San Diego Business Lawyer Blog

Litigation Should Be Your Company's Last Resort

2011-10-17T21:49:53Z

Like any metropolis, San Diego has a diverse business climate requiring constant interaction amongst retailers, service providers, customers, guests, invitees, tenants and landlords, suppliers, manufacturers, contractors, government agencies, insurers, law firms, and accountants. This level of interaction naturally breeds conflict especially when multiplied by the large number of business, consumer and professional transactions occurring every day in San Diego County. Conflict resolution occurs routinely and the vast majority of conflicts are resolved amongst the parties without the need for lawyers. In fact most conflict is resolved before anyone recognizes that a conflict has even arisen. People naturally look to solve problems as quickly and efficiently as possible so that they can move on to more important matters. Whether a simple cashier error or a complex misunderstanding regarding the terms of a contract, most conflicts are resolved within the first few hours. Of those that are not resolved quickly, most are worked out informally by the parties in a reasonable timeframe and without the need of a San Diego litigation attorney.

Unfortunately, the law of averages guarantees that some business conflicts will not be resolved without resort to the legal system. When conflicts reach this level, business owners rely on the court system to provide them access to a just resolution. The problem of course is that access to a just resolution isn't free and even in those circumstances where there seems little doubt about who is in the right, litigation outcomes are far from predictable. In fact, in most cases litigation is drawn out, expensive, emotionally draining and ultimately unsatisfying. This does not mean that access to justice is a myth. However, opting to resolve business disputes via litigation requires a cost benefit analysis similar to any other business decision. Even the most deserving cases may not be economical to pursue. Litigation costs and attorneys fees often exceed the value of the case to the litigants. In those cases, informal resolution becomes imperative. The alternative is to right off the loss rather than accept greater losses associated with long drawn out litigation.

Whatever the cost benefit analysis, resorting to litigation should be your last resort. Why? Because as stated above, litigation outcomes are unpredictable no matter how righteous a claim is. Assume for instance that a contractor is owed $225,000 for work completed on a construction project. There is little doubt from the contractor's perspective that it is owed for the work completed. Nonetheless, the developer, a private individual, has questioned the quality of the workmanship and is refusing to pay until major repairs are completed. Assume further that the developer is being unreasonable. The contractor knows that the developer is out of money and is making excuses to avoid payment. The case is simple enough. The developer should pay for the work done. If the developer cannot afford to pay, a lien can be taken against the property to protect the contractor's interest.

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This may appear like a doomsday prediction. It is not. These types of scenarios happen routinely in litigation and the parties are often stunned and devastated. The reasons may differ, but a litigant's ability to create delay, excessive costs, confusion, surprise and/or vexation can be boundless, as is the potential for unexpected third parties to muddy the waters. It does not always happen this way, but the risk is all too real.

With this type of unpredictability, the benefits of informal resolution cannot be overstated. In short, if there is the remotest possibility the matter can be worked out, work it out. A good San Diego business attorney can assist with informal resolution for a fraction of the costs described above and the mere involvement of an attorney often serves as a powerful incentive for the other side to cooperate. If the only alternative is litigation, go in with your eyes open. Make sure your attorney knows everything possible about the dispute, your opponent's likely response and your opponent's solvency. For more on ways to avoid litigation, see Avoiding Litigation - Part One and Part Two.

Why the California Limited Liability Company Is Right for Investment Properties

2011-10-17T01:06:08Z

Ownership of investment property in San Diego can be a rewarding venture. However, as with all investments, a return is never guaranteed. It's important to evaluate the property's value up front factoring in: the property's relative worth compared to alternatives; the market value of rental income in the geographic area for similar properties; the property's potential for appreciation; management costs; and potential liability and tax implications. This article focuses on the choice of business entity that best protects investors from liability and negative tax implications. Whether or not you already own investment property or are considering purchasing investment property, choosing how to structure your ownership is crucial. Consultation with an experienced San Diego business lawyer and a real estate professional are the best ways to maximize your personal protection.

There is a reason the prevailing wisdom favors the Limited Liability Company ("LLC") as the best form of ownership in California for investment properties. California LLCs are relatively flexible business entities that have proven particularly beneficial when it comes to ownership of investment properties. First, LLCs allow for pass through taxation avoiding the double taxation associated with C-Corporations (C-Corporations are taxed first on their profits and taxed again on the profits shareholders receive as dividends). Second, like most formal business entities, LLCs provide personal protection from the liabilities associated with an investment property. A member's personal assets are protected from claims against the LLC. Personal ownership in an investment property or ownership as a partnership leaves the owners vulnerable to liability for accidents that occur on the property. Liabilities are often extensive and can exceed insurance policy limits, particularly where permanent injury or death is involved.

S-Corporations are a tempting alternative to the LLC, and in some business contexts the S-Corporation may make sense. In addition to liability protection, qualifying corporations that make an S-Corporation election with the Internal Revenue Service also benefit from pass-through taxation. However, S-Corporations lack the flexibility that LLCs offer. To maintain S-Corporation status, corporations must be domestic, have only one class of stock, distribute profits and losses in proportion to each shareholder's ownership interest and cannot have more than 100 shareholders who are natural persons and U.S. citizens. LLCs, on the other hand, allow for unequal allocation of income, deductions and losses. Members can choose how profits are allocated regardless of each member's contribution or level of management responsibility. This is especially convenient for family owned investment properties or where one owner will be more actively involved in the management of the property. Members of an LLC can also be a corporation or other LLC. In addition, if an S-Corporation transfers property to another entity or sells a property to another entity in exchange for another property, it immediately incurs a capital gains tax. These transactions, if done properly, can be tax free for LLCs.

