Real Estate and Colorado Limited Liability Companies

• Jurisdiction: Colorado,United States
• Citation: Vol. 26 No. 3 Pg. 101
• Pages: 101
• Publication year: 1997

26 Colo.Law. 101 Colorado Lawyer 1997.

1997, March, Pg. 101. Real Estate and Colorado Limited Liability Companies

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101

Vol. 26, No. 3, Pg. 101

The Colorado Lawyer
March 1997
Vol. 26, No. 3 [Page 101]

Specialty Law Columns
Real Estate Law Newsletter
Real Estate and Colorado Limited Liability Companies
by Beat U. Steiner

The limited liability company ("LLC") has become a popular vehicle for real estate investment and development This popularity can only be expected to increase now that the Internal Revenue Service ("IRS") has adopted the "check-the-box" regulations,1 which, among other things, sanction single-member LLCs and make LLCs easier to form. The purpose of this article is to analyze the Colorado Limited Liability Company Act ("Act")2 from a real estate lawyer's perspective and, along the way, to point out real-estate-related issues that must be addressed when using the Act. The author assumes that the reader is familiar with, and therefore does not discuss, the basic legal concepts underlying LLCs or general partnerships, limited partnerships, and corporations, against which comparisons occasionally will be made.3

Purposes

An LLC under the Act can be formed for any lawful purpose.4 Purposes can be narrowed to a single project, making LLCs a useful substitute for joint ventures.5 The Act does not require a profit motive, so LLCs can be used as vehicles for joint ownership of vacation homes and conceivably even could be used in lieu of nonprofit corporations for common interest community associations. As in partnership agreements, the purposes clause will define the power and capacity of the LLC. It also may implicate the scope of authority of members and managers and what constitutes the "ordinary course" of business of the LLC.6 Accordingly, real estate attorneys should be attentive to the purposes clause in the operating agreement lest it inadvertently constrain the LLC from an activity necessary to deal with the LLC's real estate

Capacity Relating to
Real Property

The capacity of an LLC to own real property is express in the Act.7 The Act adopts the entity theory from corporate law rather than tenancy in partnership from partnership law.8 Accordingly, some of the arcane title questions that have arisen with respect to partnerships (and joint ventures) are avoided.9 The Act accomplishes this by enumerating an LLC's powers to include to "purchase, take, receive, lease or otherwise acquire, own, hold, improve, use and otherwise deal in and with real and personal property, or an interest in it, wherever situated . . ."10 and to "sell, convey, assign, encumber, mortgage, pledge, lease, exchange, transfer and otherwise dispose of all or any part of its property. . . ."11 Corporate attorneys will recognize this language as substantially similar to that contained in the Colorado Business Corporation Act ("Corporation Act").12

Agency

Agency issues under the Act follow a familiar, limited partnership model, but managers in a manager-managed LLC and members in a member-managed LLC are given virtually unfettered authority to convey property of the LLC. Analysis of agency under the Act starts with the election the Act requires every LLC to make in its articles of organization, whether to be manager-managed (having centralized management) or member-managed (not centrally managed).13 In a member-managed LLC, the members (or member, if a single-member LLC) are the agents of the LLC.14 In a manager-managed LLC, the manager (one or more) is the agent of the LLC.15

The scope of authority of the agent of the LLC (whether one or more members or managers, as determined above) extends to "apparently carrying on in the usual way the business of the limited liability company. . . ."16 Beyond ordinary course of business transactions, the operating agreement or the members of the LLC otherwise must grant, and a third party dealing with the LLC must determine, the actual authority of the person acting on behalf of the LLC.

The Act has a different rule of agency, however, when it comes to property transactions. In property transactions, including those involving real estate, the following rule applies:

Instruments and documents providing for the acquisition, mortgage, or disposition of property of the limited liability company shall be valid and binding upon the limited liability company if executed by one or more managers of a limited liability company.17

Based on this rule of agency, even in a transaction outside the ordinary course of business, the typical purchaser or lender in a property transaction with an LLC need only establish that the signatory is a member or a manager, as required under the articles of organization.

Whether the LLC is member-managed or manager-managed (and accordingly, whether a member or manager is the proper signatory) can be ascertained from the filed articles of...