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Business & Real Estate - Avoid a House of Cards · MaxValue Podcast

• 0:01
  SPEAKER_02: And what is the most common real estate mistake that you see owners making before a sale?
• 0:07
  SPEAKER_00: Probably the worst mistake we see is holding the real estate in a corporation.
• 0:13
  SPEAKER_00: Surprise and tax in the same sentence are never good.
• 0:15
  SPEAKER_02: What are some of the things that slow down a deal that really gives you a surprise?
• 0:19
  SPEAKER_02: You know, those sorts of things.
• 0:24
  SPEAKER_00: So, like we mentioned, lender issues, title issues.
• 0:27
  SPEAKER_00: The buyer doesn't want the lease, wants to get out of the lease, or doesn't want the property and wants to get rid of the property.
• 0:33
  SPEAKER_02: And so it's almost like a second deal entirely that you're doing at the same time.
• 0:36
  SPEAKER_02: The lender just said, no, we aren't, we aren't going to allow this to happen.
• 0:40
  SPEAKER_02: And if all the work we did just poofed away, our bills didn't poof away, but the deal just never happened.
• 0:45
  SPEAKER_00: If you think there might be a title issue, an environmental issue, any of those things, don't wait till it's time to sell.
• 0:50
  SPEAKER_00: Get that stuff wrapped up early and you know, face the music because it's not going to get any better later.
• 1:04
  SPEAKER_02: Welcome to Max Value, the show for business owners and their trusted business advisors who are on a mission to maximize their value with business valuation, exit strategy, and bringing it home with real estate.
• 1:15
  SPEAKER_02: I'm your host, Ben Town.
• 1:17
  SPEAKER_02: Today we are joined with our guest, my friend, Tamara Powell.
• 1:21
  SPEAKER_02: That's Pal.
• 1:22
  SPEAKER_02: Like, if you come at her, Pal, you'll be on your butt.
• 1:25
  SPEAKER_02: Tamara is the managing partner and founder of Strategy Law, a fast-growing law law firm in the Bay Area.
• 1:31
  SPEAKER_02: And today, we're here to talk with her about one of her specialty areas, real estate.
• 1:35
  SPEAKER_02: Specifically in the context of business exit transactions.
• 1:39
  SPEAKER_02: She guides business owners and real estate investors in navigating things like entity formation with LLCs, partnerships, corporations, contracts, leases, due diligence, and tax planning.
• 1:50
  SPEAKER_02: Oh, and also she has a real estate license as a broker.
• 1:54
  SPEAKER_02: So she actually knows how to do these things inside and out.
• 1:58
  SPEAKER_02: So without further ado, let's jump right in.
• 2:02
  SPEAKER_02: Tomorrow, welcome.
• 2:04
  SPEAKER_00: Thank you, Ben.
• 2:05
  SPEAKER_00: Thanks for having me.
• 2:06
  SPEAKER_02: Absolutely.
• 2:06
  SPEAKER_02: This is great.
• 2:08
  SPEAKER_02: So getting right into it.
• 2:11
  SPEAKER_02: Business owners often forget that there is a real estate component to their business.
• 2:16
  SPEAKER_02: And what is the most common real estate mistake that you see owners making before a sale?
• 2:21
  SPEAKER_00: Probably the worst mistake we see is holding the real estate in a corporation, uh, especially if it's in a C corporation.
• 2:29
  SPEAKER_00: Uh, and even worse if that C corporation is an operating business itself.
• 2:34
  SPEAKER_02: Gotcha.
• 2:35
  SPEAKER_02: And what's so bad about that?
• 2:37
  SPEAKER_00: Well, corporations aren't set up for real estate because essentially, as a C corporation, uh every dollar that you take out of the company someday is really taxed twice, once at the corporate level and once when it goes out to the shareholder.
• 2:56
  SPEAKER_00: And that's a really big difference when you're talking about appreciation on real estate.
• 3:01
  SPEAKER_00: Now, if the corporation is an S corporation, meaning it's elected to be treated as a pass-through entity for tax purposes, that can avoid some of that double taxation.
• 3:12
  SPEAKER_00: But there are still other tax issues on pulling corporations, I'm sorry, pulling real estate in and out of the corporation.
• 3:19
  SPEAKER_00: Um, and it can just create some very surprising tax consequences.
• 3:24
  SPEAKER_00: And uh surprise and tax in the same sentence are never good.
• 3:28
  SPEAKER_02: I'm glad you made that joke because I was going to.
• 3:31
  SPEAKER_02: Uh so there there are there's a a couple of common setups, and and you just mentioned the the worst type of structuring basically is when when it happens to be, when the real estate happens to be within a C corporation, uh, although it could be within a different kind of operating legal legal entity.
• 3:48
  SPEAKER_02: And of course, there's uh having uh real estate that's leased from a third party, uh, and then there's of course real estate that is leased from a related party.
• 3:59
  SPEAKER_02: Maybe you own your your real estate in an LLC that you then lease back to your lease back to your company.
• 4:05
  SPEAKER_02: Um so for for each one of those, I think you've already given us kind of the the warning label on you know uh having it within a C corporation, but maybe if it's even if it's not, you know, is there a choose your own adventure kind of warning label you would put on each of those three uh ways of interacting with real estate with a business?
• 4:24
  SPEAKER_00: Boy, I don't even know where to start when it comes to leasing from a third party because uh that is a significant contract that you should not be taking lightly.
• 4:35
  SPEAKER_00: Don't just sign a lease that some broker puts in front of you, especially some form lease, uh, because there are endless provisions that can affect you later and may not seem significant on day one, but could cost you or the business a lot of money.
