When it comes to zoning and land use regulations, things are not always as they appear. You may want to move into a building that housed a similar operation and sign a lease, only to find that the prior use had been grandfathered.

“There are all kinds of things out there that are not necessarily apparent that you need to check out before you do anything,” says Catherine A. Cunningham, a director at Kegler, Brown, Hill & Ritter. “One of the unique features of zoning is that it is not a state law, it’s a local law under the police powers of the local government. Every local government has its own rules. They have some commonality in how they do things, but the rules and regulations that you would be subject to are unique to the jurisdiction where the property is located.”

Smart Business spoke with Cunningham about the importance of reviewing local ordinances and regulations when considering a business site.

Do companies neglect to consider local ordinances and regulations when looking at potential locations?

It sometimes happens that way. Companies should consider all local ordinances and regulations to make sure that when they choose a location, they are able to do all the operations that they intend at that location.

Normally, most jurisdictions require that if you are constructing a new building, changing a use, or expanding an existing facility that you get a certificate of zoning compliance or zoning clearance from the local government to ensure that you are in compliance before you get too invested in the project.

What common mistakes do businesses make when choosing a location?

They might choose a location where the zoning doesn’t permit what they do, and sometimes they move to a location and find out they can’t expand or the building had a prior zoning violation that they’ll inherit.

Part of the due diligence, anytime you’re going to construct, lease or buy, is to check to make sure that what you want to do and the way you want to use the property are permitted under the current zoning law.

Do companies sign leases before realizing they have a zoning or regulation issue?

That happens more often than it should, in my view. Very often a business is dealing with someone it’s leasing from who is assuring its that it’s OK. Sometimes the company just makes a call to a government authority and talks to somebody, assuming that’s an adequate approval, when really what you need to do is to file an application and be sure that the governmental authority has had adequate time to review all of your information and make an approval.

Often it appears, or it is assumed, that a project or proposed use of property is in compliance with zoning, but then, when the government understands the exact nature of the project or operation, it may find it doesn’t comply with local zoning. Then companies can be prohibited from using the property or from making the expansion or adding the equipment that they think they need in their operations.

In many cases, businesses that have manufacturing facilities, hazardous materials or other special uses, such as outside storage, may trigger special permits from the local government regulator. A lot of times those businesses aren’t aware those permits are required, and sometimes they don’t qualify for the permits and can’t use that location.

Once you identify a property you want to look into, it’s critical to contact the local government or legal counsel to make a determination of how the property is zoned, whether you can use it the way you intend, and to try to get a certificate of zoning compliance or authority to use it that way so you’re cleared before leasing or buying a building.

EVENT: Managing Labor & Employee Relations Seminar will take place March 5. Click for more information.

Catherine A. Cunningham is a director at Kegler, Brown, Hill & Ritter. Reach her at (614) 462-5486 or ccunningham@keglerbrown.com.

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter

Published in Columbus

Banks have been dealing with evolving regulations for as long as banks have been in existence. So while the Dodd-Frank Wall Street Reform and Consumer Protection Act has given some in the banking industry cause for worry, the critical issue is how institutions will evaluate the potential effect and cope with increased regulations. While some banks might buckle under the threat, others will adapt to the new laws and regulations without allowing the complexity and costs of compliance to become an impediment.

“Savvy institutions recognize that the key is aligning their adjustments with their business models and processes,” says Jim Stempak, a principal at Crowe Horwath LLP. “By integrating compliance with normal business operations, banks stand to extract greater value from their business processes.”

Smart Business spoke with Stempak about how banks can find opportunity in new and revised regulations where others find dismay.

What regulations must banks be prepared to deal with in the near term?

Compliance officers are struggling with the efforts of bank regulators as they implement regulations under Dodd-Frank. Banks do not know what to expect from future regulatory examinations or where examiners will focus, so those expectations remain a moving target.