]]> Limited Partnership (a partnership with one general partner and one or more limited partners) can be as flexible as the LLC, offers the same individual taxation as the LLC and provides liability protection to its limited partners. However, the general partner remains on the hook for the debts and liabilities of the partnership. Thus, in the real estate investment context, there is little reason for a general partner (usually the person most involved in the property's management) to prefer a limited partnership over an LLC.

Given the LLC's flexibility, there seems little doubt that in most cases the LLC is the better choice of business entity for real estate investments. The managers are free to structure the LLC in just about any manner they choose much like a partnership while simultaneously retaining liability protection.

For those that own multiple investment properties, consideration should be given to forming separate LLCs for each property or for groups of property to reduce the risk of spill over liability. If someone is injured on one property resulting in a multi-million dollar damage award, the equity in all other properties owned by the same LLC is at risk. This can be especially costly where the injury occurred on a less valuable property (in terms of equity). Assume for instance that the property where the injury occurred had $200,000.00 in equity, that insurance on the property had a policy limit of $2,000,000.00 per occurrence and that the damages awarded at trial exceeded $3,000,000.00. If the LLC owned a second property with $1,000,000.00 in equity, the second property would be subject to a lien. Of course, too many individual LLCs can create its own logistical problems including multiple annual minimum state franchise taxes. In such cases, consider grouping properties into single LLCs based on similar equities. Consult a San Diego real estate attorney and/or CPA for further guidance in choosing the right business entity for your real estate investments.

Why San Diego Tenants Should Seek Property Tax Protection in Commercial Leases

2011-08-16T19:01:13Z

Most San Diego business owners know that commercial landlords typically pass on real estate taxes, including property taxes, to their tenants. Whether it's a triple net lease requiring commercial tenants to pay their pro rata share of all property taxes due including property tax reassessments or a base year lease (common for office buildings) where tenants are responsible for property tax increases only, property tax reassessments can have a devastating effect on unsuspecting San Diego tenants. The problem stems from California's Proposition 13 which limits property tax reassessments to 2% annually, but allows for full tax reassessments upon the transfer of ownership. Unwary prospective tenants may not realize that an attractive property has not been reassessed under Proposition 13 for years, if not decades. If the property is sold, or ownership is transferred in any number of ways, the property tax reassessment can be significant.

For example, consider a property that has not changed ownership in ten years (meaning it has not been reassessed for Proposition 13 purposes in ten years). In 1994, at the time the property last changed ownership, its value was assessed at $10,000.000.00. Assuming maximum Proposition 13 increases annually of 2%, in 2003 the Proposition 13 tax basis for the property would be $12,189,944. At a tax rate of 1.5%, the tax on the property in 2003 would be $182,849.00 (12,189,944 X .015). A new tenant in 2003 with a 10% pro rat share of property expenses under a triple net lease would owe $18,285 in taxes for 2003. Typically, these taxes are anticipated and paid by tenants as part their monthly Common Area Maintenance (CAM) expenses. However, in 2004, if the property is sold to an investor for $20,000,000.00, it triggers a Proposition 13 reassessment. The Proposition 13 reassessment is based on the new $20,000,000 price tag resulting in a property tax of $3,000,000.00 (20,000,000 X .15%). The new tenant's pro rata share for 2004 is virtually doubled to $30,000.00. In most cases, the tenant will continue to pay the same monthly CAM payment for 2004 and will be billed for the difference upon reconciliation in early 2005 (approximately $11,350 assuming the 2004 CAM calculations accounted for an anticipated 2% Prop 13 tax increase). This can place a significant burden on a new or growing business especially when the business owners do not see it coming. In some cases, the amount owed can be staggering. This is a highly simplified example, but the outcomes are similar in just about any scenario so long as property values are appreciating faster than the 2% maximum allowed under Proposition 13. Of course, the problem is less common in San Diego's current down market, but it is a climate where large appreciations can be expected in the future.

The simple solution for tenants is to seek Prop 13 protection (a clause in the lease that excludes from tenant's expenses any increase in property taxes resulting from reassessments or at least those increases directly attributed to a transfer of ownership). This is not always a practical solution, especially for tenants with less leverage. Nonetheless, it should always be the subject of negotiation. The potential harm can devastate a business. If complete Proposition 13 protection is not possible, tenants should consider seeking a cap (say 5%) on annual property tax increases or an advance agreement to spread out the lump sum tax payment that would be due upon reconciliation. If these concessions prove impossible which is often the case, a new tenant needs to know when the property was last reassessed for Proposition 13 purposes, what its assessed value was at the time and what its assessed value is today in order to forecast the potential losses due to a transfer of ownership. The longer it's been since the last reassessment, the greater the tenant's exposure to extreme property tax increases.

The property tax increase isn't a one-time burden. The new tax basis remains until the property is again reassessed and will not decrease unless property values decrease. It's understandable then that landlords seek to pass the burden onto tenants. In fact, a commercial property is harder to sell (has less value) if its tenants have Proposition 13 protection. Either way, blindly entering into a commercial lease without understanding how property taxes are apportioned is unwise for tenants and landlords alike. Consultation with a San Diego Commercial Lease Lawyer is the best way to avoid pitfalls like this.

The Commercial Lease and Your New San Diego Business

2011-07-22T15:16:45Z

Continued from "Choosing the Right Business Entity for Your New Business".