• 4:51
  SPEAKER_00: So, for example, um the lease, if it's a critical part of the business, uh, could be a huge component of the business value when you go to sell the business.
• 5:02
  SPEAKER_00: Um that could be a positive component or a negative component.
• 5:07
  SPEAKER_00: So, for example, if there's a really long lease that the owner of the business or the successor owner of the business doesn't want to be tied to, maybe they want to take on your business and bring it to their location, then that long-term lease is a liability that's really going to affect what they're willing to pay for the business.
• 5:28
  SPEAKER_00: On the other hand, I represent an operating company who really needs their location to do their operations.
• 5:38
  SPEAKER_00: And the fact that they only have a couple years left on their lease is the opposite problem.
• 5:44
  SPEAKER_00: It's a huge liability because you may have to move that business someday, and that's going to be a very expensive proposition.
• 5:50
  SPEAKER_00: So the uncertainty of where that business will be is a problem.
• 5:54
  SPEAKER_00: And then when you sell your business, even if the lease is exactly what the business needs and the buyer of the business wants to keep that lease, that lease contract itself may have some restrictions that either don't allow assignability or have a penalty or costs that the landlord can charge before they'll allow you to let the business change hands.
• 6:19
  SPEAKER_00: So a lot of people don't realize that that's one of those contracts that comes up in the due diligence process to make sure it's not going to be a problem, whether it goes with the business or not on a sale.
• 6:31
  SPEAKER_00: We already talked about owning the property within the operating company for income tax purposes, but there's also property tax purposes.
• 6:38
  SPEAKER_00: If the business sells together with the property, the operating expenses will change because the property could be reassessed, especially here in California.
• 6:48
  SPEAKER_00: There are also lender restrictions.
• 6:50
  SPEAKER_00: If you have a loan on that property, the lender may not agree to keep the loan, and any transfer of the property would require a payment in full of the loan.
• 7:00
  SPEAKER_00: So, yeah, lots to deal with if you're keeping the property either with the business or inside the business.
• 7:08
  SPEAKER_00: On the other hand, if you're leasing from yourself, there's a lot more flexibility.
• 7:14
  SPEAKER_00: There's a lot more flexibility when you're running the business because you can take advantage of some flexibility with regards to the amount of the rent and the terms of the lease.
• 7:26
  SPEAKER_00: And then you also have more flexibility when you go to sell your business because you can negotiate a new lease with the buyers of the business or not.
• 7:35
  SPEAKER_00: And you can keep your property and then go ahead to either sell it or lease it to another higher bidder.
• 7:42
  SPEAKER_02: Right.
• 7:42
  SPEAKER_02: Because not in not every case does the buyer want that particular property or wants to have a property on their balance sheet and is perfectly happy to lease potentially.
• 7:52
  SPEAKER_02: So there's a lot of considerations by uh particular uh buyers and sellers.
• 7:57
  SPEAKER_02: So I think that I think that's a that's a great great thing.
• 8:01
  SPEAKER_02: So when you're looking at a um a sale of a of a business that has the property within it, and let's leave the some of the more obvious tax uh implications behind for a second, but you know, say you're in an LLC and you have an operating business that also owns the real estate.
• 8:28
  SPEAKER_02: Um what are some of the some of the ways to uh well what are some of the things that slow down a deal that really gives you a surprise, you know, those sorts of things?
• 8:41
  SPEAKER_00: Well, they're the typical things that may slow down any real estate deal.
• 8:45
  SPEAKER_00: So, like we mentioned, lender issues, um, title issues.
• 8:50
  SPEAKER_00: Uh if the buyer doesn't want the lease, wants to get out of the lease, or doesn't want the property and wants to get rid of the property.
• 8:57
  SPEAKER_00: Um the if the buyer has to take subject to the property, they have to take into account that if they sell it within a year, they have to pay ordinary income, not capital gains on that sale.
• 9:12
  SPEAKER_00: Um, they're not in the business of real estate, so that affects a lot of things, including their obligations to their shareholders as to how they spend the money to buy up a business.
• 9:26
  SPEAKER_00: Uh, it also could affect their choice between buying the business as a stock sale or an asset sale, because uh if they don't, well, if they wanted to buy the business as a stock sale for other reasons, but they don't want that property in there, it could be problematic.
• 9:46
  SPEAKER_00: Of course, it's a lot easier if it's an asset sale and they could just choose not to purchase that asset.
• 9:51
  SPEAKER_00: Um, but that could affect other things like how they want to keep the business running.
• 9:56
  SPEAKER_00: Um, so it just complicates a lot of things because the the business and the real estate are really two completely different income streams and uh liabilities and um actually in today's world really different for uh insurance purposes as well.
• 10:18
  SPEAKER_00: So that can really complicate a deal.
• 10:21
  SPEAKER_02: Good point.
• 10:22
  SPEAKER_02: So it's almost like a second deal entirely that you're doing at the same time.
• 10:27
  SPEAKER_00: Yeah, and it should be.
• 10:29
  SPEAKER_00: Uh I watched one business that was actually a stock sale, and this company had purchased a condo in Tahoe.
• 10:42
  SPEAKER_00: It was actually a ski place up there for their employees to use as a perk.
• 10:47
  SPEAKER_00: And it became a huge problem because they landed up having this Tahoe house that they had to get rid of after the deal, but in the meantime, they had to maintain it, they had to pay property taxes and insurance and all of the other obligations.
• 11:01
  SPEAKER_00: And, you know, frankly, they were not in the business of owning real estate or managing real estate.
