Thursday, December 20, 2007

Thoughts on Investing in Real Estate - Part 3

So far we have discussed financing, tax issues, renting your property and zoning. The final piece of the puzzle is:

Insurance
Be aware that how the property is occupied can affect your insurance coverage. It is relevant whether the property is being owner occupied or occupied by tenants. If it is not occupied at all, your standard policy may not provide coverage unless the property is being visited / inspected weekly, or even daily. Make sure your insurance agent understands the uses to which the property is being put and that you understand the coverage that is being provided and what, if any, steps you are required to take to maintain the policy in force (i.e. hiring someone to check the property). If you are operating a business out of the property, make sure your broker is made aware of this. Commercial insurance will be different than purely residential insurance coverages. The more your insurance broker knows about the property and its proposed use, the better he/she will be able to assist you. Make sure you talk about insurance BEFORE you sign the Offer if you have any doubts about the insurability of the property, as you will not get financing without it.

These are a sample of the type of issues to be aware of when considering an investment in real estate. My recommendation is to get the experts involved from the beginning. Make sure your lawyer, accountant, mortgage broker, financial advisor and/or insurance agent know what you are doing. Take advantage of their education and experience. And then, enjoy your property.

Thursday, December 13, 2007

Thoughts On Investing in Real Estate - Part 2

Here is Part 2 of Zarah Walpole's commentary on Investing in Real Estate. In Part 1, we learned about financing and tax issues. Now let's take a look at two other issues to be considered:

Renting
If you’re going to be covering some of your costs by renting the property to a tenant, you’ve become a landlord and will need to be conscious of landlord and tenant law. The law varies considerably whether you are renting a residential or commercial property. In either case, you need to know the rules that will apply to your situation. An absolute minimum requirement in either circumstance is to enter into a well drafted lease agreement. From a practical point of view, I cannot emphasize enough the importance of checking potential tenants’ references. Knowing how to legally evict a tenant is one thing, never having to do so is an even better thing.

Zoning
If you plan on changing the current use of the property (i.e. adding an apartment, putting in a business), it is vital to ensure that your proposed use is permitted. For example, municipalities have zoning by-laws that only permit commercial uses in certain areas. Here in Barrie, not only are basement apartments only permitted in certain zones but they also have to be registered with the City. Knowing the zoning of your property ahead of time and making sure that it fits with your plans is good business.

Stay tuned for the final part of our series on Investing in Real Estate.

Tuesday, November 27, 2007

Thoughts on Investing in Real Estate - Part 1

The following is the first in a three part series on Investing in Real Estate, by my Associate, Zarah Walpole. Thanks Zarah!
Real estate is hot right now. I have many clients purchasing a second property for recreational and investment purposes. I’m a real estate lawyer so, of course, I think property can be a great way to hold and grow wealth. However, it is also an area that you should enter with your eyes wide open and an awareness of the many pitfalls that can await the unwary.

Financing
First, you need to fully assess how you will finance the purchase. Different considerations come into play when mortgage companies consider properties that are owner occupied, a pure investment, leased to a 3rd party or a combination of the foregoing. Don’t assume your financing options are the same as when purchasing a home. When assessing whether you can afford your carrying costs, don’t forget to include costs such as property taxes, insurance, and maintenance fees, etc.

Tax Implications
Also, make sure you understand the tax implications related to the income earned while holding the property and the role of capital gains or losses when you the sell the property. For example, unlike the family home, the capital gains exemption will not apply. Consulting with an accountant to understand the tax implications and with a lawyer to determine if the property should be held personally, in a trust, or by a corporation can be an extremely important part of maximizing your return on investment.
Stay tuned for more on Investing in Real Estate, including renting and zoning issues!

