Tag: business compliance

Choosing a Business Entity for Your HUD Insured Real Estate Investment

By: Emily Ameel

Investing in affordable housing is a necessary step in community development and advancement. The Federal Housing Administration’s (“FHA”) Multifamily Mortgage Insurance program is one of many programs facilitated by the Department of Housing and Urban Development (“HUD”) to secure the advancement of affordable rental housing in the United States. Under the FHA loan program, HUD provides mortgage insurance for loans issued by FHA-approved lenders for the construction, rehabilitation, acquisition, and refinancing of affordable and market-rate multifamily housing. A property must contain five or more rental units to be eligible for the FHA Multifamily Mortgage Insurance Program. FHA Insured properties are not subject to income limits unless the property is operating under an additional state or federal affordable housing program, such as receiving Section 8 subsidies or Low -Income Housing Tax Credits (“LIHTC”).

Under the FHA Multifamily guidelines, the mortgagor (also referred to as the borrower) of any FHA-insured project must be a single asset entity (also referred to as a single purpose entity or “SPE”), meaning that the subject property must be the sole asset of the mortgagor entity. HUD has established entity types that are acceptable forms of SPEs for participation in the FHA Multifamily Mortgage Insurance program, some of which are more popular than others. An investor must weigh the benefits and drawbacks of each entity type to determine which will be best for their real estate investment.

Popular Entity Types for the fha multifamily mortgage insurance program:

The General Partnership (“GP”) 

A real estate investor may form a general partnership as the mortgagor for their FHA Insured Multifamily project. A general partnership is composed of two or more general partners who share in the management of the company. General partnerships are known as the “default” business entity, as they can be formed with subjective intent by the partners and do not require formal state filing for formation. General partnerships enjoy the benefits (and sometimes drawbacks) of pass-through taxation, meaning that the income of the entity is “passed through” to the general partners, who must report the income on their individual tax returns.

Drawbacks of the general partnership include the lack of liability protection. All general partners of a general partnership can be held personally liable for the debts of the business. As stated above, general partners share in the management of the business but can also bind each other, making it so that each general partner shares in liability.

The Limited Partnership (“LP”)

The limited partnership is similar to the general partnership. Limited partnerships consist of one or more general partners and one or more limited partners. General partners in a limited partnership control the management and operation of the business and are personally liable for the debts of the business. Limited partners act as investors in the business, have no control over management, and are only liable for business debts up to the amount of their investment. Limited Partnerships are also pass-through taxation entities. The limited partnership is a popular entity for affordable housing developments that receive LIHTC funding, as 99.99% of the interest is typically held for a limited partner tax credit investor.

The Limited Liability Company (“LLC”)

Another popular option for investors is the Limited Liability Company. The LLC is composed of managers and members. Managers have management rights in the LLC, and members are like investors. In a typical HUD transaction, an LLC will have either a manager who is not a member and owns 0% interest in the entity or a “managing member” who is both an interest-holding member and a manager of the LLC. Additionally, LLCs provide liability protections for managers and members. LLCs are popular options for new real estate investors because they can be owned and managed by a single “managing member” individual and provide that individual with liability protection. LLCs are easy to form, with most states requiring only a few documents for formation and registration. Like general partnerships and limited partnerships, the LLC is subject to pass-through taxation. Some states do require annual reporting and fees to maintain active status.

The Corporation (“S-Corp” or “C-Corp”)

HUD also allows corporations to act as the SPE mortgagor. Corporations are composed of corporate officers and owners called shareholders. Corporate officers may also be shareholders of the corporation. Like LLCs and LPs, corporations enjoy liability protections for their officers and shareholders. For taxation purposes, C-Corps and S-Corps are treated differently. S-Corps enjoy pass-through taxation like LLCs and partnerships. C-Corps are faced with “double taxation,” where both the corporation and shareholders are taxed on the business income. Corporations must follow corporate formalities, such as holding regular meetings, recording meeting minutes, and maintaining corporate governance documents.

Other Approved Entities:

Although less popular, HUD also allows the following entity types to act as SPE mortgagors:

        • Trust with beneficiaries and one or more trustees (where the duration of the trust is greater than or equal to the FHA Note);
        • Nonprofit corporations;
        • Joint ventures

Choosing (and forming) a mortgagor entity for your multifamily investment property is one of the many steps required to participate in the FHA Multifamily program. Consulting with an attorney to make an informed decision as to which entity type is suitable for your investment is imperative, as the mortgagor’s entity structure and organizational documents will be subject to lengthy due diligence review in the approval process.

