• Coblentz’s International Legal Alliance TAGLaw named “Elite” by Chambers & Partners

    Coblentz’s international legal alliance, TAGLaw®, has again been recognized by Chambers & Partners as “Elite” for 2023—the highest ranking awarded to legal networks and alliances. This is the tenth time TAGLaw has received the distinguished “Elite” designation since Chambers & Partners began ranking legal networks and alliances in 2013.

    In selecting networks and alliances for their “Elite” status, Chambers & Partners pays particular attention to the quality of the member firms, their global reach, and the value that the alliance provides to its member firms. Member firms have exceptional reputations for quality of service and client satisfaction, and strive to cooperate to provide resources and expertise as if they were right down the hall from one another.

    As the Northern California law firm representative to TAGLaw, Coblentz is able to access a network of exemplary regional, national and international legal resources to help us better serve our clients. TAGLaw, with a global footprint in over 90 countries, has leading firms in over 160 jurisdictions providing legal services to companies ranging from the Fortune 5000 and leading SMEs to high net worth individuals. With expertise in dozens of practice areas and countless industry sectors, TAGLaw offers a substantial capability to its members’ clients. This capability is expanded by TAGLaw’s unique relationship with its sister alliance of accounting firms, TIAG, providing members and clients with the multidisciplinary expertise needed in today’s business world.

    Coblentz partner Paul Tauber is a member of the Advisory Board and chair of the Global Strategy Committee of the TAG Alliances, assisting in reviewing prospective new members, offering feedback for the planning of international conferences, and providing valuable guidance on future plans and initiatives.

    Posted on: February 27, 2023 Tags: Categories: News

  • Mayor Breed Issues Executive Directive to Address City’s Housing Crisis

    In an Executive Directive dated February 7, 2023, Mayor London Breed declared that “San Francisco needs to fundamentally change how we approve and build housing.” The Directive, titled “Housing For All,” comes on the heels of the Board of Supervisors’ January 31st adoption of its updated Housing Element, addressing San Francisco’s Regional Housing Needs Allocation (RHNA) of a daunting 82,000 housing units for the next eight-year cycle. (See earlier posts here and here).

    With high construction costs and lengthy project approval processes, San Francisco produces only a few thousand units each year. Combining these ongoing challenges with the steep decline in demand for office space resulting from the pandemic, San Francisco is facing both an ongoing housing crisis and a less vibrant Downtown. The Mayor’s Executive Directive pointedly acknowledges these issues, identifies office-to-residential conversions in Downtown as one potential way to help resolve them, and directs that City officials and departments take specific, immediate actions to facilitate more housing development in the City.

    The following are the key actions regarding housing production, generally listed by implementation deadlines:

    • Create New Funding Mechanisms: By February 14, 2023, the Office of Economic and Workforce Development was directed to advance legislation to create new financing opportunities for pipeline projects that have been unable to move forward due to financing constraints, including authorizing the creation of new infrastructure financing districts (IFD). On that date, legislation was introduced by the Mayor and Supervisor Walton to create and establish rules for an IFD for the Potrero Power Station project site south of Pier 70, which would allow construction to commence on the project’s first 105 residential units.
    • Remove Barriers for Office-to-Residential Conversions: By April 1, 2023, the Planning Department and DBI are directed to propose legislation to amend code requirements to facilitate the conversion of existing office uses to residential uses in Downtown San Francisco to spur pandemic recovery efforts. (Recognizing the opportunity that office-to-residential conversions present to help both the housing crisis and Downtown’s vibrancy, the Board of Supervisors also adopted a resolution on February 14, 2023 asking the Planning Department to report on potential candidates for conversion in the Downtown core, and to issue public facing criteria for office to residential conversions.)
    • Reduce Procedural Requirements that Impede Housing Production: By May 1, 2023, the Planning Department is directed to advance an initial package of legislation that will remove unnecessary fees and procedural constraints that obstruct the development of housing, including eliminating Conditional Use Authorizations for certain types of housing developments.
    • Housing Element Accountability and Oversight: An Interagency Implementation Team is charged with creating a Housing Element Action Plan that will describe specific steps for achieving the goals and actions set forth in the Housing Element and meeting the City’s RHNA obligations, to be presented to the Mayor by July 1, 2023.
    • Reform Restrictive Zoning Controls: By January 31, 2024, the Planning Department is directed to present rezoning proposals that will allow the City to meet its RHNA target.
    • Permit Review Timelines: City departments involved in development permitting, including Planning and the Department of Building Inspection (DBI), are directed to review their permit processes and reduce overall permitting timelines by at least 50% by February 1, 2024. Also by that date, the Planning Department is directed to eliminate the current Preliminary Project Application process and establish new procedures for providing early design feedback to large projects.
    • Revise Inclusionary Housing Requirements: Following issuance of recommendations from the Controller’s Office (no date specified), the Planning Department is directed to propose modifications to the City’s inclusionary housing program and draft legislation that will increase overall housing production while serving the City’s affordable housing goals.

