Real Estate – Beyond The Fine Print

Litigation Considerations

David A. Zobel — Tue, 05 Dec 2017 13:00:13 +0000

Part 11 of a 12-part series by David A. Zobel on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Whether you encounter a tenant who breaches your lease, a contractor who improperly repairs your property, or an individual injured on your property, at some point your company may be faced with the need to pursue or defend against a lawsuit. It is important to understand what your company should consider when it comes to our court system.

What type of paperwork do you have?

The first item to consider when an issue arises is whether the issue is documented.

If your contractor failed to properly repair the property, do you have a copy of your contract? What about pictures of the repairs?
Regarding tenant disputes, were your discussions and agreements in writing or, if initially in person or over the phone, did you follow-up with a letter memorializing your discussion? Do you have a copy of any demands for unpaid rent or to do/cease doing some activity?
Regarding an accident at the property, did you have warnings in place or written rules concerning the source of the accident?

What type of documentation was in place at the time the issue arose and what you have available will be crucial in evaluating whether and how to proceed with a lawsuit, what defenses are available, and whether settlement may be appropriate if your company is served with a court summons.

You will likely need to retain an attorney to represent the company in court.

The second item to consider is that, with very few exceptions – most notably small claims court – you will need to engage an attorney to represent your company when you go to court. In Missouri, non-lawyers may represent themselves in court, but may not represent other individuals and businesses. Remember, your company is a legally distinct “person.”

Do not delay.

There are time restrictions associated with filing a lawsuit, answering a lawsuit, seeking administrative remedies, and otherwise pursuing your claims.

On the defensive side, depending on what type of court your company is summoned to, you may have 30 days to answer the allegations made against your company or perhaps less time before the company will be expected to appear in court. Failure to observe these time restrictions can result in a default judgment against your company and a forfeiture of your company’s right to defend itself.

On the offensive side, all actions (e.g., breach of contract, eviction, or fraud) are subject to Missouri’s statutes of limitations which require actions be brought within a certain number of years from the time they accrue or not at all. Failure to observe these time restrictions can result in a loss of your right to seek relief from the other party.

Remember that insurance we recommended? Check it.

While certain occurrences, such as an injury at your property, may seem more obvious to trigger insurance coverage, there are many which, while covered, are not as obvious. It’s a good idea to get out those insurance policies and contact your agent or an attorney at the early stages of becoming aware of an issue to see where your coverage stands.

Evictions.

We cannot predict and describe each of the potential types of issues which may affect your company and lead to a lawsuit, but given the nature of real estate leasing, at some point you may be faced with need to evict a tenant. There are several different types of eviction lawsuits you can bring depending on the type of tenant breach, possibility of tenant counterclaims, and type of relief you want (whether you just want the tenant to get current on rent or you want the tenant out regardless of payment). Each type of lawsuit also has its own procedural requirements, including pre-lawsuit notice requirements to the tenant. Failure to observe those procedures can thwart and unnecessarily delay getting a defaulting tenant out of your property. As such, it is a good idea to consult your attorney as early as possible to ensure the quickest and most effective result.

A final note on being named personally in a lawsuit.

It is important to note that even when all corporate formalities are observed, you haven’t signed any agreement in your own name, you haven’t made specific representations, and you haven’t engaged in improper or nefarious activities, it is still possible that a lawsuit may be directed at both you personally and your company. This sometimes occurs with overzealous litigants or in instances where the other side is not fully apprised of the manner in which you do business. In many instances, your involvement in the lawsuit can be corrected in the early stages of a lawsuit informally, through discussions with the other party, or formally, through a motion filed with the court. (Of course, if you are acting improperly and not observing corporate formalities – you certainly can be held liable for your company’s debts.)

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This post is part of a series designed to help folks understand and navigate the various pitfalls and legal considerations of real estate leasing. If you are facing a lawsuit or need assistance enforcing your rights one of our experienced real estate attorneys would love to meet with you.

In the next post, we’ll discuss when and why it may make sense for you to seek help from an attorney. If you would like to go back and re-read any of our earlier posts, you can find links below.