Now that you have a business plan and the capital to get started, the next step is to secure necessary raw materials, wholesale goods, manufacturing equipment, vendors, licensing, contracts and other necessary procurements all of which will be unique to your business. Securing a commercial lease on the other hand is common for virtually all businesses and, unless you plan to operate out of a home office, will have a critical impact a business' success. First, by entering into negotiations for any commercial lease, you are making a fundamental choice about the location of the business. The location chosen can make or break any new venture. Second, the particular terms of the lease impact the bottom line. Rental payments, annual rental increases, inducements, common area maintenance expenses (CAMs), the term of the lease, options to renew and other rights and obligations set forth in the lease directly impact profits. Lowering monthly rents is obvious, but there are other less obvious costs that new tenants must concern themselves with many of which are intertwined with CAMs. For instance, most commercial leases require tenants to cover property taxes as part of the annual CAMs. Tenants are often shocked to learn later that the property was sold and a lump sum property tax was due sometimes tens of thousands of dollars or more per tenant.

Often, entrepreneurs fall in love with a particular location and begin to negotiate for a lease from a weak position. If prospective tenants have no other options, they are typically willing to accept almost anything from the landlord so long as the rental payments seem reasonable. This is a mistake. The better approach is to choose among multiple locations all of which have positive features. Of course, there is almost always a "better" location for the entrepreneur, and there's nothing inherently wrong with pursuing choice one first. However, knowing that other options exist better equips the entrepreneur to walk away from really bad deals. On the other hand, unrealistic expectations about lease terms can be just as detrimental to a new business. It remains important to understand relative bargaining power and make reasonable determinations about acceptable lease terms. Landlords also have other options, and are generally savvy real estate professionals. They understand what the market will bear and work from there. The negotiation requires tact and subtlety, and most importantly a hierarchy of priorities.

Because the commercial lease is of critical importance to any business, it is best to consult with an experienced San Diego Lease Lawyer before signing any lease. If hiring an attorney is not practical, take the time to review your proposed lease and diligently research all of the issues you are unclear about. There is a wealth of information available on the web.

Recapture Clauses in Commercial Leases

2011-07-15T00:05:54Z

Almost every San Diego business owner has had to negotiate a commercial lease at one time or another. Whether with the assistance of a San Diego lease lawyer or on their own, they are presented with a myriad of confusing terms and conditions. Business owners typically focus on the major terms of the commercial lease (rent, common area maintenance expenses, term of the lease and options to extend), and let their attorneys sort out the rest. While it is good practice to consult with an attorney before entering into any contract, business owners benefit from a basic understanding of the commercial lease as a whole and how its terms interrelate. This article takes a brief look at one common clause - the recapture clause.

A recapture clause allows a landlord to terminate the lease and take back possession of the premises upon the occurrence of certain conditions. It is usually associated with complex "assignment and subletting" clauses that allow tenants, upon landlord's approval, to assign their lease or to sublet a part of the leased premises to a third party. Landlords like to include "recapture clauses" that are triggered by a tenant's mere request for the approval of an assignment or subletting.

The "recapture clause" issue arises because landlords know that tenants' desires to assign or sublet are usually motivated by profit. When the commercial real estate market is hot, tenants can assign their lease at rental rates above what they are currently paying or sublet a portion of the premises at exceptional rates. Recapture clauses allow landlords to step in and take the profits for themselves. In essence, landlords are able terminate the less profitable lease. Tenants then are better off without such clauses and existing tenants need to carefully review their leases before requesting approval of an assignment or sublease.

As with all commercial lease terms, favorable language for either side will depend on the parties' relative bargaining power. Landlords want recapture clauses. They provide an out when existing leases are under performing compared to the current market. The fewer conditions the better. Ideally, from the landlord's perspective, the recapture clause will be triggered on any request for the approval of an assignment or sublease. However, given the complex nature of assignment and subletting clauses in commercial leases, it is most often productive for landlords to agree to more flexible language. Tenants, on the other hand, should ask that recapture clauses be omitted in their entirety although this is not a practical expectation for most small businesses. If the recapture clause cannot be negotiated away, tenants should insist on clear triggering language. For instance, landlord's recapture rights may only be triggered upon a request for a complete assignment or a request that more than 50% of the premises be sublet. This allows tenants to sublet portions of the premises without risking termination of the lease. There are other options equally appealing to both landlords and tenants. Most notably, language may be included in the lease that addresses the division of profits from an assignment or sublease omitting any sort of recapture clause.

In the end, commercial landlords and tenants have to weigh the value of these issues against all the other lease terms being negotiated. It may be that a tenant has little concern over future assignments and would much rather spend its bargaining power on other important concerns such as reduced annual rental increases. The practical result of recapture clauses after they are triggered will be the subject of another article. Consult a San Diego commercial lease attorney for further guidance.

What is a California Close Corporation?

2011-07-07T20:47:58Z

A California Close Corporation is a corporation designed to give its shareholders more control over the operation of their business. Instead of sitting back and letting others run the company, the owners of a Close Corporation typically act as the company's managers. By complying with specific statutory requirements, Close Corporations can forego many of the corporate formalities other corporations are required to comply with. This in turn reduces the risk that others will be able to pierce the corporate veil and reach the owners' personal assets. Section 300 of the California Corporations Code states: "The failure of a close corporation to observe corporate formalities relating to meetings of directors and shareholders in connection with the management of its affairs, pursuant to an agreement authorized by sudivision (b), shall not be considered a factor tending to establish that the shareholders have personal liability for corporate obligations". However, shareholders who manage the Close Corporation are subject to the same fiduciary duties any director of officer of a corporation has.

The California Corporations Code imposes the following requirements for qualification as a Statutory Close Corporation:

1.   The Corporation cannot have more than 35 shareholders. However, for the purposes of satisfying this requirement, spouses are considered to be a single shareholder as are corporations, trusts, partnerships or other business associations unless the primary purpose of the entity was to acquire the close corporation's shares.

2.   The Articles of Incorporation must include a provision that the corporation cannot have more than 35 shareholders and specifically state that the corporation is a close corporation.