Questions also remain about the range of authority of the Consumer Financial Protection Bureau (CFPB), the agency established by Dodd-Frank. All banks will be directly or indirectly affected by CFPB rulemaking. Some will be required to work with this new agency’s examiners, who will be conducting exams and assuming responsibility for consumer compliance regulations in certain banks (those with more than $10 billion in assets). The CFPB is in the process of bringing its employees up to speed on the agency’s mission. Banks, however, are waiting without clear direction regarding the scope and timing of the CFPB examination process and how the new agency will coordinate efforts with other federal bank regulatory agencies. Financial institutions will be forced to contend with this environment of uncertainty for quite some time. Meanwhile, there are some measures that banks can take now that will allow them to successfully navigate this changing environment.

How have banks historically coped with increased regulation while managing to stay successful?

As the dust settles on Dodd-Frank’s initial effects, banks can begin to see that successful adaptation comes down to taking a measured and systematic approach to integrating the requirements with normal processes, often using enhanced technology. However, a silo approach to compliance is unlikely to succeed. Saddling the compliance officer with the sole responsibility of adapting to this new reality is unrealistic. Instead, success requires that key managers throughout the organization get on board. Line-of-business managers, for example, will need to integrate Dodd-Frank compliance into their daily activities, while IT managers will need to adjust existing technology platforms to integrate processes that facilitate compliance, or possibly design entirely new processes and technologies.

History offers examples of how banks learned to turn difficult regulatory requirements into opportunities. Take, for instance, the Know-Your-Customer (KYC) identification programs required by Bank Secrecy Act (BSA) regulations. This mandated banks to catalog their customers’ banking activity to better identify suspicious behavior. To do this, some banks used the information they gathered to develop a profile of each customer.

Another, more effective, approach manipulated existing processes and technology platforms to better gather information while sending a message to each customer that outlined how the bank’s inquiries were intended to better understand each customer and provide him or her with personalized products and services. As a result, the customer experience was improved, new accounts were opened in less time and many cross-selling opportunities became available to the bank. The customer service enhancements were in addition to establishing a solid platform for efficiently and effectively complying with the regulatory requirements.

Similar to what was done for KYC compliance efforts, information obtained through Dodd-Frank mandated data collection also likely will provide opportunities for banks to use the information for marketing and other value-added opportunities. By ingraining the requisite activities in their existing processes, banks were able to successfully adapt to the regulations rather than treating them as if they were burdensome compliance activities.

How can organizations best cope with complying with these regulations?

To facilitate compliance with new or revised regulations, organizations should develop cross-functional teams that alert the organization to changes that are likely to be required or that are coming. Teams can begin to develop strategies for implementing new or revised processes and technology. This will necessitate involvement from thought leaders from all levels of the organization, rather than taking an approach focused solely on compliance. Teams should develop a client-focused experience that also improves product development and existing processes as they work to bring the organization into compliance.

When dealing with certain consumer lending regulations, the team should consist of management representatives from areas including mortgage origination, consumer lending, regulatory compliance, IT and marketing. Teams should coordinate efforts to monitor specific regulations that affect consumer financial products, analyze the customer’s fit with the product and deliver products fairly to all consumers. This is especially important considering CFPB will be carefully evaluating compliance with new and revised regulations for consumer financial products, including mortgage loans.

Every financial institution will be touched by the regulations and it is up to banks to take an integrative approach to compliance to make a smooth transition while positioning them to take a competitive advantage. This will allow them to comply with the regulations while simultaneously advancing their business.

Jim Stempak is a principal at Crowe Horwath LLP. Reach him at (214) 777-5203 or jim.stempak@crowehorwath.com.

Insights Accounting is brought to you by Crowe Horwath LLP

Published in Dallas

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is one of the largest pieces of legislation in history, and it has complicated the regulatory environment by increasing the government’s oversight, supervision and resolution authority over financial institutions.

“As a result of Dodd-Frank, there are more agencies with oversight over more and different types of institutions, so compliance can be difficult,” says Michael K. O’Connell, managing director and Financial Institutions Practice leader of Aon Risk Solutions. “There are a lot of new agencies and those with redefined roles. There is new regulation of over-the-counter derivatives, a new agency for enforcing compliance with consumer finance rules, reformed credit rating agency regulation, changes to corporate governance and executive compensation, the Volker Rule, new registration requirements for advisers to certain private funds and significant changes in the securitization market.”