 

This post has been reproduced and updated with the author’s permission. It was originally authored on February 2, 2023 and can be found here.

Emily Ameel, at the time of this post, is a second-year law student at Penn State Dickinson Law. She has a B.S. in Psychology and a B.A. in Women’s Studies from the University of Georgia. Prior to attending law school, Emily worked on Department of Housing and Urban Development (“HUD”) transactions as a third party consultant. She intends to pursue a career in affordable housing upon graduation. In her free time, she enjoys distance running.

 

Sources:

https://www.hud.gov/program_offices/housing/mfh/progdesc/rentcoophsg221d3n4

https://www.hud.gov/program_offices/housing/mfh/progdesc/purchrefi223f

HUD Handbook 4350.1 – FHA Multifamily Housing Policy

 

Green Responsibility: Understanding the Regulations Affecting Small Business Owners

By: Lisa Dang

Small business owners must navigate a complex maze of environmental laws. The Environmental Protection Agency (EPA) has issued a number of regulations to oversee and control the impact businesses have on the environment. While businesses must adhere to the EPA’s environmental regulations, these acts are often complex and difficult to understand. To make matters worse, studies have shown that environmental regulations disproportionately burden small businesses and may impose more stringent requirements on new operations.[1]

Regulations to keep in mind while operation your business

Environmental policies and regulations are constantly changing and being updated. It is important to know which regulations can affect your business.

CLEAN WATER ACT

The Clean Water Act (CWA)[2]  regulates the discharge of pollutants into navigable waters in order to restore and maintain the chemical, physical, and biological integrity of U.S waterways. The CWA prevents businesses from emptying wastewater or other pollutants into surface water (e.g., streams, rivers, lakes, reservoirs, wetlands, and creeks) unless they have a permit. However, a limited number of activities are exempt from acquiring permits, such as qualifying farming activities.

If your business requires discharging pollutants (e.g., sewage, solid waste, chemical waste, discarded equipment, and biological materials) into waterways, it is necessary to obtain a National Pollutant Discharge Elimination System (NPDES) permit. The permit can be issued by the EPA or by state government agencies. NPDES permits, if approved, will provide the right to discharge a limited amount of a specified pollutant.

CLEAN AIR ACT

The purpose of the Clean Air Act (CAA) is to reduce emissions that pollute ambient or outdoor air to protect human health and the environment.[3] The specific requirements affecting your business will often depend on 1) how badly your local air is polluted, and 2) the kinds and quantities of pollutants your business emits into the air. It is difficult to populate a single list that details every kind of small business that will be affected by the CAA but you should keep in mind that your business may be subject to one or more controls if your business:

        • Services and repairs motor vehicles or air conditioning systems
        • Performs work involving auto body painting, the degreasing of machinery, and agricultural chemicals
        • Operates a print shop, bakery, or dry cleaners
        • Sells or distributes gasoline, heating oil, or other petroleum products
        • Emits volatile organic compounds and nitrogen oxides in an area where smog has been identified as an air quality problem
HAZARDOUS WASTE REGULATION

Many small businesses may not even be aware that they generate hazardous waste. Almost all retail stores, including grocery or convenience stores, drug stores, and home improvement stores produce hazardous waste. The Resource Conservation and Recovery Act (RCRA) governs the management of hazardous waste.[4] The EPA has established three categories for the disposal of hazardous waste, which depends on how much waste a business generates:

        1. conditionally exempt small quantity generators (CESQG) (produces less than 220 lbs of hazardous waste per month)
        2. small quantity generators (SQG) (produces between 220–2,200 lbs per month)
        3. large quantity generators (LQG) (more than 2,200 lbs per month)

The majority of business owners will probably fall into the first or second category (CESQG or SQG). Similar to small businesses affected by the CAA, waste is typically generated by dry cleaners, construction operations, car repair shops, photo processing shops, and pesticide user/ application services.

   What Counts as Hazardous Waste?

Waste is any solid, liquid, or gas that is either chemically or biologically discarded, burned, incinerated, or recycled. Hazardous waste is classified into three broad categories.