3.   The corporation's share certificates must contain a conspicuous legend stating: "This corporation is a close corporation. The number of holders of record of its shares of all classes cannot exceed 35. Any attempted voluntary inter vivos transfer which would violate this requirement is void. Refer to the articles, bylaws and any agreements on file with the secretary of the corporation for further restrictions."

4.   The Shareholders must enter into a written agreement setting forth the matters upon which the shareholders, rather than the board, will exercise control. The shareholders' agreement must be lodged with the Secretary of the Corporation and available for inspection by prospective purchasers. It is common for Shareholders' agreements to include buy-sell provisions limiting transferability of shares providing existing shareholders with a right of first refusal. Moreover, close corporations may provide for greater control by minority shareholders and disproportionate distributions of profit.

In addition to these statutory requirements, Close Corporations cannot go public.]]> partnership providing its owners greater latitude in the management of the corporation's day to day operations. Small business owners often look to the Statutory Close Corporation as a practical business entity option, one that provides them the liability protections of a corporation while simultaneously providing flexibility and control. It should be noted, however, that Limited Liability Companies (LLCs) offer similar benefits and should be considered.

California's Statutory Close Corporation is not without its drawbacks. As stated above, shareholder managers remain potentially liable for breaches of fiduciary duties held by directors and officers of general corporations. In addition, the shareholders' agreement and statutory requirements of a Close Corporation typically make outside investment less appealing. The limitation on the number of shares sold and other transferability restrictions typically included in shareholders' agreements naturally reduce the corporate shares' marketability.

While corporate formalities are relaxed for the California Close Corporation, they remain important in many ways.   First, these formalities can only be dispensed with to the extent the shareholders' agreements and by-laws specifically allow for it. Any ambiguities are likely to be resolved in favor of normal corporate procedures. Second, from practical standpoint, banks and other lending institutions usually require certified copies of resolutions to open accounts and take out loans. Maintaining corporate formalities makes good business sense. It keeps managers, officers and directors on their toes. In addition, personal guarantees are usually required by banks for corporate loans, and this is more common for Close Corporations. Personally guaranteed loans are counter-productive to the idea of limiting personal liability.

Finally, opting for disproportionate allocation of profits or other financial rights are likely to be deemed as giving preferential rights to certain shareholders thereby disqualifying the Close Corporation from electing to be taxed as an S Corporation.

Forming a California Close Corporation is generally more expensive than forming a general corporation due to the increased attorney's fees associated with preparing the shareholder's agreement. Shareholders' agreements are usually detailed and look much like partnership agreements. The ultimate decision on which business entity is right for your business should be made with the guidance of a San Diego Corporation Attorney.

How to Fire an Employee

2011-06-21T00:30:12Z

Firing an employee is never a pleasant task. Yet it is a normal part of any business' operations whether a national corporation or a small San Diego business. Learning the best way to fire an employee begins with an understanding of the employment relationship. Most San Diego business owners understand that employment in California is presumed to be "at-will" (employees may be terminated for any reason or for no reason at all, also termed "without cause"). If a business can fire any employee it wants any time for any reason, then why bother writing an article on how to fire employees? It sounds easy enough. Putting aside the moral hesitation associated with depriving someone of their livelihood, many business owners remain reluctant to fire an employee without first consulting with a business attorney for fear of being sued for wrongful termination. Although employers are permitted to fire at-will employees without any stated reason, there are legitimate concerns employers should consider before doing so.

First, laws against discrimination and retaliation subject employers to considerable risk. Even an at-will employee cannot be fired because if his age, gender, race, sexual orientation, physical limitations, marital status or religion. To do so is illegal. It is also illegal to fire an employee, at-will or otherwise, in retaliation for seeking redress. The risks of these types of claims are significant. Employers that follow consistent termination procedures and provide reasons for termination, whether for cause or for other business reasons, reduce their risk that discrimination claims will be successful.

Second, an employer may be wrong about the employee's at-will status. In some cases, the answer is obvious. The employee has a written contract. However, in cases where employee manuals and historical procedures are in place that evidence a good cause requirement for termination, courts may infer that an employee is not at-will (that an implied contract exists). In essence, the employee is permitted to rely on the employer's written policies and historical practices. Offer letters, employment applications and employee manuals that emphasize at-will status reduces uncertainty in this area. Nonetheless, a consistent termination policy is recommended. In addition to reducing the risk of successful wrongful termination claims, a consistent termination policy signifies to other employees that they can expect to be treated fairly.

A termination policy typically includes procedures for progressive discipline and documentation of employee actions. Consistent and progressive disciplinary procedures require open lines of communication and provide employees with an opportunity to correct their ways. The procedures themselves show fairness and document the employer's reasons for termination. With a consistent termination policy and a basic understanding of at-will employment, the employer is better equipped to handle the ultimate task of firing an employee.

So back to the original question: how do you fire an employee? The steps are relatively simple (assuming there have been no violations of labor laws).

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2.   When the time comes to fire the employee, schedule a private termination meeting the same day as termination and have a witness attend (preferably someone in management or human resources).

3.   Be compassionate and professional, but be direct. Do not engage the employee in a back and forth discussion giving the impression that there is something the employee can do to change your mind. Start by tell them your decision. Follow up with the reasons and the supporting documentation. Keep the conversation short and although it is tempting to soft shoe around the real reasons, be honest. It is actually kinder to be direct and honest rather than leading an employee into thinking they should be defending themselves. If termination policies were followed, the employee is likely expecting the news anyway.

4.   Be ready for the employee's immediate departure after the meeting. If possible, have an attorney or human resource professional assist with the drafting of a termination letter, the preparation of final pay checks and an explanation of COBRA and other benefits. It is also best to have someone standing by to supervise the employee's removal of personal items from his office or cubical, return of keys, pass cards, company credit cards and other company property, and to escort the employee from the premises. It's important to maintain professionalism throughout the process.