Smart Business spoke with O’Connell and John George, account executive at Aon Risk Solutions, about safely navigating this new, stricter regulatory environment.

What are some of the risks for noncompliance that businesses face with Dodd-Frank?

You might immediately think of the obvious financial risks — fines, penalties and injunctions — of not complying with any regulation, including Dodd-Frank. But before you get to that point, your business can incur significant costs responding to a regulatory investigation. On the back end, there also can be reputational harm, which is hard to pre-quantify but can be quite impactful.

These risks are interconnected, increasing the need for financial institutions to maximize the value of their risk transfer spend. Expert help can aid with this process by using robust data and analytic tools that help financial institutions understand their exposure, develop their modeling capabilities and ultimately derive the most value from their investment in insurance and risk mitigation.

How has executive liability changed with Dodd-Frank, and how can companies protect themselves?

There definitely is increased pressure on corporate boards of directors. The provisions of Dodd-Frank create new obligations that will drive shareholder expectations and potentially lead to heightened executive liability exposure. Directors and officers (D&O) liability insurance is designed to protect individual directors and officers, as well as the corporate entity from governmental or shareholder investigations and/or legal proceedings.

It is important to understand the Dodd-Frank provisions of clawback compensation, where boards can force executives to pay back some of their compensation for wrongdoing, corporate governance and whistleblower activity within the context of your company’s D&O liability program. Pay close attention to policies’ definitions and exclusions to understand the extent of coverage available.

In these areas, it’s critical to discuss what you really want to cover and how to achieve that within the context of the policy in the current insurance market. Understanding the scope of coverage is especially important in Side A D&O policies, which can provide dedicated personal asset protection to individual directors and officers when the company is either prohibited from indemnifying or not able to indemnify.

What are the best ways for financial institutions to cover privacy and security liability?

Privacy and security continues to be an area of focus for financial institutions. At the same time that the volume of personally identifiable information is increasing, so is regulatory focus on and awareness of privacy and security risk. With this, it is important for financial institutions and others to really understand and tailor their privacy and security coverage to their exposure.

Base policy forms vary greatly and must be customized to ensure maximum possible coverage. Take a diagnostic approach to privacy and security liability. Review the scope of coverage for first- and third-party exposures in conjunction with your existing insurance program and discuss coverage priorities with experts to fully define what you’re seeking.

The breadth of coverage available has evolved, as have the service offerings that can be bundled with a risk transfer program. An example is with breach management, where insurers offer turnkey solutions that can help financial institutions quickly and effectively recover from a breach. This approach is popular among mid-tier financial institutions that may not have pre-established relationships and resources to quickly handle a breach.

What are some other risks financial institutions are facing with operations and compensation?

Some financial institutions continue to struggle to meet regulatory requirements while maintaining sound compensation strategies. As regulation shifts from being guidance-based to rules-based, for smaller banks the question is when they will have to comply. Regardless of size, all financial institutions are being tasked with balancing risks and results, creating controls to reinforce that balance and ensuring effective management of incentive compensation.  The first step in managing compensation compliance is identifying covered employees. The process, and ultimately the covered population, may vary by firm and is primarily determined by business mix. Often the most effective and well-received approach is to include risk adjustments at the time of award or deferral, with potential future forfeiture, for incentive compensation plans.

With the evolving issues related to compensation, executive liability, privacy and security, and other risks, it’s important for institutions to take an enterprise-wide approach to risk identification, quantification and mitigation. Using experts, many financial institutions accomplish this with the goal of keeping their risk perspectives current in the changing regulatory environment. Risk management professionals can help implement risk frameworks, analyze key risk scenarios and model risk, and then align an institution’s insurance and risk transfer program to their underlying risk profile.

