CONGRESS RECENTLY EXTENDED IRC §179 TO INCLUDE DEDUCTIONS FOR REAL PROPERTY BUT ONLY FOR 2010 AND 2011

Usually when you think of §179 of the Internal Revenue Code, you think of deductions available to businesses for depreciable, tangible “personal” property such as equipment, vehicles and computers. However, Congress has given a gift in the Small Business Jobs Act, signed September 27, 2010, by extending the deductions to include up to $250,000 of Qualified Real Property.

What kind of real property will qualify for this favorable tax treatment?

· First: Qualified Leasehold Improvements—typically capital improvements made to an interior portion of a commercial non-residential building.

· Second: Qualified Retail Property Improvements—typically capital improvements to buildings which are open to the general public for the sale of tangible personal property.

· Third: Qualified Restaurant Property—typically, capital expenditures for the improvement, purchase or construction of any building (new or used), if more than 50% of the building’s square footage is devoted to the preparation of, and seating for, the on-premises consumption of prepared meals.

In order to receive the benefit of this deduction for Qualified Real Property, you must place the building or capital improvement in service by the end of your 2011 tax year, so it may take some quick footwork to be able to elect §179 treatment.

Whether you can take advantage of this deduction depends on your individual circumstances and (big disclaimer coming here) you cannot consider the foregoing to be tax advice of any sort. As with anything connected with the Internal Revenue Code, there are tricky issues, so you should consult with your tax planner to guide you as to how best to take advantage of this opportunity. That said, this link will take you to a good first step in understanding the process.

Small Business Resources

As President of the Women Business Owners of Montgomery County, I have the opportunity to learn about various resources and programs aimed at women-owned and small businesses here in Montgomery County. Earlier this month, I attended the launch of the new Rockville Women’s Business Center. RWBC began as an initiative of the non-profit Rockville Economic Development, Inc. (REDI). The Center is located within the REDI offices at 95 Monroe Street in downtown Rockville, and offers tailored training, counseling and technical assistance to help entrepreneurs start and build successful business enterprises that are positioned for long-term growth. The Center is open to all and promises to be a great resource for both start-ups and companies looking to grow and expand.

I also recently attended a briefing by Robert Carpenter of the U.S. Small Business Administration on the new Small Business Jobs Act, and how this legislation affects our small business community.

One change that caught my attention is a provision that will allow some small businesses to refinance their owner-occupied commercial real estate mortgages into the SBA 504 loan program. Regulations implementing this provision should be issued during the first quarter of 2011. The law also sets higher loan limits for the 7(a) and 504 programs ($2 million to $5 million) and expands the number of small businesses eligible for SBA loans by increasing the alternate size standard to those with less than $15 million in net worth and $5 million in average net income.

The briefing, hosted by the Montgomery County Department of Economic Development (“DED”), also included information on the Small Business Revolving Loan Program, administered by DED, which provides “micro” loans of between $5,000 and $100,000 to small businesses which are looking to expand in Montgomery County and may not qualify for traditional private banking financing.

The Small Business Revolving Loan Program recently received a $2 million infusion to provide loans to small businesses whose expansion includes the creation of new jobs or the relocation of existing jobs into the County. Eligible businesses must have gross revenues of less than $5 million annually and fewer than 75 employees. To learn more, go to http://www.montgomerycountymd.gov/dedtmpl.asp?url=/content/ded/financing/small-business-revolving-loan-program.asp.

SHOULD A SMALL BUSINESS OWN ITS FACILITIES?

To own or not to own? That is the question. If you run a business, should you buy your own facility? When small business clients ask me that question, I generally advise them to rent, not purchase, their facilities. My rationale is two-fold:

• First, if your business is making widgets and you do it successfully, then keep your eye on the ball and focus on doing what you know best so that you can make your business grow. Real estate is often fraught with unanticipated consequences that divert your energies, emotions and capital; every dollar sunk into real estate will reduce your monthly income and produce additional fees/taxes and expenses. My belief is that you should invest your capital in your business, not what, in essence, is a speculative investment.

• Second, if you believe in yourself as a widget-maker, you most likely expect to expand your widget-making business over time. But along with growth comes the likelihood that you will outgrow your space. Then what? If you need to relocate, you may find yourself having to sell into an unfriendly economic real estate market, which may well scotch your growth opportunities.

