Business Succession Planning Article

Oakland Business Review: Business Succession Planning

We are proud to announce that the Oakland Metropolitan Chamber of Commerce recently featured us in the September issue of the Oakland Business Review special section entitled, Law Offices of Oakland.

The article highlights how business owners often overlook succession planning when they first start out their businesses.  The reality is you can’t plan your path without first determining your ultimate destination. Are you building a company to pass down to your children or employees? Are you creating a business to be sold to a stranger? Without understanding your intention, you can’t develop or implement strategies and actions necessary to reach your goals. Nearly 80% of business owners say they want their businesses to survive them. And yet less than 25% have any type of written succession plan or “exit strategy”.  The all too frequent result is that businesses devolve into conflict and chaos when a founder dies, becomes disabled, or when business partners fail to share the same vision. Decades of blood, sweat and sacrifice go quickly down the drain, all for want of a simple plan.

A well crafted succession plan is as important as determining the type of entity best suited for the company; utilizing contracts and agreements that accurately reflect and protect business decisions; and understanding the legal requirements and procedures necessary to retain the financial and legal protections a business entity provides.

By preparing for the ‘What Ifs’ before they happen, business succession planning improves the likelihood of your company weathering the storms and quakes of an uncertain world. […] Click here to read more.

Being Michelangelo: Revealing Your Business Masterpiece

What does one of history’s greatest artists teach business owners about how to succeed?

Since visiting Florence last month and viewing many of Michelangelo’s most famous works, including his monumental statue of David, I’ve been pondering the relationship between the artistic process and creating business success.

Michelangelo held an important belief about the art of sculpture.  He believed that in each block of stone there was a figure hidden inside, waiting to be revealed.  To him, the master sculptor’s job was to clear away what was not the image and reveal the masterpiece inside the stone.

I’ve realized that this same principle applies to business owners.  Finding the potential masterpiece your business can be requires clearing away all that does not belong.  As business owners, our gift lies in the place where our values, passions, and strengths meet.  Discovering that place is the first step toward sculpting the business masterpiece.

From a legal planning perspective I have found that this means having a laser-like focus on what you want to accomplish.

Six qualifying questions I typically ask prospective clients are:

  • what is the intention of the business,
  • what type of entity will best serve the business,
  • what types of clients you love and those you don’t,
  • what skills you have or lack that are essential for your business’ success,
  • what level of risk you are willing to take to achieve your goals; and
  • what potential legal liability does the business involve?

With these answers in hand, I am able to help my clients be sure that their contracts, internal policies and procedures, corporate structure, and business succession plan, all manifest the owners’ vision for the business.  Anything that does not serve or reflect that vision is stripped away like the unwanted marble on Michelangelo’s David.  What remains is the masterpiece.

Important Update on Status of California Short Sale Tax Issue

I wrote last week that the federal tax exemption for mortgage debt forgiveness had been extended for one year as part of the “fiscal cliff” settlement between Congress and the White House.

  • California’s Homeowners Exemption has Expired

At that time, I also wrote that the California tax exemption expired on December 31, 2012, without having been extended by the state legislature.  Consequently, mortgage debt forgiveness is currently subject to California state income tax.

  • Senate Bill Introduced to Reinstate the California Exemption

To remedy this inconsistency between federal and state tax law, the California Association of Realtors is sponsoring Senate Bill 30 (Calderon, D-Montebello).  SB 30 will conform state law to the federal law passed last week.  Upon passage of SB 30, the measure as currently drafted will be effective retroactive to Jan. 1, 2013.

  • Contact Your Local State Representative

If you believe the state tax exemption should be reinstated, contact your local state senator and ask that he/she support SB 30.

I will report further as the bill moves its way through the legislative process.

 

SB 458/931 Not Impacted by Debt Forgiveness Relief Act Expiration

No New News of Possible Extension of Mortgage Debt Relief Act

I continue to receive daily inquiries from homeowners and real estate professionals regarding the pending December 31st expiration of the Mortgage Debt Relief Act.  Unfortunately, the matter remains mired in the highly politicized negotiations over the “fiscal cliff.”  While I remain hopeful that the necessary parties will set aside their differences for the benefit of distressed homeowners, that hope is tempered by skepticism based on the lack of progress in the negotiations.

Meanwhile, I urge all affected individuals to contact their congressional and senate representatives to let them know where you stand.  And keep your fingers (and toes) crossed.

My purpose is writing this blog is to address a separate but related issue about which I’ve also received numerous questions.  Specifically, are California’s SB 458/931 threatened by the potential expiration of the Act?  The short answer is “no.”

Don’t Confuse California’s Short Sale “Anti-Deficiency” Protections with the Taxability of Forgiven Debt

California Senate Bills 458 and 931 were enacted in 2011 and are now found in Section 580e of the Code of Civil Procedure.  These laws say that a lender who agrees to a short sale is barred from collecting any portion of the mortgage debt not paid from the proceeds of sale.  In other words, the “deficiency” is deemed “forgiven” as a matter of law; thus the term “anti-deficiency” protection.

