mr. Yates still resided there as of May 15, 2012.

One of two issues the court looked at was whether Yates held the new property either for productive use in a trade or business or for investment at the time of the section 1031 exchange.  The Yates family (unsuccessfully) relied principally on testimony at trial as evidencing their intent to use the new property as a “bed and breakfast” at the time of the like-kind exchange.

Whether a taxpayer intends to hold a property for productive use in a trade or business or for investment is a question of fact that will be determined at the time of the exchange. The fact the sale document said the property was to be permitted as a bed and breakfast was not enough. The court found that “self-serving testimony without corresponding objective evidence is of negligible probative value and fails to meaningfully inform the Court as to any disputed issues. Accordingly, such testimony is routinely rejected.” The Yates had to pay a $123,648 deficiency for taxable year 2006 (among other penalties.)

The key issue in both cases was that the use of property solely as a personal residence is antithetical to its being held for investment. Starker v. United States, 602 F.2d 1341, 1350-1351 (9th Cir. 1979).  In the Reesink case, the court considered the testimony of the brother, the testimony of the Reesink family regarding plans for their children and retirement as well as evidence of their family income and diminishing earnings over the decade preceding the exchange.

A typical like-kind exchange requires a “property-by-property” comparison for computing gain recognized in the transaction. In the end, the type of property, the timing of the exchange and the intent of the property owner are all key factors.  Furthermore, if multiple properties are transferred in a like-kind exchange, the properties must be separated and arranged for analysis into “exchange groups” based on shared characteristics.

When structuring a 1031 exchange, ensure that there is sufficient objective evidence that property being exchanged is being used for a legitimate business or investment purpose in order to successfully defer taxable gain.

Land Surveys and Encroachments

Ideally, a land survey will identify easements and encroachments in a land purchase before improvements are made.  Knowing about the property is a prudent first step to avoid future litigation.  Unfortunately, there are cases where an encroachment is not discovered until after costly improvements are made.

An encroachment is an illegal intrusion like a wall or a fence. The legality of any easement or encroachment is determined in court.  In the case of AMKCO, Ltd., Co. v. M D. Welborn, a New Mexico limited liability company purchased a plot of land next to a highway.  The company sold part of the original land purchased to Welborn, an individual, with the plan to develop only what was needed for a truck stop.  Two surveys were performed over a nine year period.

The original survey in 1988 showed a 58 foot strip that could not be developed because it was a highway right of way easement. The site plan and second engineering survey positioned the newly-constructed truck stop, with gas pumps, on the land that was sold to Welborn. The improvement took into consideration the easement, but created an encroachment.

In this case due diligence didn’t prevent litigation.  The issues arose years after the land purchase and construction was completed. When the encroachment was discovered almost nine years after the original survey, Welborn sued for ejectment.

An ejectment is a legal action to recover possession of land (an eviction) and for damages. Where there are accurate surveys and both parties don’t notice the problem until a lot of money is spent, the court will perform what is called a balancing test to look at the relative hardships to each party, before awarding damages.

In this case, the gas company spent almost $200,000 building a diesel island and anticipated losses of over $100,000 in gas sales.  The court took this in to account and denied Welborn’s ejectment request but granted another remedy; an easement.

What can be learned here?  A land survey will provide important details to aid in the purchase of land but any legal easement and encroachment issues that arise after the purchase will need to be resolved in court.   What “preventive maintenance” can be done to reduce the chances of losing property rights to prescriptive easements and encroachments?

Before purchasing:

  • inspect the property carefully
  • identify the property boundaries
  • consider retaining a surveyor for an informal consultation or formal survey
  • obtain title insurance that specifically protects against encroachments or easements
  • Be vigilant
  • Regularly audit the property by inspecting the boundaries and making a record of the inspection (concurrent notes and photographs).

 

 

Default Judgment in a New Mexico Foreclosure Matter

By Dena Wurman

A recent New Mexico foreclosure case (Flagstar Bank, FSB v. Keith M. Giles) offers a lesson in what a court will look at in awarding a default judgment against a borrower.

In 2007 Giles, a commercial real estate developer, took out a loan secured by his condo in Taos. In 2008 he stopped making loan payments. The lender planned to foreclose on the property. While trying to negotiate a deed in lieu of foreclosure (for over a year) he was served with a notice to respond to a foreclosure action. Giles did not respond or appear in court so a default judgment was awarded the lender. In 2010 a date was set for the sale of the condo. At that point, Giles hired an attorney.

