NEW LAW TO INCREASE EFFICIENCY AND LOWER COST FOR ARIZONA BUSINESSES

Many prudent real estate professionals form a business entity such as an LLC or PLLC for their business.  On January 1, 2015, Arizona introduced a more business-friendly legal framework for entity restructuring transactions. Thanks to this new law, these transactions will be more efficient and available at a lower cost.

Background: What is an Entity Restructuring Transaction?

It’s not uncommon for a business to reach a point in its life where it needs to undergo an “entity restructuring transaction” – a transaction to change its form or location. There are five reasons why a business entity transaction may be required.  For example, you might have started your family-owned business as a partnership, and now the business has attracted new members or investors.  Or perhaps your real estate investment company needs to divide into one or more new limited liability companies to diversify or to help manage risk. 

Here is a brief summary of the five different entity restructuring transactions: (1) a merger – this occurs when two entities combine into one surviving entity; (2) a conversion – this occurs when a single entity changes form — for example, when a limited liability company converts into a corporation; (3) an interest exchange – this occurs when owners trade their ownership in one company for ownership in another company; (4) a domestication – this occurs when an entity formed in one state changes its state of incorporation to another state; and (5) a division – this occurs when one entity divides into two or more entities.

The Problem: Obsolete Law Governing Intricate, Multi-Step Transactions

Historically, entity-restructuring transactions have required multiple steps to accomplish, ratcheting up risk and expense. Your business may have even needed to dissolve to change its form or location. In that case, you would have needed to wind down the business and satisfy creditors and interest holders, potentially incurring adverse tax consequences. Those consequences erode profitability. And those consequences are counterproductive to a company that simply wants to continue in another form or location.

Compounding the problem, Arizona has not had a comprehensive statutory framework for these transactions. Arizona’s entity restructuring laws were hard to find, scattered throughout Titles 10 and 29 among the twenty-two types of Arizona business entities. And Arizona’s entity restructuring laws were incomplete, leaving out domestications and divisions. And those laws were procedurally inconsistent, imposing different requirements for the same transaction on different entity forms.

The Solution: The Arizona Entity Restructuring Act and its One-Step Transactions

The Arizona Bar and Arizona lawmakers recognized the above problems and have been working over the last four years to implement a solution: the Arizona Entity Restructuring Act (“AERA”), effective January 1, 2015.

In sum, the AERA universally applies to all kinds of business entities. And the law allows your company to change form or location, without dissolving and winding down. Cross-entity transactions are available. And the statute fits with Arizona’s existing laws for business entities, meaning that Arizona’s current corporate and partnership statutes will remain intact. Moreover, these new procedures will not extinguish creditors’ interests as a debtor-entity changes form. Therefore, the AERA allows for seamless, non-disruptive transitions between the old and new companies. Entity restructuring transactions will be more efficient and available at a lower cost.

Here is the simple process for changing an entity’s structure under the AERA.

First, each kind of transaction requires a written plan, one approved by the company’s interest holders. The plan will describe the details and effect of the transaction. You approve that plan according to your company’s organizational documents, such as its bylaws or operating agreement, or AERA’s default rules. Second, once the plan is approved, a statement concerning the transaction must be filed with the appropriate filing authority, which is the Arizona Corporation Commission for corporations, business trusts, and limited liability companies, and the Arizona Secretary of State for limited partnerships and limited liability partnerships. That statement notifies the public of the transaction and identifies the surviving business entity. 

To round out this discussion, the AERA does not apply to government agencies, trusts, or estates — and does not displace relevant regulatory statutes, dissenters’ rights, or appraisal rights.

Application

Prudent investors and business owners should wisely chose the correct business entity structure to limit liability and to aggregate capital and assets, such as real estate. Thanks to the AERA, businesses will be better equipped to stay nimble and restructure as needed.  The AERA is straightforward and comprehensive. Overall, it encourages new businesses to incorporate or organize in Arizona and simplifies the process for existing out-of-state companies to relocate to Arizona.

