1972, January, Pg. 1. How to Advise the Land Developer.

• Author: by L. Douglas Hoyt

1 Colo.Law. 1

Colorado Lawyer

1972.

1972, January, Pg. 1.

How to Advise the Land Developer

11972, January, Pg. 1How to Advise the Land Developerby L. Douglas Hoyt and Richard A. FrancisL. Douglas Hoyt, Denver, is president of Eagle County Development Corporation and is a member of the Colorado Bar. At the 1971 CBA convention he spoke to the Real Estate Law and Titles Section on state and federal regulation of real estate, and he is a frequent speaker on the legal implications of real estate development. Richard A. Francis, Denver, is assistant secretary and staff attorney of Eagle County Development Corporation. This article is drawn from a speech prepared by Mr. Hoyt and Mr. Francis and delivered by Mr. Francis to the Modern Real Estate Techniques-Seminar at the November 1971 meeting of the ABA Real Property, Probate and Trust Section.In terms of sheer numbers of inexperienced participants, the gold rush of 1849 was far less alluring than has been the land development boom of the 1970's. Would-be land developers visualize gold in each and every acre, in or out of California. However, unless the would-be developer seeks counsel from his attorney before entering the development business, his business chances of succeeding are far less than were those of his miner counterpart, who had only to have luck on his side and knowledge of the rudiments of staking a lode claim.

We present here a check list of legal and business matters of concern to that attorney whose counsel is sought by the would-be developer-client.

Ideally, the attorney should begin advising the client at the moment of desire to enter into the land development business, and continue through the land acquisition, development and marketing aspects. As one will readily observe, decisions cannot be made in one phase without recognition of their impact in a later phase of the total economic endeavor.

The following are some matters to be considered.

Contemplating the Entry

The first question to consider is whether the client should enter the land development business.

Does he have the time to dedicate to the development business? If he contemplates being other than an investor limited partner, a minor joint-venture participant, or a corporate shareholder, he must personally be involved daily in the development. The chances of failure are substantially increased by dependency upon land planners, engineers, architects and other consultants when their work is not personally supervised, directed and limited by the developer.

Does he have the capability of funding a development? Land development requires large front-end funding. The cost

2of the land will almost universally represent only a minor part of the capital requirement. The would-be developer should not be permitted to delude himself into thinking that the time at which sales will commence and the monthly sales rate are certain. Unless he is funded on a basis which permits cash flow to commence at a later date and in lower amounts than his projections, he should not undertake the development.

Can he or the business entity withstand the income tax ramifications of land development? The large number of capital dollars invested must be spread over the entire development. Taxable income is deemed to be achieved on the first subdivision lot sale, even though the developer may have hundreds of thousands or millions of dollars to recover before he has enjoyed an economic gain.

Structuring the Enterprise

Two primary considerations which must be weighed in determining the proper structure of the development enterprise are the income tax ramifications to the client and, of course, protection against liabilities. If the client is to act in his own name, as a general partner or as a joint venturer, he will probably be deemed a "dealer" for income tax purposes, as well as being subject to all legal liabilities arising out of the business. If he acts through a true corporate entity (either general or subchapter S), or as a limited partner, he may avoid for-income tax purposes the "dealer" classification and limit his legal liabilities.

Considering the Land

There are several points to be considered prior to acquisition of the land intended for development.

Status of TitleThree basic questions must be explored.

Is a fee or long-term leasehold title to be acquired? In certain areas...