Sec 5- Chapter 13: The Brokerage Business

Independent contractor / broker relationship. What can the broker require from the independent contractor? Who is responsible for income & security taxes? Does the Broker withhold taxes? Can the broker provide benefits?

1. a broker can require performance results, but is limited in demanding how a contractor performs the work. For example, a broker may not prescribe selling methods, meeting attendance, or office hours. 2. an IC is responsible for income and social security taxes; the broker does not withhold taxes 3. a broker cannot provide an IC with employee benefits such as health insurance or pension plans

What is a sales agent NOT permitted to do (only the broker is permitted)? (3)

1. bind a client to any contract 2. receive compensation directly from a client 3. accept a listing or deposit that is not in the name of the broker

Goodwill is a business brokerage term with two meanings

1. goodwill is an intangible asset consisting of any factor that an owner values in the business, apart from any other specific asset. 2. more familiar to accountants, goodwill is the difference in value between an owner's price and the value of all other business assets. Ex. on page 181

In addition to being organized as a sole proprietorship, partnership, corporation or joint venture, a brokerage may be: (4)

1. independent or affiliated 2. specialized in a type of property 3. specialized in a type of transaction 4. specialized in a type of client

Name some obligations the broker has to the sales agent (IC or employee).

1. make the brokerage's listings available 2. make the brokerage's market and property data available 3. provide whatever training was promised at the time of hiring 4. provide whatever office support was promised at the time of hiring 5. uphold the commission structure and expense reimbursement policy 6. conform to ethical standards imposed by the broker's trade organization 7. uphold all covenants and provisions of the employment agreement

the value of the business is a function of the following: (6)

1. past, present, and future net profits, and capitalized value of these 2. amount of risk and certainty associated with realizing future profits 3. value of all assets as reflected in the books of account 4. impact of goodwill on the value of the business 5. prices paid for similar businesses 6. all other risks associated with the business

Knowing a market includes keeping up to date on: (5)

1. pricing and appreciation trends 2. financing rates and terms 3. demographic patterns and trends 4. construction trends 5. general economic trends

Franchisors generally offer local franchisees.. (5)? What happens in exchange?

1. the use of a recognized trade name 2. national and regional advertising 3. training programs 4. standardized operating procedures 5. a national referral system In exchange, a franchisee pays the franchisor start-up fees and a portion of gross income.

Can a cooperative association broker real estate?

A cooperative association may not broker real estate.

Requirements for a corporation to broker real estate?

A corporation may broker real estate if it is legally authorized to do business in a state and licensed to broker there. State license laws may require one or more officers to hold active or inactive broker's licenses. Generally, shareholders may not broker real estate for the corporation.

Franchise

A franchised brokerage is an independently-owned company that enters into a licensing arrangement with a franchisor to participate in various benefits offered in exchange for compensation.

Limited partnership

A limited partnership consists of general partners and limited partners. General partners are wholly responsible for business operations, while limited partners are investors who participate only in business profits. The general partners typically receive compensation for their management responsibilities.

Can a limited partnership broker real estate? If so, what are the requirements.

A limited partnership may broker real estate. However, limited partners may not broker real estate for the partnership. State laws may require the general partners to have active or inactive broker's licenses. Limited partners need not be licensed for the partnership to broker real estate.

Can a non-profit broker real estate?

A non-profit organization may not broker real estate.

Can a sole proprietorship broker real estate?

A sole proprietorship may broker real estate if properly licensed.

Advertising Regulations

Advertising must not be misleading, and the brokers identity must be on all advertisements.

What happens to a Corporation for Profit when a stock holder, director, or officer dies?

"perpetual" existence: the corporation survives the death of any of the stockholders, directors, or officers

A broker or agent who wants to undertake business brokerage needs basic proficiency in accounting. In particular, one must know how to read and interpret:

- income, expenses, and profit on an income statement - assets, liabilities, and net worth on a balance sheet

Marketing Steps (3)

1. Marketing Plan 2. Selling the Prospect 3. Obtaining Offers

Data that brokers are responsible for managing (5)

1. Property data 2. Buyer data 3. Tenant data 4. Client data 5. Market data

Listing Steps (4)

1. Prospecting 2. Pricing 3. Listing Presentation 4. Negotiating the agreement

Employee / broker relationship. What can the broker require from the independent contractor? Who is responsible for income & security taxes? Does the Broker withhold taxes? Can the broker provide benefits?