Before Section 580e, lenders frequently approved short sales only on the condition that the seller/borrower agreed to repay some portion of the loan deficiency.  This is no longer allowed.  More importantly, there is no “expiration date” to this California statute.  It will remain in effect unless and until repealed by the legislature with the consent of the governor.  That is extremely unlikely.

In summary, no matter what happens with the Mortgage Debt Relief Act, mortgage holders whose lenders approve a short sale of their California property will remain protected by the state’s “anti-deficiency” statutes; they will not have to repay any portion of the unpaid, forgiven loan balance.

Impact of Expiration of Act on California Short Sales

In contrast, expiration of the Mortgage Debt Relief Act will remove many of the protections that qualified homeowners have had since 2007 for the tax consequences of forgiven mortgage debt.  In other words, the IRS will tax as income any portion of the home loan not repaid to the lenders from the proceeds of the short sale.  (As stated in earlier articles, there are other possible tax exemptions applicable to this “income”; however, far fewer property owners will qualify for these other protections.)

Expiration of the federal Act will trigger expiration of California’s related tax protection.  That is, the law passed in California to protect homeowners from the state income tax liability for forgiven debt also expires on December 31, 2012.

There is no guarantee that an extension of the federal exemption will automatically result in an extension of the California exemption.  For that reason, it is also important to contact your representatives in Sacramento to urge extending the state tax protection.

If you are uncertain regarding the impact of these matters on your situation, please contact qualified legal and tax professionals without delay.


 

“Simon Rule” Gutted by New Court Decision

The so-called “Simon Rule”, among the most potent weapons available to distressed homeowners in negotiating short sales, and protecting themselves from financial liability following foreclosure, has been significantly weakened as a result of a new California court of appeals decision.  That decision, Cadlerock Joint Venture, LP v. Lobel (2012) 203 Cal.App.4th 1531, will change the landscape to the detriment of many struggling California mortgage holders.

How Does This Impact Homeowners Considering a Short-Sale?

Cadlerock now requires a court to look at who owns the loans at the time of the foreclosure by the senior lienor.  If the senior lienor has assigned/sold its junior lien to a third party prior to the foreclosure, that third party will now be able to sue the homeowner for the full amount of the junior loan after the foreclosure.  To summarize, following Cadlerock, in most situations the homeowner will lose the home and also have to repay the balance of the non-purchase money second loan.  (The court left a small amount of “wiggle room” for cases where the senior lienor assigns/sells its junior lien after the foreclosure.  There, Simon will still apply.)

Simon Rule Background

As discussed in previous articles, for the last twenty years many Californians with non-purchase money second loans have been able to protect themselves from claims brought by certain “junior” lenders after a foreclosure by the “senior” lender.  This protection originated in a landmark case called Simon v. Bank of America (1992) 4 Cal.App.4th 1537.

The Simon decision created an exception to the old rule that applies where a homeowner has two separate loans on a single property, and where the first mortgage holder (aka the “senior lienor”) forecloses on the property.  Before Simon, the second loan (aka the “junior lienor”) could collect the balance still owing on that loan after the senior foreclosed (and so long as the second loan was not a “purchase money” loan; i.e., part of the loan “package” used to buy the house).  (“Purchase money” second loans were, and still are, barred from collection under a separate rule not discussed here.)

What Simon said was that where the first and second loans were issued by the same bank (in that case, Bank of America), the bank could not collect on its second loan after foreclosing on its first loan; thus, the “Simon Rule”.  An equally important part of the rule was that a bank could not avoid this restriction by “assigning”, or selling, its second loan to another bank or investor.  In other words, courts would look to who owned the loans when they were issued.  If the same bank issued the two loans, the “Simon Rule” would apply.

In recent years, Simon became an invaluable tool in negotiating short sales involving non-purchase money second loans.  (See my January 2012 blog post, Playing the Simon Card in Short Sale Negotiations.Cadlerock now renders that tool virtually useless.

All homeowners considering short sales should consult with competent legal counsel to determine the impact of Cadlerock on their situation.  Failure to do so may result in enormous financial consequences and long-term hardship.

Business Succession Planning Article

We were just featured in the September issue of the Oakland Business Review!

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Oakland chamber of commerce

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Short Sale Tax Exemption Update

I recently attended a networking event of local Bay Area realtors, and was shocked to hear a young realtor say she had heard that the short sale homeowners tax exemption, scheduled to expire on December 31, 2012, had been extended.  I quickly informed her that her information was incorrect, and that the exemption remains on track to expire at the end of the year.  My purpose in this blog is to provide a status update regarding the homeowners exemption, and to clarify the availability of another potential tax exemption for homeowners unable to complete their short sale in time.