Why Is Social Media Important to Franchisors and Franchisees?

Since more and more Americans use their connections to Facebook, Twitter and YouTube to guide them in their consumer decisions, they expect the companies they patronize to be accessible on the web. That fact gives franchisors and their franchisees a common interest in having their business develop a dynamic presence on the Internet via the various social media outlets.

Many franchisors have gotten the message and have made budgeting decisions accordingly with respect to their marketing programs. Existing franchisees may ask, “Are the social media programs being adopted by their franchisors more than just trying to get on the bandwagon or simply attracting prospective franchisees and/or investors”? This is because whatever expense the franchisor makes for social media marketing is probably going to be paid for by the franchisees through the advertising or fees they are charged.

It behooves both franchisors and franchisees to develop the best and nimblest social media marketing program that they can so that it will be of interest to, and attract, potential customers/clients. Many businesses have figured out what it takes. Their programs are so well developed that while a customer is sitting in a restaurant wondering why he does not have more corn tortillas, the franchisor’s corporate HQ picks up the Twitter complaint and can inform the local restaurant owner of his customer’s concern.

This kind of 24/7 social media coverage can be expensive. Given the size of certain chains, they may not be able to respond within minutes to a customer’s complaint. However, that should be a goal towards which each franchisor aims and it is certainly a marketing sophistication level that any prospective franchisee should expect.

If a franchisor cannot provide such “hands on” response time for their social media marketing campaigns, what would be a reasonable standard to expect?

Useful Links

Sometimes a blog is just a blog, sometimes it has some insights (hopefully of value) that the blogger wants to share and sometimes –- as in this case –- the blogger has seen some other blogs that might warrant a visit. Toward that end, here are links to directories of local real estate blogs that run the real estate blog gamut:

• Maryland Real Estate Blogs


• Virginia Real Estate Blogs


• Washington, D.C. Real Estate Blogs

and two more narrowly-focused blogs:

• The Real Estate Bloggers


• NAI Global
  

Enjoy.

Real Estate Appraised Valuations vs. Fair Market Value

I’m a subscriber to Zillow.com, which, according to its website, is a home valuation site that provides an estimate of a home’s market value. According to Zillow, the “Zestimate” of my home increased 1.1% in January while according to the Zestimate I received last week, the value decreased by 0.5%. Since I have no present intention of selling my home, I find these fluctuations to be more interesting for their entertainment value than anything else.

According to Zillow.com, it differentiates its Zestimates from appraisals because Zestimates are computed using a proprietary formula. Real estate appraisals on the other hand are performed by qualified professionals, often – although not always – by an appraiser who is a Member of the Appraisal Institute (“MAI”), which means the appraiser has fulfilled specific educational and experience requirements and passed an examination. (See, http://www.appraisalinstitute.org.)

Are real estate appraised valuations the equivalent of the fair market value (“FMV”) of real estate?

Maybe, but not necessarily.

In one variation or another, FMV is defined as the price at which a bona fide knowledgeable, willing seller under no pressure to sell will sell a real estate asset and the price a bona fide knowledgeable, willing buyer under no pressure to buy will pay for that asset.

The appraised value of real estate is basically the opinion of the appraiser and can take one of several forms, including:

The “cost value” approach, which is the aggregate of the land value and the depreciated value of any existing improvements.

The “sales comparison” approach, which is predicated on the recent sales value of similarly situated comparable properties.

If the property is commercial, retail or industrial, the “income capitalization” approach may be the basis for an appraisal, which capitalizes the income stream to be generated by a particular property and bases the value of the property on the “cap rate.”

So, for example, a cost value may, at any particular point in time, be significantly higher than a prudent buyer would pay for a property. Similarly, the cost value may be significantly lower than the price a prudent buyer would pay, thus leading to an enviable “bidding war” among competing buyers, one of whom will end up paying more than the asking price for the property.

So, why is my Zestimate up one quarter and down the next? Apparently, because of fluctuations in the recent sales prices of “comparable” homes in my neighborhood. Of course, I think my home is incomparable – but that would lead me into a discussion of “intrinsic” value, which is a different proverbial kettle of fish.