Michael K. O’Connell is a managing director and Financial Institutions Practice leader of Aon Risk Solutions. Reach him at (212) 441-2311 or michael.oconnell@aon.com.

John George is an account executive at Aon Risk Solutions. Reach him at (248) 936-5264.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in Detroit

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is one of the largest pieces of legislation in history, and it has complicated the regulatory environment by increasing the government’s oversight, supervision and resolution authority over financial institutions.

“As a result of Dodd-Frank, there are more agencies with oversight over more and different types of institutions, so compliance can be difficult,” says Michael K. O’Connell, managing director and Financial Institutions Practice leader at Aon Risk Solutions. “There are a lot of new agencies and those with redefined roles. There is new regulation of over-the-counter derivatives, a new agency for enforcing compliance with consumer finance rules, reformed credit rating agency regulation, changes to corporate governance and executive compensation, the Volker Rule, new registration requirements for advisers to certain private funds and significant changes in the securitization market.”

Smart Business spoke with O’Connell and Jo Ellen Thelen, managing director, Aon Risk Solutions, about safely navigating this new, stricter regulatory environment.

What are some of the risks for noncompliance that businesses face with Dodd-Frank?

You might immediately think of the obvious financial risks — fines, penalties and injunctions — of not complying with any regulation, including Dodd-Frank. But before you get to that point, your business can incur significant costs responding to a regulatory investigation. On the back end, there also can be reputational harm, which is hard to pre-quantify but can be quite impactful.

These risks are interconnected, increasing the need for financial institutions to maximize the value of their risk transfer spend. Experts can aid with this process by using robust data and analytic tools that help financial institutions understand their exposure, develop their modeling capabilities and ultimately derive the most value from their investment in insurance and risk mitigation.

How has executive liability changed with Dodd-Frank, and how can companies protect themselves?

There definitely is increased pressure on corporate boards of directors. The provisions of Dodd-Frank create new obligations that will drive shareholder expectations and potentially lead to heightened executive liability exposure. Directors and officers (D&O) liability insurance is designed to protect individual directors and officers, as well as the corporate entity from governmental or shareholder investigations and/or legal proceedings.

It is important to understand the Dodd-Frank provisions of clawback compensation, where boards can force executives to pay back some of their compensation for wrongdoing, corporate governance and whistleblower activity within the context of your company’s D&O liability program. Pay close attention to policies’ definitions and exclusions to understand the extent of coverage available.

In these areas, it’s critical to discuss what you really want to cover and how to achieve that within the context of the policy in the current insurance market. Understanding the scope of coverage is especially important in Side A D&O policies, which can provide dedicated personal asset protection to individual directors and officers when the company is either prohibited from indemnifying or not able to indemnify.

What are the best ways for financial institutions to cover privacy and security liability?

Privacy and security continues to be an area of focus for financial institutions. At the same time that the volume of personally identifiable information is increasing, so is regulatory focus on and awareness of privacy and security risk. With this, it is important for financial institutions and others to really understand and tailor their privacy and security coverage to their exposure.

Base policy forms vary greatly and must be customized to ensure maximum possible coverage. Take a diagnostic approach to privacy and security liability. Review the scope of coverage for first- and third-party exposures in conjunction with your existing insurance program and discuss coverage priorities with experts to fully define what you’re seeking.

The breadth of coverage available has evolved, as have the service offerings that can be bundled with a risk transfer program. An example is with breach management, where insurers offer turnkey solutions that can help financial institutions quickly and effectively recover from a breach. This approach is popular among mid-tier financial institutions that may not have pre-established relationships and resources to quickly handle a breach.

What are some other risks financial institutions are facing with operations and compensation?

Some financial institutions continue to struggle to meet regulatory requirements while maintaining sound compensation strategies. As regulation shifts from being guidance-based to rules-based, for smaller banks the question is when they will have to comply. Regardless of size, all financial institutions are being tasked with balancing risks and results, creating controls to reinforce that balance and ensuring effective management of incentive compensation.