    We will continue to monitor the City’s various legislative and administrative responses to the Mayor’s Directive and provide further updates.

    Posted on: February 21, 2023 Tags: Categories: Blogs

  • Landlords File Lawsuit Challenging Legality of San Francisco’s Empty Homes Tax

    Local landlords and owner-groups filed a lawsuit in San Francisco Superior Court last week in response to the recently-passed Proposition M, also known as the Empty Homes Tax Ordinance. We previously covered the new San Francisco legislation here. The Empty Homes Tax Ordinance imposes an Empty Homes Tax (the “Tax”), which ranges from $2,500-$20,000 per unit, applies to vacancies of more than 182 days in a tax year within residential buildings with three or more units, and is effective as of January 1, 2024. It passed in November 2022 with 54.5% of the vote.

    The lawsuit was filed by the San Francisco Apartment Association, the Small Property Owners of San Francisco Institute, the San Francisco Association of Realtors, and four individual landlords. The lawsuit argues that the Tax is intended to force property owners to rent their vacant units by imposing burdensome charges, and thereby the Tax violates the Takings Clause of the Fifth Amendment of the U.S. Constitution and the state Ellis Act by penalizing owners for exercising their rights under those provisions.

    The lawsuit also argues that the Tax threatens the constitutionally protected privacy interests of due process and equal protection by, among other things, exempting units that are rented to strangers but not units that are rented to close family members. The Empty Homes Tax Ordinance provides that the Tax applies when a unit is vacant (unoccupied, uninhabited, or unused) for more than 182 days in a tax year, and none of the exemptions enumerated within the Empty Homes Tax Ordinance apply. One exemption is where the unit is subject to a bona fide lease with a third party. This so-called “Lease Period” exemption does not apply to a lease with a close family member. In other words, a unit is considered vacant and is subject to the Tax if a close family member leases the unit but does not occupy or use the unit for more than 182 days in a tax year, whereas if the unit is leased to a bona fide third party, that third party need not occupy or use the unit at all for the owner to avoid the Tax.

    We will monitor the lawsuit and continue to provide further updates when they are available.

    Contact Real Estate attorney Caitlin Connell at cconnell@coblentzlaw.com for additional information.

     

    Posted on: February 16, 2023 Tags: Categories: Blogs

  • Distinguishing Investment and Business Expenses – Family Office Structuring After Lender

    By Jessica Wilson

    Structuring a family’s investment activities can be complex. Across assets, activities, relationships and the particular circumstances of each family member-investor, a family office will typically provide a spectrum of services. While the role of the family office is, in part, to substitute the range of independent advisors needed, structuring a family office in a tax-efficient manner can be difficult due to the limitations that the tax law places on related persons and managing one’s own investments. One such limitation has been the inability to deduct trade or business expenses related to the family office. However, recent court cases offer new guidance to family offices that may entitle taxpayers to a deduction for trade or business expenses if the family office is structured properly.

    Background

    Lender Management, LLC v. Commissioner of Internal Revenue, T.C. Memo. 2017-246 (2017), provides family offices with a potential way to obtain trade or business expense deductions under Internal Revenue Code (the “Code”) Section 162 in connection with rendering investment management services.

    Prior to tax reform legislation enacted in December of 2017 (the “2017 Tax Act”), Code Section 212 allowed taxpayers to deduct expenses incurred for the production or collection of income, to the extent such expenses exceeded 2% of the taxpayer’s adjusted gross income. The 2017 Tax Act suspended miscellaneous itemized deductions under Code Section 212 from 2018 through 2025.

    Code Section 162, on the other hand, has not been suspended. Section 162 allows a taxpayer to claim as a deduction all of the ordinary and necessary expenses paid or incurred by the taxpayer during the taxable year in carrying on a “trade or business.” For example, payment of salaries and other compensation is deductible as a trade or business expense. However, it has long been held that an investor is not, by virtue of activities undertaken to manage and monitor his or her own investments, engaged in a trade or business.

    Therefore, given the suspension of deductions under Section 212, it would be beneficial for the owners of income-producing activities if those activities were treated as a trade or business expense for tax purposes rather than as an investment activity engaged in for the production and collection of income.

    Lender Facts

    A recent case that many taxpayers and practitioners have been relying on to work around the suspension of Code Section 212 is Lender Management, LLC v. Commissioner. The Lender case involved a family business consisting of multiple LLCs. Every LLC at issue in Lender was co-owned, whether individually or through an entity, by the child, grandchild or great-grandchild of the family patriarch, or by the spouse of one of those people. Lender Management, LLC (“Management LLC”) directed the investment and management of assets owned by three investment LLCs, each of which were owned by Lender family members. Management LLC was also owned indirectly by two Lender family members. Management LLC owned only a minority interest in the investment LLCs.