As a pretty clear demonstration that value is in the eye of the beholder, a recent Zillow.com value for my home was 15% greater than the MAI appraised value conducted in connection with a mortgage refinance at the same time. Apparently, the value of my home is worth 15% less for loan security purposes than it is for sales purposes. Presumably, the MAI appraiser conducting the appraisal for my prospective lender knew the purpose of the appraisal and chose to be conservative. Thus the often-heard sobriquet, “Made As Instructed”!

Who Owns Copyright in Source Code in Technology Start Up Company?

Start-up ventures, especially in the area of technology, often begin based on nothing more than good faith assumptions of the founders. Frequently they operate informally without understanding the need to document the relationships among the venture, its principals and its employees. More often than not avoidable disputes ensue, creating needless expense, arguments and sometimes the split-up of the founders or the loss of key employees leading to the dissolution of the venture.

JustMed, Inc. v. Michael Byce, a case decided by the U.S. 9th Circuit Court of Appeals earlier this month, involved a dispute between the founders of the venture about the ownership of the copyright in computer source code. This case is a classic illustration of what not to do; these facts are often present in startup companies (not only the IT field), namely the absence of written agreements and formal employment procedures.

Former brothers-in-law, Joel Just and Michael Byce, patented a device to help those whose larynxes have been removed. Together they formed JustMed for the manufacture and development of the necessary hardware and software. Byce was a shareholder and served on the Board of Directors. He took over the development of the software from a company employee, and basically rewrote the source code. JustMed had no employment agreement with Byce; he created the source code at home; worked his own hours; and his pay was in company stock.

Byce was anxious that he would not receive his fair share should there be a buy-out or merger of the company. So, to protect what he considered his intellectual property, he deleted the source code from the company’s computers.

The expected lawsuit followed. From JustMed’s point of view, it owned the copyright in the software on the theory that Byce was its employee and, therefore, the source code was a “work made for hire.” Byce countered, arguing that he was an independent contractor and, therefore, owned the copyright in the work.

In deciding whether an employer/employee relationship existed, the Court examined several factors to determine to what extent JustMed controlled the manner and means of the creation of the source code. Typically in employee vs. independent contractor disputes, factors such as whether an employment agreement exists; whether taxes are withheld and social security paid; to what extent the employer controls the creation of the work product; and what level of skill is required in the work, are examined to see which side proves stronger.

Here, despite that JustMed operated informally as to Byce’s compensation, namely, by the issuance of stock; did not exert control over the manner and means of the creation of the source code; and was lax in its tax and withholding procedures, the Court nevertheless concluded that Byce was an employee, making the source code a work made for hire, which meant that JustMed owned the copyright in it.

In other circumstances, such informal employment practices could be seen to favor an independent contractor interpretation. Here, because of the start-up nature of the technology enterprise, the Court relied on other factors (such as that a software developer is expected to be inventive and work independently, that the project was central to JustMed’s business and that Byce performed other tasks for JustMed) to buttress its conclusion that he functioned as an employee.

Regardless of whether one considers the outcome fair in this case, had some of the variables changed slightly, it is unclear whether another court would give similar leeway to a technology company faced with a challenge to its copyright ownership in its software. But why take the risk? Had JustMed documented its relationship with Byce and specified who owned the copyright, it could have avoided the expense, disruption and animus that both sides experienced.

Commercial Photographer Dilemmas in Protecting Copyright in Photographs

A case recently decided by the US Eleventh Circuit Court of Appeals offers commercial photographers a primer on what to do and what not to do in order to protect their copyright interests in their photographs. While the case involved some well known players—Kawasaki Motors and Roaring Toyz—and the unveiling of the ZX-14 sports motorcycle at the Daytona Bike Week in 2006, it took four years for the 11th Circuit to rule on the copyright claims of a photographer, and not all of the issues have yet been resolved.

The basic facts were that Kawaskai wanted to focus on the customization potential of its new motorcycle. It hired Toyz to customize some ZX-14 motorcycles to display at Daytona. As part of its customization efforts, Toyz hired an independent contractor, Ryan Hathaway, to apply custom paint and graphics to the vehicles. Toyz also hired Todd Latimer, a motorcycle photographer known for his unique and artistic style, to photograph the two customized ZX-14s.

The dispute arose over whether Kawasaki and Toyz used Latimer’s photographs in ways beyond those he claimed to have authorized. In response to Latimer’s claim of copyright infringement, the defendants raised significant arguments that he had to rebut. By examining some of these defensive arguments, you can learn from Latimer’s miscues.

