Posts in: July

Raising Money for Others

July 26, 2016 Business planning Comments Off on Raising Money for Others

If you are assisting someone else’s company in raising money and are receiving a fee for doing so you must do such activities within the confines of the securities laws. These laws essentially provide three different ways in which one may legally raise money for another for a fee.

BROKER DEALER LICENSE– First, if you are licensed and are registered with an SEC registered broker dealer you may receive commissions and other forms of compensation for raising money in public or private offerings (e.g. private placements).  The newest form of registration from FINRA is designed to license and regulate those who operate as “investment bankers” and is called a Series 79 license. This license allows a holder to collect commissions and other fees for raising funds for an offering of equity (e.g. stock) or debt (e.g. notes or bonds). In addition to passing the licensing test, you’ll need to associate with a broker dealer.

FINDER’S FEE– Second, if you take a limited role in the raising of funds and are paid a flat or hourly fee, as opposed to commissions based on funds raised, you may be able to be paid a finder’s fee for introducing investors to others. A finder’s fee can only be paid to a finder so long as; a) the finder isn’t involved in negotiations of the securities being sold, b) the finder doesn’t discuss the details of the securities, c) the finder isn’t paid based on money raised (e.g. no commission), d) the finder doesn’t perform “finding” services on a regular basis. In sum, a finder’s fee may be paid but only to someone who makes introductions of potential investors and the fee amount must be based on some factor other than compensation relating the persons or amount of securities sold to those introduced by the finder.

DIRECTOR OR OFFICER OF OFFERING COMPANY– Third, you may be able to assist in raising funds for another if you are an officer or director of the company whom you are raising money for. The SEC promulgated Rule 3a4-1 which is a Safe Harbor from enforcement and allows someone who serves as a paid Director or Officer to assist in selling the company’s securities. There are many ways to qualify under this Rule but the most common is to meet the following criteria; a) be paid as a director or officer by salary or other criteria that is not linked to sales of securities made (e.g. be the CFO or Treasurer and offer financial consulting advice in addition to working with potential investors), b) can’t be associated with a broker dealer and cannot have a prior SEC disciplinary history, c) should stay on with the company following closing of the offering so as to show your purpose as a Director or Officer was not just for raising funds, d) takes a passive and restrictive role in selling the securities and refers to the CEO or President for details and negotiations.

Failure to comply with the securities laws can result in civil and criminal action. In addition, investors who can claim a failure to comply with the laws outlined above are able to rescind their investment and can subject the company’s founders and the person soliciting the investment with personal liability for any losses.

Airbnb Lawsuits, Short-Term Rentals, and Real Estate Investors

July 25, 2016 Real Estate Comments Off on Airbnb Lawsuits, Short-Term Rentals, and Real Estate Investors

You may have heard about the lawsuits involving Airbnb in San Francisco and New York City.  Although such lawsuits involve, in part, the question of whether Airbnb can list on their website those properties that have not been duly registered with the local municipality, these cases highlight the importance of knowing the local rules that govern short-term rentals, as discussed below.

The issues surrounding short-term rentals are becoming more prevalent as many clients are constantly looking to add a vacation rental to their existing portfolio of real estate investments, or to convert a “long-term” rental to a vacation rental.  The prospect of owning a property that provides income and a place to get away every now and again is pretty great, but if you are thinking about acquiring a vacation property / short-term rental, here are a few tips to keep in mind:

  1. Comply with the local rules and ordinances of the municipality where your rental is located. I won’t bore you with details of the Airbnb case v. San Francisco, but in short, there is a local law that provides that you cannot operate a short-term/vacation rental unless you are a resident of San Francisco and unless you register the property with the city.  So before you convert a traditional rental to a vacation rental, or add a vacation rental to your real estate portfolio, check with the local laws to find out if there are any restrictions and to what extent registration of the property is required.
  1. Obtain a business license where appropriate. If you are operating a vacation rental, this can, depending on your circumstances, be comparable to a hotel as opposed to a tenant with a long-term tenant.  If your vacation property is like a hotel in which services are provided to the guests, then it is an operating business, and would likely require a business license.  Contrast that scenario with rental properties with long-term tenants, particularly residential.  Although it depends on the jurisdiction, typically a business license is not required for a residential rental property with a long-term tenant, however, it is becoming more common for municipalities to enact ordinances that specifically provide that collecting rental income via residential real estate rises to the level of activity that requires a business license.
  1. Understand the tax implications of operating a short-term rental / vacation property as opposed to a “traditional” or long-term rental. Rental income is typically not subject to self-employment tax.  However, rental income that is received in connection with services performed could subject such income to self-employment tax.  It is much more likely that services would be performed in a short-term rental / vacation property scenario than a rental situation with a long-term tenant.  One example would be a cleaning service while the property is occupied, bed and breakfast, or any other services that are “hotel-like”.  If you’re planning to provide those types of services to the guests of your vacation rental, be prepared as you’re likely going to be subject to self-employment tax.
  1. Consider setting up a business entity for liability protection. It is almost always a good idea to setup a business entity that limits the liability of the entity owners to own the rental property, whether it is a long-term rental or a vacation rental.    Your particular situation will determine the type of business entity to setup, including how the rental income is taxed.  Remember that using a business entity to own a rental property should be a supplement to placing appropriate insurance on the property.
  1. Do not evict a long-term tenant simply to convert a rental into a vacation property. Assuming you own a rental in an area where there is a market for vacation rentals, you may be tempted to kick out your tenant so you can begin marketing the property as a vacation rental.  This is happening more and more but I advise you to read carefully the terms of your rental agreement and applicable law and do not evict a long-term tenant simply to expedite the process of converting a property to a vacation rental.  However, you could always work out an agreement with the long-term tenant to entice them to voluntarily terminate the contract. So called “cash for keys” where you give the tenant cash to move out early usually does the trick. However, make sure you get that agreement to terminate the lease early in writing. Also, use a check you can show they deposited and not actual cash.
  1. No personal use of the vacation rental if using a self-directed IRA/401k. We have many clients who use a self-directed retirement account to invest in real estate.  If you’re planning to acquire a vacation property with a self-directed IRA or similar retirement account, you, or any other disqualified persons, cannot stay on the property, even for a weekend.  I know, that is one of the main reasons to own a vacation rental, but if the owner of the property is your self-directed IRA, you can’t do it. It’s a prohibited transaction as you cannot have personal use of IRA owned assets.

In sum, there is a lot of appeal to vacation rentals, but there are many issues to consider.  As the Airbnb lawsuits highlight, it is important for a real estate investor to know the local rules that govern short-term rentals.  There are many other tax and legal issues to consider, a few of which have been mentioned in this article.  If you are planning to acquire a vacation rental property and have tax or legal questions, please contact our office.

How Pokemon Go Could Get you Sued

July 19, 2016 Asset Protection, Law, Uncategorized Comments Off on How Pokemon Go Could Get you Sued

For those of us who grew up in the 90’s, Pokemon was a series of kids’ video games and cartoons from Japan. I was a little too old for the original Pokemon craze, but my younger siblings were into it and the whole thing always seemed like harmless fun.

Since its introduction into the U.S. in 1996, Pokemon has waxed and waned in popularity, but has always maintained a relatively dedicated following over the years as new games have come on the market. However, nothing could have prepared the world for the phenomenon that is Pokemon Go. According to the 21st Century’s repository of all human knowledge, Wikipedia: “Pokemon Go is a free-to-play location-based augmented reality mobile game developed by Niantic and published by The Pokemon Company as part of the Pokemon franchise.” For the uninitiated (such as myself), the game allows players to capture, battle, and train virtual creatures, called Pokemon, who appear throughout the real world. It makes use of GPS and the camera of compatible devices.

Pokemon Go debuted on July 6th, and it is estimated that it already has at least 21 MILLION daily users. For some perspective, at the height of its popularity, Candy Crush Saga had about 20 million daily users. On average, iPhone users are spending more time each day on the Pokemon Go app (33 minutes) than they are on apps for such social media giants as Facebook (28 minutes), Snapchat (18 minutes), Twitter (17 minutes) or Instagram (15 minutes). All of this has translated to stacks of cash for Nintendo, which has seen its market value increase by $7 billion (with a “b”) in the past two weeks.