1. a broker can impose a sales methodology. In addition, a broker can enforce all office policies, including hours, meeting attendance, and telephone coverage. 2. a broker must withhold income taxes and pay unemployment compensation tax on behalf of an employee 3. an employee may receive the benefits enjoyed by the broker's non- selling employees

Transaction-specialized brokerages

Brokerages often organize around a particular type of transaction. Thus, there are companies that specialize in apartment rentals, office rentals, exchanges, business brokerage, and, most commonly, residential sales.

Collusion

Collusion is the illegal practice of two or more businesses joining forces or making joint decisions which have the effect of putting another business at a competitive disadvantage. Businesses may not collude to fix prices, allocate markets, create monopolies, or otherwise interfere with free market operations.

Buyer- and seller-oriented brokerages

Companies sometimes specialize even further by choosing to represent only one side in a transaction. Thus a brokerage may represent only commercial tenants, or only residential buyers, or some other limited type of client.

Conversion

Conversion is the act of misappropriating escrow funds for the broker's business or personal use. More serious than mere commingling, conversion is effectively an act of theft: using monies which do not belong to the broker. (Brokers responsibility, not sales agent)

Sherman Antitrust Act

Enacted in 1890, the Sherman Antitrust Act prohibits restraint of interstate and foreign trade by conspiracy, monopolistic practice, and certain forms of business combinations, or mergers. The Sherman Act empowers the federal government to proceed against antitrust violators.

Do real estate consultants who offer advisory services to the public need a real estate license?

In most states, yes.

Limited partnership taxation

Limited partners are taxed once, on profits distributed by the partnership.

Market allocation

Market allocation is the practice of colluding to restrict competitive activity in portions of a market in exchange for a reciprocal restriction from a competitor: "we won't compete against you here if you won't compete against us there." Example on page 179.

Taxation of non-profit corporations

Non-profit organizations are not subject to taxation.

Price fixing

Price fixing is the practice of two or more brokers agreeing to charge certain commission rates or fees for their services, regardless of market conditions or competitors. In essence, such pricing avoids and disturbs the dynamics of a free, open market. Example on page 179.

Liability of joint venture

Principal parties in the joint venture share liability, but may not obligate the other co- venturers to agreements outside of the joint venture project.

Business liabilities acquired in a corporate stock sale include (2)

Short term debt (ex. accounts payable) Long term liabilities (ex. mortgages and leases)

Bulk Sales Act

The Bulk Sales Act protects creditors against loss of collateral in an indebted business through the undisclosed sale of the business's inventory. If a business sells over half of its inventory to a buyer, the act declares that the sale is a bulk sale, and, as such, is potentially an asset sale. Since a creditor could lose security in such a sale, the seller must disclose the names of creditors to the buyer in a Bulk Sales Affidavit. The buyer must notify the creditors of the sale, who may then take appropriate action to secure their loans.

CAN-SPAM Act. What does the abbreviation stand for? What are the main rules? (3)

The CAN-SPAM Act (Controlling the Assault of Non- Solicited Pornography and Marketing Act of 2003) supplements the Telephone Consumer Protection Act (TCPA). It 1. bans sending unwanted email 'commercial messages' to wireless devices 2. requires express prior authorization 3. requires giving an 'opt out' choice to terminate the sender's messages.

Telephone Consumer Protection Act. What does it address? What are the main rules (3)

The TCPA (Telephone Consumer Protection Act) addresses the regulation of unsolicited telemarketing phone calls. Rules include the following: 1. telephone solicitors must identify themselves, on whose behalf they are calling, and how they can be contacted 2. telemarketers must comply with any do-not-call request made during the solicitation call 3. consumers can place their home and wireless phone numbers on a national Do-Not-Call list which prohibits future solicitations from telemarketers.

investor in syndication

The investors' role is to provide funds. Investors in a syndication have little or no role in managing the investment.

A Business Broker must have what skills? (3) What kind of team? (3)

To be competent in this brokerage specialty, a business broker must have specialized skills concerning transactions, accounting, and pricing. A business broker must also rely on a professional team. Members of this team would include the client's legal counsel, accountant, and, preferably, a professional appraiser.

EEOC

U.S. Equal Employment Opportunity Commission

UCC. What does the abbreviation stand for? What does it regulate?

Uniform Commercial Code (UCC). The Uniform Commercial Code regulates the sale of personal property on a state-by-state basis, and forms the basis for standardized sale documents. Standard documents include promissory notes, security agreements, and bills of sale.

The most common transaction documents in business brokerage are (4)

a sale contract, an assignment or real estate sale contract, a no- compete agreement, and a consulting agreement.