Introduction
Part 1: Do I Need a Legal Entity?
Part 2: What Type of Legal Entities are Available?
Part 3: Tax Treatment Considerations When Selecting Your Entity
Part 4: Your Entity’s Governing Documents
Part 5: Operational Considerations – Purchasing Real Estate – Title Insurance
Part 6: Operational Considerations – Purchasing Real Estate – Indenture Review
Part 7: Operational Considerations – Purchasing Real Estate – Loan Documentation
Part 8: Observing Corporate Formalities
Part 9: Insurance Considerations
Part 10: Drafting the Right Lease Agreement
Part 11: Litigation Considerations
Part 12: Should I Employ an Attorney to Assist my Real Estate Business?

Posted by Attorney David A. Zobel. Zobel assists clients with business and litigation matters, primarily in the areas of contract, banking, insurance, and real estate issues. He is also a litigator for the firm’s commercial, probate, and insurance-related practices, handling general litigation, trust and probate litigation, title defense, surety defense, and professional malpractice disputes.

Drafting the Right Lease Agreement

David A. Zobel — Tue, 07 Nov 2017 15:12:25 +0000

Authored by David A. Zobel with contribution from James M. Heffner

Part 10 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Congratulations, you have a space to lease and someone interested in leasing it. Now you need to define the rules and requirements which will control the relationship between you, as landlord, and the tenant – you need to draft a lease. (Of note, it is possible to have an unwritten or oral lease, but we strongly discourage that practice as it significantly increases the likelihood you’ll end up in court with a tenant arguing who is responsible for what and when). This could be the starting point for a one-year, 10-year, or longer relationship with your tenant, so it is important that everyone understand the parties’ respective rights and obligations from the outset.

The full scope of items you might or should consider incorporating into your lease will depend upon many factors, including the nature of your property and whether your tenancy is residential or commercial. Here are a few items to consider, regardless of your company’s particular circumstances.

Identify and Include the Appropriate Parties.

Landlords: The lease should identify your company as the landlord and the party to whom rent should be payable. If you operate several companies which each own a leased property and you set up another company to manage those companies (streamlining rent and other issues), please ensure you have a written property management agreement in place between your two companies and each tenant lease identifies and distinguishes each of your company’s roles.

Tenants: If your company is leasing residentially, ensure that everyone that is going to live at your property is made a party to the lease so they can be made jointly responsible for the lease’s requirements. Co-signers (often parents of the individual tenants) should also be properly identified and required to sign the lease. If your tenant happens to be another company, you may want to consider requiring the managers or members of that company to sign a personal guaranty – depending on how secure you feel that the company will fulfill the obligations of your lease.

Identify What the Rent Covers and What It Doesn’t.

You will want to clearly identify whether utilities, insurance, taxes, maintenance items, and property management services are covered by the monthly rent payment. These additional costs can have a significant impact on the net income your property can generate.

For commercial leases, pure gross leases – where the tenant pays a base rent and the landlord must use a portion of that rent on operating expenses – are one option. More common options though are net leases – where the tenant reimburses the landlord for all of its ongoing operational expenses so that the landlord ensures a net amount – and modified gross leases – where the tenant reimburses the landlord for some of its ongoing operational expenses. Depending on the nature of the tenant’s business, percentage rent leases – where rent is calculated by multiplying tenant sales by a certain rent – may be appropriate.

Identify Responsibility for Repairs and Improvements.

To avoid he-said, she-said issues down the line, you should put into writing any scope of work you agree to do before the tenant moves into the space. The lease should also identify who is responsible for permits and construction at your property generally. For commercial leases particularly, your lease (or an exhibit thereto) should memorialize whether there will be a build-out, whether the tenant is permitted rent allowances, and when rent payment obligations will commence (during or after the build-out).

The lease should also identify whose responsibility – both the actual work and payment for that work – it will be to make repairs once the tenant moves into the space. If the lease will permit the tenant to make improvements at the property, the lease should also identify whether those improvements need to be removed at the end of the lease.