As a reminder, homeowners whose mortgage debt is forgiven, reduced or cancelled in a short sale, foreclosure or loan modification will receive a 1099 from their lender in the amount of the unpaid debt.  And unless they qualify for a tax exemption, they will have to pay income tax on the 1099 amount.  Since 2007, many homeowners have been able to avoid the tax by applying for the IRS Form 982 homeowners exemption.  (The exemption does not apply to all home mortgage debt; there are limitations that can be explained by a knowledegable tax professional.)

First, it is correct that President Obama has proposed that Congress extend the homeowners tax exemption, also known as the Mortgage Forgiveness Debt Relief Act, through 2013.  But it is only a proposal.  The Senate Finance Committee has also approved a bill to extend the Act; however, that’s as far as it’s gotten.  And the highly partisan congressional and presidential battles makes it virtually certain that nothing will happen until after the November 6th national election.

The hope is that the “lame duck” congress will then extend the exemption.  Knowledgeable prognosticators currently place the odds at 60/40 in favor of the extension; however, that is only speculation.  There is a significant risk that the looming “financial cliff” and public pressure to reduce the deficit may torpedo the exemption.  Congressional estimates are that a one-year extension of the Act will reduce government revenues by as much as $1.3 billion.

Homeowners facing potential tax liability from mortgage debt cancellation — resulting either from a foreclosure, short sale or loan modification — are urged to determine if they qualify for the “insolvency” exemption.  Unlike the homeowners exemption, the insolvency exemption does not expire this year.  And it is available for more types of mortgage debt that the homeowners exemption.

Briefly, if the fair market value  of all your assets, including your retirement accounts, is less than your total debt, you are “insolvent” for tax purposes.  Depending on the extent of your insolvency,  you may be able to reduce your 1099 mortgage debt tax liability.  For example, if you have $100,000 in 1099 mortgage debt income, and your debts exceed your assets by $50,000, your taxable income is reduced by $50,000.  (Again, these calculations should be done by a qualified tax professional.)

Please contact me if you need help determining your individual situation.  It is critical you make no decision unless and until you know the consequences.  An incorrect choice may potentially place you in even worse condition, something few homeowners can afford.

Free Neighbors Helping Neighbors Workshop!! 9/22/12

Are you asking yourself these kinds of questions?

  • Should I keep paying my mortgage?
  • Can my lender come after me if I walk away from my home?
  • What happens to my credit if I do a short sale or foreclosure?
  • Why won’t my lender modify my mortgage?
  • Are there tax consequences if I modify my loan, do a short sale, or the bank takes my house?

Are you a homeowner with an “underwater” mortgage, and confused on what to do?  Come join our panel of experts to hear clear, reliable information and solutions that will help you make decisions on how to get out of your problem and back on the road to long-term financial stability and security.

Panel members include a representative of the Keep Your Home California Program, a certified HUD counselor, loan modification expert, a realtor experienced in short sales, a mortgage professional and a real estate attorney.  Each of the panel members will present a brief summary of their area of expertise, followed by a question and answer session between the panel and workshop attendees.

The workshop is sponsored by the Neighbors Helping Neighbors organization, and hosted by the Concord Salvation Army.  Location: 3950 Clayton  Road, Concord, California.  Time:  10 a.m. to 12 noon.  Come join us and take your first step into a new, brighter future.

URGENT: FHFA Announces New Fannie/Freddie Short Sale Guidelines

The Federal Housing Financial Administration (FHFA) has just announced that it will align guidelines for Fannie Mae and Freddie Mac short sales and allow lenders and servicers to quickly and more easily qualify borrowers for a short sale.  Real estate professionals and associations have long advocated for a streamlined, standardized short sale process, and some of the changes below address some of the main concerns involving these transactions.

Effective November 1, 2012, the primary changes are as follows:

  • Eliminates current Fannie Mae and Freddie Mac short sale programs and creates a single standard short sale process for both entities (Fannie and Freddie HAFA programs will expire at the end of the year).
  • Enables servicers to quickly and easily qualify certain borrowers for short sales who are current on their mortgages without waiting for an approval from Fannie Mae or Freddie Mac Offers special treatment for military personnel with Permanent Change of Station (PCS) orders.
  • Standardizes and clarifies foreclosure suspensions on a property with an approved short sale.
  • May pay borrowers up to $3,000 in relocation assistance.
  • Fannie Mae and Freddie Mac will offer up to $6,000 to subordinate lien holders to expedite a short sale.

FHFA also clarified that a borrower experiencing a hardship must wait at least two years following a short sale before becoming eligible for a new Fannie Mae or Freddie Mac loan.

It is hoped that these new guidelines will improve short sales eligibility for those troubled homeowners trying to avoid a foreclosure so they can move on with their lives.  Of course, only time will tell….

See Fannie Mae’s press release regarding the new short sale guidelines:  http://www.fanniemae.com/portal/about-us/media/corporate-news/2012/5814.html

For a copy of Freddie Mac’s Servicer Bulletin go to: http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1216.pdf