• 11:06
  SPEAKER_00: And uh so it just sat empty.
• 11:09
  SPEAKER_00: The employees didn't use it uh until eventually they could get rid of it.
• 11:13
  SPEAKER_00: And when they did, they landed up selling it for way more than the seller could have if he had sold it um initially.
• 11:22
  SPEAKER_00: So what he sold it to them for, uh, they made a huge profit on it just a couple of years later, uh, which is really sad because that's something that the owner really should have kept and sold himself.
• 11:34
  SPEAKER_02: Makes sense.
• 11:35
  SPEAKER_02: That makes sense.
• 11:37
  SPEAKER_02: So obviously, you know, your one of your roles as a legal advisor is to suss out any potential problems and avoid them.
• 11:52
  SPEAKER_02: Of course, being creative and proactive is the other side of that.
• 11:56
  SPEAKER_02: And that's something that I know you do really well.
• 11:58
  SPEAKER_02: So in any one of those situations, or uh, or maybe we can go through each situation, you know, what are some things that we can do that a business owner can do ahead of time to smooth out these problems?
• 12:10
  SPEAKER_02: Obviously, calling you is the very, very first one.
• 12:13
  SPEAKER_02: Uh, but just kind of in in general categorization, you know, what are we talking about?
• 12:19
  SPEAKER_00: Well, I think that all goes to if you're planning to sell your business, you don't just wake up one day and decide to sell it.
• 12:26
  SPEAKER_00: You really plan for that in advance.
• 12:29
  SPEAKER_00: So in the years before you put it up for sale, I'm sure you work with people to increase the valuation of the deal.
• 12:37
  SPEAKER_00: At the same time, you really want to be increasing their bottom line.
• 12:41
  SPEAKER_00: And if that bottom line means keeping the real estate separate, um, look into the tax application of moving it out of the company uh years ahead, or put a good lease in place so that you can keep that lease after the business sells.
• 12:59
  SPEAKER_00: I know quite a few Silicon Valley businesses that operated for a generation or more, and at the end of that time, the real estate they owned in that business was worth more than the business itself.
• 13:14
  SPEAKER_00: And so that real estate could really be a legacy for the family if they kept it separate from the business.
• 13:20
  SPEAKER_00: And it can be independent of whether the business sells for a lot of money or not, or you know, where their future income comes from for you know, gifting to the next generation for retirement, etc.
• 13:36
  SPEAKER_00: Um, so yeah, I think you want to look ahead to how you're planning to benefit from the business and where your cash flow is coming from after you sell the business, and how the rent on the real estate that you own could benefit you separate and apart from the transfer of the business.
• 13:58
  SPEAKER_00: And then you then look at things like lender requirements.
• 14:01
  SPEAKER_00: You know, if if uh you're gonna have a lender restriction on there, make sure you refinance it so that it's no longer an owner-occupied loan, for instance, that you have flexibility.
• 14:12
  SPEAKER_00: Make sure next time you renegotiate your lease extension, you get more flexibility for assignment or subletting if it's a third-party lease.
• 14:20
  SPEAKER_00: Um, insurance, you know, make sure those are kept separate so you have a good idea of the costs.
• 14:28
  SPEAKER_00: But really, you know, you always should try to keep the real estate separate anyway for liability purposes.
• 14:35
  SPEAKER_00: Because if something goes wrong in your business and the plaintiff comes after the business as a defendant, you want to make sure that business isn't a deeper pocket than it needs to be.
• 14:49
  SPEAKER_00: And by keeping that real estate separate, if you're talking about owning the real estate here, uh that gives you the ability to kind of keep your domino separate so that if one falls over, it doesn't affect the other.
• 15:00
  SPEAKER_00: Uh so if there's a huge liability with the business, you still own the property, and that can be, for many people, their biggest asset.
• 15:09
  SPEAKER_02: Well, and technically vice versa as well.
• 15:11
  SPEAKER_02: If there's ever a problem with the property, somebody does a trip and fall, and they, I don't know, for some reason sue the property owner.
• 15:18
  SPEAKER_02: Um of course now I'm getting into the legal discussion I know nothing about uh the so really that that that's kind of handling uh, I guess, the the uh second situation or third third scenario where you know the it's a related party now.
• 15:34
  SPEAKER_02: You own that real estate, but outside of the entity, which is kind of the uh the best case scenario, most flexible, most protected, least risky.
• 15:42
  SPEAKER_02: And that's you know, you you brought it up earlier, you know, the best way to look at this is to do your exit planning ahead of time.
• 15:49
  SPEAKER_02: And yes, part of that is always to as much as possible, uh increase the value of the business, but it also is to decrease through pre-diligence in a lot of ways, but decrease the risk surrounding the uh the deal that will be upcoming.
• 16:08
  SPEAKER_02: I mean, even if it's just you know internally to your kids or to an ESOP or whatever, whatever.
• 16:13
  SPEAKER_02: Um let alone to a third party who's going to be, of course, negotiating and looking out for their own interests pretty uh pretty heavily too.
• 16:22
  SPEAKER_02: Okay.
• 16:24
  SPEAKER_02: Um when you have a a situation where you're going to, you know, uh sell and lease back, um what are some of the benefits?
• 16:39
  SPEAKER_02: What are the some of the pitfalls?
• 16:42
  SPEAKER_00: You know, making sure that the lease, I'm sorry, that the loan isn't an issue, that you're not gonna lose your SBA owner-occupied loan because you sold the business that is occupying it.