The first step in managing compensation compliance is identifying covered employees. The process, and ultimately the covered population, may vary by firm and is primarily determined by business mix. Often the most effective and well-received approach is to include risk adjustments at the time of award or deferral, with potential future forfeiture, for incentive compensation plans.

With the evolving issues related to compensation, executive liability, privacy and security, and other risks, it’s important for institutions to take an enterprise-wide approach to risk identification, quantification and mitigation. Using experts, many financial institutions accomplish this with the goal of keeping their risk perspectives current in the changing regulatory environment. Risk management professionals can help implement risk frameworks, analyze key risk scenarios and model risk, and then align an institution’s insurance and risk transfer program to their underlying risk profile.

Michael K. O’Connell is a managing director and Financial Institutions Practice leader at Aon Risk Solutions. Reach him at (212) 441-2311 or michael.oconnell@aon.com.

Jo Ellen Thelen is a managing director at Aon Risk Solutions. Reach her at (314) 854-0710 or joellen.thelen@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

Published in St. Louis

A loan through the U.S. Department of Housing and Urban Development isn’t for the faint of heart. The red tape can cause headaches for multifamily housing owners (“investors”) and real estate management companies not familiar with the ins and outs. However, with the proper guidance, you can achieve a true understanding of annual compliance requirements.

“Today, more and more investors in this economic environment are not able to get conventional financing, as they once used to, for their apartment buildings and multifamily housing complexes,” says Lori M. Crow, CPA, COS, associate director in assurance services for SS&G. However, HUD has been able to continuously insure and help fund these loans, she says.

“With many companies deciding to refinance with HUD, there are complexities to understand when moving into a heavily regulated environment, many of which investors and real estate management companies do not know about since they may have only used conventional financing for their apartment buildings,” she says.

Smart Business spoke with Crow about financing a multifamily housing loan through HUD and how to adhere to regulations.

Who finances with the Department of Housing and Urban Development and what are the benefits?

HUD issues insurance and direct loans to for-profit and not-for-profit entities. As far as for-profits, generally partnerships and LLCs participate in the program and receive insured loans. For example, a for-profit partnership approaches a third-party financial institution that deals with HUD; that institution will obtain the loan, but HUD insures it so in the event of any defaults the financial institution is protected. Nonprofits can have both insured and direct loans with HUD.

In fiscal year 2011, HUD insured mortgages for 442 projects nationwide — that’s approximately 60,000 apartment units with loans averaging $3.5 million.

The biggest benefit to a HUD loan is financial institutions aren’t 100 percent on the line; HUD is backing them up or insuring them in the case of default. Since the 2008 economic downturn, banks have been hesitant about the stability of apartment buildings and other multifamily complexes.

The loans have fixed interest rates, too. In 2011, 3.5 percent was the average fixed rate. Generally speaking, a HUD loan is 85 percent of the property’s appraised value and the partnership or LLC only needs to invest 15 percent equity into the property. Often, conventional financing is variable or for a lower amount.

What are the disadvantages of HUD financing?

Problems come from investors who are re-financing into HUD but aren’t as tuned in to the regulations. When investors obtain a HUD loan, a regulatory agreement is executed both by HUD and the owning entity, and there are a minimum of 10 types of compliance requirements that the owner must follow on an annual basis. As long as the owning entity understand these requirements, it’s not hard to follow them. However, a lot of investors moving into it for the first time don’t realize everything they signed on to.

Another factor is time. It’s a lengthy process. For example, it can take more than a year to close on a loan for an entity that already has an established relationship with HUD.

What regulations are most often not adhered to?

Annually, an independent HUD audit is required that will provide an opinion on both the financial statements, as well as compliance with the requirements as set forth in the Regulatory Agreement.  The three biggest non-compliance issues auditors identify are:

  • Unauthorized distributions. This is the biggest noncompliance problem. You cannot distribute cash back out to the investors more than twice a year based on HUD’s strict calculations of surplus cash. That differs from conventional loans, where you may be able to take money out of the property whenever there’s cash in the business.
  • Unauthorized loan of project funds. This is where an entity may loan money to a partner, another entity within management’s portfolio, or to any other related or nonrelated party.
  • Unauthorized change of ownership. This occurs when either the general or majority-limited partners exit or transfer their interest without HUD’s prior authorized approval.