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CO ACTION for multiple generations in Commercial REAL estate

Multiple generations, from traditionalists to baby boomers to gen Xers, bring a variety of knowledge, skills, and perspectives into the commercial real estate  workplace. The millennial generation has jumped into the mix, providing great potential upside for middle market firms who know how to bring generations together toward a common goal. But if you don't have a blueprint for getting these different age groups to understand, respect, and trust each other, your middle market firm might not withstand the productivity drain that results from such discord.

Here are some things to consider:

 
1) The foundation for creating synergy starts with team building. 

"People want to grow, people want to be listened to, and people want to feel they are important, the value  of team building in order to get team members to buy in to a collaborative learning environment where people of different backgrounds can all contribute their specific strengths. "Realize that each generation brings wonderful strengths to the workplace,While focusing on our own individual strengths is certainly important, imagine how much more effective everyone on your team could be if [they] learned from the strengths of others as well. Publicly acknowledge what each  strengths are and encourage everyone to share their viewpoints and values with the group."

2)  Team-building exercises can expose assumed stereotypes. 

Many veterans have a hard time respecting team members  who have been on the job only a few years and who they perceive to be unwilling to put in as much effort. On the flip side, many younger team members believe that veterans are averse to technological advances that bring efficiency and are generally stuck in outdated ways of thinking and operating." You must create an informed respect between the different generations that allows them to better communicate, share ideas, and help one another.

3)  Management must take additional action besides team building.

Holding  weekly meetings with department leaders to reinforce the idea that employees must stay connected so that they trust each other enough to be able to ask for help and tap into each other's strengths. For a middle market firm to reach its full potential, it has to be done.

4)  Form diverse committees. 

Just as important as management getting together is the idea that firms should develop a committee comprised of team members  from each generation. The goal here is to allow for frank observations and questions in a private setting so as to better understand the viewpoints of team members from different generations and how these manifest themselves in the daily actions of team members . These meetings can be casual at times, but when there's a need for it, members can hash out specific situations involving team member  friction. This will help committee members understand different generational perspectives on a topic, and each member can then go back and provide insight to others within his or her own peer group, all for the benefit of the firm. 

*Looking forward to your comments, replies, and suggestions . Thank you for reading and contributing,  your feedback is MUCH appreciated .

What IS a holdover fee?

Your business is doing well, and you are happy with your current landlord. You may or may not notice that your lease is expiring in less than a year. You might think, since there has been no word, that your landlord forgot. I guarantee you, this is not the case. Maybe you are thinking the landlord will allow you to go month to month. They probably will, as you will most likely be charged significant holdover fees for doing so—something you are probably not aware of!

What IS a holdover fee? Let’s talk it out. 98% of the leases have a holdover fee of 125% to 200% or MORE. Which means that on a lease that is $1,000 a month, if you stay even one day past your expiration date, you will pay $1,250 for that ENTIRE MONTH. If you have a 200% holdover fee, that cost will skyrocket up to $2,000. Even if you are just a day over your expiration date. Most leases do not prorate holdover fees, so a day can cost you more than an entire month’s rent.

Sneaky, right? This is what we call the last minute gotcha! Your landlord often counts on you not noticing these sorts of clauses in your lease, and most will contact you just a month before your lease expires, offering you a renewal option. This is not a lot of time to find a new space, and most likely, the rate they are quoting will be over market. They may tell you to go ahead and move, but do not forget—going even one day over will cost you significant holdover fees.

My advice? Plan ahead. Start searching for a new space 6 months to a year ahead of your expiration date. You need to know your options to play the market right and you do not want to end up paying a last minute gotcha! 

*Have questions and would like further information? 

Contact Shannon Murphy 

shannon.murphy@icoreglobal.com

sjkm@rocketmail.com

480.290.0249 direct