Finally, the lease should address whether the tenant is obligated to carry insurance (highly recommended) and if so, what type and what level of insurance will be required, and whether tenant must name the landlord as an additional insured on any required policies.

As indicated above, these items are just a few of many items your company should consider when drafting an appropriate lease agreement. Lease drafting is another area where it may be particularly helpful to consult with an attorney whose experience can help identify what lease provisions are appropriate for your company and property. That attorney can also help ensure you understand the contract your company will be entering into and be bound by for the duration of the tenancy. If you do not consult with an attorney, we highly recommend you carefully review each provision of any internet samples to ensure not only that you understand the effect of each provision, but that the sample you choose is appropriate for residential or commercial tenancies and is legal in the state of Missouri.

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This post is part of a series designed to help people understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to assistance drafting a lease or in learning more about lease agreement considerations, one of our experienced real estate attorneys would love to meet with you.

In the next post, we’ll discuss what happens when things don’t go plan and how litigation can impact your company. If you would like to go back and re-read any of our earlier posts, you can find links below.

Posted by Attorney David A. Zobel with contribution by Attorney James M. Heffner. Zobel assists clients with business and litigation matters, primarily in the areas of contract, banking, insurance, and real estate issues. He is also a litigator for the firm’s commercial, probate, and insurance-related practices, handling general litigation, trust and probate litigation, title defense, surety defense, and professional malpractice disputes. Heffner practices in corporate and real estate law. He is experienced in the purchase, sale, financing, and leasing of real estate, as well as the creating and negotiation of construction documents. In corporate matters, he supports business owners in structuring entities, shareholder disputes, mergers, and stock purchases/redemptions.

Insurance Considerations

David A. Zobel — Tue, 03 Oct 2017 13:00:09 +0000

Authored by David A. Zobel with contribution from Michael J. McKitrick

Part 9 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

As a caveat to this discussion on insurance, we recommend that you consult with an independent insurance agent/broker to ensure that you obtain the most appropriate type and extent of insurance coverage that your specific business will need.

Having said that, there are some general insurance issues every residential or commercial leasing business should consider.

First, foremost, and fundamentally – don’t skip over insurance and do not assume your personal policies will cover your company’s property or operations. Most personal policies do not cover businesses.

As we discussed in the previous post on corporate formalities, one basis for a creditor to pierce the corporate veil of a company and reach the member/shareholder’s personal assets is when the company is undercapitalized. There is no hard and fast rule about what constitutes undercapitalization, but it is generally found where the company has very small funding or resources in comparison to its debts and risks commonly associated with that type of business. A leasing company’s primary risk will be in negligence liability, such as a slip-and-fall injury, as opposed to contract or product-liability issues. A court will want to see that the company has taken steps to address that type of risk – whether through substantial capital reserves or, more likely for a newly established business, an adequate insurance policy. It is also important that any such policy is held by the company itself and that the members/shareholders do not attempt to simply add the company’s property to their existing personal policies as this may be seen as improper commingling of the member/shareholder and company.

Second, require your tenant(s) to also carry coverage.

Your lease can shift primary responsibility for certain injuries and events to your tenant and require the tenant to carry an insurance policy to cover such responsibility. A tenant’s policy is not a replacement for your company’s policy, but will help reduce the risks that a claim is made against your company’s policy.

To ensure tenant compliance, your lease should clearly articulate the type and amount of insurance required, dictate that it will be primary, not secondary to the landlord’s coverage, and indicate that failure to obtain and maintain coverage will be considered an event of default under the lease. As a best practice, require the tenant to provide your company with a copy of the policy.

Third, there are different types of insurance that may be available to your company.

Most business owners are familiar with property insurance which addresses risks to property, such as fire, theft, and weather damage; however, there are other types of coverage which may be useful for your company. The first to consider is a general liability policy which is designed to cover legal issues related to an accident, injury, or negligence claim. If you employ an employee to help manage your property or make repairs, you may want to consider workers’ compensation insurance which will address medical treatment, disability, and death benefits for that employee. Finally, you may also want to consider business interruption insurance which is designed to replace lost rental income in the event of a disaster or other event.