A few issues here are noteworthy. First, the borrower attempted to negotiate a deed in lieu of foreclosure. In order to be approved for a deed in lieu, the title to the property must be clear. The problem here was the property had three liens on it . Second, when the liens were finally removed, the property had been gutted. So the offer to settle the loan was rejected by the lender.

Then, when the borrower tried to appeal the default judgment triggering a sale, he was unable to persuade the court that he was justified in not responding to the legal notices he received. This was because he was a real estate developer and it was assumed he should know that responding to legal actions in real estate is important.

One defense he asserted that he was not “on notice” that his participation in the litigation was necessary to prevent the entry of a default judgment because he believed that the parties had negotiated a settlement of the foreclosure lawsuit through a deed in lieu of foreclosure.

Here is why the legal argument the borrower offered did not work. Under New Mexico law, a borrower is not entitled to notice of a default judgment when they do not appear in court. The borrower is only entitled to three days written notice and a hearing before the entry of a default judgment when they (or the party’s representative) “appear in the action.” The borrower in this case chose from the outset to do nothing in the court proceedings until after the default judgment was entered against him.

The lesson here is that a negotiation to settle a foreclosure action will not prevent a lender from filing a claim in court. In order to prevent a default judgment, the borrower must appear and respond.

Dena Wurman is a practicing attorney

Improvement Value Credits in New Mexico

Sales and leases of New Mexico trust lands generate revenue for a trust fund that helps finance public education in New Mexico.

In December 2010 State Auditor Hector H. Balderas published a report identifying key problems with the way the state now manages trust land transactions. The audit arose from a concern that the government was not acting in the best interest of trust beneficiaries.  The audit itself looked at 100 transactions from January 1, 2002 through March 11, 2010. According to the report, nearly all of the exchange transactions reviewed lacked important financial information.

The audit report also examined procedures for determining compensation known as an “improvement value credit.” Improvement value credits are an amount paid to a private developer for the developer’s reasonable project costs incurred in connection with the development of trust land. The audit looked at transactions from November 2006 through July 2010.  Improvement credit payments by the Commissioner to developers amounted to $15 million of the total proceeds of $25 million from land sales related to planning and development leases.

The report concluded the State Land Office had no formal policies or procedures to calculate credits paid to private developers. Without policies and procedures, there was an increased risk that the trust may not receive true value for the land due to these overpayments. The 2010 audit also found instances where the Commissioner determined the value of trust lands by using “deficient” appraisals or appraisals rejected for use by the State Land Office staff.

The New Mexico State Land Office is proposing new regulations regarding these trust fund leases. The Commissioner of Public Lands is the trustee of New Mexico’s trust lands pursuant to the Enabling Act and the Constitution of New Mexico. As the head of an administrative agency, the Commissioner has broad discretion in crafting new regulations, subject to certain guidelines.  In general, the state legislature passes statutes. Then, agencies create more detailed regulations through rule-making. This requires a notice of proposed rule-making; a public notice issued when an agency of the government wishes to change a rule or regulation as part of the rule-making process.

Ray Powell, the New Mexico Commissioner of Public Lands, and the New Mexico State Land Office (NMSLO) now proposes to repeal 19.2.22 NMAC “PLANNINGANDDEVELOPMENT LEASES” (Rule 22) in its entirety and replace it with a new rule which incorporates various changes, amendments, additions to and deletions from the previous rule. Two pages of the drafted new rule are devoted to improvement value, appraisals, subsequent appraisals, calculations and adjustments for appreciation payable to trustees.

A formal public hearing on proposed amendments will be held in Santa Fe, New Mexico, at Morgan Hall, State Land Office, 310 Old Santa Fe Trail, from 10:00 a.m. to 12:00 p.m. on August 15, 2012. The Commissioner will also hold one or more focus groups during the comment period at different locations around the State for the purpose of obtaining public comment on the proposed amendments.

Ms. Wurman is a former real estate broker and current legal analyst with the Albuquerque New Mexico Construction Reporter.

Piercing the Corporate Veil in a Colorado Construction Matter

Forming a corporation generally protects shareholders from personal liability for claims against the company.  When formalities are not performed correctly, a winning party to a lawsuit can “pierce the corporate veil” to have the corporation set aside and attach personal liability to a shareholder, to pay a judgment against the company.  A recent Colorado construction case (Swinerton Builders v. Craig Nassi) shows how this can happen.

Swinerton entered into a construction contract with the corporation Beauvallon in 2001. This contract included an American Institute of Architects clause, which provided for the arbitration of claims arising out of or related to the contract. The contract also contained a fee-shifting provision, in the event of any litigation between the parties, awarding the prevailing party reasonable attorneys’ fees, expert fees, court costs, and all other third-party costs of the litigation incurred by the prevailing party.

