Harriet B. Alexson Law

Legal Fees: Are Your Legal Fees Deductible?

admin — Sat, 14 Apr 2012 00:36:35 +0000

FINANCIAL SERVICES CLIENT ADVISORY GROUP

Legal Fees: Are Your Legal Fees Deductible?

Law Alert

March, 2012 No. 4

By: Harriet B. Alexson (714.384.6578)
halexson@bmkalaw.com
©2012. All Rights Reserved.

Generally, legal fees may be currently deductible as ordinary and necessary business expenses. Examples of legal actions in which fees are currently deductible include:

1.    Creating or reviewing contracts and agreements, suing for breaches or defending claims of breach    of contract;
2.    Assistance in collecting outstanding accounts payable;
3.    Defending against trademark, patent or copyright infringement claims;
4.    Defending against wrongful discharge or other employee (or former employee);
5.    Obtaining tax advice, actions involving the IRS or state tax departments or obtaining IRS ruling.

When a business is formed, there are associated legal fees. Deductions can not be claimed for legal fees that are viewed as capital expenditures. These are costs associated with creating, acquiring, or protecting a capital asset, such as real estate or intellectual property. These costs are added to the basis of the capital asset.

However, in some cases, the legal fees that are capitalized may be recovered through depreciation amortization. For example, your company buys an office building and incurs legal fees of $3,000. The fees relate to the acquisition of a capital asset, the building, are added to the cost of the building. The costs of the building (minus the land) can be depreciated.

No deduction is allowed for legal fees that are purely personal in nature and not otherwise deductible if not related to the production of income, such as a recovery of a taxable award in a lawsuit. Generally, no deduction can be claimed by a business owner for obtaining a divorce, even though the business is an asset subject to division or distribution during the course of the divorce.

When it comes to the deductible of legal fees, don’t make assumptions. In the case of fees related lawsuits, look at the “origin of the claim” giving rise to the legal action. If it relates to business issues not required to be capitalized, a current deduction may be appropriate. Discuss the deductibility of fees with your tax advisor.

For more information on this interesting topic, please contact below:

Harriet B. Alexson
Chair Financial Services Practice Group
Bohm, Matsen, Kegel & Aguilera, LLP
695 Town Center Drive, Suite 700
Costa Mesa, CA 92626
Tel: 714.384.6578
halexson@bmkalaw.com
info@alexsonlaw.com
www.alexsonlaw.com

Actual resolution of legal issues depends upon many factors, including variations of fact and state laws. This article is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this article.

REO Sales for Rental to Hit the Market in Full Force

admin — Sat, 14 Apr 2012 00:33:16 +0000

FINANCIAL SERVICES CLIENT ADVISORY GROUP

REO Sales for Rental to Hit the Market in Full Force

Law Alert

March, 2012 No. 5

By: Harriet B. Alexson (714.384.6578)
halexson@bmkalaw.com
©2012. All Rights Reserved.

On February 1, 2012, President Obama, as part of an overall plan to assist homeowners and help the housing market, announced a pilot plan for the U.S. Federal Housing Finance Agency (the “FHFA”) to sell REO currently held by Fannie Mae for transition into rental housing as a way to help stabilize neighborhoods and improve home prices.

Any investors desiring to participate in the pilot program are required to submit a prequalification request form published by the FHFA. Based on a submission of the form, Fannie Mae will determine whether a party is qualified to bid. Elements of the pre-qualification request require a bidder to certify as to matters with respect to itself, its affiliates and owners, including (i) organizational structure, (ii) experience, (iii) confidentiality and (iv) the source of funds used for the acquisition.

With respect to the organizational structure of a bidder, the pre-qualification form identifies only certain types of institutions or individuals that would be acceptable bidders and any potential bidder is required to satisfy at least one of those criteria. The limited options available to bidders are generally as follows: (i) a not-for-profit organization, unit of a local government or state agency, (ii) a bank, broker dealer or registered investment company, (iii) a trust with total assets in excess of $5,000,000 that was not formed for the purpose of acquiring specific assets from Fannie Mae and whose decisions are directed by a person with experience in the necessary matters, (iv) a natural person with a net worth in excess of $1,000,000, (v) a business entity all of whose equity owners meet one of the criteria of clauses (i) – (iv), and (vi) a natural person with an individual net income in excess of $200,000 in each of the two most recent years.