Beyond the categories of insurance types, we also strongly recommend you fully understand the scope of coverage your specific policy provides. For instance, property insurance generally comes in two different forms: all-risk policies, which will cover a wide-array of events except those excluded in the policy, and peril-specific policies, which will cover losses only to those events listed in the policy.

These items are just three of the many insurance considerations that your company should evaluate before and during its operations. Consultation with your agent/broker is strongly recommended to ensure you have taken appropriate steps to manage and minimize the risks associated with leasing real estate.

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This post is part of a series designed to help business owners understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn more about insurance considerations for your business, one of our real estate attorneys would be happy to meet with you.

In the next post, we will identify several issues you will want to consider when drafting your lease agreement. If you would like to go back and re-read any of our earlier posts, you can find links below.

Posted by Attorney David A. Zobel with contribution by Attorney Michael J. McKitrick. Zobel assists clients with business and litigation matters, primarily in the areas of contract, banking, insurance, and real estate issues. He is also a litigator for the firm’s commercial, probate, and insurance-related practices, handling general litigation, trust and probate litigation, title defense, surety defense, and professional malpractice disputes. With over 30 years of hands-on commercial litigation and transactional law experience, McKitrick’s practice encompasses business and transactional advice, commercial real estate matters, and regulatory and practice management guidance for health care professionals. Most of his clients are in the medical, financial services, and manufacturing sectors.

Observing Corporate Formalities

David A. Zobel — Tue, 05 Sep 2017 13:00:30 +0000

Written by David A. Zobel with contribution from Jeffrey R. Schmitt

Part 8 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

It is absolutely critical to keep in mind at all times that your limited liability company or corporation is not an alter ego or simply an extension of yourself. The entity’s bank account cannot be used as your personal bank account, you should not use the entity’s money to cover personal debts, and, in general, your personal assets should not be relied on to continually cover your entity’s debts. This is true even if you are the sole member or shareholder. The entity is and must be treated as a separate “person” from yourself, with its own assets, activities, and representations.

Keeping that distance is often referred to as observing corporate formalities. Failing to do so can remove the very asset protections that your legal entity was designed to impart. Each business model is different and all necessary formalities cannot be listed for each company, but below are some general guidelines for observing the necessary formalities.

Your company should exercise care to hold itself out to the public as the company. All property, letterheads, billheads, contracts, advertising, business cards, and telephone listings should use the company’s full (or properly registered fictitious) name. Moreover, when you sign your name to a letter, check, or agreement on behalf of the company, you must clearly indicate your title or capacity to sign on that behalf. Typically this may be accomplished by writing the company name followed by your name and title, but each occasion for signature will be different.
Establish a separate bank account for the entity, in the entity’s name, and keep it separate from your personal funds. Do not commingle personal funds and corporate funds. Courts have held the commingling of funds as a basis to disregard the legal entity’s separate status and reach the member’s personal assets. If you transfer money in or out of the company, ensure it is properly authorized by its governing documents and well-documented.
Maintain appropriate assets and/or an appropriate type and amount of insurance for your entity. Another basis where courts disregard corporate entities (and reach member’s personal assets) is inadequate capitalization. There is no bright line rule for what constitutes “adequate” capitalization, but courts typically consider capitalization to be inadequate if the entity’s funding and resources are very small in comparison to the nature of the company’s business and risks commonly associated with that type of business. Especially for new businesses with little funding and resources, an appropriate type and amount of insurance can help address this issue.
Follow your entity’s rules. If the operating or shareholder agreement calls for reports or meetings or votes or certain signatures or notices or other things, abide by those requirements. Remember the entity is the one acting, not the member. This can be especially problematic for single-member limited liability companies, but if the rules are not observed that can lead to a finding that the member is completely dominating or controlling the entity – another basis where courts have looked beyond the entity to reach the member’s personal assets. One way to avoid this issue is to completely understand your entity’s formation and governing documents and seek counsel to guide that understanding, as opposed to printing and signing an overly complicated operating or shareholder agreement from the internet.