Latimer’s first mistake was not having a written agreement that clearly stated what uses of his works he was permitting. Not taking the time to consider and memorialize, even if by an e-mail, what uses are permitted, subjected Latimer to the task of proving a negative, namely, that he did not authorize the use about which he then complained.

Ironically, Latimer had to overcome the argument that because his photographs were shot without Hathaway’s permission, he infringed on Hathaway’s copyright in the graphic art appearing on the motorcycles. Therefore, Latimer’s second mistake was not recognizing that what he was photographing contained separate copyright --protected material, thereby exposing himself to the claim that his photographs were not protected by copyright because they infringed Hathaway’s work. Only because the Court concluded that Hathaway had granted an implied license to have his work on the customized ZX-14s photographed was Latimer able to remain in the game. However, in accordance with the well-settled legal principle that “What is good for the goose is good for the gander,” Kawasaki and Toyz argued that their uses of the photographs came within an implied license from Latimer.

At this point it is useful to discuss how a court will determine the existence of an implied license. Basically, an implied license can be inferred from the conduct of the parties. The objective facts of a photographer creating a work at the request of another, delivering that work and intending that the person will copy and distribute the work, (i.e., knowing how the client intends to use the work), show the existence of an implied license. Once an implied license is established, it will be interpreted broadly unless there is proof that at the time of the work’s delivery, the photographer placed limitations on its use.

Latimer’s third mistake was not recognizing that his actions could be viewed as his grant of an implied license to use his photographs. In this case, the Court concluded that Latimer’s conduct resulted in an implied license. The unanswered question was whether any of Kawasaki’s uses exceeded the scope of the license.

Latimer’s fourth mistake was not having any clear proof when he delivered his work product (the photographs), that he intended to limit the scope of their use. This absence of proof of his intent resulted in the case being returned to the trial court to examine the facts on that issue.

The lesson from all of this is that commercial photographers can avoid Mr. Latimer’s problems by taking relatively simple steps to protect the use of their work.

The Virtues of Joint Venturing

Small businesses face multiple hurdles new and old, from identifying lucrative contact opportunities to determining how best to use limited resources to penetrate new markets. In this post, I will extol the virtues of joint venturing or teaming with equals or larger companies to gain a competitive advantage and multiply earning potential.

As a lawyer, I see companies, particularly closely held businesses, grapple with subcontracting agreements and similar contractual arrangements in which they have little leverage to shape the final terms. The scenario usually involves me reviewing a subcontract with terms such as: “the subcontractor shall not be paid unless and until the owner approves of all work performed …” and “in the event that the owner does not pay the prime for any reason, the prime shall have no obligation to pay the subcontractor.” Another favorite: “as a condition precedent to final payment, the subcontractor shall execute and deliver to the prime a release of all claims against the prime and the owner arising under or by virtue of this agreement.” I promptly revise the most offensive terms, the other party or their counsel objects citing their reasons, and in the end the parties have a finished product that reflects their unequal bargaining positions.

Joint venturing, which is simply forming a strategic alliance with one or more other businesses, could be a powerful weapon for these businesses and a more advantageous alternative to the traditional subcontracting arrangement. In the case of a small business teaming with another small business, the advantages are evident:
(1) each company maintains their autonomy (making teaming a superior alternative to mergers);
(2) the companies collaborate to compete for business they could not otherwise hope to win on their own; and
(3) most importantly, they equitably split the rewards of their labor.

Incidentally, government contracting officials and others with a vested interest in small businesses winning their fair share of contracting opportunities often report that small businesses would be much better positioned to win and successfully perform contracts if they simply joined forces with one another. What’s more, the value and potential of both companies suddenly expand manifold.

The big guys are adept at this. In a recent issue of Business Week, for example, an article about Thermax, Ltd., an Indian power equipment maker, noted the company’s market value rose to its highest in seven weeks after it merely announced a joint venture with Houston-based Babcock & Wilcox Power Generation Group, Inc. The deal is expected to add $30 billion to Thermax’s sales by March 2015. Its CEO was quoted as saying: “We no longer need to be a part of any consortium to bid for projects. We will be able to compete with bigger rivals now.”