Purchasing REO is purchasing an asset that the bank, or other lender has already either foreclosed on or taken back the property by deed in lieu of foreclosure. An investor in REO will also need to consider issues pertaining to the adequacy of title to the REO. Typically, when a valid foreclosure is completed, the borrower’s equitable right of redemption ends. In some states, however, the borrower also has a statutory right of redemption—that is, the borrower has an additional period of time post-foreclosure to pay the redemption price (typically the foreclosure sale price) and retain (or in some instances, take back) the property. The statutory time period varies by state but can range from six months to over a year. Therefore, an investor acquiring REO during this redemption period faces the possibility that its title to the property can be divested by the exercise of this right.

Another title issue an investor in REO must consider is the validity of the foreclosure sale itself. All states mandate procedures by which a foreclosing lender must follow in order to foreclose on property. Any lender that has not followed these requirements might be subject to borrower challenges, not just during foreclosure proceedings but possibly even after the foreclosure sale was completed. I advise our clients to investigate the use of title insurance. Generally, the owner of multiple REO properties would retain a manager to manage the properties: to lease vacant apartments, collect rents, enforce the leases, repair and maintain the properties and generally oversee the properties on behalf of the owner. Management agreements can be complex and frequently must take into account state and local law issues. Extensive diligence on the manager should be considered when acquiring REO in bulk in any particular state, and contracts should be in place before the purchase. Working with a law firm experienced in real estate law with local law and practice and the negotiation of management contracts is essential to the process.

For more information on this interesting topic please contact below:

Commercial Real Estate Workouts – 2012

admin — Sat, 14 Apr 2012 00:26:49 +0000

FINANCIAL SERVICES CLIENT ADVISORY GROUP

Commercial Real Estate Workouts – 2012

Law Alert – White Paper

February, 2012 No. 4

By: Harriet B. Alexson
(714.384.6578)
halexson@bmkalaw.com
©2012. All Rights Reserved.

Many commercial real estate investors have been considering a return to the market. The question seems to center around product types and price. Our clients are asking whether the market has corrected enough to purchase commercial real estate at current market prices. The following is a discussion of the issues that will affect the price of commercial real estate.

The real estate secured loans funded from 2005 – present were loans funded by lenders either in their own portfolios or purchased through acquisitions. The CMBS (Conduit) loans will start coming due soon with increasing amounts continuing to mature over the next five (5) years. Of course, the dynamics of the special servicer workouts may change based upon the number of loans that will turn over in the next five (5) years. Therefore, the inability to refinance loans at the end of the term will have an impact on pricing.

Another issue is the use of current appraisals by lenders, listing REO’s or selling non-performing notes secured by commercial real estate. The appraisals are often estimates as appraisers have not been able to find good comparables in today’s market. A lack of good comparables also makes it difficult for an owner/investor to challenge the lender’s valuation is a workout scenario. Loan to value ratios are also changing which means more equity is expected in the transaction. Whereas an 80% loan-to-value was common a few years ago, in restructuring a loan that is maturing or in default, the lender will frequently want to reduce the loan-to-value from 80% to 70%. Another interesting factor is that many commercial real estate secured loans entered into from 2005 and later contained interest rate swap components. When the loans went into default, the swap was not always cancelled, in accordance with the confirmation, or, appropriate ISDA Agreement or the borrower disputed the swap for a variety of legal reasons. Therefore, many of these loans ended up with significant swap obligations, beyond the traditional financing portion of the loan. This issue became a challenge for developers and investors who had either buyers and/or private equity partners, as the lender would require that the swap issue be addressed before release of its lien on the real estate. We have been successful in creative solutions to the question of a disputed swap amount, on a commercial real estate secured loan.

We have seen many lenders under regulatory supervision in today’s market. These lenders have no tolerance for negotiation and commence foreclosure actions without giving the developer an opportunity to solve the problem. If a lender is willing to enter into an extension and restruction of the note, the lender will put very tight constraints on the borrower’s activity during the extension period. The lender may require certain assets to be sold, may prohibit future development, and will often limit distributions to the borrower. In addition, the lender will often require significant principal pay-downs so that at the end of the extension period, the borrower will either have a property that the lender would lend on, or the borrower would have a property that other lenders might be willing to finance.