There are other regulations to follow, as well, such as ensuring you have the proper internal controls over the federal programs and complying with affirmative fair housing rules.

What happens if an owning entity doesn’t comply with HUD regulations?

The auditor will qualify their opinion on compliance and provide detail findings of the noncompliance identified stating the issue, cause and effect, any questioned costs, the auditor’s recommendation for correction and management’s response to the finding.  Then the owning entity will have to follow up with implementing the corrective action, paying money back to the property, if necessary, or undertaking other actions to become compliant again. If it’s a significant noncompliance issue, the owning entity may be sent to the Departmental Enforcement Center (DEC), which then moves the noncompliance and the entity’s corrective action out of the local HUD office and this could prohibit the investor or management company from obtaining HUD financing for other properties in their portfolio.

Normally once the audit is submitted, you’ll hear from HUD in a couple of days. If you don’t, then there’s often a problem.

What’s your advice for those new to HUD loans?

Early in the stages of entering into a firm commitment with HUD, a CPA should become involved who has HUD expertise, somebody who audits similar entities on a day-to-day basis. A lot of times, CPAs are not engaged until transactions or unauthorized distributions have already occurred, normally when an owner is looking for a firm to complete its first annual audit. If an expert comes in early to assist the owning entity in understanding all the regulations, it will tremendously help with a clean transition into HUD financing.

Lori M. Crow, CPA, COS, is an associate director in assurance services for SS&G. Reach her at (440) 248-8787 or lcrow@ssandg.com.

Insights Accounting & Consulting is brought to you by SS&G

Published in Akron/Canton

The U.S. government views export control laws and regulations as serving a critical function in safeguarding national security and promoting foreign policy interests of the U.S.

“The regulatory regimes have imposed very significant penalties on certain companies and individuals for export control violations, so given the nature of how trade is conducted, and the threat of terrorism, there definitely seems to be greater scrutiny by regulators,” says Aneezal Mohamed, of counsel with Kegler, Brown, Hill & Ritter.

Smart Business spoke with Mohamed about how to ensure you are complying with export control laws.

Why should a company be concerned about export control laws?

Penalties for noncompliance could be very severe and hinge on how pervasive the noncompliance and violations are, whether the exporter has self-reported violations, etc. Penalties could include seizure of export and import shipments, criminal and civil penalties, appointment of a special compliance officer, debarment from exporting and employment ramifications.

Who administers the export control laws and who is subject to it?

Several agencies are involved, including the Department of State Directorate of Defense Trade Controls (DDTC), which administers the International Traffic in Arms Regulations (ITAR) and the Arms Export Control Act that control items considered defense articles and services; the Department of Commerce Bureau of Industry and Security, which administers the Export Administration Regulations (EAR) that control dual use technologies; the Department of Energy; U.S. Customs and Border Protection; and the Bureau of Census.

Every ‘U.S. person’ must comply with export control laws and regulations. All U.S. individuals and companies, and green card holders are considered U.S. persons under these laws.

What type of registration is required under ITAR?

Under ITAR, if you manufacture or export defense articles, you have to register with the DDTC. The annual registration fee ranges from $2,250 to $2,750. Disclosures required by the registration statement are technical and detailed, so getting expert counsel to help would be in your best interest. If you’re exporting defense articles or services, you’ll need licensing and approval from the DDTC.

What is the meaning of ‘export?’

Exporting is not only transmitting something outside of the U.S. If someone who is not a U.S. citizen or a green card holder is employed in your U.S. office and views controlled information, you have exported that controlled information to that individual’s country of citizenship; it’s called a ‘deemed export,’ and it is a violation of export control laws.

Exporting also includes sending or taking defense articles outside the U.S.; transferring ownership or control to a foreign person; transferring or disclosing technical data to a foreign person inside or outside the U.S.; and performing a defense service for a foreign person inside or outside the U.S.