5.   Finally, consider changing passwords that might provide access to sensitive information off site.

Landlord Management of Common Area Maintenance (CAM) Expenses

2011-06-10T21:09:32Z

Triple net leases dominate today's San Diego commercial lease market and virtually every landlord is faced with the annual burden of reconciling common area maintenance expenses (CAM expenses). Challenges to CAM expenses often spiral out of control. Tenants, ever weary of the unseen profit center, want to ensure that they are being billed correctly and are willing to share their frustration with other tenants. The management of CAM expenses begins with the initial lease negotiation which in the ideal results in lease terms that clearly set forth each CAM expense and how each expense will be calculated and apportioned. Experienced commercial managers and lease lawyers understand the need for clarity and comprehensiveness and strive for consistency among tenants while simultaneously negotiating the best possible terms. Unfortunately, the result is most often imperfect. National chains and anchor tenants' demands are given greater weight in negotiation and smaller tenants are finding themselves with increased bargaining power due to the current downturn. Regardless of the economic climate, landlords can and should take care in managing and accounting for CAM expenses. The goal is to reduce tenant frustration and avoid future problems and associated costs.

The best first step towards improved management of CAM expenses is for property managers to simply pay attention. Supervision of maintenance operations ensures that waste is kept to a minimum. If or when a tenant does question a specific expense, the landlord will be prepared to produce relevant invoices and explain why the expenses were necessary. This is especially important for anchor tenants who typically have the resources to challenge landlords' accountings. Too often property managers ignore potential problems hoping that the tenant will either forget about it or accept an evasive answer for fear of creating conflict. What property managers tend to overlook is that tenants have long memories. If later problems arise or if business starts to decline (for whatever reason), tenants inevitably latch onto the older seemingly innocuous issues and the landlord/tenant relationship can deteriorate rapidly. Regardless of the tenant's size, experienced property managers know the headaches this can create.

In addition to supervising maintenance operations, it's best to know what allowable CAM expenses are for each tenant. That is of course why consistency in tenant leases is so important. Knowing that all of the tenants are billed the same way for all expenses makes for simpler calculations. Because perfect consistency is virtually impossible, it is particularly important that property managers know where the differences lay. Misunderstandings can be costly. It may seem that a parking lot improvement is simple enough. Putting aside that the anchor tenant may not be required to share in the expense (reverting a large share of the cost back to the landlord), it may be that another tenant previously negotiated for the specific use of some of the parking spaces being torn out.

]]> Another relatively simple step landlords can take is to better estimate the coming year's CAM expenses. Spreading out anticipated expenses over the year is more palpable for tenants. They are less likely to dispute an improvement they knew in advance was calculated into their bill than when forced with an unanticipated lump sum payment due upon reconciliation. A little more communication up front goes a long way towards avoiding potential problems down the road.

Other simple steps that can improve CAM management include: provision of proper notice to tenants for property improvements; frank discussions with new and existing tenants about anticipated capital improvements and/or transfers of ownership that will result in higher property taxes; oversight of accounting and bookkeeping; provision of detailed expense reports with annual reconciliations; careful calculation and documentation of management fees; provision of detailed annual budgets sent to tenants early; prompt notice to tenants of significant mid-year variances; and the prompt correction of billing errors.

Perhaps it's true that property managers' efforts to run efficiently often go unnoticed. What is certain is that inefficiencies rarely escape scrutiny. Problems can and are often exacerbated if left unchecked until annual reconciliations. This may all seem obvious to the seasoned property manager, but it never hurts to step back and reevaluate operations. In the end, it's about maintaining a level of professionalism that builds trust and valuable long term relationships with tenants.

The value of existing tenants as an asset shouldn't be underrated. Empty commercial space in San Diego is ubiquitous, and even those high value commercial spaces are seeing significant turnover. The costs are high and at the macro level astronomical for San Diego County. Commercial property managers of all sizes are scrambling to climb out of this hole desperately courting prospective tenants. There's nothing wrong with accepting this reality. Bureaucracies, inertia and complacency are powerful engines. This writer merely suggests that the balance sheet is better served by working closely with long term existing tenants than the continual rolling of the "new tenant" dice.

How to Respond to a Cease and Desist Letter Claiming Trademark Infringement?

2011-05-24T20:01:36Z

Cease and desist letters claiming trademark infringement have an intimidating effect on their recipients. Most San Diego business owners are bewildered and have no idea how to respond. They have been in business for months if not years, and have constructed signs, circulated business cards, advertising and other promotional materials, published websites, formed a corporation and built goodwill and customer loyalty all under their existing name. Now some company they have never heard of is telling them they need to abandon their identity and start all over, a costly endeavor. Ideally, businesses will conduct a trademark search before deciding on the use of a name and logo and then file their own trademark registration, but this is of course hindsight. There are two very important things to keep in mind upon receipt of a cease and desist letter claiming trademark infringement: don't panic and don't ignore it.

Don't panic because in many cases the issues can be resolved without having to abandon your business' identity. Your mark may not actually infringe on the claimant's mark, you may have a common law trademark giving you the right to use the mark in your geographical area, or the claimant may be willing to license use of the mark, place some limited restrictions on use or request some reasonable modifications to the mark. Remember that pursuing trademark infringement claims is an expensive endeavor and it is often economical for the claimant to work out an agreement with alleged infringers. Usually, a San Diego trademark attorney can assist in resolving the dispute for a reasonable cost. Of course, in some circumstances the claimant will not walk away so easily. It depends on the size of the claimant's business, the strength and recognition of the claimant's mark and the geographical scope of the claimant's customer base. A business won't get very far opening a hamburger joint called McDonald's and utilizing a big yellow "M" at the forefront of its logo's design. McDonald's will pursue a trademark infringement claim no matter the expense.