• 16:56
  SPEAKER_00: You're gonna want to make sure that lease is really clear on who's paying for expenses and who's operating uh the property with regards to maintenance.
• 17:08
  SPEAKER_00: Um, so all leases will spell out who's supposed to be doing the maintenance, the taxes, the insurance, either paying for those or actually doing them.
• 17:21
  SPEAKER_00: And you know, depending on the type of business, any one of those can become more important as to who's covering them and what the costs are.
• 17:30
  SPEAKER_00: So, for example, I dealt with one uh sale of a business that catered to a lot of partying college students, and uh the people who kept the property realized pretty quickly that their lease was not sufficient with regards to janitorial and what was covered under janitorial and what wasn't?
• 17:55
  SPEAKER_00: So if you've got a bunch of um you know crazy partying people really uh messing up the space, breaking things, um, dealing with unusual amount of um not just janitorial, but really you know, repair issues.
• 18:14
  SPEAKER_00: Maintenance.
• 18:15
  SPEAKER_00: Yeah, at what point does that become a tenant issue as opposed to a landlord issue?
• 18:21
  SPEAKER_00: And in this case, it said landlord was paying for janitorial, and the tenant thought that meant they have to clean up after everything, uh, including you know, repairing a sink that may have been torn off a wall and things like that, toilets that are broken.
• 18:37
  SPEAKER_00: So it became uh a real issue.
• 18:39
  SPEAKER_00: So I would say you need to take a lot more time to look at the details of who pays for what and who's responsible for what in any lease or other real estate uh sublease or assignment agreement, uh, just to make sure that there's going to be less opportunity for confusion and dispute later when the operations are going and you're not on both sides of that deal anymore.
• 19:04
  SPEAKER_02: You know, there's a lot of stakeholders involved that aren't just you and the buyer or you and the seller or whatever, whichever side of the transaction you're on.
• 19:14
  SPEAKER_02: I mean, you have the as you said, you have the lender who's gonna have a say in things.
• 19:18
  SPEAKER_02: You have, depending on how the real estate is is held or who owns it, the the landlord may have a huge say in even how your business gets sold.
• 19:29
  SPEAKER_02: And then of course, you know, even if you get the uh the real estate outside of the operating business entity, maybe you have partners in that.
• 19:41
  SPEAKER_02: Um we see this all all the time, right, with professional service firms, is they want to own the rightly, they want to own the business uh as well as the the uh the property, and the property may not have the same owners necessarily as the the operating business over time, those sorts of things.
• 19:58
  SPEAKER_02: And so some of those people will definitely have something to say about you know the disposition of their property.
• 20:04
  SPEAKER_02: Um I don't I don't know if there's anything you wanted to add to that, but that's what kind of came to my mind.
• 20:08
  SPEAKER_00: Yeah, so much comes up when you've got partnerships and leases or you know, sharing real property.
• 20:18
  SPEAKER_00: Um very often partnerships like that, professional services or other businesses, will start off by owning the business and the real estate in the exact same percentages.
• 20:30
  SPEAKER_00: And when you have the same percentages on both sides of the deal, you can be a lot more flexible.
• 20:35
  SPEAKER_00: And you may say, look, we want the rent to be a lot higher.
• 20:39
  SPEAKER_00: We're gonna go with the absolute max that we can get away with as fair market value with the IRS, because the real estate company can use its depreciation to offset that.
• 20:49
  SPEAKER_00: And then the operating company gets to take those higher rents as losses, and so it's kind of a win-win for us, which is great until somehow the ownership changes.
• 21:00
  SPEAKER_00: And if it doesn't change equally for both companies, now you've got a real conflict of interest between the owners of one operating company and the real estate that they're leasing from.
• 21:11
  SPEAKER_00: So I try whenever possible to tie the interests together with buy-sell terms in both, for example, the corporate shareholder agreement and the real estate LLC operating agreement that says, you know, if I change my percentage interest in one, then I have to also change my percentage interest in the other, because then it gives all of us the flexibility to be you know a little bit more tax-friendly with how we set the rules.
• 21:41
  SPEAKER_00: Um if you don't do that, I've seen problems with one building that initially was purchased by a group of dentists.
• 21:49
  SPEAKER_00: They were all individual solo dentists, and over time they or their estates didn't want to sell the property because it was very valuable.
• 21:58
  SPEAKER_00: But as they sold Off either their dental practices or simply rented those offices to other people, all of a sudden we had a total disconnect between the level of agreement that was required in each place.
• 22:12
  SPEAKER_00: So, for example, one of the dentists who was not an owner all of a sudden needed significant repairs to the building for ADA purposes, for example.
• 22:24
  SPEAKER_00: And the other owners of the business, they were just in the business of collecting rental checks each month and didn't want to give up or didn't have the ability to give up some of that cash and didn't want to necessarily invest it in the future value of the business, the building in that case.
• 22:42
  SPEAKER_00: And it became actually a litigation matter because there was no way to force certain partners to do certain things, like contribute additional capital to that real estate partnership, because that hadn't been built into the agreement when it started.
• 22:58
  SPEAKER_00: And yet, when there was an ADA lawsuit on this operating dentist who then sued the landlord, the landlord was all of those people in this partnership that owned the property.
• 23:10
  SPEAKER_00: So it's definitely something you have to think about up front if you're going to have it affect more than one entity.
• 23:19
  SPEAKER_00: And the same thing happens when you start making gifts of real estate.
• 23:24
  SPEAKER_00: For example, in a family entity, you may have real estate that's a great way to gift to next generation.
