Buy-Sell Agreement is Important Business Component

One of the most important issues facing a small business is the continuation of the business after the death, disability or retirement of a principal owner/operator. It is essential for a proper succession plan to be implemented to assure that there will be a smooth transition in the ownership and operation of the business. If no such plan is implemented, the day-to-day operation of the business may be seriously harmed, and the remaining owners may be left with a new co-owner that they cannot work with.

A buy-sell agreement is a binding contract among the owner/operators of a business that provides the terms for the smooth transfer of ownership and continuation of the business upon the withdrawal of an owner/operator. A buy-sell agreement may take the form of a "cross purchase agreement," which provides that the withdrawing owner will sell his interest to the remaining owners at a determined price. Alternatively, a "stock redemption agreement" may be utilized, in which the business itself purchases the ownership interest of the withdrawing owner. A combination of the two types of agreements also may negotiated, in which the business has the first right to purchase the ownership interest of the withdrawing owner, and the remaining owners have the right to do so if the business elects not to purchase.

One of the key issues involved in developing a buy-sell agreement is the source of the funds that will be used to purchase the ownership interest of the withdrawing owner. In many instances, the business itself, or the remaining owners, do not have the funds immediately available to furnish the purchase price. Many businesses find that life insurance policies and disability income insurance policies can be very helpful in providing the guaranteed liquidity to fund the buy-out without forcing the remaining owners to sell assets or borrow money.

How "Bid-Down" Procedure is used at Iowa Tax Sales

The June 16, 2008 tax sale in Polk County, Iowa, was noteworthy because of the unusually large number of tax sale certificates that were sold to "bid-down" bidders. Iowa Code Section 446.16(1) authorizes bid-downs. In Iowa, tax sale certificates are sold for the total amount of taxes, interest, fees and costs due. Normally, the purchaser receives a certificate that establishes a lien on a 100 percent interest in the subject parcel. However, where more than one bidder desires to purchase a certificate for a particular parcel, the certificate is sold to the bidder who offers to take a lien on the lowest percentage interest in the parcel. For example, if a certificate is sold to a bidder with the lowest bid-down percentage of 25 percent, the certificate establishes a lien only to an undivided 25-percent interest in the parcel.

If the parcel is redeemed by the owner by paying the total amount due, it makes no difference whether the percentage lien interest was bid below 100 percent. The certificate holder will still receive interest at redemption at the standard rate of two percent per month or portion of a month. However, if the parcel is not redeemed and the certificate holder forecloses on the certificate and obtains a tax deed to the parcel, then there is a significant difference between a 100-percent lien and a lien for less than 100 percent. The tax deed conveys ownership to the certificate holder of an undivided percentage ownership interest equal to the bid-down percentage. For example, if the bid-down percentage was 25 percent, the resulting tax deed would only convey a 25-percent ownership interest in the parcel. The former owner would retain ownership of the remaining 75-percent undivided interest.

When a tax deed is given for an undivided percentage ownership interest there is a strong possibility that a dispute may arise with the owner of the remaining undivided ownership interest. The two owners have the legal status of tenants in common. If they cannot agree on how the parcel is to be used, then the only practical legal remedy is for one of them to file a partition action in the district court. A partition action provides for the court to oversee procedures for the sale of the parcel and the distribution of the net proceeds to the two owners in proportion to their percentage interests.