Monday, November 26, 2007

Thoughts on Creditor-Proofing - The Matrimonial Home

Being in business carries its risks. As a sole proprietor or partner, you are personally liable for the obligations of your business. Even directors and officers are increasingly exposed to personal liability through legal and statutory obligations to shareholders, creditors, employees, the government and, in some instances, to the public. One of the risks of running a business, in whatever form, is that your assets, including your family home, could be exposed. Your first defense is to ensure your business (and its officers and directors, where applicable) is adequately insured. However, another possible line of defense is to transfer ownership of certain personal assets to a spouse who is not similarly exposed to such personal liability.

Before you transfer ownership of the family home to your spouse for the purpose of creditor-proofing, you should be aware of the following:

Timing is Everything
As a preliminary matter, the time to consider transferring ownership is well before any event that raises the prospect of personal liability has occurred. The courts can void a transfer to a spouse if it is done in order to avoid payment of impending liabilities. It is recommended that the transfer of a family home be done as part of a general plan to avoid the possibility of personal exposure that may arise in the future course of running your business.

Consequences of the Transfer – Separation or Death
You must be aware that there can be consequences to transferring your ownership to your spouse and these should be weighed carefully. If there is a marital breakdown and the spouses separate, the benefits of ownership only accrue to the title-holding spouse. There can also be consequences on the death of the title holding spouse, such as the need for probate and the payment of probate fees.

Protection of the family home from exposure to the potential liabilities of a business may be legitimate and intelligent planning. However, in deciding to do so, you should consider the effects of such a transfer in the event the of divorce or death. This decision should be made with the assistance of your lawyer and your accountant. That’s good business.

Sunday, October 21, 2007

Allocating the Purchase Price

If you are selling all or substantially all of the assets of your business, or if you are buying the assets of a business, you will certainly have to come up with a purchase price that both sides can agree upon. However, the negotiating with respect to the purchase price should not stop there. The parties should be making an agreed-upon determination of how that price is allocated amongst the various types of assets. For instance, what is being paid for the goodwill or client list of the business verses the depreciated assets verses the leasehold improvements? It can make quite a difference to both sides, in terms of the tax consequences, and often the buyer and seller have opposite preferences. So the actual price can be influenced by how that price is allocated. Buyers will be more likely to pay more up front, for instance, if they can write the assets off quickly afterwards. It is important for both the buyer and the seller to consult with their lawyers and accountants with repsect to the allocation and to ensure that it is agreed upon either up front, or at the very least, prior to closing. Understanding the tax and legal implications of your decision to buy or sell at a certain price makes good business sense.

Wednesday, October 10, 2007

Bringing in an Investor Shareholder

I have a client who has a company and a fantastic business idea. But as with lots of great ideas, there is the reality of getting a product to market and, by reality, I mean costs. So, he has a friend who wants to invest in the great idea, throw some money at the company and reap the rewards if the idea flies. My client has asked me to prepare the paperwork to bring this friend of his on as a shareholder. Here are some of the issues we discussed. First, how much of the company is this guy going to take? After all, my client came up with the idea and has toiled for two years developing the product so that it is now ready to take to market. What is this worth? He's going to have to be able to come up with a method of determining how much his friend's money is worth in shares - does he get a 50/50 interest or say 15 - 20%? And should the shares issued to this investor be voting shares? The same type of share as my client or a separate class? Once we get this all sorted out, we have to talk about control issues and how (hopefully) my client is going to retain control over the company that is, in fairness, his baby. This means drafting a shareholders agreement to address issues like:

(a) What happens if one of them dies?

(b) What happens if the investor wants out - can he get his money back?

(c) Will the investor/shareholder be a director of the company? How involved will he be with the running of the business?

(d) What happens if my client gets an offer to purchase the company from a third party? Can the investor prevent the sale or should he get dragged along?

Businesses often need a "jump start" with an influx of cash and sometimes that cash will come from friends or family. The question is, how to structure this transaction in a way that will allow for the much needed cash infusion, provide some assurances to the investor, and also protect the original owner of the business - the guy with the great idea or the talent or the know how. Bringing in an investor as a shareholder is only one way to facilitate an investment. A good business lawyer and accountant should be consulted prior to any final decisions being made on the best way to structure this sort of deal.