Business brokerage

is effecting a sale or exchange of an existing business. In most cases, the sale of a business entails the simultaneous transfer of an estate in land, whether a leasehold or a fee. Thus to sell businesses, a broker must generally hold a real estate license.

sale contract

sets forth all terms and conditions of the agreement, including exactly what is being sold.

liability of sole proprietorship

sole proprietors are personally liable for their own debts and actions and those of employees while performing business duties; proprietors may be sued personally

Enterprise Brokerage

sub-category under Business Brokerage. concerns a larger company, usually a corporation, where the transaction involves the sale of stock and multiple real estate parcels leased or owned by the seller.

There are generally two types of business sale transaction for a business broker to be aware of

the asset sale and the stock sale

What happens when the business owner for a sole proprietorship dies?

the business dies

Who manages non-profit corporations

A board of directors and officers manage operations.

Who oversees the business in a Corporation for Profit?

A board of directors elected by stockholders oversees the business.

Independent brokerage

A brokerage that is not affiliated with a franchise is an independent agency. Many independent agencies participate in networks on a local, regional, or national basis. Such networks expose the independent broker to a larger market without compromising individual identity.

Licensing for a business broker

A business broker generally must have an active real estate license. In addition, the broker may need to have a valid securities license since a transaction may entail the sale of securities.

Business trust? real estate investment trust?

A business trust is a group of investors who invest in a pooled trust fund managed by their elected trustee. The trustee purchases investment assets and distributes profits and gains to the trustors. A business trust that invests primarily in real estate and meets certain other requirements is a real estate investment trust (REIT) and receives special tax treatment.

Can a business trust broker real estate?

A business trust may not broker real estate, but it may buy and sell its own real estate assets.

Cooperative association

A cooperative association is a non-profit, tax-exempt alliance of individuals or companies formed to promote common goods or services.

Corporation for profit Business

A corporation is a legal entity owned by stockholders. A corporation for profit consists of one or more persons authorized to conduct business for profit

General Partnership

A general partnership is a for-profit business consisting of two or more co-owners who have agreed to share business profits. Unlike a corporation, the general partnership is not a distinct, legal entity, although a corporation may be a partner in a general partnership.

Can a general partnership broker real estate? If so, what are the requirements.

A general partnership may broker real estate if properly licensed. State law may require one or all partners to hold active or inactive broker's licenses.

Joint venture

A joint venture is a partnership formed to complete a specific business endeavor, such as a real estate development. Individuals, general and limited partnerships, and corporations may participate

Can a joint venture broker real estate?

A joint venture may broker real estate, provided the co-venturers are duly licensed.

Non-profit corporation

A non-profit corporation is a corporate entity which is not legally entitled to generate profit.

real estate syndication

A real estate syndication is a form of investment in which two or more investors contribute capital to a pool for the purpose of acquiring, managing, and selling an investment property for a profit.

co-brokerage

A transaction involving a cooperating subagent is called co-brokerage. In a co-brokered transaction, the listing broker splits the commission with the "co- broker," typically on a 50-50 basis.

Why are listings more likely to generate revenue (working with a seller rather than a buyer)?

In the absence of an exclusive buyer representation agreement, a buyer may move from one agent to another without making any commitment. Agents can spend considerable time with a buyer and earn nothing. Hence the special value of a listing: it is likely to generate revenue.

Commercial and residential brokerages

Many brokerages deal primarily with limited types of property: residential, commercial, industrial, undeveloped land, etc. In practice, most residential companies conduct a small amount of commercial brokerage, while commercial brokerages tend to deal strictly with retail, office, industrial, or land properties.

Clayton Antitrust Act

The Clayton Antitrust Act of 1914 reinforces and broadens the provisions of the Sherman Act. Among its prohibitions are certain exclusive contracts, predatory price cutting to eliminate competitors, and inter- related boards of directors and stock holdings between same-industry corporations. The Clayton Act also legalizes certain labor strikes, picketing, and boycotts.

Contingency Period aka Pre-closing Period

The time period between contracting and closing

Limited partnership liability

a limited partner must make an investment, which subsequently comprises the extent of the partner's liability. a general partner bear sole liability for debts and obligations

Earnest Money

a portion of the price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer. earnest money allows the buyer additional time when seeking financing. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account.