What defense articles and services are controlled under ITAR?

Defense articles are any article or service specifically designed, developed, configured, adopted or modified for a military application.

Defense service means furnishing training and assistance in the U.S., or outside the U.S., for the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of defense articles.

What articles and technical data are subject to ITAR and EAR regulations?

The U.S. Munitions List contains all defense articles subject to control under ITAR. There are 22 categories that are broadly interpreted by the DDTC. Technical data is information required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles, and software for defense articles.

EAR controls dual use items such as those with primarily commercial uses that also have military applications.

Is it critical to determine if an item is controlled under EAR or ITAR?

Yes. Making the right determination is critical because if you incorrectly classify your item as being controlled by EAR and it is actually an ITAR controlled item, then you face disclosure, penalty and other sanctions. In the reverse case, you have created unnecessary work and an administrative burden.

What steps need to be taken before exporting?

The significant steps are classifying items as ITAR or EAR controlled; verifying if a license is required to export your item to the target country; verifying that no prohibited end-users (countries, groups, individuals, etc.) are involved with the export transaction; verifying that no prohibited end uses (intended purposes) are involved with the export transaction; if a license is required, determining if there are exceptions; and if no exceptions are available for your transaction, filing for and obtaining the appropriate license before exporting.

Are export control laws complex?

Export control laws are complex, but that is why you hire experts. If done right, they offer significant benefits. If done wrong, the penalties for noncompliance could be costly for the company and for individuals. It is best not to have to defend yourself from charges of jeopardizing U.S. national security and foreign policy interests.

Aneezal H. Mohamed is Of Counsel with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5476 or amohamed@keglerbrown.com.

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

For some companies sponsoring 401(k) plans, the next few months may be a period of whistle blowing – with painful consequences.

If these sponsors fail to comply with new federal regulations, employees may blow the whistle on them with federal regulators, potentially triggering costly fines and other sanctions and paving the way for employee lawsuits; most federal investigations of this type start with employee complaints.

To prevent this unfortunate scenario, some companies may have to blow the whistle on the large financial institutions that provide their plans for failing to provide required information they need to assure their plans comply with the new rules from the U.S. Department of Labor (DOL).

Central to this potential consternation is the reality that many employers — especially small and mid-size companies — aren’t aware of precisely how much their 401(k) plans cost, what their plans and participating employees are receiving in return for these fees and where this value, or lack thereof, lands in the national spectrum of plan pricing for the services provided.

In issuing the new regulations, the DOL is seeking to make employers and employees aware of the value they’re getting for the fees they’re paying as part of a larger effort to enable plan participants to make more informed investment choices. Fees are among the most significant factors affecting total investment returns.

The regulations require employers to know all such fees, and what they’re getting for them, by July 1, and to ascertain whether these fees are reasonable for the services being provided. That means they’ll have to determine where this value stands in the national marketplace by benchmarking fees, which is no simple undertaking.

Also by July 1, the financial services companies, brokerages and insurance companies that provide 401(k) plans are required to have given plan sponsors a rundown on all fees and the services these fees cover. If employers don’t receive this information, they’ll be hamstrung in their efforts to benchmark fees against the market to determine whether they’re reasonable. In such cases, employers will have no choice but to blow the whistle on their plan providers.

However, the companies that provide 401(k) plans tend to be large, highly sophisticated institutions with significant in-house and outsourced legal resources, so they’re amply equipped to protect themselves from liability. Most, if not all, of these companies are expected to deliver the required fee-for-services information to plan sponsors.

But in many cases, this information may be strewn throughout a document the size of a phone book — a document that the human resources people overseeing 401(k) plans at many companies don’t have time to read, much less interpret.

With the July 1 deadline approaching, many employers should have a great sense of urgency. Yet many, unaware of the new rules or their seriousness, do not. In many cases, employers who are aware of the rules aren’t concerned because they’re receiving informal, oral assurances from their plan providers that everything will be all right.