• 23:32
  SPEAKER_00: And one family, I remember, gifted a bunch of the real estate interests to their kids so that the kids would then be able to use the profits from owning part of the real estate in order to pay for their college education.
• 23:48
  SPEAKER_00: So it was a great way for the parents to pay for the kids or help the kids pay for their college education without just giving them cash each month.
• 23:58
  SPEAKER_00: But eventually the parents chose to sell the business and they wanted to sell the building with it at the same time, and they had not put in a good partnership agreement.
• 24:09
  SPEAKER_00: And one of the kids who was actually gifted for interest said, no, she wasn't going to sell unless she got more money, a bigger percentage than what she owned.
• 24:19
  SPEAKER_00: And as a minority owner, uh she unfortunately had the rights to hold up the sale.
• 24:26
  SPEAKER_00: So yeah, you definitely want to be thinking about uh the future, not just based on the people who are in whatever ownership group uh when it starts, but the plan down the line.
• 24:39
  SPEAKER_00: What happens when somebody dies or just retires, uh, moves out of state and doesn't want to doesn't have the same interests in both sides of the deal anymore.
• 24:52
  SPEAKER_02: You brought up something uh just a second ago too.
• 24:54
  SPEAKER_02: I mean, obviously that that situation that you were referencing there is kind of an ugly, nasty one for sure.
• 25:01
  SPEAKER_02: Um nobody wants that, and and yet it does happen.
• 25:06
  SPEAKER_02: Uh but you also brought up uh I think with the with the dentist uh office, the the medical offices, that sometimes people can't, you know, they have a really hard time uh uh they rely on that mailbox jacket every month.
• 25:20
  SPEAKER_02: And so uh even if they wanted to, you know, you you you're now subject to their uh issues uh with this because again, they're now a stakeholder that you can't really do much about you know uh when um when certain um decisions need to be made uh and that kind of thing.
• 25:37
  SPEAKER_02: So I think it put puts you at uh a disadvantage when trying to get something done like a like a deal.
• 25:44
  SPEAKER_02: And you know, speaking of that, I mean a common saying is time kills deals, and I've heard you use that you know before.
• 25:51
  SPEAKER_02: Um in uh in relation to real estate inside a business sale or with within the context of a business sale, what what are what are some of the things that really add time to a business deal uh with that real estate?
• 26:05
  SPEAKER_00: Yeah, certainly complexity and getting everyone to agree, if that's what the agreement, the partnership agreement or whatever agreement it is that owns the real estate or the business requires.
• 26:16
  SPEAKER_00: I always recommend against having unanimous decision requirements in any contract, if you can.
• 26:25
  SPEAKER_00: Um and even in a 50-50 deal, if you can find a way out, if they can't agree, uh a better way out than going to court, because that can take years and countless amounts of uh attorney's fees and other issues.
• 26:41
  SPEAKER_00: Um any complication with getting people to agree, and tragically, I see this even more in family situations than I do in third-party situations.
• 26:55
  SPEAKER_00: Because when it comes with families who own things together, all of the emotions and um you know the history get in the way of what the best business deal is.
• 27:06
  SPEAKER_00: Um so yeah, I've seen family businesses that are willing to spend more money on fighting each other through attorneys than it's worth as far as you know the value of the property.
• 27:19
  SPEAKER_00: Um, so that's definitely consent, is is one thing.
• 27:24
  SPEAKER_00: Um and then you know, other issues on the property uh related to mismanagement of some sort.
• 27:32
  SPEAKER_00: I'm dealing with one property right now, they had an environmental issue, they had a dry cleaner about 20 years ago, and as a result, they all just sat on this building.
• 27:43
  SPEAKER_00: It's a strip mall, and nobody wanted to deal with the environmental issue, so it's never sold.
• 27:48
  SPEAKER_00: And so now we're they're getting tied into the next generation, and instead of having two people owning this strip mall with this problem, now they have, I think it's six people, uh, this next generation that own it and now have to agree on finding the cash to do the environmental remediation in order to sell the property.
• 28:07
  SPEAKER_00: And it just gets harder as time goes on rather than easier.
• 28:11
  SPEAKER_00: Um more you can do sooner uh to get those agreements in place so that you don't have one minority person having what I call the power to say no, you know, the power of no over the fact that um somebody wrote an agreement poorly is really problematic.
• 28:31
  SPEAKER_00: Um and any other issues.
• 28:36
  SPEAKER_00: If there, you know, if you think there might be a title issue, an environmental issue, any of those things, don't wait till it's time to sell.
• 28:43
  SPEAKER_00: Get that stuff wrapped up early.
• 28:45
  SPEAKER_00: Um, you know, face the music because it's not gonna get any better later.
• 28:50
  SPEAKER_02: That's funny.
• 28:50
  SPEAKER_02: That I was talking to a a business owner uh today actually about uh him not wanting to open a can of worms.
• 28:59
  SPEAKER_02: And this had to do with ownership, not so much specifically with real estate, although that was an issue too.
• 29:04
  SPEAKER_02: Uh he said, I don't want to open this can of worms.
• 29:07
  SPEAKER_02: I said, Well, as you keep growing the company, as you keep doing all these good things, that that can of worms is still there, whether you open it or not.
• 29:15
  SPEAKER_02: And it's just getting bigger.
• 29:17
  SPEAKER_02: And so as as that can grows, there's more worms in it, and now you want to, you know, you're gonna have to open it sometime.
• 29:23
  SPEAKER_02: So you might as well do it when it's uh the least the least amount that it's ever gonna be right now.