The above recommendations are just some of the better practices to ensure proper operation of your entity. There will be other best practices you will want to abide by depending on the specific nature of your business and type of assets held.

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This post is part of a series designed to help folks understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn about best practices for observing corporate formalities, one of our experienced real estate attorneys would love to meet with you.

In the next post, we’ll discuss the need to insure both your company and its assets. If you would like to go back and re-read any of our earlier posts, you can find links below.

Posted by Attorney David A. Zobel with contribution by Jeffrey R. Schmitt. Zobel assists clients with business and litigation matters, primarily in the areas of contract, banking, insurance, and real estate issues. He is also a litigator for the firm’s commercial, probate, and insurance-related practices, handling general litigation, trust and probate litigation, title defense, surety defense, and professional malpractice disputes. Schmitt represents businesses and individuals in commercial litigation matters including banking and finance, real estate, condo and homeowners associations, professional liability defense, title disputes, transportation, and pension and retirement plans.

Recent Tax Sale Emphasizes Importance of Periodic Review of Your Entity’s Registered Agent and Contact Information

David A. Zobel — Wed, 23 Aug 2017 09:00:23 +0000

A recent turn of events in a San Francisco neighborhood should prompt you and your entity to confirm that your contact information is up-to-date. As reported by the San Francisco Chronicle, residents of a private street, lined with multi-million dollar homes, recently learned that their street had been purchased by real estate investors at a tax sale after the homeowner’s association failed to pay its annual $14 property tax bill for several decades. The association claimed it was unaware of its tax obligations because the county tax bills were apparently sent to the address of a former accountant who hadn’t worked for the homeowners since the 1980s. The residents have filed a lawsuit seeking to undo the tax sale and while their success in that endeavor is uncertain, two things are certainly true—this was a costly and completely avoidable mistake.

While it is prudent to review all of your entity’s contact information to make sure creditors, vendors, and others can easily and consistently communicate with your entity, there are two specific records that are critically important—the contact information of your registered agent and the mailing address for your local real estate taxes.

Registered Agent

By statute, all foreign and domestic corporations, limited liability companies, limited partnerships, and limited liability partnerships registered in Missouri must designate and maintain a registered agent. A registered agent is simply a person designated by the entity to receive important notices and demands on the entity, such as state and governmental agency filings and tax statements. The registered agent is also designated to receive notice of any lawsuit initiated against your entity. If your registered agent or registered agent’s contact information is outdated, it is possible you may miss very important notifications. Consequences of failing to maintain good contact information for your registered agent can include the Secretary of State administratively dissolving your entity and allowing a default judgment to be entered against your entity. In Missouri, you can verify that your registered agent contact information is current by visiting the Secretary of State’s website or clicking on this link.

Local Taxing Authority

The next piece of information to verify is the one that led to the dilemma in San Francisco—a current mailing address for your local real estate taxes. This is the address where local governments send notifications regarding annual tax obligations. Many counties, including St. Louis County, maintain these records on their websites which allow for ease of verification. Failure to maintain this address can result in not receiving notice of your tax obligations and, ultimately, sale of your property by the local government to satisfy those taxes.

As demonstrated in the San Francisco case, failure to maintain current contact information can have profound financial and legal implications; however, with simple, routine verifications you can ensure your entity is properly protected against those risks.

If you have questions or concerns about your entity’s contact information, immediately contact your local or state government officials or consult with your attorney.

Posted by Attorney David A. Zobel. Zobel assists clients with business and litigation matters, primarily in the areas of contract, banking, insurance, and real estate issues. He is also a litigator for the firm’s commercial, probate, and insurance-related practices, handling general litigation, trust and probate litigation, title defense, surety defense, and professional malpractice disputes.