    The operating agreements of the investment LLCs provided Management LLC with a profits interest as compensation for its services to the extent that it successfully managed its clients’ investments. While Management LLC was owned by, and provided services to, Lender family members, it also held itself out as an active management entity to various governmental authorities, clients, investment banks, hedge funds and private equity funds. While each investor in the investment LLCs was in some way a member of the Lender family, Management LLC’s clients did not act collectively. The Tax Court noted that they were geographically dispersed, and some of them were even in conflict with each other. Thus, it did not simply make investments on behalf of the Lender family group. It provided investment advisory services and managed investments for each of its clients individually, regardless of the clients’ relationship to each other.

    The Tax Court found that Management LLC was engaged in a trade or business for purposes of the deduction under Code Section 162. The Tax Court focused its attention on the activities of Management LLC and the family relationship among the investors. While family relationships are generally subject to heightened scrutiny, Lender Management’s activities and the positive facts in this case satisfied the Tax Court and the deduction under Section 162 was allowed.

    Hellmann

    About a year after the Lender decision, the Hellmann family petitioned the Tax Court for a similar issue. However, the Hellmann family had less favorable facts.

    The Hellmanns were a group of family members who owned and operated GF Family Management, LLC (“GFM”). Like Lender, the issue raised in Hellmann was whether GFM was engaged in a trade or business within the meaning of Section 162, which would entitle it to claim ordinary business expense deductions for its operating costs. The IRS, as it did in Lender, argued that GFM was not engaged in a trade or business.

    The Hellmann case eventually settled without a ruling, so it cannot be certain how the Court would have ruled. Prior to settlement, however, the Tax Court issued an order outlining some of its preliminary thoughts, which highlighted the differences between Hellmann and Lender:

    • There were four Hellmann family members related to the court case; they all resided in the same city, had a good relationship, and the family office made investment decisions for the group as a whole. While the Lender family members, on the other hand, were geographically dispersed, in some cases did not get along or did not know each other at all, and the family office made decisions for each family member separately.
    • The Hellman family members owned 99% of the relevant investment partnerships, and each of the four family members held a 25% interest in the family office. In contrast, the Lender family office did not own a significant portion of the LLCs it managed, and most of the family members who invested in the LLCs did not have an ownership interest in the family office.

    Concluding Thoughts

    While the Lender case does provide a helpful look at what the Tax Court views as a valid trade or business for purposes of deducting expenses under Code Section 162, it is important to keep in mind that the facts are key. The structure in Lender may not be the typical family office structure, but for clients with the appropriate expertise and family structure, Lender potentially provides an avenue for deducting family office expenses under Section 162.

    Each family office attempting to deduct expenses under Section 162 should analyze its unique circumstances in connection with these cases. This article was authored by Jessica Wilson. If you are interested in establishing a family office, restructuring an existing family office to fit within this guidance, or would like to learn more about ways to maximize value to your family, please contact Jessica Wilson at jwilson@coblentzlaw.com or James Mitchell at jmitchell@coblentzlaw.com.

    To view a PDF version of this article, please click here.

    Posted on: February 2, 2023 Tags: Categories: Publications

  • With Preliminary Approval from the State in Hand, the San Francisco Board of Supervisors Adopts an Updated Housing Element

    By Daniel Gershwin

    On January 31, the San Francisco Board of Supervisors unanimously and finally approved an updated Housing Element, on the schedule we referenced in our prior post. The City had obtained a compliance letter from the California Department of Housing and Community Development (HCD) on January 20, which confirmed that the City’s final draft element “meets the statutory requirements” and will comply with State Housing Element Law when it is submitted to and approved by HCD.

    This puts the City in “substantial compliance” with state requirements and should preclude developers from successfully invoking the “Builder’s Remedy,” a provision of the Housing Accountability Act that allows developers to bypass local zoning and approval processes to build certain housing projects.

    The City will now shift its focus to Housing Element implementation, including an ambitious and robust rezoning effort. HCD’s letter frames the City’s rezoning commitment to include “permitting multifamily uses without discretionary action and requiring a minimum density of 20 units per acre.” This refers to programs in the Housing Element intended to provide a pathway for delivery of units affordable to lower-income households. These changes, if implemented, would be particularly noticeable in neighborhoods with traditionally lower density and active neighbors who pursue discretionary review of residential projects, and would come after a public process sure to attract significant attention and interest.

    We will continue to monitor Housing Element implementation and provide further updates when they are available.

    Contact Real Estate attorney Dan Gershwin at dgershwin@coblentzlaw.com for additional information.

    Posted on: February 1, 2023 Tags: Categories: Blogs