New AML Rules for Investment Advisors?

James M. Heffner

By James M. Heffner



The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, is proposing new anti-money laundering rules for investment advisors. Continue reading »

Consumer Financial Protection Bureau releases Supervision and Examination Manual

James M. Heffner

By James M. Heffner



Established in 2010 by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (“CFPB”) has released its first edition of the Supervision and Examination Manual. The Manual is a guide to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.

As stated on the CFPB’s website, the Manual is divided into three parts:

  • Part One describes the supervision and examination process.
  • Part Two contains examination procedures, including both general instructions and procedures for determining compliance with specific regulations.
  • Part Three presents templates for documenting information about supervised entities and the examination process, including examination reports.

While the Manual is designed in large part to supervise the nation’s largest mortgage servicers, it will impact all lenders who deal with consumer loans.

Posted by Attorney James M. Heffner. 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. 

Banks Loosening the Purse Strings?

James M. Heffner

By James M. Heffner



New York Times article notes that banks are making more loans. Corporate lending is leading the way, up 7.2% from October 2010.

Posted by Attorney James M. Heffner. 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.  

How Long Should You Stay in Your Commercial Lease?

James M. Heffner

By James M. Heffner



Lease Term, Renewal Options, Lease Purchase Options

Part 2 in Series – “10 Lease Traps & Tips for the Small Business Owner”

When contemplating new lease space, the small business owner understands the need for flexibility. The term, or length of time, you will remain in the leased space is a chief concern of any entrepreneur. You don’t want to be forced to look for new space after only a few years, on the other hand, you want to be able to leave if after a period of time you learn the space is not right for your business.

One of the most important aspects of a lease for the small-to-medium sized business owner is flexibility. How much space do you need? Will you grow? Was your initial assessment too ambitious?

Lease Term – Most commercial landlords will insist on a lease term of at least 3 – 5 years. Depending upon your industry, this very well could be a good place to start. For example, if you’re looking for office space, the initial investment on fixtures and other start up costs can be minimal; conversely, if your space is going to be used for heavy manufacturing, just getting the machinery situated can be a huge expense, warranting a longer term lease.

Renewal Options – The more the better. Renewal options allow you to choose to remain in a space, usually under the same lease terms, or to look for a new space after the term has expired. One term that often does change is rent. You’ll want to either include a percentage rental increase for the renewal term, attach the increase to a Consumer Price Index, or agree to negotiate using the future “market rate”. A renewal option doesn’t do you any good if you don’t exercise it per the lease’s requirements – be certain to develop a system to calendar the date by which you must provide notice to your landlord.

Lease Purchase Options – Sometimes it makes more sense for a tenant to own their space rather than pay rent. While this decision inevitabely involves important tax consequences, it allows you to test drive the property before buying. It also gives you the ability to build some equity towards the purchase price if the lease is properly negotiated; meaning, you need to make certain some portion of your monthly lease payment will be applied to the purchase price. The potential downside of a lease purchase option is that the landlord will probably make you pay a premium for it. Again, be certain to calendar the date by which you must give notice to landlord in order to exercise your option.

Part 1 in Series – “10 Lease Traps & Tips for the Small Business Owner”

Posted by Attorney James M. Heffner. 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.

 

Control Agreements from the Secured Party’s Perspective – Perfecting Security Interests in a Securities Account

James M. Heffner

By James M. Heffner



Any secured party, e.g. a bank, making a loan inevitably wants as much control over its collateral as the borrower is willing to give, and the law allows. In a declining real estate market, an obvious source of collateral for lenders may include a borrower’s securities account. But, taking a securities account as collateral adds an additional element to the loan process by bringing a new party to the table – the financial intermediary.

As people in the industry know all too well, different forms of collateral require different procedures to properly perfect their security interests. Real property, for example, is relatively straight forward; a secured party in Missouri records a properly executed deed of trust with the recorder of deeds office in the county in which the property is located. Investment property (stocks, bonds, mutual funds, brokerage accounts, etc.) are a different animal altogether. Under the Uniform Commercial Code (the “UCC”), a securities account is classified as investment property (UCC § 9-102(a)(49)). Most investors do not maintain physical possession of their certified securities (stock certificates or bonds); rather, these are held by their financial intermediaries. Understanding that your borrower will not have the ability to hand you its certified security for this reason, a creditor wishing to obtain its highest priority should perfect its security interest in investment property by control (UCC § 9-314(a)).