• 29:28
  SPEAKER_02: Um so that makes that makes a ton of sense to me.
• 29:31
  SPEAKER_02: Okay.
• 29:34
  SPEAKER_02: Last question.
• 29:35
  SPEAKER_02: Or last official question.
• 29:37
  SPEAKER_02: What is one killer idea to keep the real estate part simple for a business owner who's running the business?
• 29:45
  SPEAKER_02: And obviously just up to their eyebrows all the time with operations and doesn't really want to think about this most of the time.
• 29:53
  SPEAKER_00: I love when people pay off their real estate because lender restrictions make any deal more difficult.
• 30:00
  SPEAKER_00: So if you can afford and it makes sense to pay off your loan, um that's uh that's an excellent opportunity for the next generation, for gifting, for transfers, for sales.
• 30:14
  SPEAKER_00: It just makes everything easier.
• 30:16
  SPEAKER_00: Um if you can't afford to do that, um try to avoid refinancing and pulling cash out of that property because that makes things more difficult for tax planning as well.
• 30:29
  SPEAKER_00: Um, but regardless, if you've got property and it's appreciated in value, we still have the ability to do 1031 exchanges.
• 30:39
  SPEAKER_00: So if you plan ahead, you can either take that property out of the business and put it into tenants in common with enough time period before you choose to make a sale that you could possibly have the individual owners split up if there are more than one owner and do what they want with those funds.
• 31:01
  SPEAKER_00: You could take that property in 1031 it into another property and uh avoid having to pay the capital gains tax uh for now and be able to invest in something different.
• 31:13
  SPEAKER_00: So, for example, you know, you could take the value of the property that you used to have to operate your business in and trade it into an incredibly value, valuable Hawaiian house on the beach that you rent out.
• 31:32
  SPEAKER_00: And um, 50 weeks of the year or whatever, right?
• 31:35
  SPEAKER_00: Yeah, exactly.
• 31:36
  SPEAKER_00: Now you get to use it once in a while.
• 31:38
  SPEAKER_00: Uh limited use by the owner isn't taxable.
• 31:41
  SPEAKER_00: Um, and eventually someday you could even change the use and choose to make it your residence and move into it.
• 31:47
  SPEAKER_00: So there's all sorts of opportunities you can do if you keep your options open.
• 31:54
  SPEAKER_02: Totally makes sense.
• 31:56
  SPEAKER_02: I I do remember a valuation situation I was in years ago where a family was trying to make some gifts down to the second generation.
• 32:04
  SPEAKER_02: We did all this work.
• 32:05
  SPEAKER_02: There were multiple properties and multiple LLCs.
• 32:08
  SPEAKER_02: It was it was a it was a fairly big uh estate.
• 32:12
  SPEAKER_02: Um the uh uh the lender just said no, we aren't we aren't going to allow this to happen.
• 32:22
  SPEAKER_02: And it all the work we did just poofed away, but um our bills didn't poof away.
• 32:28
  SPEAKER_02: Uh but the uh but the deal just never happened.
• 32:31
  SPEAKER_02: And this is just to their kids too.
• 32:33
  SPEAKER_02: It was uh it was kind of an interesting thing.
• 32:35
  SPEAKER_02: I hadn't seen that before, but um certain I have now.
• 32:38
  SPEAKER_02: Uh that was very, very disappointing for really everybody involved.
• 32:42
  SPEAKER_00: Yeah, many people don't realize that the loan can be so restrictive that a death can be a default under the loan.
• 32:53
  SPEAKER_00: Um so I remember when my grandfather was 90 years old, he bought a property and he was laughing because the bank gave him a 30-year mortgage, and he thought that was hysterical.
• 33:04
  SPEAKER_00: Uh, that you know he's obviously gonna live another 30 years because the bank said he would.
• 33:09
  SPEAKER_00: And but the issue then is we deal with large properties where you have that situation.
• 33:16
  SPEAKER_00: The bank loaned based on dad or grandpa or whoever it is they have the history with and who has the personal financial statement.
• 33:24
  SPEAKER_00: And then grandpa dies and leaves these properties, whether they're um multifamily, mobile home parks, you know, or just um smaller rentals, leaves it to the next generation who obviously who all of a sudden are not qualified as borrowers.
• 33:43
  SPEAKER_00: And now the loan is called.
• 33:45
  SPEAKER_00: And so the next generation is stuck with if we want to keep this property, we have to refinance it in a rush quickly, and we're not gonna get rates anywhere near as good as what grandpa had.
• 33:57
  SPEAKER_00: And that on top of now the California's property tax regime, where it's all going to be reassessed as well, uh, unfortunately means that most real estate doesn't get to transfer to the next generation because they just can't afford it.
• 34:11
  SPEAKER_00: Well, and you and I talked about an instance too where it almost uh had to get taken away from a company because the company had transferred.
• 34:20
  SPEAKER_00: Uh, I remember telling you a story about a company putting an ESOP in place, an employee stock ownership plan, and the company owned the real estate in-house.
• 34:30
  SPEAKER_00: And when enough of the ownership of the company changed, it caused a reassessment of the property, which no longer made that property affordable for this business.
• 34:40
  SPEAKER_00: And it became very painful.
• 34:42
  SPEAKER_00: Again, that's much easier to swallow if there's no loan on the property.
• 34:46
  SPEAKER_00: In this case, they had a loan on the property and the new property taxes, uh, which just became uh horrendous and not the business they thought they were taking on because the PL changed abruptly overnight.
• 35:00
  SPEAKER_02: Well, and like you said, surprise and tax should never be in the same sentence ever.