Don't ignore it because some companies will pursue their claims even if they are not as big as McDonald's. Once a trademark infringement claim is filed in Federal court, you lose significant bargaining power. Even if you capitulate and agree to change your business' name, the claimant will almost certainly want to be recuperated for bringing the action including attorney's fees and other costs associated with filing suit. With or without an attorney, open the lines of communication.

If hiring a lawyer is not economically feasible, start by calling whoever sent the letter and ask them whether there is room for negotiation. However, be careful about making any admissions, especially in writing. For instance, your case will be significantly weakened if you send a letter to an attorney for the other side admitting that your mark infringes on theirs and apologizing for the mistake. Instead, let them know that in the interest of avoiding legal fees and litigation costs you are willing to work something out. Ask what it will take. If you feel you have a strong position, tell them why - your mark has been in use in San Diego County for 10 years well before they obtained their federal trademark registration (giving you a common law trademark). Or suggest that the two marks really aren't that similar and there isn't any likelihood of confusion. If your position is weaker, suggest alternatives that won't involve reinventing a marketing campaign. Maybe the design of your website is too similar to theirs requiring a simple fix. Maybe they'll be willing to license the mark for a nominal fee given that the marks are being utilized in two different states. However, it's best not to play attorney with these folks. Be conciliatory so that they understand your willingness to cooperate. If at any point it seems like you are in for a battle, that's probably the time to contact a trademark lawyer regardless of the cost.

How to File for a Federal Trademark?

2011-05-23T18:49:56Z

Few doubt the importance of protecting a business' name and logo with a federal trademark. Yet, many business owners focused on more immediate problems and concerned about the cost and time associated with applying for a trademark put the task aside. Some local businesses that have had a name and logo in continuous use prior to other trademark registrations will benefit from common law trademarks. However, if those businesses begin marketing themselves on line (even if only locally), they may run up against trademark infringement claims. In addition, the common law trademark will only protect a business' name within a limited geographic area where the business is located. While there is no need for all business owners to fall victim to the "you can't afford not to trademark" doomsday threat, it is important to evaluate your risk. Consider consulting a trademark attorney for guidance.

If you do need a federal trademark, the process is relatively straight forward but can be challenging for the lay person. The first step is to be sure that someone else hasn't already trademarked the name. This does not necessarily mean that your trademark cannot include the same words as other trademarks. The question is whether your trademark is similar enough to an existing trademark for a similar product or service such that it creates a likelihood of confusion to the consumer. Registering a trademark without an attorney requires some research to better understand this concept and evaluate your trademark against existing registrations. The actual search for existing trademarks is simple enough and can be conducted on the United States Patent and Trademark Office (USPTO) website using the Trademark Electronic Search System (TESS). If there is a potentially conflicting Trademark, be sure to check its status. It may be that the trademark registration was canceled. Finally, qualifying for a federal trademark requires that the mark at issue be in use in interstate commerce. A restaurant that serves customers from other states does business in interstate commerce as does just about any internet business.

The next step is to draft a description. This includes a description of the mark and the goods and/or services the mark will be used with. Refer to the USPTO's manual Acceptable Identification of Goods & Services for valuable assistance in preparing your description. You will also need to select a classification. The classification options are listed on the USPTO website. The trademark application also requires an actual representation of the mark. The mark can consist of the words only in standard letter format or can be a designed logo.

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After evaluating the mark, checking the mark against existing registrations, describing the mark and the goods or services the mark will be used with, selecting a classification, and drafting a representation of the mark, you are ready to begin the application process. Simply follow the instructions. The application may be submitted on-line or by mail. Applications submitted by mail require a filing fee of $375.00 per class of goods and/or services. There are two options on-line: TEAS Plus at $275.00 per class or TEAS for $325.00 per class. TEAS Plus is the best value, but has stricter application requirements.

Funding and Finances: Business Plan Part Five

2011-05-05T14:05:27Z

Continued from Marketing Your Product or Service: Business Plan Part Four.

Funding: The Funding section sets forth the amount of funding necessary to start or expand your business. A strong business plan doesn't merely ask for a fixed amount of money. It sets forth the company's funding requirements in detail and includes different funding scenarios. It describes how the money will be spent, whether future funding will be necessary and how the current and/or expected future financial condition of the business will accommodate the debt. What does the five year horizon look like? Is the company seeking equity investment or a loan? What terms will best fit with the company's financial strategy? The funding section should also specifically state how an injection of capital will benefit the company's bottom line, and should delineate best and worst case scenarios. Tell the prospective investor or lender the company's long range financial strategies, how profits will be used and what the return on investment will be. In addition, describe precisely how the funds will be used including whether some or all of the funds will be needed to pay off debt or for capital expenditures. Be sure to tie your funding needs to the company's strategic goals. Lenders want to know that you will be able to repay your debt and investors want to know that there will be a positive return. Show them that the company has a plan to allocate resources efficiently and effectively.

Financials: The Financial section of the business plan is the dollars and cents section. It tells the reader about the company's current financial health and its projected financial health over the next five years. This is where you crunch the numbers and it is your opportunity to show the prospective lender or investor just how sound your business plan really is. The financial data backs up the funding requests. The financial sections should include historical financial data (typically three to five years back or for as long as the company has been in business if shorter than three years). Provide the company's accounting records including income statements, balance sheets and cash flow statements for each year, and identify any collateral. The prospective financial data should project the company's finances for the next five years including forecasted income statements, balance sheets and cash flow statements. It is helpful to provide monthly projections especially for the first year, and quarterly projections thereafter. It's important to discuss assumptions made to support projections. If you project increased revenue for year two based on increased advertising in the third quarter of year one, say so. Be sure your assumptions make sense and are consistent with your overall business plan. Don't expect that the reader will make these connections for you. It's also important that your funding requests are consistent with the financial projections. Finally, the Financial section should close with a brief analysis of the company's financial information including an analysis of historical and prospective trends. Use of excel spreadsheets and graphs are great tools.