The secured party gains control over the securities account when the owner of the account instructs the securities intermediary, after the secured party has rights in the account, that the intermediary shall comply with the secured party’s orders without consent of the owner.

Put more simply, for a lender to perfect its security interest in a securities account two steps are required: (1) execute a written security agreement whereby the borrower acknowledges its pledge of the account (rights to the account); and (2) enter into a written three-party agreement among the lender, borrower, and financial intermediary (borrower’s instructions to the intermediary).

Continue reading »

It’s a Great Time to Become an Urban Business Dweller

James M. Heffner

By James M. Heffner



With downtown St. Louis office vacancy now at 19%, landlords are being forced to compete aggressively and find creative ways to market their office properties.

Landlords have found they also have to create major incentives for tenants: everything from rent concessions to significant tenant improvement allowances.

If you are looking at moving your business, or if you are opening a new office, your best bet may be a move to downtown St. Louis.

Now may be a good time to be looking! Read more in this article from the St. Louis Business Journal.

Illinois Considering Substantial Changes to Improve Foreclosure Process

James M. Heffner

By James M. Heffner



Chicago Tribune reports Illinois considering changes to its foreclosure process, potentially affecting any one of the approximately 70,550 foreclosures pending in the State.

Cash-for-Keys Strategy Gaining Momentum in St. Louis

James M. Heffner

By James M. Heffner



Interesting article in today’s St. Louis Post-Dispatch on the Cash-for-Keys program. The Cash-for-Keys program is designed to entice tenants residing in bank-owned, foreclosed upon properties to willingly vacate the property for a pre-negotiated sum. The tenant receives some amount of money for leaving, the bank saves money by avoiding litigation to remove the tenant. What the article fails to mention is that the bank needs to properly document the Cash-for-Keys transaction to ensure the tenant actually vacates by the agreed upon date.

The End of LIFO/FIFO Loan Participations between Banks?

James M. Heffner

By James M. Heffner



Loan participations are invaluable to community and regional banks who want to service their borrowers’ needs beyond its legal lending limits or risk tolerance. Loan participations frequently include “LIFO” (Last-in, First-out) and “FIFO” (First-in, First-out) provisions designed to streamline the lending process, simplify monitoring the legal lending limits, and entice banks to participate in a loan they would not otherwise consider.

LIFO loan participations are effective when the originating bank advances funds to its borrower up to its legal lending limit for that single borrower – subsequently the participating bank purchases that amount of the loan which exceeds the originating bank’s lending limit. For the participating bank’s trouble, or relative bargaining power, the participating bank is repaid its principal before the originating bank. The opposite holds true for FIFO loans. Regardless of the loans LIFO or FIFO status, in the event of default losses are shared between the originating bank and the participating bank on a pro-rata basis.

Effective January 1, 2010, FASB Statement No. 166, Accounting for Transfers of Financial Assets (“FAS 166”) altered what constitutes a transfer of a portion of a financial asset, e.g., a loan participation, to be treated as an actual sale. Per FAS 166, LIFO and FIFO participation loans do not qualify for sale accounting treatment. What this means to bankers is that the originating bank is now obligated to report that portion of the loan “sold” to the participating bank as a loan on its balance sheet. So, rather than account for only what the originating bank has outstanding, less what it sold to the participating bank, the originating bank now must include the aggregate balance of a borrower’s debt, which, in turn, is used to determine compliance with legal lending limits (see generally12 USC § 84; Reg O; RSMo § 362.170; and CSR 140-2.080).

The American Bankers Association has been proactive on this front, authoring a March 3, 2010 letter discussing the regulatory requirements for loan participations effected by FASB Statement No. 166. In its letter to the Federal Reserve and interested parties, the ABA recommends that FAS 166 should not be used to regulate legal lending limits – rather, “[c]ompliance with such limits should apply on the basis of the contractual borrower.”