Joint ventures are in, and if you're not utilizing this powerful tool, chances are your competition is, or will soon be. The trick is knowing when it makes sense to collaborate with your peers on a project. First, consider whether a prospective joint venture partner has an accommodating culture with compatible broader business strategies. Second, don’t overlook the importance of having a carefully drafted legal document (the joint venture agreement) that describes what each party brings to the joint venture in detail. Finally, and more important than the process itself, is the execution of the joint venture—start with a full-fledged joint business plan, including (very important) an exit strategy.

Business Financing & the Bursting of the Commercial Real Estate Bubble

A few weeks ago, I wrote about the economy in general and the commercial real estate market in particular.

Last week, The Washington Post had an article suggesting that the other shoe is about to drop when it comes to commercial real estate. The article makes for sober reading, suggesting that the commercial market is a bubble that is about to burst (although, unlike home foreclosures, it is likely that few, if any, commercial and retail tenants will find themselves out on the street because of a foreclosure).

A spate of commercial foreclosures is something we have seen before. During the S&L crisis of the early 90s, I recall one banker telling a client of mine that his project was going to be foreclosed upon and it would just be added to the pile of other properties that the bank had already acquired in that manner. The banker did not seem particularly troubled.

Just this week, we learned that bank lending dropped 7.5% during 2009, supposedly the largest annual decline since the 1940s. Is there a corollary between the dearth of lending activity and the upcoming bubble burst? In my opinion, there is; it’s not hard to imagine how the former will cause the latter. Most businesses need to be able to borrow money in order to operate and smooth out cash flow ups and downs. Debt is not necessarily an evil to be avoided and, in fact, if used wisely, is a good cash management tool. When a business needs new expensive equipment, why should it pay the full price up front when debt will allow it to amortize the cost over the effective life of the equipment? And in today’s economic climate, where customers age their receivables as long as possible, a business may need to dip into its operating line of credit to meet those obligations which cannot be aged – payroll, for example.

When banks stop lending, businesses find it hard to operate – let alone grow. And for a business that is marginally profitable, or for a business that is currently in an economic trough, the unavailability of credit can make it impossible for the business to continue. A business can, of course, ask its landlord for rent relief, but a too-understanding landlord may suddenly find itself unable to generate enough rent revenues to meet its debt service obligations or find that, even with rent relief, its business tenant cannot long survive; this, obviously, impairs the landlord’s rent revenues and its ability to meet debt service obligations. So, it is not hard to draw a straight line from the lack of business financing to the bursting of the commercial real estate bubble.

Back in 1990, I started a law firm with two colleagues. During our first year our revenues were, as one might expect for a start-up, acceptable, but not spectacular; nevertheless, we all did quite well economically because we offset the low revenue stream with a close eye on operating costs; what we didn’t make in revenues we enjoyed in savings.

While I don’t want to suggest that the road to survival is layoffs, there are many areas of discretionary spending that can be reduced if not eliminated. How many businesses have a budget that is continuously reviewed and updated? My guess is that there are very few that do. Contrary to popular sentiment, I think it’s currently prudent to sweat the small stuff.

Best Wishes for a Happy and Prosperous 2010

It’s been some time since I’ve blogged, what with the Thanksgiving, Christmas and New Year holidays, but I suspect I’m not alone in breathing a sigh of relief that 2009 is past. (Of course, I hope that this time next year, we’re not looking back on 2009 as the “Good Old Days.”)

When people ask how Press, Potter & Dozier fared in 2009, my stock response is “We made a larger profit than GM and Chrysler combined.” Of course, that’s not necessarily saying much.

If you had asked me last October if I thought the commercial real estate market was showing signs of life, based on the sudden spike in first generation lease activity that kept me busy, I would have said “Yes.” But things slowed considerably in November and December and January has been somewhat of a roller coaster.

I’ve seen small spurts of activity, mostly with the renewals of existing leases, but nothing of long-term significance to suggest to me that the end of the downturn is in sight. As long as businesses tread water or, worse, contract, there does not seem to be any reason for the commercial real estate market to show any vibrancy.

And until consumers – which, in reality, are all of us – start to regain confidence and begin spending, there will be little reason for businesses to expand by increasing production or adding employees. In that sense, I suppose Pogo (the classic Walt Kelly comic strip character) was right when he said “We have met the enemy and he is us.”

I invite you all to return here regularly to see what my colleagues and I think is of interest to the real estate, general business and ADR and environmental law communities and, of course, I really, really, really mean it this time when I wish each of you a Happy and Prosperous 2010.