After construction was completed, Swinerton sued Beauvallon.  Swinerton won their case but could not collect from the company. They had to file a second claim.  The purpose of the second lawsuit was to identify the company’s President, Nassi, as the “alter-ego” of the company Beauvallon, in order to collect payment.

Swinerton incurred attorney fees in attempting to enforce its judgment against Beauvallon, and Nassi’s refusal as president of Beauvallon to pay the judgment forced Swinerton to bring the veil-piercing action.  When the corporate veil was pierced, Nassi, who did not sign the corporate contracts at issue, was held personally liable for the contractual obligations of the corporation.

The appeals court concluded that Swinerton was entitled to recover the reasonable attorney fees incurred in the veil-piercing action, and remanded this case to the district court for a determination and award of the appropriate amount of such fees.

One might ask, how might this Colorado Court of Appeals decision persuade a judge in New Mexico? The answer is it depends on the facts of the case.  A state court’s decision can be used as persuasive authority in any state court that is not required to follow it. If the legal issues are the same, the decision based on the most closely matching factual situations will usually be the stronger persuasive authority.

Ms. Wurman is a former real estate broker and current legal analyst with the Albuquerque New Mexico Construction Reporter.

Green Building Debate in New Mexico

Public construction projects in New Mexico were among the country’s first to utilize progressive energy conservation guidelines, such as the LEED rating system. As part of a broad pro-business agenda, Gov. Susana Martinez (R) replaced these codes with a less-stringent code established in 2003 that many other states and municipalities have adopted.

This code reversal is the subject of recent litigation in New Mexico.  In January 2012, a group of environmental advocates, including the Sierra Club, filed a brief with the New Mexico State Court of Appeals challenging the method which the “replacement codes” where recently adopted by the New Mexico Construction Industries Commission.  Here is their argument.

The environmental groups allege members of the Commission came to conclusions on how to vote on the replacement codes prior to their meeting, not at the meeting, in violation of the New Mexico Open Meetings Act. The Open Meeting Act is known as a “sunshine law.”  Such laws are motivated by the belief that the democratic ideal is best served by a well-informed public.

In their brief, those challenging the Commission findings state “The Act provides that decisions of state agencies that are not made in open meetings are invalid.”  According to the Open Meetings Act 2008 Compliance Guide, this subsection of the statute seems to arrive at a different conclusion.

The guidance instructs us that the Act establishes “a presumption that actions taken by public bodies have been taken at meetings that conform to the requirements of the Act. Where this is shown not to be the case, the actions of a public body may be held invalid.”

The language in the Attorney General guidance implies a presumption of conformance when an action is taken by the Commission.  The Attorney General adds, it is “always possible that a court faced with the same issues would disagree…”

What is your opinion on the Commission’s actions and the “replacement codes”?  What about the environmental challenge?

Ms. Wurman is a licensed real estate broker and current legal analyst with the Albuquerque New Mexico Construction Reporter.

The Perils of an Unwritten Construction Contract

The state court of appeals in New Mexico rendered an interesting opinion in a dispute over an unwritten agreement for the construction of a home. (Mileta v. Jeffryes)

At trial, the court listened to both the contractor’s testimony and Mr. and Ms. Mileta’s to determine the terms of their agreement, because it was not written down. The Miletas testified that their contractor (Jeffryes) told them in 2004 he would build their house in Raton, New Mexico for $282,000. Jeffryes testified that he entered into a cost plus ten percent contract. He also testified that he did not always submit the costs or invoices to the Miletas, did not add the ten percent on the invoices he did submit and never explained how the costs would be determined with respect to labor.

With no written agreement, the testimony of each party has equal weight in court. It was undisputed that the total amount paid to Jeffryes was $294,278. In this case, Jeffryes was paid $294,278 which exceeded the oral contract for $282,000.

Based on the evidence presented, the court concluded that the testimony of the Miletas raised “a sufficient question of fact” as to their understanding of the agreement with Jeffryes. A judge or jury will decide what happens next.

The contractor said he usually used written contracts for such construction projects. He did not use one here, in part because he had had negative experiences with contracts in the past. The lesson is that with no written agreement, a court may decide, particularly when a professional contractor with 32 years of experience goes up against an inexperienced client.

Ms. Wurman is a former real estate broker and current legal analyst with the Albuquerque New Mexico Construction Reporter.