June 2002
Vol. 5, Issue 2

Stuck Above Prime?  Try Taxable Notes
By Sean W. Vollman, Esq.

Below-prime financing may be available to you through the issuance of taxable notes.  Taxable notes are backed by a letter of credit and sold to investors in the public market.  Access to the public markets, along with the fact that taxable notes are secured by a bank letter of credit, allows a borrower to obtain a lower rate of interest than would normally be available. Unlike tax-exempt financings, proceeds from taxable notes may be used for any purpose approved by the bank.

Taxable notes have a variable rate of interest and are subject to prepayment at any time.  The interest rate is reset on a weekly basis.  The notes bear interest at a rate approximating the monthly LIBOR rate (as published daily in the Wall Street Journal).  Although the rate is variable, interest rate swaps may be used to fix the rate and hedge the interest rate risk.

Before it issues a letter of credit, a bank uses the same credit analysis for taxable notes as for a conventional loan. If the bank would not make the loan on a conventional basis, it won’t issue a letter of credit to back the taxable notes. The bank charges an annual fee for the letter of credit.  The actual fee depends upon the credit-worthiness of the borrower.

Due to the higher costs of issuance for a taxable note financing, this procedure will likely make financial sense only for borrowings of at least $2 million and a term of at least seven years.  These numbers are rough estimates.  The actual economic benefit of a potential note issue must be determined on a case-by-case basis.

Borrowers who that otherwise have access to below-prime financing will probably not benefit from the issuance of taxable notes.  If that is not the case, however, taxable notes may be a very attractive financing option.

Sean Vollman is an associate and  member of the Finance & Public Law Section of the Business Law Practice Group.  He can be reached at svollman@bdblaw.com or 330.258.6515.  As an additional resource, Stephen Hammersmith can be reached at shammersmith@bdblaw.com or 330.258.6417.

The state of Ohio has changed the rules! A new Ohio law – House Bill 272 – will lead to significant differences in the way that many real estate agents and brokers do business. This law, which went into effect on April 5, 2002, offers major tax and business advantages to Ohio real estate brokers and salespeople.

Under H.B. 272:
Real estate brokers and salespeople who are licensed in another state but not in Ohio can now transact business on commercial property, working in cooperation with someone with an appropriate Ohio license.

Real estate brokers are now permitted to pay commissions to various types of business entities, not just to individual salespersons as was previously the case.

The owner of non-Ohio property can receive a referral fee for referring a prospective buyer to the person who sold the owner that property.

The Ohio Real Estate Commission must adopt rules implementing a three-year license renewal system before January 1, 2004.

Tax and Business Advantages
Of all these provisions, the most significant is the change in how brokers may pay commissions. The new rules lead to business opportunities because real estate salespeople can now operate under multiple business structures.

Under the traditional system, a salesperson worked with a broker as an independent contractor. After a sale, the broker received the commission and paid the appropriate share of that commission to the salesperson. Prior to implementation of H.B. 272, this commission could be paid to the salesperson only, not to any other person or entity.

Under the new law, a salesperson can form his or her own business, operating as a corporation, partnership, association, limited liability partnership, or limited liability company. Subject to certain restrictions on the structure of the business, now the salespeople can tell the broker, “Please pay my commission to my company.” The company receives the payment, not the individual.

Why is this provision so advantageous?
Previously, a very high producer might employ an assistant.  Payments to the assistant came directly out of the salesperson’s after-tax dollars. Any employee benefits such as life insurance would have been a direct out-of-pocket cost to the employing salesperson.

Under H.B. 272, a salesperson can establish a company and receive the same tax advantages that have been available to other businesses:  For example, the salesperson can provide insurance or health care related benefits to the assistant and treat them as legitimate business expenses.  These same benefits may be tax-free to the employee and do not have to be treated as employee income.

Economies of Scale
Further opportunities under H.B. 272 can benefit both established salespeople and those just entering the field. An established agent may well have more business than he or she can handle, while a new agent probably does not have enough work. Setting up a company allows the established agent to hire an agent who is just starting out. The two agents can then share the workload, enabling the established agent to increase his or her total sales. The resulting commissions are paid into the company, and the employee is compensated with a salary or by whatever other payment system the company owner chooses.