 

        1. Listed waste: often comes from manufacturing processes or commercial product chemical waste. Your waste is considered hazardous if it is on one of the four lists published in the Code of Federal Regulations, 40 CFR Part 261.
        2. Character waste: exhibits characteristics of ignitable waste, corrosive waste, reactive waste, or toxic waste.
        3. Mixed Radiological Wastes: has both a hazardous and a radioactive component.
   Managing and Disposing of Hazardous Waste

First, most small businesses will fall into the SQG category and therefore must obtain an EPA identification number. CESQGs are exempt from this requirement. Second, SQGs are permitted to accumulate the waste on-site for up to 180 days without a permit. Last, SQG may send their waste only to a regulated Treatment Storage and Disposal Facility or recycler. Managing and disposing of hazardous waste may be complicated. Check with your appropriate state authority to ensure you are properly handling, storing, and transporting hazardous waste.

COMPLIANCE AND PENALTIES: HOW TO AVOID VIOLATIONS

The penalties for violating regulatory acts such as the CWA, CAA, and the improper treatment, storage, or disposal of hazardous waste impose a significant financial burden that small businesses might not be able to absorb. Each year, the EPA publishes an annual inflationary increase to the fine amounts for civil penalties assessed under its authority.[5] As of January 12, 2022, the penalty for violations are as follows:

        • Clean Water Act (CWA): $59,973
        • Clean Air Act (CAA): $109,024
        • Resource Conservation and Recovery Act (RCRA, Hazardous waste): $109,024

Over the past decade, the EPA has recognized the burden environmental regulations place on small businesses. The EPA has developed several comprehensive guidelines and has required states to develop assistance programs specifically to address the needs of small businesses to ensure regulatory compliance.[6] Under the RCRA, the EPA provides industry-specific guidance to help with hazardous waste management.

Furthermore, the EPA will eliminate or significantly reduce penalties for small businesses that voluntarily discover violations of environmental law and promptly disclose and correct them under the Small Business Regulatory Enforcement Fairness Act. A business has 21 days from the time it discovers that a violation has, or may have, occurred to disclose the violation in writing to EPA.

conclusion

Understanding and complying with the various environmental regulations that may affect your small business ensures your business will not bear the significant financial burdens imposed by civil penalties. Although the regulations may seem daunting for a small business, following the guidelines set by the EPA or contacting your state’s Small Business Environmental Assistance Program (SBEAP)[7] will help you to meet regulatory compliance.

This post has been reproduced with the author’s permission. It was originally authored on February 7, 2022, and can be found here.

Lisa Dang, at the time of this post, is a rising 3L at Penn State–Dickinson Law. Dang hails from Richmond, Virginia, and graduated from the College of William and Mary with a BS in Neuroscience and Philosophy. Before coming to law school, Dang worked as a Research Assistant in the division of Hematology, Oncology & Palliative Care at Virginia Commonwealth University. Dang has a wide-range of interests and has been exploring many different classes and areas of law. In between work and school, Dang plays competitive Ultimate Frisbee.

Sources:

[1].  https://www.epa.gov/sites/default/files/2014-12/documents/do_environmental_regulations_disproportionately_affect_small_businesses.pdf

[2].  The Clean Water Act, 33 U.S.C. §1251 et seq.

[3].  The Clean Air Act, 42 U.S.C. 7401 et seq.

[4]. Resource Conservation and Recovery Act, 42 U.S.C. §6901 et seq.

[5].  https://www.federalregister.gov/documents/2022/01/12/2022-00349/civil-monetary-penalty-inflation-adjustment

[6].  https://www.epa.gov/resources-small-businesses

[7]. https://nationalsbeap.org/states  

Photo Sources:

https://www.uniteammarine.com/clean-water-united-states-u-s-clean-water-act-and-relevant-regulations/

https://www.epa.gov/hw/learn-basics-hazardous-waste

USERRA: Is Your Business Compliant?

By: Eric Kocsis

In 1994, President Clinton signed into law the Uniformed Services Employment and Reemployment Rights Act (USERRA). USERRA is designed to protect the employment rights of military service members, veterans, and members of uniformed services.

Generally, USERRA provides job security for service members who are called into active service—whether voluntary or involuntary—by guaranteeing their reemployment upon return. The most common context in which a small business owner will experience this is when an employee is in the National Guard or a Reserve component of the military. The types of service commonly experienced are active duty training, basic training, deployments, drill weekends, national disaster relief, or annual training.

USERRA also bars discrimination against a service member based on their military service—including during the hiring process.

Unlike other federal labor laws, there is no exception based on the size of the employer. This is important to keep in mind for small businesses, who may need to expend more effort to stay in compliance with USERRA.

who is covered under userra?