In conclusion, although this article sites a number of challenges to investment in commercial real estate, our clients are beginning to move back into the market. Of course, the basic fundamentals of purchasing real estate must be followed such as due diligence, including but not limited to, property inspections, environmental audits, title review, review of the operating expenses for the property, review of the rent rolls and leases to determine if the rental income has been exaggerated, the engagement of a good management company and proper review of the financials for the property. At this point, current return shouldn’t be as great a factor as long-term appreciation of the asset.

For more information on this interesting topic, please contact below:

Annual Minutes Required

Gay — Tue, 28 Feb 2012 00:34:44 +0000

If we are representing your corporation/limited liability company (or we have set up this entity for you), we will now require that you return our annual checklist so that we can prepare legally sufficient Minutes for your records. In this economy, as more litigation is pending and state and federal tax audits are ongoing, our clients must comply with corporate formalities.

California Capital Access Program

admin — Sat, 25 Feb 2012 16:36:49 +0000

FINANCIAL SERVICES CLIENT ADVISORY GROUP

Law Alert

California Capital Access Program

February, 2012 No. 3

By: Harriet B. Alexson (714.384.6578)
halexson@bmkalaw.com
©2012. All Rights Reserved.

The California Capital Access Program (“CalCAP”) is a lending program with the objective of encouraging banks and other financial institutions to make loans to small businesses. With CalCAP portfolio insurance, a lender is able to cover portions of loans that exceed the risk threshold normally allowed for business loans.

The CalCAP Program allows:

1. Eligibility of any business loan with a few exceptions.
2. CalCAP provides insurance on a lender’s portfolio of loans. Funds are placed in the loss reserve account as each CalCAP loan is enrolled.
3. A Lender can enroll all or a portion of a loan. CalCAP allows a lender to cover loans beyond its conventional risk threshold whether it is for all of a loan or only a portion.
4. Lenders can restructure loans by extending the terms of CalCAP loans, amending covenants or releasing collateral.
5. Loans up to $5 million can be included in the CalCAP portfolio.
6. The maximum lender/borrower contribution for any single borrower in a three (3) year period is $100,000.

CalCAP is a form of loan portfolio insurance which may provide up to 100% coverage on certain loan defaults. The lender controls the terms of the loan documents. CalCAP insures loans made to small businesses to assist them in growth and expansion. Loans can be used to finance the acquisition of land, construction or renovation of buildings, the purchase of equipment other capital projects and working capital. There are limitations on real estate loans and loan refinancing. CalCAP prohibits financing certain projects including, but not limited to, gambling facilities, bars and adult entertainment businesses.

Any federal or state-chartered bank, savings association or credit union is eligible to participate in CalCAP. A lender must certify that it is in good standing with its regulatory body (Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Comptroller of Currency, Thrift Supervision, National Credit Union Administration (NCUA), or state banking authority). Other lenders, such as certified community development financial institutions, and finance companies may also be eligible.

When a lender’s first loan is enrolled, CalCAP establishes a loss reserve account for that lender. Each time a loan is enrolled under CalCAP, premiums are paid into the portfolio loss reserve account and CalCAP matches the premiums. For instance, if the lender and borrower each pay a 2% premium, CalCAP will typically pay 4%. For this one loan a total of 8% is added to the lender’s loss reserve account for its entire CalCAP portfolio.

The eligible business requirements are as follows:

1. The borrower’s business must be in one of the industries listed in the qualified Standard Industry Classification (SIC) or the North American Industry Classification System (NAICS) codes list.
2. The borrower’s primary business and at least 51% of its employees or business income, sales or payroll must be in California.
3. The business activity resulting from the bank’s loan must be created and retained in California.
4. The small business must be classified as a small business under U.S. Small Business Administration guidelines (Title 13 of the Code of Federal Regulations) and have fewer than 500 employees.

For more information on this interesting topic please contact below:

Model Credit Agreement

admin — Sat, 25 Feb 2012 16:30:29 +0000

FINANCIAL SERVICES CLIENT ADVISORY GROUP
Law Alert

Model Credit Agreement

January, 2012 No. 2

By: Harriet B. Alexson (714.384.6578)
halexson@bmkalaw.com
©2012. All Rights Reserved.