Stock Sale

a purchaser acquires complete ownership of a business, including the legal corporate entity, all assets, all financial liabilities, and any current or future legal liabilities arising from incidents that have occurred prior to the sale. A purchaser may prefer a stock sale to avoid creating a new business entity or to benefit from a possible tax advantage. In addition, a stock sale keeps a business identity intact, which can be very valuable.

liability in general partnership

all partners bear full liability for debts and obligations jointly and severally

Participants in a syndication may be? Most often?

any legal entity, for example, corporations, partnerships, individuals, and joint ventures. Most often, a syndication is structured as a limited partnership.

Most brokerages maintain two categories of property data..

available properties, and all properties in the market area

Taxation of Sole Proprietorship

business profits are taxed once as the proprietor's personal income

Business practices and behaviors which violate antitrust laws include (7)

collusion, price fixing, market allocation, bid rigging, restricting market entry, exclusive dealing, and predatory pricing.

Why must a business broker evaluate a buyers income and expenses?

in order to determine what the business may be worth to a buyer. This often involves interpreting which income and expense items will change after the business is sold. Ex. Seller employs children. Buyer is a bachelor with no children.. must account for expenses to hire.

sole proprietorship

is a business owned by a single individual

no-compete agreement

is a seller's covenant, for compensation, not to compete with the buyer under prescribed conditions and time periods.

assignment or real estate sale agreement

is an agreement for transferring any and all real property involved in the transaction.

consulting agreement

is an employment agreement that hires the seller to assist the buyer in taking over business operations.

The process of business brokerage

is similar to real estate brokerage: a broker secures a listing, procures a purchaser, and facilitates the closing. Once a ready, willing, and able buyer is found, the broker earns a commission.

syndicator

is the organizer and usually the party who provides the expertise to undertake the acquisition, management, and sale of the property.

Violations of fair trade and anti-trust laws may result in

may be treated as felonies, and penalties can be substantial. Loss of one's license is also at stake. Brokers are well-advised to understand and recognize these laws.

NAR

national association of realtors. largest trade organization in the world. promotes ethics and education in the industry. NAR realtors must complete 3 hours of training every 4 years

In some states, business brokerage is classified into (2)

opportunity brokerage and enterprise brokerage in accordance with the size of the business being sold.

taxation of Corporation for Profit?

owners are double-taxed on business profits; corporate profits are taxed and after-tax dividends distributed to shareholders are taxed again as personal income

taxation of general partnership

partners are taxed once on their respective partnership profits; partnerships do not have double-taxation

In residential brokerage, available property basically consists of

properties listed in MLS and for sale by owner properties

The critical difference between selling a business and selling real estate is

selling a business includes the transfer of business income, personal property assets, and, possibly, liabilities, in addition to real property.

liability of Corporation for Profit? Who and what are they liable for? What Act is responsible for this?

shareholders of the corporation are only liable to the extent of the value of one's shares; officers and directors may be held personally liable for the corporation's actions under the Sarbanes-Oxley Act of 2002

Opportunity Brokerage

sub-category under Business Brokerage. concerns a small business, usually a proprietorship or partnership, where the transaction consists of a sale of assets and an assignment of a lease.

The assets of a business include two types of assets, what are they? Examples of each?

tangible and intangible tangible - cash and marketable securities, inventory, trade fixtures and equipment, real property, accounts receivable. intangible - the company name, trademarks, copyrights, licenses, contracts for future sales of goods or services, goodwill

The primary benefit of a syndication is

that investors can participate and profit in a venture that would otherwise be beyond their individual financial and managerial capabilities. Financial benefits include income, appreciation, and possible passive loss tax deductions resulting from depreciation.

Commingling

the act of mixing the broker's personal or business funds with escrow funds. A broader definition of commingling includes the failure to deposit earnest money into escrow in a timely manner. (Brokers responsibility not sales agent)

formation of general partnership

the partnership is formed by a written or oral partnership agreement with or without a financial investment by either partner

dissolution in general partnership

the partnership may be terminated through mutual agreement, withdrawal or death of a partner, or by legal action

Asset Sale

the purchaser takes possession of some or all of the assets of the business, as well as the real estate, in exchange for the sale price. The purchase usually does not include acquiring the existing business entity or its liabilities. An asset sale is preferred by buyers who want to buy only portions of a business, or to avoid liabilities inherent in a stock purchase.

A business's profit is

the revenue remaining from gross income after all expenses have been paid.

There are two groups of parties in a syndication:

the syndicator and the investors.

formation of a Corporation for Profit? What makes a corporation domestic?

to incorporate, principal parties must complete and file articles of incorporation in accordance with state law; a corporation is domestic if it is headquartered in the state where the articles of incorporation were filed. Otherwise, the corporation is a foreign corporation