USA - ALABAMA Law and Practice Contributed by: Adam J. Sigman, Crystal H. Walls, Nathan Stotser and Katie Sinclair, Dentons
Such private restrictive covenants may be enforced by the parties to the covenant or by the successor in title to such a party. However, Alabama does follow a “general rule that restric - tive covenants are not favored in the law and, therefore, that they will be strictly construed, with all doubts resolved in favor of the free and unrestricted use of land and against the cov - enants”. See Whaley v Harrison, 624 So 2d 516, 518 (Alabama 1993). 5. Investment Vehicles 5.1 Types of Entities Available to Investors to Hold Real Estate Assets Alabama law authorises the formation of corpo - rations, general partnerships (GPs), limited part - nerships (LPs), limited liability companies (LLCs), and real estate investment trusts (REITs) for the purpose of holding real estate. The most frequently used ownership entities in Alabama are LLCs and LPs (including limited liability limited partnerships). Generally, LLCs are preferred to LPs as investment vehicles because none of an LLC’s owners (“members”) is liable for the entity’s debts and obligations, while an LP is required to have at least one part - ner (the “general partner”) liable for such debts and obligations. LLCs also have a potential tax basis advantage over LPs in qualifying for non- recourse basis treatment for an entity-recourse debt. Alternatively, an LP may be preferable if certain owners are not US citizens and if the requirements of their home country’s tax laws would impose additional tax burdens upon them otherwise. Both LPs and LLCs are usually preferred over corporations (other than real estate investment trusts (REITs), as described below) because cor -
porate income is taxed at the corporate level, and then the dividends paid to the corporate owners (“shareholders”) are taxed again. Corporations that own real estate often do so in connection with their trade or business (eg, factories). Other entity types can be used to hold real estate assets as well, such as S corpora - tions and general partnerships, but their use is infrequent due to taxation and liability concerns, respectively. 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity With respect to LPs and LLCs, almost all fea - tures of their operations are negotiated among the partners or members in an LP’s limited part - nership agreement or in an LLC’s limited liabil - ity company agreement, including how and by whom decisions are made as well as how the economics are divided. Major decisions typically require the consent of the partners or members, and often include: • a sale or refinancing of the principal asset; • certain major leases; • construction matters, such as budgets and hiring of contractors; and • decisions affecting the continuation of the entity, such as merger, termination, and bank - ruptcy. These agreements also establish the priorities of economic distributions and the payment of agreed-upon fees among the partners or mem - bers, providing for how and when additional capital may be called from the partners or mem - bers. It is important that these agreements prop - erly address income tax considerations, as the allocation of economic benefits and tax liabili - ties of ownership must comply with detailed US tax code regulations or risk unintended tax out -
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