STRUCTURING A TRANSACTION
STRUCTURING A TRANSACTION
Introduction
This program is designed to give you some additional
insight into how to structure a transaction. It will also show
how the structure of the transaction relates to the type of
investment which you choose.
It is, in a sense, more of an explanation of my
self-conscious thoughts of the internal assumptions I make when
I am setting up a transaction. I have found in my practice as
an attorney that people who tend to get in trouble and come to
me as clients are those people who really have not worked
through what those assumptions are.
First and foremost, take a look at the transaction from
the standpoint of an investor or a businessperson; then take a
look at it from the legal aspect. Be an investor first: then
protect yourself!
Considerations
I. COMPLIANCE WITH LAWS
A. Example: You are buying a single family home and
your intent is to convert it into a professional
office; you are buying a duplex and you intend to
do nothing more than continue to manage the real
estate as a duplex.
1. In both circumstances, your first
consideration is whether there is compliance
with applicable laws.
2. You must check zoning because it is going to
determine ultimately whether you can, in
fact, do what you want to do.
3. In the alternative, at least determine to
what extent you are going to have to modify
the circumstances to be in compliance with
applicable laws.
B. Four different forms of protection:
1. Secure the principle of your investment.
2. Secure your profit.
3. Protect yourself against contingent
liabilities.
4. Protect yourself against tax liability
exposure.
C. Example: You are buying a $10,000.00 mortgage at
a 12% interest rate for $6,000.00.
1. Protect the amount of money that you have
invested, i.e., $6,000.00.
2. Make sure that whatever profit you intend on
making is also secure, i.e. $4,000.00 profit
and the 12% interest.
3. Limit your liabilities to the investment.
Never put your personal assets in jeopardy
if you can avoid it.
4. Eliminate or reduce your tax liability.
II. METHODS OF PROTECTION
A. Structure the transaction in an appropriate way.
1. Example: A person wants to incorporate a
business.
a. The person who wants to incorporate is
not always aware of the loss of the
advantages he could get if he were
operating his company on a Schedule "C"
basis.
b. Incorporating is not always going to be
the appropriate way to structure the
transaction, it depends upon the nature
of the business he's in.
c. People actually buy property in the name
of a corporation and do not even make
the corporation a Chapter S corporation.
On their personal 1040's, they pay
substantial taxes and the corporation
has considerable depreciation and tax
losses that cannot be used.
(1) First of all, the corporate tax
rate is lower than the personal
tax rate.
(2)Secondly, you do not have anything
you can do with the tax loss in
the corporation.
d. My suggestion to you, then, is,
depending upon the nature of the
particular type of business you are
going to buy, you need to structure it
in a way which is appropriate.
2. Example: An investor is purchasing a radio
station.
a. The purchase consists of the FCC
license, equipment, the property that
houses the radio station, and so
forth.
b.Buy the property in your personal name,
so that you could depreciate it
completely.
c.Incorporate the company operating the
radio station and lease the property to
the corporation.
d. Through an awareness of what the
implications and the considerations are
you can structure the transaction in a
way which is going to maximize your
advantages and protect your interests
as much as possible.
3. Example: Sale/Leaseback transaction.
A software company that needs hardware is a
good candidate for a sales/leaseback.
a. It sells you its computers and leases
them back from you.
b.You get five-year property, accelerated
depreciation, and I.T.C.
c.You will also make a profit because you
do not lease it out for less than at
least two (2%) percent a month. Two
(2%) percent per month is a twenty-four
(24%) percent per year rate of return.
B. Check what needs to be checked.
1. Example: For a Sale/Leaseback, you would
check recording provisions.
a.You are going to check the Secretary of
State's office. The Secretary of
State's office is the appropriate place
to check to see if anyone has a
security interest in that equipment.
b. If there is a lien outstanding, the
filing statement would be on record in
that office.
c.The filing statement is going to tell
you if they have good title and will
ultimately allow you to buy the
property that you are going to lease
back without problems.
C. Execute appropriate documents and provisions.
1. Questions to ask:
a. What is the nature of the transaction?
b.What do you need to get out of this
particular transaction?
c.What do you want to have happen if the
deal goes sour?
2. Example: A person from New York gives a
$12,000.00 good faith deposit on a mobile
home park to a person who was going to be his
partner, instead of to an escrow agent. The
partner buys that property in his own name
alone.
a.The New York investor put a provision in
the contract that if the deal goes
sour, the deposit would be returned.