Appendix: The business plan should conclude with an appendix that lists all of the supporting documentation such as: resumes and letters of reference; marketing materials; supporting data for market analyses: licenses, permits, trademarks or patents; leases, contracts, and other legal documentation; corporate, partnership or LLC documentation; and list of professional advisors such as your accountant, business attorney and banker.

For more information on starting up a new business see Starting Your Own Business. If you are considering purchasing an existing business, check out Purchasing an Existing Business Offers Benefits Often Overlooked and Considerations When Purchasing a San Diego Business.

Marketing Your Product or Service: Business Plan Part Four

2011-05-04T13:57:09Z

Continued from Describing the Company: Business Plan Part Three.

Marketing: Once you have a complete understanding of what your target market is, it is critical to have a plan to capture a competitive share of that market. The Marketing section of your business plan should tell the prospective investor exactly how you intend to accomplish this important goal. Your marketing strategy should be unique, creative and effective. It's important to tell the reader in this section: how the company intends to penetrate existing markets; how the company intends to distribute its products; what the company's plans for growth are; and what the company's marketing strategy is or will be. Explain the business' strategies in detail. Does it intend to expand via acquisition of other businesses or franchising? Does it intend to expand the customer base via advertising and promotion? How will the company use various marketing tools to grow the business? There is no "one size fits all" marketing strategy. However, zeroing in on these fundamental components assists in the development of a strategy that has the best chance of success.

The Marketing sections should also set forth your sales strategy if your business relies on or will rely on a sales force. What type of sales force will you use? How will you recruit and train them? Will they be independent contractors or employees? How will they be compensated? What type of system will you have in place to identify and prioritize customers? Will they be contacted by phone or in person? What is or will be the average number of calls necessary to make one sale? Show the reader that the sales force will be productive.

Service or Product Line: The Service/Product Line section describes what the company is selling, and explains why potential and current customers will benefit from your particular product or service. What distinct advantages will your business offer? Will you provide customers solutions they cannot find elsewhere? Do you own, have pending or intend to obtain copyrights, patents, trademarks, trade secrets or licenses that will provide an advantage? If so, in what way will they be advantageous to the company? Is there any research and development (R&D) underway? What about competitors? Describe your R&D goals and compare them with other R&D efforts in the industry. Explain why your solutions are important to the client base, and anything else that will set your business apart from its competitors. Provide a detailed description of the company's services and/or products and pricing schedules. Include promotional and marketing materials. Is the product or service seasonal? If so, how will the company deal with seasonal trends? What is the availability and cost of necessary supplies and raw materials? Who are the company's suppliers? This is your opportunity to pitch the product or service to the prospective investor or lender, to explain why people will be willing to purchase your product or service at profitable price points and to explain how you will be able to meet those price points.

Continued in Funding and Finances: Business Plan Part Five.

Choosing the Right Business Entity for Your New Business

2011-05-03T17:52:29Z

Continued from How to Fund Your New San Diego Business.

Choosing the right business entity for your new San Diego venture is a critical step that should be made early in the process. It's important to diligently examine the pros and cons of each choice before deciding on what business entity to go with. In some cases, opting for a sole proprietorship or general partnership remains a practical option. In other cases, the owner or owners desire the creation of a more formal entity such as a corporation, limited liability company (LLC), limited liability partnership or professional corporation. The ultimate choice will depend on the nature of the business, the number of owners and the capital investments being made. The goal is to minimize potential liabilities including taxes. The correct business entity choice for any particular company will depend on the individual characteristics of that company. Your accountant and business attorney can provide guidance. Nonetheless, there are some general issues to keep in mind:

Limiting Liability: One of the main reasons people opt for a formal business entity is to insulate owners from company liabilities. Limiting the liability of owners encourages investment offering a distinct advantage over operating as a sole proprietorship or general partnership. However in most cases, the owners of new businesses are required to give personal guarantees for commercial leases, loans and contractor agreements. If so, the benefits of the formal business entity become less relevant, particularly if the business is adequately insured and intends to form an LLC or S-Corporation resulting in pass-through taxation. If the owners have to personally guarantee loans and commercial leases, have insurance to cover civil liabilities and are going to elect pass through taxation so that they are taxed as individuals, there is little incentive to go through the expense of forming a formal entity.

The Limited Liability Company (LLC) or S Corporation: Most people forming new businesses end up narrowing the choice of business entity to an LLC or S-Corporation. This is because they want pass through taxation to avoid the prospects of double taxation associated with C-Corporations. If you are forming a new business and your main goal is to limit owner liability, the LLC is generally a good choice. It offers more flexibility than the S-Corporation, and allows for unequal allocation of income, deductions and losses to the owners. On the other hand, the S Corporation may offer some advantages to those concerned with self employment and FICA taxes. If there is any doubt between these two forms of business entities, it's best to consult with your accountant (preferably a CPA) or tax advisor for input.]]> C-Corporations: C Corporations may offer some advantages to new businesses but come with the burden of double taxation (the corporate income is taxed as are the shareholders' dividends). This does not mean that a C-Corporation is always a bad idea. One major advantage is tax deductible employee benefits. In addition, there are ways to limit taxable corporate profits through salaries and benefits. Consultation with an experienced tax professional is crucial should your business consider a C-Corporation. If the corporation intends to go public than there is no choice but to opt for a C-Corporation.