While all of this in interesting, it doesn’t speak to the question of how Pokemon Go could get you sued. The answer comes from Wikipedia’s description of the game. It says people playing Pokemon Go are supposed to capture, battle and train creatures that “appear throughout the real world” – this includes on private property.

The potential problem for landowners comes from the legal doctrine called “attractive nuisance.” Under this doctrine, a landowner is subject to liability for physical harm to children trespassing on their property caused by an artificial condition upon the land if:

  • The place where the condition exists is a place the landowner knows or has reason to know that children are likely to trespass;
  • The condition is one the landowner knows or has reason to know and which he realizes or should realize will involve an unreasonable risk of death or serious bodily harm to such children;
  • The children, because of their youth, do not discover the condition or realize the risk involved in intermeddling with it or in coming within the area made dangerous by it;
  • The utility to the landowner of maintaining the condition and the burden of eliminating the danger are slight as compared with the risk to children involved, and
  • The landowner fails to exercise reasonable care to eliminate the danger or otherwise to protect the children.

The question therefore becomes whether the “existence” of an augmented reality Pokemon on your private property creates an attractive nuisance. If the answer is yes, and a child is injured or killed in scaling a fence or participating in some other dangerous activity on your property while trying to bag a rare Vaporeon Pokemon (yeah, I looked that up), then you could be held liable.

Now, as you might guess, the law of Pokemon Go and augmented reality in general is what we in the legal business would call developing. This means it is so new that we’re not real sure where it will go yet. Some interesting case law applying to specific situations is surely coming down the pike.

With that being said, the law of attractive nuisance is not new. More traditional attractive nuisances you may have on your own property are things like:

  • Swimming pools and fountains (empty or filled with water)
  • Machinery (i.e. lawnmowers, gasoline pumps, etc.)
  • Wells and tunnels
  • Dangerous animals
  • Paths and stairs

It’s always a good idea to take proactive steps to avoid liability, instead of reacting after the fact. This is certainly true in the case of an attractive nuisance. As such, here are some smart steps to take to protect yourself:

  • “No Trespassing,” “Warning,” or “Caution” signs are certainly a good place to start. However, sometimes they aren’t enough to alleviate risks, especially when a child visitor (or trespasser) is not old enough to read. Including a picture on the sign may help.
  • If you have a swimming pool and your yard is not fenced in, building a small fence or enclosure for the pool is a smart idea. The fence should be locked to prevent trespassers from accessing it. You should also keep the pool covered if it is reasonable to do so.
  • If an object is too large to be stored when not in use (such as a trampoline or play set), you should try to block access to it and definitely use a warning sign with a clear picture on it as well. Trampolines in particular can cause serious injuries, as you may be surprised to learn that children often tend to bounce too high and can land on them (or off of them) the wrong way.
  • Put away potentially dangerous objects (such as power tools), when not in use. If such objects are too large or cumbersome to move, then at least make sure they are turned off and unplugged, that there are guards on blades and other sharp edges, and that you’ve taken any other reasonable precautions.
  • If you have objects like old refrigerators or wood piles, store them in a locked shed or some other difficult to access place, so that children aren’t tempted to play in and around them. For appliances like refrigerators and washing machines that are not in use, get rid of them, or at least remove the doors to ensure kids don’t crawl inside and get stuck.
  • Have sufficient insurance. This may go without saying, but buying and keeping sufficient insurance can save the day if something terrible does happen.
  • Establish an LLC to own your property. There are often tax reasons not to do this with your personal residence, but if you own an income property or undeveloped land, then establishing an LLC, deeding the subject property into the name of the LLC, and maintaining and doing business with the LLC properly, is great way to make sure your personal assets aren’t at stake if a tragic accident does occur.

The Pokemon Go craze will surely come and go, but keeping yourself out of lawsuits never goes out of style. If you own real estate, make sure you take the necessary precautions to protect yourself, your assets, and your family’s future from the liabilities associated with your investment.