Setting up a company could also benefit a group of part-time agents. Some salespeople work part-time but would still benefit from the assistance of a staff support person. It would be prohibitively expensive for one part-time individual to pay a full-time assistant. Through a company, however, a group of part-time salespeople could share the expense and the services of a full-time staffer, thereby taking advantage of certain economies of scale.

While the potential benefits are great, certain caveats apply: H.B. 272 does not allow these companies to be set up simply to avoid creditors. Furthermore, brokers retain their obligation to supervise the salespeople and their new companies.  The creation of the new companies does not render brokers or affiliated licensees exempt from disciplinary sanctions or immune from personal liability in a civil action. Nevertheless, operating under this new structure should bring significant business and tax advantages to many Ohio real estate brokers and agents.

David Woodburn is an associate and member of the Real Estate & Construction and Trusts & Estates Practice Groups.  He can be reached at dwoodburn@bdblaw.com or 330.258.6506.

This article was also published in the May issue of “Properties Magazine.”

Properties Magazine Inc. " For almost 60 years dedicated to real estate and building progress!"  For subscription and advertising information see www.PropertiesMag.com or call 216.251.0035.

Practice Group Profile Featuring James W. Fisher, Esq.
Jim Fisher is a member of the Real Estate and Construction Practice Group in the Buckingham Akron office. He focuses his practice on zoning, planning, land subdivision, purchase and sale, brokerage, leasing, and other aspects of real estate. Or as Jim summarizes the legal work he does for clients, “I’m a mechanic. I fix things that are broken.  I solve problems.”

An Ohio Registered Professional Engineer, Jim had planned a career designing highways and bridges. After he took a co-op job in the City of Akron’s Planning Department, though, he found to his surprise that he had an aptitude for zoning, so he decided to go to law school. While working for the City, Jim wrote the draft of the zoning code presently in use. He explains, “I parlayed that co-op job into a career. Many of the people I worked with then are now in positions of authority. I am often on a first-name basis with someone who can solve a client’s problem.  I do a lot of local government liaison. People are always stopping in my office and asking how to get a pothole fixed or what to do about a property tax problem.”

Jim stands out in his real estate practice because “I try to be more empathetic. I get to the heart of the client’s problems. I find out what the client does and create a solution tailored to that client, whether it’s a homeowner, manufacturer or retailer.  I try to give practical advice, which often is as valuable as legal advice.”  For example, a homeowner with a wet basement may not need to sue a neighbor or builder over a storm run-off problem. Jim advises taking the practical approach first: Running a hose down the downspout may clear the blockage and dry up the basement without further problems.

In solving client problems, Jim not only draws on his extensive network of friends and acquaintances throughout local government and professional organizations, but also the expertise of other lawyers at Buckingham. He adds, “If someone were expanding a factory, he or she should talk to others at the Firm, like Steve Hammersmith and Tom Trotter, regarding a bond deal or economic development incentives.”

A member of the Ohio and American Bar Associations, Jim also belongs to the local and national home builders associations. He was vice-chairman of the Akron Bar Association Real Property Law Section and is a member of the Ohio Planning Conference and the American Planning Association. He has served as Secretary-Treasurer of the Summit County Planning Commission and on the Copley Township Zoning Commission and the Copley Trustees Zoning Advisory Committee.

Jim lives in Bath with his wife, Nancy, and is active in a number of community organizations, including the Copley Lions Club and Fairlawn-West United Church of Christ. Jim says that his “only discernible vice” is Ohio State football; he has attended more than 350 games since 1967.

He also enjoys what he describes as “experimental gardening.” Jim claims that once he retires he plans to go to Ohio State to earn a degree in agronomy so that he can continue his pursuit of the perfect sweet corn.

Jim Fisher is a shareholder and member of the Real Estate & Construction and School Law Section of the Business Law Practice Groups.  He can be reached at jfisher@bdblaw.com or 330.258.6461.

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