Tax Sale Article in June 16, 2008 Des Moines Register

Crowds Expected at Polk Tax Sale
By JEFF ECKHOFF • jeckhoff@dmreg.com

County Treasurer Mary Maloney estimates that Polk taxpayers will owe more than $7 million in unpaid taxes on roughly 5,000 properties by the time the sale commences. That's roughly a 16 percent increase over last year, according to the latest figures. For the first time, the pool of interested investors will fill up all 810 chairs in a rented room Maloney uses to sell the tax liens.Plus, there will be a waiting list more than 165 names long to bid on the debts.
"With delinquencies up and interest rates down, it's kind of like I've got the vultures circling," Maloney said last week.Johnson County Treasurer Tom Kriz said delinquent taxes are up roughly 25 percent in his county compared with last year, although that number was expected to shrink drastically due to the traditional flurry of last-minute payments.Linn County Treasurer Michael Stevenson said he expects to take 78 percent more properties to this year's tax sale, where they will be bid on by 218 more people than last year. Bidders are "looking at the volume we have right now, and they're playing the game," Stevenson said.
Tax-sale buyers say they fill an essential public purpose by allowing governments across the nation to enter a new budget year with only a minimum amount of unpaid taxes. Money made from the sale of "tax certificates" is cash that otherwise would be missing from county, city and school budgets for months or years.For investors, this civic duty comes with sometimes highly lucrative returns - especially when a questionable economy swells the ranks of available debts to purchase.
"It's a sign of the times, and it's increasing everywhere we do business," said Lambros Zethalis, director of Mooring Tax Asset Group, a Virginia-based company that will have more than 80 people purchasing properties at today's sale in Polk County. "We don't root for a bad economy ... but there is a benefit to having someone with the wherewithal to help when the county's got a budget to meet."The process, slated to take place in every Iowa county this week, will last three days in Des Moines. It works like this:
By law, Iowa treasurers must go property by property beginning Monday and sell certificates in the amount of unpaid taxes on each piece of land. The process in Polk tends to resemble a large bingo tournament for third-graders. County employees call bidder number after bidder number and repeatedly shush the crowd of hired bidders to quell the chattering.Maintaining order is important, Maloney said, because noise makes it hard to hear and slows down the process even more.
Each tax certificate amounts to a lien on that property and entitles the certificate holder to seize title to the land after two years if the original owner hasn't paid him or her back. Property owners also will owe an additional 2 percent per month in interest.Iowa's interest rate used to be capped at 14 percent per year. But the law was changed in the early 1990s to allow annual returns of up to 24 percent - a rate buyers describe as one of the nation's best, although vast differences in sale procedures make it hard to directly compare Iowa with other states.
The higher interest rate, plus the relative safety of the investment - more than 90 percent of Iowa tax certificates eventually get paid off - has led to an explosion of out-of-state tax buyers. Polk's sale, which used to take place in a county conference room, now requires a convention center and a computerized lottery to determine which bidder gets first crack at each property.The lottery, controlled by a random number-generating computer program, also serves as a cap on how much each investor is allowed to purchase. With 810 bidders and 5,312 parcels, each participant can expect to have his or her bidder number called no more than six or seven times during the three days.
"It's not as lucrative as it used to be when I got into it," said Dr. Brian Kay, a 52-year-old Minnesota pathologist.Kay, a former Des Moines resident, went to his first tax sale with his father in Clarion at age 18. He now finances a handful of auction bidders each year organized by a Des Moines-area friend."I used to be able to put more money into it, actually, when there were only a dozen of us," Kay said. "We wouldn't bid against each other. We'd just kind of sit around and say, 'Do you want this one?' ... I think most of those guys are dead now."
Most big players in the tax sale operate on a significantly larger scale. Employees at one Des Moines temp agency, where bosses declined to comment, said their agency will have at least 400 workers hired out to various tax-certificate companies this week. On top of the surrogates' salaries, which county officials estimate at $10 per hour, each company who bids at the Des Moines sale must pay Polk County $150 per head to register its bidders. (Because there's less paperwork, the fee is $75 for individuals representing themselves.)
The sole three-day job for surrogate bidders: To sit at rows of tables and listen for their assigned numbers to be called, then yell either "Sold" or "Pass.""It's like the lottery," said Nancy Coon of Oak Helm Partners in Davenport. "You have to have a lot of numbers in to make it worth your time."You also have to do your homework and determine ahead of time whether each property is worth the risk of ownership. Bidders say the only real control they have in such a crowded sale is knowing when to refuse to purchase the certificate for a losing property. If tax certificates aren't redeemed, buyers won't get paid and could lose their entire investment.
"If you don't do your homework, you certainly can pick up an environmentally hazardous property where you're going to walk away from your investment," said James Nervig, a Des Moines attorney and long-time tax sale buyer. "But there's certainly a lot more positive in individual cases than there is negative."

BIZ - Polk County's Business Accelerator

Mike Colwell of BIZ visited the firm last week.  Mike talked about his organization and its many offerings for growth businesses in Des Moines and the surrounding community.  

For more information be sure to visit their site.