Sunday, September 30, 2007

Franchising Pros & Cons

Thinking about starting or buying a franchised business? There are certainly lots of franchise opportunities out there. And there is some important legislation out there, as well, which attempts to provide some protection for potential investors. In Ontario, that legislation is called the Arthur Wishart Act. One of the things the Act does is sets out a number of disclosure requirements for franchisors so that potential buyers have information pertaining to the history of the franchise and its current status. Franchisors are required to provide potential franchisees with a "disclosure document" which will provide background information and a sample franchise agreement for review prior to the potential franchisee making a final decision to move forward. Franchise Agreements may or may not be negotiable. Usually it depends upon the strength, popularity and age of the franchisor. But even if you can't change a thing in it, it still makes good sense to understand what you are signing and the pros and cons. If I am asked to review a franchise agreement, I will often go through the agreement, using two very simple notations:

1. - The letter "C" for control: areas which indicate that the franchisor has control over decisions effecting your business - such as controls over pricing or inventory; and

2. - The dollar sign ($): areas where the franchisor has the power to make you spend further money - such as forced upgrading to leasehold improvements or forced buying from franchisor-approved suppliers only.

Buying a franchise can often be a very lucrative way of starting a business. The upside should certainly be the fact that you will benefit from the experience of the franchisor and also from things like combined marketing, trade-name value, etc. The downside is that, quite often, you will need to give up some control over the business operations. Franchising is not for everyone. If you are consideraing it, speak to a lawyer and make sure it's a good fit for you. Knowing what the arrangement will be from the outset and being sure that it fits with your plans and your personality makes good business sense.

Monday, September 24, 2007

Don't Forget the Right to Renew!

I just had a client call me in a panick because they had been advised by their Landlord that they would need to vacate their leased premises at the end of the initial term of their lease. The Tenant was shocked because they had negotiated a right to renew in the Lease and thought they had another 5 years. Unfortunately, they did not comply with one of the conditions to exercising this right, by providing the Landlord with 6 months advance written notice of its intention to do so. The Landlord took advantage of the oversight because it was able to lease out the entire floor of the building (which included my client's space) to a new tenant. Our client was stuck looking for new space. This can be a very difficult position to be in, as tenants often spend a great deal of money, up front, on leasehold improvements. Also, location can be extremely important to the ongoing success of a business. In this case, the Tenant turned the surprise into an opportunity and ended up purchasing new business premises, but the lesson is an important one. If you have a right to renew in your lease, make sure that you know what the conditions are to exercising it and diarize the proper dates to make sure you comply. That's good business.

Wednesday, September 12, 2007

The Ongoing Costs of Incorporating

I often get asked about what costs are associated with being incorporated, aside from the initial start up fees. This is an excellent question, as you will want to factor this into any decision to incorporate and your ongoing business budgeting.

First, it will be necessary to keep your minute book up-to-date. Corporate law requires that companies have yearly meetings of both the shareholders and directors to do a number of things including re-electing the directors and officers, approving the yearly financial statements, and exempting the company from the requirements of an audit (if applicable). If a company has only one or two shareholders, instead of holding a meeting, resolutions can be prepared and signed by all of the shareholders and all of the directors of the company. Most corporate lawyers provide their clients with a yearly corporate maintenance service. There is usually a small fee associated with this service, which varies from firm to firm but is usually under $500 for basic annuals (at least in Barrie!). The law firm will contact the company's accountant and inquire as to whether any management bonuses or dividends have been declared. The appropriate resolutions are then prepared and, if there have been any changes to things like the directors or the registered office, they will file the applicable forms providing the government with notice of these changes.

The second ongoing cost will be the accounting fees. You will have an additional corporate tax return to file yearly and financial statements to prepare. Your accounting fees will therefore likely be higher. You should speak with your accountant about this so that you are able to do a complete cost-benefit analysis. Finding out about not only the upfront costs but also the ongoing costs of incorporating is just good business.