• 35:04
  SPEAKER_02: Uh oops.
• 35:06
  SPEAKER_02: So that's the end of the of you know what I wanted to ask you about about the topic.
• 35:11
  SPEAKER_02: And thank you so much for for your perspective uh on that.
• 35:15
  SPEAKER_02: Um but I have a couple of you know get to know you questions, even though I don't need them.
• 35:19
  SPEAKER_02: Uh maybe people who are watching this uh might want to know a little bit more about you.
• 35:24
  SPEAKER_02: You uh willing to uh to share with us a little bit.
• 35:28
  unknown: Sure.
• 35:29
  SPEAKER_02: All right.
• 35:30
  SPEAKER_02: So I know you were always awesome, uh, but how did you finally get to the current mega evolution of tomorrow?
• 35:37
  SPEAKER_00: Oh wow, I don't know, always awesome counts for anybody.
• 35:40
  SPEAKER_00: Um, but thank you.
• 35:41
  SPEAKER_00: Uh I'll take it.
• 35:43
  SPEAKER_00: I started out in law school.
• 35:45
  SPEAKER_00: I worked for some lawyers that were terrible business people, and I saw that and immediately added on the joint JD MBA program.
• 35:54
  SPEAKER_00: Uh so I ended up staying in school an extra year doing the MBA, and I got recruited out of the MBA program actually to work at Price Waterhouse, where I worked in the tax consulting area for a number of years.
• 36:08
  SPEAKER_00: And I realized pretty quickly that I'm not an accountant.
• 36:11
  SPEAKER_00: Uh I love numbers, I love spreadsheets, but I really think like a lawyer.
• 36:14
  SPEAKER_00: I want to talk about strategy and figure out the best way to get things done for people.
• 36:20
  SPEAKER_00: So I moved from there to uh working in a law firm in the business and tax group.
• 36:27
  SPEAKER_00: And then I got a little frustrated because so many of the partnerships that I was working on were limiting to just the partnership and tax planning side.
• 36:39
  SPEAKER_00: But most of them were LLCs buying real estate investments or uh doing leases or involved with operating companies.
• 36:48
  SPEAKER_00: So I really wanted to be able to do both the business side and the real estate side.
• 36:53
  SPEAKER_00: And so that was why about 21 years ago I formed my own firm and uh left the firm I was at in order to be able to do both sides of the transaction, the real estate side, the business side, a bit of the tax planning.
• 37:08
  SPEAKER_00: Uh, and it just made it a lot more fun for me.
• 37:11
  SPEAKER_00: Um I've then went out uh and got uh my broker's license during the recession uh when I had some time on my hands and not as many people were doing real estate and business deals.
• 37:21
  SPEAKER_00: And that let me use it not for my clients, but for myself to be able to do real estate investments.
• 37:27
  SPEAKER_00: So over the years, I have been managing partner of two law firms for over 20 years now, and I have invested in single family, multifamily, office, and other real estate areas.
• 37:43
  SPEAKER_00: And I think all of those things have really helped me come at these issues from the business person's perspective rather than from you know what you would read in the textbooks.
• 37:55
  SPEAKER_00: Uh, and I think that has probably been the best way that I was able to grow my practice was because I understood what people really wanted as opposed to you know the ideal uh that the you know I would love to have an absolutely perfect partnership agreement for everybody, but there is no such thing.
• 38:16
  SPEAKER_00: And so sometimes you just have to do the best you can, and and done is better than perfect.
• 38:21
  SPEAKER_00: And uh so same thing with legal advice.
• 38:24
  SPEAKER_00: You have to take into account the amount people are willing to spend, the risk they're willing to take on, and tailor your advice uh based on what makes them comfortable, not what makes me comfortable.
• 38:38
  SPEAKER_02: That's a good point.
• 38:39
  SPEAKER_02: I mean, so much of the law, or at least business law, I would say, is does come down to the business decision aspect of it, weighing risk and reward reward and cost benefit.
• 38:49
  SPEAKER_02: Uh interesting.
• 38:52
  SPEAKER_02: So Okay.
• 38:54
  SPEAKER_02: So that kind of brings us up to date with uh you professionally.
• 38:58
  SPEAKER_02: Tell me something that's not on your LinkedIn or website profile.
• 39:02
  SPEAKER_00: Oh wow.
• 39:02
  SPEAKER_00: I've got some weird things on my website profile.
• 39:05
  SPEAKER_00: It even talks about my chickens and um my uh love of trail running, especially if I'm stressed.
• 39:14
  SPEAKER_00: Uh something that's not on there.
• 39:18
  SPEAKER_00: Uh well, I'm now an empty nester.
• 39:21
  SPEAKER_00: I have my husband and I had all three sons um go off to college and uh start growing up.
• 39:28
  SPEAKER_00: So that has given me uh a lot more flexibility to do whatever uh comes my way, which has been a lot more fun to get more involved in more philanthropic work, attending more charity events, uh, more boards, uh, as well as for fun, fostering kittens with the San Jose Animal Shelter when I can and when they have overflow.
• 39:55
  SPEAKER_00: Um sometimes I even bring those into the office, even though that's technically a violation of my lease.
• 40:00
  SPEAKER_00: Uh they sometimes visit on their way to the vet.
• 40:02
  SPEAKER_02: They're in transit.
• 40:03
  SPEAKER_02: It doesn't count.
• 40:04
  SPEAKER_00: Right.
• 40:05
  SPEAKER_00: It's a risk, right?
• 40:05
  SPEAKER_00: We all have to decide how much risk we're willing to take, and that makes my staff here really happy if they get to play with kittens for a bit.