If you want to see more from Mike you may also want to check out a podcast between Mike and Rush Nigut of the Brick Gentry Law Firm.

Iowa Tax Sale Certificates Expire After Three Years

In Iowa, tax sale certificates to parcels of real estate with delinquent taxes are sold by the county treasurer at the regular annual tax sale in June of each year. See Iowa Code Section 446.7. A certificate holder may not initiate procedures to foreclose on the certificate until one year and nine months after the tax sale. See Iowa Code Section 447.9. Foreclosure procedures require a certificate holder to serve 90-day redemption notices on all persons with interest in the parcel, and to commence the 90-day redemption period by filing an affidavit of service with the county treasurer. See Iowa Code Sections 447.9 and 447.12. If the parcel is not redeemed by the end of the 90-day redemption period, the certificate holder is entitled to receive a tax sale deed from the county treasurer. See Iowa Code Section 448.1.

Iowa Code Section 446.37 requires that a tax sale certificate will automatically expire if the holder does not file the affidavit of service of the 90-day redemption notice with the county treasurer before the third anniversary of the tax sale. Purchasers of tax sale certificates at the June 2005 tax sale should be aware of this important statutory requirement and allow themselves ample time to commence and complete foreclosure procedures before their certificates expire in June 2008.

Recording of 120-day Affidavit is necessary to establish Marketable Title under Iowa Tax Sale Deed

The Title Standards of the Iowa State Bar Association require that a person who has acquired title to a parcel by a tax sale deed must complete procedures under Sections 448.15 and 448.16 of the Code of Iowa before the tax deed title may be considered marketable. Section 448.15 authorizes the tax deed holder to file a 120-day affidavit with the county recorder, stating that any person with a claim adverse to the tax deed title must file the claim with the county recorder within 120 days after the filing of the affidavit. Section 448.16 states that any claims not filed within the 120-day filing period are barred thereafter.

Generally, an Iowa title-examining attorney will not render an opinion that tax deed title is marketable until after the expiration of the 120-day claim period following the recording of the 120-day affidavit. Therefore, whenever a tax sale deed is obtained, the deed holder should give strong consideration to the preparation and recording of a 120-day affidavit.

Important New Iowa Tax Sale Law

On April 8, 2008, House File 2642 was enacted by the Iowa Legislature to amend the Iowa Code to significantly enhance the marketability of tax sale deeds in Iowa. This amendment is intended to substantially eliminate the adverse impact on tax titles that resulted from the recent decision by the Iowa Supreme Court in Dohrn v. Mooring Tax Asset Group, 743 N.W.2d 857 (filed January 25, 2008). In Dohrn, the Court determined that a tax deed is subject to invalidation, even years after it was recorded, if it is challenged by a person who shows that notices were not served on persons with unrecorded possessory rights, such as (a) a tenant under an unrecorded lease, (b) a person who had parked a truck on the premises, and (c) a person who stored personal items in a building on the premises, (d) a person who maintained a pile of lumber behind an uninhabited home, (e) a neighbor who went every other day to the house in an attempt to exterminate vermin, (f) a person who periodically cut weeds and hauled dirt from the premises, or (g) a person who removed timber from an uncultivated wood lot. Under their title standards, Iowa attorneys examining abstracts of title for a potential buyer or lender rely on matters of record in rendering opinions as to the marketability of title. Under the Dohrn decision, a tax deed is subject to invalidation for reasons that are not disclosed by an abstract. The abstract can furnish no notice to the examiner of the existence of persons with insignificant, unrecorded possessory interests of the types discussed in Dohrn.

The HF2642 amendment addresses the problem of tax deed marketability by adding a new unnumbered paragraph to Iowa Code Section 448.3, which provides that a tax deed is not subject to invalidation if notice was not served on a person entitled to service. Instead, the interest of the person not served with notice simply survives the issuance of the tax deed. The only exception is that a tax deed remains subject to invalidation in the case of failure to serve the owner of record or the person in whose name the parcel is taxed. By protecting the interest of any person not served with notice by allowing his or her interest to survive the issuance of the tax deed, while at the same time upholding the validity of the deed, HF2642 effectively reduces the problem of marketability of tax titles that exists under the prior law. The amendment takes effect immediately upon its enactment on April 8, 2008, and applies to all tax sale deeds issued on or after that date.