Tuesday, September 11, 2007

Think of Income Splitting When Incorporating

If you are considering incorporating your business now or down the road, you should have a discussion with your accountant and lawyer about any income-splitting opportunities that you may have. If you have a spouse, or children over 18, it may be useful to create some separate classes of shares so that you have some flexibility when declaring dividends. Let's use an example of a business where the husband is the sole proprietor and his wife stays home with the kids and has no income. If the husband is going to incorporate, he may want to ask the lawyer to create a separate class of common shares. So, for instance, the husband could have voting Class A Common shares and the wife could have nonvoting Class B Common shares. Both classes of shares would share in the growth of the business. The husband would retain voting control and, therefore, control over the business. However, it would be possible, from year to year, in conjunction with the advice of the company's accountant, to issue dividends to only the Class B shares. If the wife has no other income, she could potentially receive in excess of $20,000.00 per year in dividends, tax free. This is a relatively simple way to achieve some tax savings, but be sure that your lawyer is an experienced corporate lawyer who is able to set up these shares appropriately. If done with solid financial and legal advice, this makes good business sense.

Monday, September 3, 2007

Get It In Writing

When you are in business, you may often find yourself entering into agreements with other business people - perhaps suppliers or customers. Some people are proud that they can do business on a handshake, but I personally feel that, if there is any degree of sophistication to a deal, it should be in writing.

Writing it down makes sure everyone is on the same page. Did you ever play that game as a kid, where you start off whispering something to someone in a circle and, by the time it gets to the end of the circle, the original message has turned into something completely different? The same thing can happen when you have a conversation with someone about a business deal. It just seems that, quite frequently, two people can come away from a conversation having very different recollections of what transpired and very different expectations about what is to be done.

This difference of opinion is often at the root of law suits. When people's expectations are not met, they tend to sue. If you can get something down in writing and hash out the details ahead of time, it can significantly cut down on confusion around who is doing what, by when and for how much. By going through the exrecise of writing it down, people usually discover that there are more details to be dealt with than they may have anticipated. Discussing the details ahead of time helps the parties to clarify all of the terms of the deal. Even if you do this without a lawyer, it can at least help to avert confusion around the basics of the transaction, and this is important.

If you want to go a step further, you get a lawyer to draft the agreement, and that way you should be able to depend upon that agreement being legally enforceable. There are aspects of contract law that we lawyers study that assist us in ensuring that the basic components of a contract are in place, so that, if necessary, the contract can be used as the basis upon which one party can pursue another party on default. Also, the process of working with a lawyer to draft the agreement can assist the parties in considering all of the angles and discussing, ahead of time, the "what ifs". The parties can actually decide, in the contract, what the consequences of default will be. This provides some stability and fairness to the enforcement process.

It may be useful, in your business, to have a standard form contract, that can be modified to incorporate the specifics of each transaction. This could be drafted by a lawyer, without having to pay a lawyer everytime you enter into a new contract.

Whether you involve your lawyer or not, getting it down in writing will go a long way to making your business run more smoothly and, you will likely end up with happier customers, whose expectations are being met at an agreed-upon rate by an agreed-upon time. And this just makes good business sense.

Friday, August 31, 2007

Small Gestures Go a Long Way

I am going to take a bit of literary license here and write about something that has nothing to do with legal advice. I can't help myself. Last night I arrived home after a pretty stressful day at work. My cleaning lady, who has been cleaning my house for about three years now, left me a letter. Without going into a lot of detail, let me just say that this letter made my day. She wanted to let me know how I had, in a few small ways, influenced her life. She had recently experienced the death of her cousin who was about her age, and she has come away from that experience feeling strongly that we should reach out to others more, and let people know how we feel about them. So, she explained to me, she just wanted to let me know how I had touched her life. I had absolutely no idea and so, when I read this letter, well, I just had such a warm feeling. It completely changed my mood and made me think about how grateful I am for my life and the people I have in it.

