Do I Need a Legal Entity?

David A. Zobel

By David A. Zobel



Part 1 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

A common statement we’ve heard from folks considering getting into real estate leasing (or investing for that matter) is that they need or want “a LLC,” but far fewer seem to know exactly why. While there are certainly other valid reasons for choosing to operate your business through a legal entity, the primary basis for using one is asset protection.

Consider this: If you buy stock and the price plummets to zero, you’re typically out only the cost of your investment. Real estate investment, on the other hand, operates differently and may not necessarily end at zero or the cost of your investment, but can extend beyond to reach your personal home, bank account, and day-to-day finances. Proper use of a legal entity can help insulate you from that risk and ensure a bad investment does not turn into your financial ruin. The following scenarios help exemplify the importance of using a legal entity:

Scenario 1: Direct or Individual Ownership and Operation

John takes $50,000 from his savings and buys a condo in his personal name. He then enters into a lease with Bob, as landlord and tenant respectively, in his personal name. Within the first month of the tenancy, Bob falls down the stairs and is injured (ideally John would have insurance in place to cover such an incident, but let’s assume he doesn’t in this example). Bob racks up $75,000 in medical bills. Bob believes his injuries resulted from a defective condition at the condo and sues John, his landlord and owner of the condo, personally. Bob wins and obtains a judgment against John, personally, in the amount of $75,000. John refuses to pay the judgment and Bob begins collection efforts against John. Continue reading »

Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

David A. Zobel

By David A. Zobel



For many folks, the thought of extra income from leasing commercial or residential real estate is quite attractive and straightforward:

  1. Buy property,
  2. Get tenant, and
  3. Collect rent.

As many brokers and managers in the industry will tell you, it doesn’t always work out that way. Real estate leasing is a risky business. There are countless ways for your business to fail and end up not as a benefit to, but drain on your finances. Continue reading »

Short-term Rentals Via Internet Outlets: Three Tips for Homeowner & Condominium Association Boards

Jeffrey R. Schmitt

By Jeffrey R. Schmitt



Community associations continue to struggle with the emergence of the “sharing economy” issues raised by AirBnB, VRBO and other online outlets (see CNN Money article: Why everyone is cracking down on Airbnb).

When addressing these issues, condominium, townhome, and neighborhood association boards should consider the following steps as a proactive approach to maintaining their desired community environment:

  1. Be vigilant. The good news is that you are only a few mouse clicks away from finding out whether your owners are making short term or transient leases. Nearly all of these sharing economy services are online and searchable by location. Additionally, urge other residents to keep an eye out for new faces on a regular basis.
  1. Know the rules. Does your association prohibit short term leasing or lodging? Is permission required to rent? Do tenants have access to all common areas?  The answers to these questions should all be found in your governing document, the declaration or indenture and possibly in your rules and regulations as well. Know the rules of the game and consider whether they should be updated or amended to address emerging issues.

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No Vacancy – When Bed & Breakfasts Run Afoul of Condominium Communities

Jeffrey R. Schmitt

By Jeffrey R. Schmitt



The popularity of vacationing or traveling via bed and breakfast lodging, or, as more popularly known, “BnB,” is rapidly on the rise. The concept allows an owner with a vacant house, condominium, apartment, or even a single room, to create investment property by listing the space on a website for rent to vacation and business travelers, often for very short stays and possibly as short as a single night. Property owners can make a little extra money, and travelers can often find better accommodations at lower prices. Add in the ease of use by listing your space on the internet – airbnb.com and vrbo.com are among the most popular sites – and this is a quickly expanding industry.

Frequently, the phenomenon overlooks the legal ramifications of being a short-term landlord, or essentially acting as a hotel or lodge. Some local governments are addressing the issue and requiring that property owners apply for permitting, pay taxes, or maintain compliance with other local rules relating to lodging or short-term leasing. However, the Airbnb concept also runs afoul of various considerations applicable to community associations, specifically condominiums and townhomes. Continue reading »

No-Fly Zones: Using Drones for Commercial Purposes

Jeffrey R. Schmitt

By Jeffrey R. Schmitt



Drones are all the rage. Actually, drones are causing quite a rage as well.