Operational Considerations – Purchasing Real Estate – Loan Documentation

David A. Zobel — Tue, 01 Aug 2017 12:45:56 +0000

Written by David A. Zobel with contribution from James M. Heffner

Part 7 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Once you’ve established your legal entity, the next step will be purchase the real estate you wish to lease (or invest in). The type of real estate which will be appropriate for your business will vary depending on a number of factors, including your location, level of investment, and potential tenant base. Not surprisingly, thorough research, inspections, and planning are critical to ensuring success. In this series of posts, we’re outlining several important issues when selecting a property to purchase: title insurance, indenture review, and ensuring appropriate loan documentation.

A Note on Loan Documentation

If you purchase your property with cash, you can skip over this section. However, if you are going to seek a loan from a traditional lender, you will want to make sure the loan is properly documented. This includes, to the extent possible, working with your lender to ensure the business entity (not the members/shareholders) is listed on the loan documents. Ideally, your entity will be listed as the borrower on the promissory note and the grantor of the deed of trust (mortgage) on the property to be acquired by your entity. This helps to distinguish the transaction as one of the business rather than that of the members and shareholders personally. Every lender is different and will have its own lending requirements.

As a side note, it is becoming increasingly common for real estate transactions to involve some form of tax credits as the credits can be critical in ensuring the economic success of a particular deal. The principles above concerning appropriate loan documentation are also applicable to seeking and securing tax credits.

Personal Guarantees and the Lender Exception to Asset Protection

When you seek a loan in the name of your company, the lender may still request the principals of the acquiring entity to personally guarantee the loan. This will be more likely the case with new entities, entities without other assets, and where the debt to equity ratio of the loan to property value is high. A personal guaranty of the principals helps assure the lender that if the company fails to pay the promissory note, the lender can still seek repayment from the individual(s) that caused the company to get the loan.

Without the guaranty, the lender may not feel secure enough to make the loan. Without the loan, you won’t be able to purchase the property so the personal guaranty is often a necessary step. Of note though, the lender’s special ability to reach the members personally does not defeat the overall asset benefit protections offered through the operation of your business through a legal entity.

And as a final note, once your business is established with assets/income and your indebtedness is reduced, you should attempt to renegotiate with your lender, or another, to have the guaranty and that special exception eliminated or limited.

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This post is part of a series designed to help folks understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn about loan documentation and lending considerations, one of our experienced real estate attorneys would love to meet with you.

In the next series of posts, we’ll outline additional operational considerations aimed at properly managing your entity, as well interacting with the general public. If you would like to go back and re-read any of our earlier posts, you can find links below.

Posted by Attorney David A. Zobel with contribution by Attorney James M. Heffner. Zobel assists clients with business and litigation matters, primarily in the areas of contract, banking, insurance, and real estate issues. He is also a litigator for the firm’s commercial, probate, and insurance-related practices, handling general litigation, trust and probate litigation, title defense, surety defense, and professional malpractice disputes. Heffner practices in corporate and real estate law. He is experienced in the purchase, sale, financing, and leasing of real estate, as well as the creating and negotiation of construction documents. In corporate matters, he supports business owners in structuring entities, shareholder disputes, mergers, and stock purchases/redemptions.

Operational Considerations – Purchasing Real Estate – Indenture Review

David A. Zobel — Thu, 06 Jul 2017 13:00:15 +0000

Written by David A. Zobel with contribution from Jeffrey R. Schmitt

Part 6 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Once you’ve established your legal entity, the next step will be purchase the real estate you wish to lease (or invest in). The type of real estate which will be appropriate for your business will vary depending on a number of factors, including your location, level of investment, and potential tenant base. Not surprisingly, thorough research, inspections, and planning are critical to ensuring success. In this series of posts, we’re outlining several important issues to consider when purchasing a property: title insurance, indenture review, and ensuring appropriate loan documentation.

Indenture Review

Most title searches will disclose that the property you are purchasing is subject to certain local rules and agreements between neighbors. The terms used for these neighbor agreements will vary depending on the nature of the property. Condominiums are subject to declarations and by-laws while houses are typically subject to neighborhood or subdivision indentures. (For simplicity, we’ll refer to all of these agreements as indentures.)