Hence, he must sue.
b.Would it not have been better if he
simply provided that the $12,000.00
deposit would be in the form of a
non-assignable certificate of deposit
which could not be cashed until closing?
c.The investor would not have to worry
about suing his partner.
3. If you have an alternative between a
self-help remedy or having to sue, choose
the self-help remedy.
a. Self-help remedy. Structure in a way
which insures you are covered. If the
other wants to sue you, he can sue and
bear the expense of the suit, but you
can always counterclaim.
b. You put the other person in the position
of having to sue you, rather than you
having to sue the other person.
4. Example: A person in Kissimmee owned a store
that had several health code violations. He
complained to the landlord without results.
He was losing money and the Health
Department threatened to close him down.
a. I advised him to clean up the store and
then break his lease.
b. The landlord was advised that the lease
was terminated. If the landlord had
taken any action, my client would have
counterclaimed.
5. Example: You contract to sell a car for
$10,000.00 and you know you can sell the car
for $8,000.00 if the buyer defaults. You can
sue for $2,000.00 but it would be better to
have a good faith deposit of $2,000.00, and
in the event of a default, you keep the
$2,000.00.
6. Additional question: If you go to recover
your lost profit, will you be facing greater
risk or greater cost?
a. Example: A person is owed $3,000.00
from someone who has defaulted on a
contract.
(1) At $100.00 per hour in attorney's
fees for litigation, the cost would
be about $4,000.00 to collect
$3,000.00.
(2) The contract must specify that
attorney's fees shall be awarded
to you.
(3) Must you chase him down wherever he
lives?
(a) The contract should specify
that the parties submit to
jurisdiction and venue in
your home state and county.
IV. SUMMARY
A. Comply with laws.
B. Protect your interests.
C. Create methods that will best protect your
interests.
V. CONCLUSIONS
A. Do not be concerned about the structure of the
transaction until after you have evaluated your
business decision. Do not ever get wrapped up with
the structure and technicalities until after the
decision is made.
B. Find out what is the best type of investment and
how to invest. This ultimately distinguishes good
investors from bad investors.
C. After all of that, face the issue of how to
structure the transaction and what to do to
protect yourself.
Introduction
This program is designed to give you some additional
insight into how to structure a transaction. It will also show
how the structure of the transaction relates to the type of
investment which you choose.
It is, in a sense, more of an explanation of my
self-conscious thoughts of the internal assumptions I make when
I am setting up a transaction. I have found in my practice as
an attorney that people who tend to get in trouble and come to
me as clients are those people who really have not worked
through what those assumptions are.
First and foremost, take a look at the transaction from
the standpoint of an investor or a businessperson; then take a
look at it from the legal aspect. Be an investor first: then
protect yourself!
Considerations
I. COMPLIANCE WITH LAWS
A. Example: You are buying a single family home and
your intent is to convert it into a professional
office; you are buying a duplex and you intend to
do nothing more than continue to manage the real
estate as a duplex.
1. In both circumstances, your first
consideration is whether there is compliance
with applicable laws.
2. You must check zoning because it is going to
determine ultimately whether you can, in
fact, do what you want to do.
3. In the alternative, at least determine to
what extent you are going to have to modify
the circumstances to be in compliance with
applicable laws.
B. Four different forms of protection:
1. Secure the principle of your investment.
2. Secure your profit.
3. Protect yourself against contingent
liabilities.
4. Protect yourself against tax liability
exposure.
C. Example: You are buying a $10,000.00 mortgage at
a 12% interest rate for $6,000.00.
1. Protect the amount of money that you have
invested, i.e., $6,000.00.
2. Make sure that whatever profit you intend on
making is also secure, i.e. $4,000.00 profit
and the 12% interest.
3. Limit your liabilities to the investment.
Never put your personal assets in jeopardy
if you can avoid it.
4. Eliminate or reduce your tax liability.
II. METHODS OF PROTECTION
A. Structure the transaction in an appropriate way.
1. Example: A person wants to incorporate a
business.
a. The person who wants to incorporate is
not always aware of the loss of the
advantages he could get if he were
operating his company on a Schedule "C"
basis.
b. Incorporating is not always going to be
the appropriate way to structure the
transaction, it depends upon the nature
of the business he's in.
c. People actually buy property in the name
of a corporation and do not even make
the corporation a Chapter S corporation.