In August 2011, the Loan Syndications and Trading Association (“LSTA”) through its Primary Market Committee (“PMC”) published its revised Model Credit Agreement Provisions 2011 (“Revised MCAPs”). The Revised MCAPs have become, with certain variations, standard market terms in many bank forms.
Although defaulting lender provisions are not new, the increase in bank failures following the credit crisis focused the attention of market participants on the issue of defaulting lenders, and highlighted some of the weaknesses of typical defaulting lender provisions. A key objective of that effort was to craft a set of provisions that were crisp enough to address with certainty issuing lenders’ and borrowers’ exposure to defaulting lenders, but flexible enough to address issues that might arise in the bankruptcy or receivership of the defaulting lender (e.g., the automatic stay).
Under the Revised MCAPs, a lender will be a defaulting lender if:

It fails to fund borrowings or to meet its funding obligations to the administrative agent, issuing bank or swingline lender within two (2) days of the date when due;
It delivers a written notice to the borrower, the administrative agent or any issuing bank or swingline lender that it does not intend to comply with its funding obligations (or makes a public statement to that effect);
It fails to confirm its intention to comply with its prospective funding obligations following written request by the administrative agent or the borrower (the “Failure to Confirm Limb”); or
It or its parent becomes subject to any bankruptcy or receivership proceedings.

One of the most significant tax changes to the Revised MCAPs, the new increased costs provision, was drafted with an eye to protecting lenders from the various proposed bank taxes. The PMC took the view that a newly imposed bank tax is similar to an increased cost resulting from a regulatory change and, therefore, should be similarly covered by the increased costs provision.  While the increased costs provision has some complicated cross-references, essentially the provision covers taxes that (i) are not imposed on payments and (ii) are not net income or franchise taxes imposed because of a lender’s connection with the taxing jurisdiction.  The indemnification provisions were modified to ensure that the lenders’ obligation to indemnify the agent in connection with suits by lenders was clear. Other provisions, such as agency, assignment and electronic communications, have also been augmented and modernized, including by adding a mechanism in the agency provision for the removal of an agent that has become subject to bankruptcy or receivership proceedings.

Enforcement of Guaranties – Non Update for 2012

admin — Sat, 25 Feb 2012 16:18:20 +0000

FINANCIAL SERVICES CLIENT ADVISORY GROUP

Law Alert

Enforcement of Guaranties – Non Update for 2012

January, 2012 No. 1

Over the past few years, there has been increased litigation over the enforcement of commercial guaranties by lenders. As more borrowers default on their loan obligations, lenders have more frequently taken action against guarantors to recover damages due to a borrower’s default. In response, guarantors have raised a variety of defenses.

A guaranty is an agreement made by a third party, whether a person, trust or a business entity, to pay and/or perform the obligations of a debtor for the satisfaction of a debt owned to a creditor upon the occurrence of an event, typically a default by the debtor, under the original loan agreement. A guaranty, like any contract, requires mutual assent, adequate consideration, definiteness and a meeting of the minds.

In the context of a loan transaction, a guaranty serves as a form of collateral to support the debt obligation between the debtor and the creditor. But, the guaranty and the loan agreement evidence separate obligations, and their independence is not affected by the fact that both agreements are written on the same instrument or are contemporaneously executed. The guaranty cannot exist without a primary debt obligation. Thus, if the primary debt obligation has been fully satisfied, is void or is illegal, a guaranty of the debt obligation can also be deemed unenforceable.

A party’s enforcement of a commercial guaranty, like any other contract, requires the analysis of basic contract principles. What sets a commercial guaranty apart from other contracts is that a commercial guaranty may lie dormant and unattended to by the parties until the occurrence of some subsequent, triggering event. At that time, which may be months or years after the commercial guaranty and the underlying debt documents were originally executed, the party seeking to enforce the guaranty then has to examine the terms of the guaranty, the status and condition of the guarantor and other facts and circumstances existing at the time of enforcement.

A guarantor of a debt obligation is liable upon a default, and the person to whom the guaranty is made is not required to first resort to recover from the primary obligor. A guarantor of a promissory note may be held jointly and severally liable with the primary obligor, although the extent of the guarantor’s liability depends upon the terms of the guaranty agreement.