Without getting any more sappy than I already have, I just wanted to relay this story to readers out there. I think it could serve as an important reminder to all of us that we need to let the people around us know how we feel about them, at least once in awhile. Now let me tie this back into some semblance of a business-related topic. Most of us spend a large part of our day at work with co-workers and employees. If you are a business owner you know that the strength of your staff is very importat to the success of your business. These employees are people in our lives too. And it is equally important that we let these people know how much they are valued and how they influence and shape our day to day lives. So give this some thought and maybe there is someone that you work with who could use a pat on the back today, a short note letting them know how great they are. It really doesn't take much more than a thought to make someone's day. And retaining motivated, caring employees who feel like valued team members makes good business sense.

Ok. I got that off my chest and now I feel better. Tomorrow, back to legal stuff.

Tuesday, August 28, 2007

Two Ways To Sell a Business

I was on the phone with a client tonight, trying to explain the difference between an asset sale and a share sale, and, now that I am a blawger, it occurred to me that this might make a good blawg article. It's been a long day, so I am not going to get into all of the pros and cons of these two very different transactions - we'll leave that for another article. I am just going to try to explain why they are different.

First, let's presume Mr. Green owns a lawncare company. Let's call it Green Lawncare Inc. (totally unimaginative, I know). Mr. Brown wants to purchase the business. The business likely has value to Mr. Brown because it has assets - maybe some equipment, a vehicle, some inventory and, usually an established name and customer list. Mr. Brown could start his own lawncare company, but there is value in purchasing an existing lawncare business, since he can get used equipment, presumably at a lower cost, and can assume all of the existing lawncare contracts that Mr. Green's business has. This means instant income as opposed to pounding the pavement for lawncare contracts.

Mr. Green can sell his business in one of two ways:

1. Asset Sale: Green Lawncare Inc. (a separate legally incorporated entity) can sell all or substantially all of its assets to Mr. Brown. Mr. Brown would pay the corporation for these assets. The agreement could stipulate which assets Mr. Brown would buy and which would stay in the company. For example, Mr. Brown may not wish to purchase the accounts receivable of the business. He could list the assets he did wish to purchase, such as the "goodwill" (customer lists, existing contracts, phone number) and the equipment necessary to carry on the business. Mr. Brown would not likely assume the liabilities of the business. On closing, Mr. Brown would pay the company for its assets. Mr. Brown would either buy those assets personally, or set up his own company (Brown Lawncare Inc?) to purchase the assets and operate the business through. Mr. Green could be paid by the Company (now flush with cash from the sale) through salary, management bonuses or dividends.

2. Share Sale: Mr. Green could sell all of his shares in Green Lawncare Inc. to Mr. Brown. Mr. Brown would then become the sole shareholder, director and officer of the company. Mr. Green would get the cash on closing, personally. Mr. Brown would continue to operate Green Lawncare Inc.

There are many issues involved with determining whether a transaction will be an asset sale or share sale and, often, the purchaser and vendor are at odds over which form the transaction should take. Considerations such as liability issues and taxation (as usual in the business law context!) should be addressed with both your lawyer and your accountant, before a final decision is made. Knowing the difference between the two types of transactions is the first step in making the right business decision.

Monday, August 27, 2007

Signing an Offer to Lease

If your business is in need of commercial space and you are going to have to lease that space, here are some quick thoughts to keep in mind. First, if you are working with a real estate agent, who is negotiating on your behalf, and that agent is experienced with commercial leasing, you are one step ahead of the game. Still, it would be prudent to run the Offer to Lease by your lawyer before submitting it to the Landlord. It is quite common for a lease agreement to run for three to five years. If you calculate the amount of rent you will pay over the life of that lease you may discover that it one of the biggest contracts you will ever sign. Leases are usually relatively large commitments, which means that you will want to make sure that you understand what you are signing and that you get the best possible deal.