On their personal 1040's, they pay
substantial taxes and the corporation
has considerable depreciation and tax
losses that cannot be used.
(1) First of all, the corporate tax
rate is lower than the personal
tax rate.
(2)Secondly, you do not have anything
you can do with the tax loss in
the corporation.
d. My suggestion to you, then, is,
depending upon the nature of the
particular type of business you are
going to buy, you need to structure it
in a way which is appropriate.
2. Example: An investor is purchasing a radio
station.
a. The purchase consists of the FCC
license, equipment, the property that
houses the radio station, and so
forth.
b.Buy the property in your personal name,
so that you could depreciate it
completely.
c.Incorporate the company operating the
radio station and lease the property to
the corporation.
d. Through an awareness of what the
implications and the considerations are
you can structure the transaction in a
way which is going to maximize your
advantages and protect your interests
as much as possible.
3. Example: Sale/Leaseback transaction.
A software company that needs hardware is a
good candidate for a sales/leaseback.
a. It sells you its computers and leases
them back from you.
b.You get five-year property, accelerated
depreciation, and I.T.C.
c.You will also make a profit because you
do not lease it out for less than at
least two (2%) percent a month. Two
(2%) percent per month is a twenty-four
(24%) percent per year rate of return.
B. Check what needs to be checked.
1. Example: For a Sale/Leaseback, you would
check recording provisions.
a.You are going to check the Secretary of
State's office. The Secretary of
State's office is the appropriate place
to check to see if anyone has a
security interest in that equipment.
b. If there is a lien outstanding, the
filing statement would be on record in
that office.
c.The filing statement is going to tell
you if they have good title and will
ultimately allow you to buy the
property that you are going to lease
back without problems.
C. Execute appropriate documents and provisions.
1. Questions to ask:
a. What is the nature of the transaction?
b.What do you need to get out of this
particular transaction?
c.What do you want to have happen if the
deal goes sour?
2. Example: A person from New York gives a
$12,000.00 good faith deposit on a mobile
home park to a person who was going to be his
partner, instead of to an escrow agent. The
partner buys that property in his own name
alone.
a.The New York investor put a provision in
the contract that if the deal goes
sour, the deposit would be returned.
Hence, he must sue.
b.Would it not have been better if he
simply provided that the $12,000.00
deposit would be in the form of a
non-assignable certificate of deposit
which could not be cashed until closing?
c.The investor would not have to worry
about suing his partner.
3. If you have an alternative between a
self-help remedy or having to sue, choose
the self-help remedy.
a. Self-help remedy. Structure in a way
which insures you are covered. If the
other wants to sue you, he can sue and
bear the expense of the suit, but you
can always counterclaim.
b. You put the other person in the position
of having to sue you, rather than you
having to sue the other person.
4. Example: A person in Kissimmee owned a store
that had several health code violations. He
complained to the landlord without results.
He was losing money and the Health
Department threatened to close him down.
a. I advised him to clean up the store and
then break his lease.
b. The landlord was advised that the lease
was terminated. If the landlord had
taken any action, my client would have
counterclaimed.
5. Example: You contract to sell a car for
$10,000.00 and you know you can sell the car
for $8,000.00 if the buyer defaults. You can
sue for $2,000.00 but it would be better to
have a good faith deposit of $2,000.00, and
in the event of a default, you keep the
$2,000.00.
6. Additional question: If you go to recover
your lost profit, will you be facing greater
risk or greater cost?
a. Example: A person is owed $3,000.00
from someone who has defaulted on a
contract.
(1) At $100.00 per hour in attorney's
fees for litigation, the cost would
be about $4,000.00 to collect
$3,000.00.
(2) The contract must specify that
attorney's fees shall be awarded
to you.
(3) Must you chase him down wherever he
lives?
(a) The contract should specify
that the parties submit to
jurisdiction and venue in
your home state and county.
IV. SUMMARY
A. Comply with laws.
B. Protect your interests.
C. Create methods that will best protect your
interests.
V. CONCLUSIONS
A. Do not be concerned about the structure of the
transaction until after you have evaluated your
business decision. Do not ever get wrapped up with
the structure and technicalities until after the
decision is made.
B. Find out what is the best type of investment and
how to invest. This ultimately distinguishes good
investors from bad investors.
C. After all of that, face the issue of how to
structure the transaction and what to do to
protect yourself.
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