Last weekend’s Super Bowl in Arizona was a “no drone zone,” where flying drone aircraft for purposes of getting a better view of the action was prohibited. In fact, all NFL games are no-fly zones for drones, as are nearly all professional sporting events and other outdoor stadium events where more than 30,000 people are present.

Drones are threatening to interfere with air travel near airports, and one crashed on the White House lawn recently. The recent explosion of drone usage by the public has even caused one major drone manufacturer to begin a software update for its vehicles that will prohibit them from entering air space in Washington, D.C., or near airports.

Unmanned aerial vehicle (“UAV” or drone) technology is one emerging area where the speed of technology has eclipsed the speed of the law. If you were lucky enough to receive a drone as a gift during the holidays and want to use it for personal use, the good news is that the Federal Aviation Administration (“FAA”) is not stopping you from doing so, as long as you do so in a reasonable manner and do not infringe on others’ rights.

However, commercial use of drone technology is a different story. Continue reading »

Is Your Property Insured Against a Riot?

David A. Zobel

By David A. Zobel



The current unrest facing the St. Louis metropolitan region carries with it the elevated risk of damage and/or destruction of both real and personal property. While everyone intends and hopes their insurance policies cover all eventualities that may arise, the truth of the matter is that not all eventualities are covered by insurance.

Unfortunately, it is generally only after something truly unexpected happens that policies are reviewed and tested for actual coverage. At that moment, it may be too late to both prepare for the event and/or adjust coverage.

As a result, it may be wise now to pull out your current auto, homeowners, renters, commercial or other similar policies to review each policy’s specific language.

One of the coverage limitations to consider are so-called “force majeure” clauses. “Force majeure” is a contractual term that relieves parties from performing their contractual obligations when certain circumstances beyond their control arise, often making their performance under the contract impractical or impossible. Examples of these circumstances can include earthquakes, war, strikes, epidemics, acts of God, and riots. Continue reading »

Condo Association Embezzlement Case Demonstrates Need for System of Financial Checks and Balances

David A. Zobel

By David A. Zobel



A St. Louis bookkeeper recently pled guilty to wire fraud for embezzling more than $70,000 from his condominium association. His scheme spanned more than two years and involved more than 50 unauthorized wire transfers from the association’s financial accounts to the bookkeeper’s own personal bank accounts.  Unfortunately for condominium and homeowner associations, this type of activity is all too common and demonstrates the critical need for associations to prepare and implement systems of financial checks and balances.

What each association’s system should entail to sufficiently reduce the risk of improper financial activity (while also recognizing the need for effective and responsive management) will vary from association to association depending on several factors, including association size, level of involvement from the homeowners, and governing rules. However, many effective systems begin with distributing financial supervision and actions between several individuals. This practice includes: Continue reading »

New Illinois Recording Law Designed to Combat Fraudulent Filings Likely to Have Immediate Impact on Title Insurance Industry

David A. Zobel

By David A. Zobel



Illinois recorder of deeds offices are now authorized to implement fraud referral and review processes to detect and address fraudulent recorded instruments in their counties with the recent passage of Illinois House Bill 2832 (55 ILCS 5/3-5010.5).

The new law identifies 19 separate indications of potential fraud, but county recorders are each free to create a unique detection system for their county. Under these systems, once the recorder reasonably determines an instrument to be “fraudulent, unlawfully altered, or intended to unlawfully cloud or transfer the title of any real estate property,” the law affords the recorder two distinct courses of action.

First, recorder personnel may, at their own discretion, notify law enforcement officials, including the Department of Financial and Professional regulation, of the suspected fraud and request assistance for further review and potential criminal investigation.

Second, the recorder may, upon notice and confirmation of the potential fraud with the last owner of record, flag and refer the instrument to a local administrative law judge for hearing. If that judge determines the instrument to be legitimate, a judgment stating so would then be recorded along with the original instrument. However, if determined to be fraudulent, a judgment stating “that the document in question has been found to be fraudulent and shall not be considered to affect the chain of title of the property in any way” would then be recorded with the original instrument. No documents, regardless of legitimacy, would be “unrecorded” or struck from the county records.

Like many new laws, this new recording law is not without controversy. Proponents praise the law as an expedited and cost-effective alternative to filing a lawsuit to clear a victim’s title. However, critics complain the law unconstitutionally expands the powers of county recorders and may lead to unforeseen consequences in the recovering real estate industry.