It is critically important that you review the indentures governing the property you seek to purchase before you close on the property. Most indentures contain some level of restrictions on real estate leasing and short-term rentals. Those restrictions can be purely administrative, including requirements that all leases be submitted and approved by the condominium board or neighborhood trustees. However, others can mandate lease durations and even bar certain types of rental arrangements, like short-term rentals made popular by AirBnB and VRBO. Some municipalities may also require permitting and fees for certain types of leasing.

Failing to consider or ignoring indenture restrictions can result in costly litigation and even the loss of the property itself. Accordingly, we highly recommend reviewing all governing indentures before closing to ensure the desired property can be used in the manner to which you are planning.

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This post is part of a series designed to help people understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn about navigating indenture restrictions, one of our experienced real estate attorneys would love to meet with you.

In the next post, we’ll outline a few legal considerations when you seek a loan to purchase real estate. If you would like to go back and read our earlier posts, those links are set forth below.

Operational Considerations – Purchasing Real Estate – Title Insurance

David A. Zobel — Tue, 06 Jun 2017 12:49:22 +0000

Part 5 of a 12-part series by David A. Zobel on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Once you’ve established your legal entity, the next step will be to purchase the real estate you wish to lease (or invest in). The appropriate type of real estate for your business will vary depending on a number of factors, including your location, level of investment, and potential tenant base. Not surprisingly, thorough research, inspections, and planning are critical to ensuring success. In this and the next two posts in this series, we’ll outline several important issues at this juncture: title insurance, indenture review, and ensuring appropriate loan documentation.

Title Insurance

When you purchase real estate you may be purchasing more (and maybe less) than the land and improvements you actually see. The land is likely encumbered by third parties who may have rights (possibly superior to your rights) to your land which could restrict your use and ownership in various ways. Encumbrances can be minor, such as a minimum set-back restrictions simply preventing owners from building up to a property line, but others can be more severe, such as utility or access easements, and even unreleased mortgages and liens – requiring the purchaser to pay up or lose the property.

As such, before you close on your purchase, it is critically important for you to inspect any property’s title. You can inspect a property’s title yourself by searching through the records maintained by the county recorder of deeds and other public databases; however, most people contact a local title company to perform a search on their behalf and issue a report as to the various encumbrances and discovered issues affecting the property.

That report, also known as a commitment, can later be transitioned into a title insurance policy at closing. This will insure against various undiscovered issues affecting the property which were not uncovered by the title search. In this regard, title insurance operates differently from other types of insurance: it insures backwards against unknowns which occurred prior to your purchase, whereas more well-known insurance types such as casualty policies insure against unknowns occurring after your purchase.

Note: Title insurance policies are contracts just like all other insurance contracts. Only certain risks are covered based upon certain circumstances. It is very important for you to review and understand which risks are covered by the policy and which are not.

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This post is part of a series designed to help people understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn more about the needs and limitations of title insurance, one of our experienced real estate attorneys would love to meet with you.

In the next post, we’ll discuss why it is important not to ignore neighborhood indentures and condominium declarations when selecting which property to purchase. If you would like to go back and read our earlier posts, you can find links below.

Your Entity’s Governing Documents

David A. Zobel — Tue, 02 May 2017 13:00:13 +0000

Authored by David A. Zobel with contribution from Michael J. McKitrick

Part 4 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Simply put, every company should have an agreed-upon, written set of rules identifying how the company is to be run and by whom. The names for these sets of rules vary depending upon the type of entity you have, e.g. operating agreements, partnership agreements, and shareholder agreements, but they are generally known as the company’s governing documents.

Common issues described and controlled by these governing documents include:

Ownership structure of the company including the source and amount of owner contributions)
Capital contributions and division of profits and losses
Roles and restrictions of the owners in managing the company
Decision-making process for the company including notice and voting procedures
How and where the company’s books and records will be kept
Policy regarding transfer of owner interests
Dispute resolution
Wind up and dissolution of the company

Additionally, if certain owners make special agreements with the company, including arrangements for the company to use an owner’s vehicles, tools, or other personal property, the nature and scope of those arrangements should be stated in a written, signed agreement. This helps avoid confusion as to the extent of company assets and observance of corporate formalities.