Under USERRA, any member of the uniformed services is protected. The uniformed services include, not only the Armed Forces, but also members of the commissioned corps of the Public Health Service, the commissioned officer corps of the National Oceanic and Atmospheric Administration, and System members of the National Urban Search and Rescue Response System.

what are the rights of service members under userra?

Service members have certain employment and reemployment rights under USERRA. First, service members have a right against discrimination in hiring, rehiring, retention, promotion, or any other benefit of employment based on their status in the uniformed service. This includes the decision to enlist. Second, service members have a right against reprisal for exercising their rights under USERRA. Third, service members have a right to reemployment if their absence is caused by their service in the uniformed services.

If a service member leaves employment for a period of service, they are entitled to return to the position they would have been employed in if their employment had not been interrupted. This is known as the escalator principle. If the service member is not qualified to perform the duties of that position—after reasonable efforts to qualify them—the service member will be entitled to the same position they had when they left.

For example, if an employee would be entitled to a time based promotion had they not left for service, then they are still entitled to that promotion.

If a service member leaves employment for more than 90 days and they incurred or aggravated a disability during their service that leaves them unqualified for the position they are entitled to, then they are entitled to another position which is equivalent in seniority, status, and pay.

Any absence for service is deemed as a furlough or leave of absence. Thus, a service member on leave for service is entitled to any benefits afforded to other employees on furlough.

Once a service member returns to employment, there are certain rights that protect them from termination. If their period of service was greater than 180 days, they cannot be terminated—except for cause—for one year. If their service was more than 30 days, but less than 181 days, this protection only extends for 180 days.

The service member also has a right to receive notice of these rights. This can be accomplished by posting a notice where the employer usually posts notices.

If a service member believes their USERRA rights have been violated, they can file a claim with the Department of Labor.

the responsibilities of the service member

USERRA provides broad protections for service members and veterans, especially when mandating reemployment after service. In return, there are a few steps the service member must take. First, they must give verbal or written notice to their employer, unless they are precluded by military necessity. Second, they must timely report or apply for reemployment. Finally, they must—upon request of the employer—provide copies of their orders if the service was more than 30 days.

If a service member fails to timely request reemployment, they do not immediately lose their USERRA rights. Instead, they may be disciplined in a manner that is consistent with an employee would normally be disciplined for being absent from work.

For this purpose, timely manner depends on length of time the service member was on duty. If the time of service was less than 31 days, the service member must report to their next regularly scheduled shift on the first calendar day after allowing for safe travel and eight hours of rest. If their service was greater than 30 days but less than 181, the service member must request reemployment within 14 days. For any service longer than 180 days, the service member is allowed up to 90 days to request reemployment.

are there any exceptions?

Under USERRA, there are a few exceptions in which an employer would not be required to reemploy a service member. A service member is not entitled to reemployment if they received a dishonorable discharge. A service member is also not entitled to reemployment if the employment was temporary with no reasonable expectation that it would continue indefinitely.

An employer is also not required to reemploy a service member if the employer’s circumstances changed to make reemployment impossible or unreasonable. Similarly, if a service member’s injury would create an undue hardship on the employer, the employer is not required to reemploy the service member.

Finally, an employer is not required to reemploy a service member if the cumulative period of service exceeds five years. This five-year rule restarts whenever the service member starts at a new place of employment. It is important to note that the five-year rule is subject to many exceptions and many common types of service do not count toward the five-year rule.

Service members have many rights under USERRA and it is crucial that employers of all sizes protect those rights.

This post has been reproduced with the author’s permission. It was originally authored on February 9th, 2022, and can be found here.

Eric Kocsis, at the time of this post, is a 3L at Penn State Dickinson Law and is an officer in the Ohio National Guard. Kocsis wrote this blog to blend those parts of his life and to write about issues that matter to service members and their small businesses.

Sources

https://www.justice.gov/crt-military/userra-statute

https://osc.gov/Services/Pages/USERRA.aspx

https://osc.gov/Services/Pages/USERRA-Employer.aspx

https://osc.gov/Services/Pages/USERRA-Employee.aspx

https://osc.gov/Services/Pages/USERRA-FAQ.aspx

Photo Sources

https://www.thebalancecareers.com/what-the-recruiter-never-told-you-3332713

https://strongpointlaw.com/5801/major-change-at-owcp-dfec-and-dlhwc-merged/