• 40:11
  SPEAKER_00: Yeah.
• 40:14
  SPEAKER_02: That's great.
• 40:15
  SPEAKER_02: The um well, are there any of the uh nonprofits or organizations you want to shout out?
• 40:20
  SPEAKER_00: Uh wow.
• 40:22
  SPEAKER_00: Uh we were just talking about Sharks Foundation before we started this call.
• 40:25
  SPEAKER_00: That's always a great one.
• 40:26
  SPEAKER_00: Ability Path, an amazing group, including Via Services, uh, which is right here in the Stevens Creek um mountains uh for um people of different needs, special needs, and different abilities.
• 40:41
  SPEAKER_00: Um and I also have a ton of respect for the people at the Bill Wilson Center who work with foster children who are aging out of foster care, uh, and think about how incredibly difficult that is in Silicon Valley, of all places, where nothing is affordable.
• 40:57
  SPEAKER_00: Um so yeah, I kind of I spread it myself uh over a various um strange list of different causes that I believe in and always enjoy getting to know people who are on other boards because I have a tremendous amount of respect for people who give back to the community.
• 41:17
  SPEAKER_02: Absolutely.
• 41:17
  SPEAKER_02: I know one of the things that is really important to you also is reading.
• 41:21
  SPEAKER_02: What are you reading these days?
• 41:23
  SPEAKER_00: Oh, good question.
• 41:24
  SPEAKER_00: Actually, right now it's kind of a boring book about um using AI in your practice.
• 41:30
  SPEAKER_00: Um there's so much talk about AI, but I feel like I constantly have to stay on top of that to make sure that the AI policy for my law firm is up to date.
• 41:40
  SPEAKER_00: And so I need to know what the risks are there.
• 41:43
  SPEAKER_00: Um so not very entertaining.
• 41:46
  SPEAKER_00: Um, the one I read before that was one I had picked up in the airport in Australia.
• 41:51
  SPEAKER_00: Uh, I always like picking up a book in English, but from the local area if I go traveling somewhere, uh, because uh just having a book written by a local author gives you a much better taste for the country.
• 42:05
  SPEAKER_00: And so this one was uh just a fun beach read mystery about, you know, living in kind of um the outskirts of Sydney, Australia, and uh what that's like.
• 42:20
  SPEAKER_00: And I switch around.
• 42:23
  SPEAKER_02: Well, you yeah, you definitely have to have the cotton candy along with the the I don't know, mind-stretching uh AI discussion and how to run your business and all all the things that people will constantly want to tell you, but which you have to kind of ingest in order to see whether it's a good idea or not.
• 42:38
  SPEAKER_02: Um Okay.
• 42:40
  SPEAKER_02: So if people want to be getting in touch with you, if you want to be gotten in touch with, where would people find you?
• 42:47
  SPEAKER_00: Strategylaw.com.
• 42:49
  SPEAKER_00: You can find me and all of our lawyers there, uh, including some information about us.
• 42:54
  SPEAKER_00: Um always happy to help.
• 42:56
  SPEAKER_00: We have a great blog section as well with a lot of information on local uh things that are happening and laws and things that you know we try to keep updated as things change.
• 43:08
  SPEAKER_02: And hopefully everybody can tell uh that you're wonderful, you're one of my favorite people, and you're wonderful to work with as well.
• 43:16
  SPEAKER_02: I just want to you know make sure that anybody who who's listening hears that.
• 43:22
  SPEAKER_02: But that's it.
• 43:23
  SPEAKER_02: We've wrapped up.
• 43:24
  SPEAKER_02: Thank you so much for for coming on.
• 43:26
  SPEAKER_02: I know it's been a long time coming, uh, my fault, but finally having you here has been a blast.
• 43:32
  SPEAKER_02: Thank you.
• 43:32
  SPEAKER_00: Yeah, well, thanks, man.
• 43:34
  SPEAKER_00: I've always appreciated the uh combined uh abilities you have on the CPA and valuation side and the business sense side of it.
• 43:43
  SPEAKER_00: So uh as always, nice talking with you.
• 43:45
  SPEAKER_02: Hey everybody, I want to take a second here to share something about who we are and why we make this show.
• 43:49
  SPEAKER_02: You're probably here because either you or a client of yours is thinking about buying or selling a business, bringing in investment, or planning an eventual exit.
• 43:58
  SPEAKER_02: And that is why we call this show Max Value.
• 44:01
  SPEAKER_02: We provide you with information and insights about how to maximize the value of your business.
• 44:05
  SPEAKER_02: Our team at Town Advisory guides business owners through the crucial, often once-in-a-lifetime opportunity to exit their business.
• 44:12
  SPEAKER_02: We use our trademark exit builder program to help business owners prepare early, protect the value they built, and obtain maximum value through an exit.
• 44:20
  SPEAKER_02: And the secret is our clients define what value means to them.
• 44:23
  SPEAKER_02: Taking the right steps now can make all the difference in creating a successful outcome for yourself, your family, and your work team.
• 44:29
  SPEAKER_02: If you think you're ready for the next step in understanding and increasing the value of your business, make a comment, send me a message on LinkedIn, or send me an email.
• 44:38
  SPEAKER_02: All those points are in the channel.
• 44:40
  SPEAKER_02: That's a wrap! You've been listening to Max Value Podcast, and if this episode provided any interesting information, hit that subscribe button, smash a like, and drop a comment below.
• 44:49
  SPEAKER_02: I'm Ben Town Account Advisory and I'll catch you next time.