While the ultimate effect (and constitutionality) of the new law remains to be seen, the law will almost certainly have an immediate impact on Illinois title companies. In some cases, it may lead to longer and more expensive administrative review and closing periods as title companies may be reluctant to insure any title during an active review/referral process. However, in others, the law’s finality in determining the legitimacy of unusual instruments in a chain of title may lead to decreased risks borne by title companies and thus decreased costs borne by the consumer.

Either way, the new law’s application and effect will certainly need to be considered by companies seeking to insure title in Illinois.

Posted by Attorney David A. Zobel. Zobel primarily represents individuals and corporations in the defense of civil litigation, including contract, negligence, and real estate matters. In addition to his court room work, Zobel assists in advising clients on contract and employment issues and regarding issues arising under the Sunshine Law.

 

Missouri Supreme Court Upholds Foreclosure Laws

Jeffrey R. Schmitt

By Jeffrey R. Schmitt



On April 12th, Missouri’s highest court granted lenders across the state a victory by ruling that banks only need to give defaulted borrowers, in foreclosure, credit for the amount of the foreclosure bid, as opposed to the fair market value of the property. The ruling is consistent with existing Missouri precedent, which, for decades, has maintained that the sale price of a foreclosed property is determinative with respect to the deficiency owed by the borrower to the bank, which is the remaining balance on the loan for which the lender can sue.

In the case, First Bank v. Fischer & Frichtel, the borrower, Fischer & Frichtel, a Missouri real estate developer, defaulted on loans to First Bank, which then foreclosed on properties securing the loan. First Bank purchased the property at the foreclosure sale. The lender proceeded to sue the borrower for the deficiency balance remaining on the loan. The borrower defended the case by alleging that the proper method of determining the deficiency was not the sale price at the foreclosure sale, but rather, the fair market value of the property. In so doing, the borrower essentially sought a modification of existing Missouri law with respect to calculations for suing on deficiency against a defaulted borrower. Fischer & Frichtel maintained that Missouri should align itself with other states which require a lender to determine the fair market value of the foreclosed property and apply that amount, which is generally higher than the foreclosure price, to the loan balance before suing a borrower.

The borrower argued that the current law often grants lenders a windfall after a foreclosure. Foreclosure sales require cash buyers on the day of the sale, except that the foreclosing lender can simply bid as a credit against the amount of the indebtedness owed by the borrower. This allows lenders to often easily outbid potential purchasers who may not have cash readily available. If the lenders obtain the properties at a depressed sale price at the foreclosure, they can then resell the property to a third party, in an arms-length transaction, and are entitled to keep any profits from the resale of the foreclosed property, without applying those profits to the borrower’s loan balance.

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Is This by Consent? Changes to Missouri Supreme Court Rule Affect Use of Non-party Subpoenas

David R. Bohm

By David R. Bohm



Part of a series on issues related to Manufacturers, Distributors and International Trade

Co-authored by David R. Bohm and David A. Zobel

A major change involving subpoenas to non-parties has hit the business world in the state of Missouri.

A new amendment to the Missouri Supreme Court Rules now requires non-party record custodians to physically appear at deposition to produce subpoenaed items, unless all parties to the litigation have agreed that the subpoenaed party may produce the items without appearing.

The amendment changes the prevailing practice where parties send out subpoenas to third parties with a letter explaining that they will be excused from appearing at deposition if they produce the requested items along with what is known as a business records affidavit.

Rule 57.09, as amended, now requires parties to first obtain consent from all other parties to the litigation before a subpoenaed witness may produce documents without attending the deposition. This agreement must be communicated to the witness in writing. Absent this agreement, a witness must appear to produce subpoenaed items at deposition.

What does this mean to you? If you receive a subpoena, you may only produce the documents to the party serving the subpoena without appearing at deposition if that party represents to you in writing (e.g., in a letter) that all other parties have consented to production of the docume

nts without need for you to appear at the deposition. Such a letter should protect you from allegations that you improperly produced records by mail, instead of bringing the documents to the deposition. You do not need to see the actual agreement. If you have any questions as to whether you can simply mail the documents, instead of appearing at deposition, you should either call your attorney for advice or simply wait and bring the documents at the time and place designated in the subpoena.

Continue reading »