The Offer to Lease may seem harmless - after all, it's not the actual Lease (which gets prepared after the main terms of the lease are agreed upon in the Offer) - but it is actually very important to get this document right. It will form the basis upon which the Lease is drafted and, if an important term is not in the Offer, you may be out of luck when it comes to the Lease. So, what sorts of things should you be thinking about when drafting the Offer? Here are some examples:

1. Who will the Tenant be? Will you be signing personally or through your corporation? If through the corporation, will the Landlord require a personal guarantee or indemnity?

2. Do you have any special signage requirements? Do you require any leasehold improvements to be done by the Landlord? If so, write it in the Offer and be specific.

3. Are you asking for a fixturing period - a month or two that is rent free, or base rent free, in order to get your business up and running?

4. What about stepped-up rent? If you are a new business, perhaps you can negotiate lower rent in the first year in return for slightly higher rent in the following years. This can assist in keeping your overhead low while you are first starting out.

5. If you anticipate the possibility of requiring additional space, you should consider requesting a right of first refusal over adjoining space so that when it comes available, you get the first chance to lease it, if you require it.

6. If there is a provision in the Offer that states that the Tenant agrees to sign the Landlord's standard form of Lease Agreement, make sure you add: "to be negotiated by the parties, acting reasonably." After all, why would anyone agree to sign a document that they have not even seen yet, without retaining the right to negotiate its terms!

7. You may want to negotiate a right to renew the lease for another one or two terms. The wording on this right to renew is important if it is going to be worth anything to you, so, again, a lawyer is recommended. If you have invested a lot of money into leasehold improvements or if the location of your business is a key component to its success, this provision makes good business sense.

Tuesday, August 21, 2007

When Should You Incorporate? And Who Should You Ask?

There is no easy answer to this question. It depends. It's interesting to me that often, new businesses get conflicting advice from their accountant and their lawyer. There's nothing wrong with this, it's just that each professional is looking at the question from a different angle. An accountant is going to look at the tax implications of incorporation and, often, incorporating won't do a start-up business any good tax-wise. In fact, it may not make any sense at all from a tax perspective to incorporate a business that hasn't even started yet and may have some losses up front due to start up costs and low initial income. Lawyers, however, tend to look at the issue of limited liability. Incorporating creates a separate legal entitity, so, from a liability standpoint, it can be very useful in terms of keeping your personal assets separate from your business liabilities. Often a client has to listen to two very conflicting views and then make a decision, based upon what may be more important to that specific client.

Here's some really good advice - try to get your lawyer and accountant in the same room at the same time and then you can all have the discussion together, not only about incorporating, but about all of the other questions you may have regarding your new or existing business. I don't know why we don't do this more often. It is value-added for the client who doesn't have to go back and forth between his or her two advisors to try to figure out what direction to take. Plus, you get the benefit of actual live communication with your most trusted advisors working together and brainstorming ideas. Everyone is in the loop and connected. That's how you "get business done".

Sunday, August 19, 2007

Just Getting Started?

Are you thinking about starting a business and trying to find out how to get started? Speak to your trusted advisors and mentors if you are lucky enough to have them. If you don't, think about getting one or two. Every new business should have a competent accountant and lawyer to provide advice about start-up. How will your current financial situation be impacted by this new business? Is the new venture risky financially? Will there be large start-up losses? Does the business pose the risk of law suits? These are questions that your lawyer and accountant will want to address before you get started. If you are looking for a good lawyer or accountant, the best way to find one is through word of mouth. Go to two or three other business people who you respect and ask them who they deal with and if they would recommend their advisors. Or go to a seminar where a lawyer or accountant is speaking to get a sense of how they communicate and what their personality may be like. Establishing a relationship with your professional advisors will take time so think of your initial consultation with the professional as the beginning of a long-term relationship. It may take a couple of appointments before you find the right fit. But finding the right fit will be important in the long-term success of your business.