Drafting the Right Lease Agreement

David A. Zobel

By David A. Zobel



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.

  1. 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. Continue reading »

Insurance Considerations

David A. Zobel

By David A. Zobel



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. Continue reading »

Observing Corporate Formalities

David A. Zobel

By David A. Zobel



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. Continue reading »

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

David A. Zobel

By David A. Zobel



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. Continue reading »

Operational Considerations – Purchasing Real Estate – Loan Documentation

David A. Zobel

By David A. Zobel



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. Continue reading »

Operational Considerations – Purchasing Real Estate – Indenture Review

David A. Zobel

By David A. Zobel



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.) Continue reading »

Operational Considerations – Purchasing Real Estate – Title Insurance

David A. Zobel

By David A. Zobel



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. Continue reading »

Your Entity’s Governing Documents

David A. Zobel

By David A. Zobel



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. Continue reading »

Tax Treatment Considerations When Selecting Your Entity

David A. Zobel

By David A. Zobel



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. Continue reading »

What Types of Legal Entities are Available?

David A. Zobel

By David A. Zobel



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

Part 2 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Several types of legal entities are available to operate your real estate venture. The entity type most appropriate for your business will vary depending on factors such as the number of owners, desired tax treatment, and management preference. Below we’ll outline several of the more commonly utilized types of entities available: limited partnerships, corporations, and limited liability companies.

Limited Partnerships

One commonly used entity is the limited partnership (LP). To explain how a limited partnership operates, it is first necessary to describe what constitutes a regular or general partnership.

A general partnership is typically defined as a business where two or more people share ownership and management. This type of partnership does not require a special filing with the Secretary of State and is generally presumed when two individuals go into business together. In a general partnership, each partner is expected to contribute to the business and management decisions are made together by the partners. Profits and losses are split equally between the partners in the absence of a written agreement. General partnerships do not have personal liability protections — each partner is personally liable for the debts and liabilities of the business.

An LP alters a general partnership in management and liability. LPs have a general partner and a number of limited partners. Management of the LP is vested in the general partner, who remains personally liable for all debt and liabilities of the business. The limited partners do not manage the day-to-day affairs of the company, but their liability is typically capped at the amount of their investment in the partnership. This entity type can be useful when silent investors are present. LPs can only be created through filings with the Secretary of State. Continue reading »