Partnerships: The general partnership is most like the sole proprietorship in that the partners retain liability for the debts of the company and each partner is taxed as an individual. A general partnership offers flexibility in the management of the company and is relatively simple to form although doing so without a written partnership agreement is not recommend. As with the sole proprietorship, a general partnership may be a sensible option if partners intend to obtain adequate insurance, prefer individual taxation and expect to personally guarantee loans.

There are various other options such as limited partnerships (one or more general partners remain liable for the debts of the partnership while one or more limited partners do not - these are common for real estate investments) and limited liability partnerships and professional corporations both of which are designed for specific professional services.

There is no single answer for any new business. The key is to diligently evaluate all options with the assistance of trusted professional advisors such as a business attorney and accountant.

Continued in "The Commercial Lease and Your New San Diego Business".

Describing the Company, Business Plan Part Three

2011-05-02T13:47:22Z

Continued from The Market Analysis: Business Plan Part Two.

Company Description: As the title suggest, this section describes the business. In the Company Description, the San Diego business owner summarizes the nature of the business, how the business is organized, the needs of the marketplace and the reasons why your business will succeed. The information in the Company Description may be repetitive of other sections. Be careful not to copy exact language from the Market Analysis or the Organization and Management sections. Instead, use the information in these sections to help paint a broad picture of the company and how each of these factors interrelate with each other within that broad picture.

Organization & Management: The next section in a typical business plan is Organization & Management. It sets forth in detail the company's organizational structure, ownership and management structure and identifies the owners, management team and/or board of directors and their qualifications. This section tells the reader whether the company is a California corporation, limited liability company, partnership or sole proprietorship. It then identifies the owners, their percentage interest in the company, the role each will play in the company's operations and describes their respective experience levels in the industry and exactly how that experience will benefit the company. It is often helpful to provide the reader with an organizational chart that covers all aspects of the company's operation and tells them who does what.

The Organization & Management section also describes the qualifications of key management personal and corporate officers, and the salaries and benefits offered to keep them. It shows the reader that the company is in good hands, and intends to maintain that level of quality over time. It's important to set forth the details of the owners and management team's qualifications, including their names, percentage and type of ownership (if owners), position and description of their primary job duties and responsibilities, unique experience and skills, employment history and track record with other companies and recognition in the industry. What are their achievements? In short, prospective investors want a resume for each person that will have influence over the success of your business.

Continued in Marketing Your Product or Service: Business Plan Part Four.

How to Fund Your New San Diego Business

2011-05-01T20:59:21Z

Continued from Be Prepared Before Undertaking a New Business Venture.

Marshalling the resources necessary to fund a new San Diego business can be intimidating. In fact, it's probably the biggest reason many decide against a new venture. How in the world will I come up with the capital necessary to: purchase an inventory; purchase equipment; lease commercial space; hire employees; pay an accountant and/or a business attorney; and/or pay for insurance? And even if I come up with the necessary funding to open my doors, will I be able to continue paying the company's expenses? What about my personal expenses? These are important questions and they require a funding plan that takes into account start up requirements as well as the company's short term and long term financial needs.

To properly evaluate a business' capital needs, it's important to have a strong business plan that clearly defines the company's strategy for success and sets forth detailed projections of the company's short term and long term finances. It will also define how an infusion of capital will be spent (whether on operating expenses or capital expenditures necessary for real estate and equipment). A critical analysis of the financial landscape aids in determining just what level of funding is needed and whether additional funding will be needed down the road. The more detailed and well reasoned your business plan, the more likely lenders and investors will provide needed capital. They will want to know how the money will be spent.

There are numerous ways to finance a new business' operations. In most cases, new businesses are funded via a combination of resources. Personal assets, credit cards, bank loans, third party loans, 2nd mortgages, loans from friends and family, partners' capital, sale of a corporation's shares or a limited liability company's membership interest, venture capital, sale of personal assets such as stocks, automobiles and boats are all common and legitimate means of raising capital. The first step is to inventory your personal resources. Whether via the sale of assets, withdrawal of cash from checking and savings accounts or via a second mortgage on your home, tally the dollar amount of the investment you are able to make. In deciding the amount of personal assets to invest in your new business venture, be sure to consider the need to meet personal expenses over time (preferably two years). Under your business plan, will you be paid a salary? Will you have enough money set aside as a cushion should the business prove unable to pay your salary or worse fail? These are important questions. Remember that you can opt to keep some reserves and make up the difference in needed capital via other means.

]]> Small Business Administration (SBA). In addition to assisting new businesses raise capital, the SBA has a wealth of resources available to help guide young business owners through the maze of business ownership. The SBA is an often overlooked resource. It shouldn't be. Finally, consider working with existing lines of credit. So long as you have a sound business plan and have taken into consideration the need for a personal cushion, existing lines of credit can help you get off the ground.

Bringing investors on board is less risky than taking out loans. In most cases, new business owners personally guarantee business' loans. Investors inject equity into the business taking on risk in exchange for a share of the profits down the road. You essentially sell a share of the business, and in most cases cede some of the control to your new partner. Start with friends and family. It's surprising how many people are interested in a good business idea. In addition, networking with professionals, business owners and others experienced in your particular industry can be a great source of investment. There is no single best source for finding investors. However, there is a wealth of information on the internet regarding a wide variety of investment sources from angel investors to venture capitalists.

Inadequate funding is one of the top reasons new businesses fail. The key is to look to as many potential sources as possible and choose those most suited to the new business' needs. In the end, a strong business plan is necessary to attract serious investment. Once investment or debt equity is lined up, consider consulting with a San Diego business attorney to assist you with any requisite contracts.

Continued in Choosing the Right Business Entity for Your New Business.