To be clear, FAS 166 does not apply to loan participations where all cash flows from the entire financial asset are divided proportionately among the participating interest holders in an amount equal to their share of ownership. What is less clear, however, is whether banks must are required to modify accounting methods for loans made pre-2010 but include disbursements post-2009, such as a revolving line of credit.

In sum, until the certain clarifications are made, in order to qualify for sale accounting the originating bank must carefully review its policies and procedures for loan participations, and understand the implications that come with FAS 166.

I’ve Formed My Company, So Now What?

James M. Heffner

By James M. Heffner



The Basics of “Corporate Formalities” & a Few General Rules for the Small Business Owner

Almost all small business owners understand that before they open shop they need to first form a company. Most small business owners even understand that operating their business through a corporate entity helps to insulate their personal assets from liability. But, in my experience, too few small business owners fully understand how to use their corporation or limited liability company to best ensure the company is treated as a separate entity from you, the owner.

In a nutshell, if you and your company fail to follow certain “corporate formalities”, your company could lose its corporate status, create adverse tax consequences, and even open the door for individual liability. Let’s say your company gets sued, a smart plaintiff will attempt to “pierce the corporate veil” and go directly after you, and your hard earned assets. Think of your company as a protective bubble with you in the middle – when used properly, the protective bubble (veil) is designed to keep creditors away from you personally. Unfortunately, far too many small business owners, for some reason or another, fail to follow the legally required corporate formalities, and consequently leave an opening for plaintiffs/creditors to pierce that protective bubble, thereby allowing them to go after you in your individual capacity.

Below are 10 Rules that all small business owners should followafter forming your company. These rules have been developed over more than 100 years of corporate jurisprudence, but are, in most instances, equally applicable to limited liability companies (“LLCs”).

  1. Abide by the Company’s Operating Agreement, By-Laws, etc.If you didn’t go to a lawyer to create you LLC and decided to save a few dollars by forming your company on-line, beware. Missouri law requires all LLCs to have an operating agreement. If you do have an operating agreement (LLC) or By-Laws (corporation), review them annually and make certain your company complies with their terms.
  2. Sign All Documents on Behalf of Your Company. You can quickly personally obligate yourself on a contract, purchase order, etc. if you sign said document in your individual capacity rather than as a member of your LLC or officer of your corporation. Your signature block should look like this:
              –[Name of company]–
              By:__________________________
              –[Title of individual]–
  3. Hold Scheduled Meetings. If you are a corporation, you need to hold your annual meeting as dictated in the bylaws.
  4. Hold Special Meetings. Again, if you are a corporation and an important decision is coming up, you should hold a special meeting consistent with your by-laws (think… signing a lease, selling the company, buying a company, borrowing money, entering into a big contract, compensation, etc.).
  5. Use Your Company Minute Book & Resolutions. Use your minute book to record actions of shareholders and directors of a corporation. This would include annual minutes showing the election of directors by the shareholders, as well as resolutions showing any significant corporate activities where a special meeting was held.
  6. Bank Accounts and Commingled Funds. You should never commingle personal funds with the funds of the company; rather, you need to open a separate bank account for the company. This is not your money, this is the company’s money.
  7. Stock Ledger Book. If you are a corporation, rather than an LLC, you are required to keep a stock ledger book evidencing who has stock certificates and what was paid for them. This is also an effective way to keep track of who owns how much of the corporation.
  8. Document Loans to and From the Company. Any loan you make to or from the company must be properly documented – usually through use of a promissory note. The company is not your ATM.
  9. Maintain Accurate and Up-to-Date Accounting Records. Pretty obvious, but if your company is audited you’ll regret having skipped this step.
  10. The Last Place to Borrower is from the IRS.Be certain to set aside sufficient funds for taxes – this includes employment, income, and sales taxes. Unlike most debts, these taxes are as a general rule non-dischargeable in bankruptcy.

In sum, remember, you are not your company, and your company is not you. Even if you are the only owner of your company, and you are the only person running the company, it is crucial you always keep in mind that your corporation or LLC is a distinct and separate entity from you personally, and must be treated as such.