For obvious reasons, articulating these policies beforehand for a single-member company will have less importance. However, having clear guidelines and rules for multi-member companies before an issue arises is crucial to assuring its continued success and avoiding misunderstandings and disputes among owners.

In light of the above, thoughtful attention should be given to setting up these rules at the formation stage of your company. In doing so, you should consider consulting with an attorney about the nature and scope of agreements which will be appropriate for your specific business venture. Additionally, it may be helpful for you to consult with your accountant.

Please note that simply printing out an agreement from the internet can be risky. First, what may be legal in one state may not be legal in your state. Second, people often think a longer, more complex agreement is better without consideration of whether it is needed. A lengthy, overly-complicated agreement can be more troubling than helpful. It can lead to governing policies and corporate formalities not being followed. (This increases the risk that a potential creditor may question if you are abiding by the entity’s corporate formalities). As such, you should thoroughly read and understand any agreement before approving it to govern your company.

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This post is part of a series designed to help folks understand and navigate the various pitfalls and legal considerations of real estate investing and leasing. If you would like assistance drafting, revising, or understanding your entity’s governing documents, one of our experienced real estate attorneys would love to meet with you.

In our next post, we’ll move from formation to operations and begin to cover a number of issues to consider in purchasing and managing real estate. If you would like to go back and read our earlier posts, you can find links below.

Tax Treatment Considerations When Selecting Your Entity

David A. Zobel — Tue, 04 Apr 2017 13:15:01 +0000

Authored by David A. Zobel with contribution from Patrick J. Murphy

Part 3 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

With tax season upon us, we thought it particularly appropriate to outline the basics of how the entities outlined in Part Two are generally taxed on their profits and losses.

Limited Partnerships

Income, expenses, and losses of limited partnerships pass through the entity to the partners and are reported on their respective individual tax returns according to their proportionate interest in the partnership. The partnership pays no income tax itself, but is required to file an annual informational tax return.

Corporations

Corporations that have not made an election to be taxed under subchapter S of the Internal Revenue Code, on the other hand, do not have such “pass through” status and are required to pay their own taxes on profits. As such, they are required to file their own tax returns separately from their shareholders. Because of this additional layer of tax, shareholders end up being taxed twice on income – once initially on the corporation’s profit and then again when dividends are distributed.

Limited Liability Companies

Limited liability companies are not taxed themselves and profits and losses pass through to their members. Members report profits and losses on their individual returns in the same manner as the limited partnerships above. Although the limited liability company itself is not taxed, it is still required to file an informational return.

The information above is simple for a reason. It is not intended to act as a single source guide to assist in the preparation of your taxes, but rather general guideposts which may assist you in selecting the most appropriate type of entity for your business. Many factors, including specific elections made by the company, will affect tax payment and reporting obligations. You should contact your accountant or tax lawyer with specific questions about your business.

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This post is part of a series designed to help folks understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn more about forming and operating your business through a legal entity, one of our experienced real estate attorneys would be happy to meet with you.

In the next post, we’ll move to considerations regarding your company’s governing documents. If you would like to go back and read our earlier posts, you can find links below.

Posted by Attorney David A. Zobel with contribution by Attorney Patrick J. Murphy, CPA. Zobel assists clients with business and litigation matters, primarily in the areas of contract, banking, insurance, and real estate issues. He is also a litigator for the firm’s commercial, probate, and insurance-related practices, handling general litigation, trust and probate litigation, title defense, surety defense, and professional malpractice disputes. As both an attorney and a CPA, Murphy’s practice includes sophisticated estate planning approaches as well as corporate transactions and advice in mergers and acquisitions, buy/sell agreements, corporate structuring, and real estate transactions for small to medium-sized businesses.