When two or more persons guarantee the debt of another, they simultaneously enter into an implied promise on the part of each to contribute his or her share if necessary to meet the common obligation between the co-guarantors. The discharge of one co-guarantor’s direct liability to the creditor does not relieve him or her from liability to contribute to the other co-guarantors. In addition, the fact that a creditor sues only some of the co-guarantors, or recovers a judgment against fewer than all of them, does not excuse those not sued or not included in the judgment from paying their part of the joint debt. Accordingly, as a general rule, one or more of the co-guarantors against whom the judgment is recovered may, upon paying the creditor, compel contribution from all other co-guarantors. A creditor’s release of one guarantor does not necessarily release the co-guarantors.

In certain instances, a creditor must provide the guarantor with notice of a default or triggering event under the primary debt obligation before seeking to enforce a guaranty agreement. However, the language of the guaranty is controlling in determining whether the creditor is under a duty to notify the guarantor of a default, and notice need not be given when the terms of the guaranty expressly dispense with the need for the notice. The language of the guaranty may also include various waivers of certain rights by the guarantor. Most of these waivers, if properly drafted are legally sufficient and will be upheld by the court in favor of the creditor.

Third Party Payment Processing Services

Gay — Tue, 14 Feb 2012 01:24:26 +0000

The FDIC issued FIL-3-2012 on January 31, 2012 (“FIL-Payment Processing”), which offered additional guidance to those financial institutions with payment processor relationships. The payment processor is a deposit customer of the financial institution and uses its relationship to process payments for third-party merchants. This processing is done typically by creating and depositing remotely created checks and/or by originating Automated Clearing House (“ACH”) debits on behalf of the merchant customers. These relationships are becoming more common as technology changes and financial institutions are looking for new ways to earn fee income. For more information and to receive our recent report on FIL-Payment Processing please e-mail us at halexson@bmkalaw.com

Purchase of Tenant-In-Common Interest

Gay — Tue, 14 Feb 2012 00:39:19 +0000

Recently we have seen an increase of the purchase of a tenant-in-common interest in real estate in certain parts of the country. These purchases are made by individuals who intend to live on the premises and appear like the purchase of a condominium. The tenant-in-common agreement typically allows for the conversion of the property to condos pursuant to certain conditions set forth in the agreement. These purchases are complicated based upon the interest in real property obtained, and the fact that the tenant-in-common agreement sets forth the rights of the parties, including upon the default of any of the tenants. For more information on this timely real estate topic, please contact me at halexson@bmkalaw.com

Single Member Limited Liability Companies and Asset Protection

admin — Tue, 15 Nov 2011 14:48:10 +0000

FINANCIAL SERVICES CLIENT ADVISORY GROUP

Law Alert

Single Member Limited Liability Companies and Asset Protection

In an important decision relating to asset protection for single-member limited liability companies, the Florida Supreme Court reviewed a statute that permitted debtors to use a wholly owned limited liability company (LLC) to put their assets beyond the reach of judgment creditors. In Olmstead v. FTC, Case No. SC08-1009 (Fla. June 24, 2010), the Florida Supreme Court ruled that a court may order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member Florida limited liability company to satisfy an outstanding judgment.

Until the Court’s decision in Olmstead, it was generally believed that a charging order was the exclusive remedy available under Florida law. A charging order permits the judgment creditor to collect distributions otherwise payable by the LLC to the judgment debtor until the debt is paid. However, the debtor’s interest in the underlying company is preserved. The charging order does not permit the creditor to seize and force the sale of the debtor’s ownership interest of the LLC or to vote or otherwise participate in management of the LLC.

The Florida Supreme Court ruled that the provision of the Florida LLC statute authorizing the use of charging orders does not constitute the exclusive remedy for a judgment creditor against a judgment debtor’s intent in a single-member LLC. The Court based its decision on the provisions of the Florida LLC statute which does not specifically state that a charging order is an exclusive remedy. A copy of Olmstead v. FTC is available at http://www.floridasupremecourt.org/decisions/2010/sc08-1009.pdf.

This case presents a dilemma for asset protection plans that have been set up for single-member limited liability companies. If you already have established a limited liability company, you should contact legal counsel to determine if this case has an effect on your current plan.

For further information about this interesting topic please contact:

Harriet B. Alexson
Chair Financial Services Practice Group
Bohm, Matsen, Kegel & Aguilera, LLP
695 Town Center Drive, Suite 700
Costa Mesa, CA 92626
Tel: 714.384.6578

halexson@bmkalaw.com
info@alexsonlaw.com
www.alexsonlaw.com