Yet this handholding means nothing because, unlike their sponsor clients, these institutions don’t have fiduciary responsibility, with all the attendant risk and liability. As long as providers meet their disclosure obligations under the new laws, they’ll be fine. Meanwhile, employers who fail to act on this information as required will be left twisting in the wind.

One way that sponsors can reduce their liability is to outsource their regulatory obligations to an independent fiduciary advisor who evaluates plans from the ground up.  This way, sponsors can get an unbiased view of providers’ fee-for-service disclosures and benchmark fees against the national market to determine whether they’re reasonable. If they aren’t, these employers could attempt to negotiate them downward or put their plans out to bid for a new provider. Further, an independent advisor can X-ray plans to see if they’re achieving their various goals and meeting all federal requirements.

This way, they’ll have a better story to tell federal regulators – and employees who may become outraged when they read their statements next fall and learn of the whopping fees being deducted from their accounts. These statements will be the first to show all fees. Currently, statements merely show account totals after these fees have been siphoned off.

Most people outside the 401(k) industry would find it astonishing that 401(k) plan sponsors and participants don’t know the fees involved or specifically what services these fees cover.  Unfortunately, this is a tale of benign neglect for overworked HR departments, especially at small companies that lack in-house expertise in defined contribution plans. There’s always more pressing work to do, and many plan administrators are understandably reluctant to lift the hood on plans that may have longstanding deficiencies. Now, the new DOL rules are changing this state of affairs.

The key language in the new rules is “fees for services provided,” because this focuses on value: Are employees getting services worth the fees being charged? In many cases, they’ll find they aren’t.

Employers who become aware of this sooner than later and act on it in accordance with the new rules will be taking a major step toward protecting their companies and assuring the integrity of their plans and their capacity to help employees build their resources for retirement.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., a Cincinnati-based financial services company that provides retirement-plan fiduciary services and employee-benefit solutions to small companies. Kippins holds the AIFA (Accredited Investment Fiduciary Analyst) designation. He can be reached at rpa@retirementplanadvisorsltd.com.

Published in Cincinnati

New rules regarding the capitalization and deduction of expenditures related to tangible property were issued by the Treasury Department in proposed and temporary form on December 23, 2011. All businesses with tangible assets will be affected by these regulations. These new rules attempt to guide taxpayers where previous proposed regulations were not successful. The new rules are effective for taxable years beginning on or after January 1, 2012.

Business leaders should begin a dialogue with their tax professionals sooner rather than later to determine how they might be affected. A review of company policies and procedures will be necessary to maintain tax compliance while minimizing increased administrative burdens.

Smart Business spoke with Josh N. Wheeler, CPA, and Tom Tyler, CPA, a partner with Crowe Horwath LLP, about what taxpayers need to know about the new Treasury regulations.

What is the purpose of the new regulations?

The regulations attempt to provide guidance so that a taxpayer can determine whether expenditures should be expensed, or capitalized and depreciated, for tax purposes. The new regulations apply to expenditures incurred to acquire, produce, repair and improve tangible real property, such as a building, and tangible personal property, such as a copy machine, for example.

What types of items are covered under the new regulations?

The tangible asset regulations cover the treatment of materials and supplies, routine maintenance, costs to improve property, dispositions of property, as well as costs incurred to acquire property, such as employee compensation and overhead costs.

How do the new regulations differ from the ‘old’ regulations?

In certain respects, the new regulations are the same as the old regulations and in other respects they deviate significantly from their predecessor.

One of the most significant differences between these regulations and previous version concerns how taxpayers determine if an improvement has been made to a unit of property. At the core of determining whether expenditures should be capitalized as an improvement, or expensed as a repair, is identifying the unit of property to which the expenditure relates.

The new regulations depart from the old regulations by requiring that taxpayers apply the improvement rules to separate building systems when determining whether expenditures should be expensed or capitalized. Those separate components include HVAC, plumbing and electrical systems; security, fire protection and alarm systems; gas distribution systems; and all escalators and elevators.

Having to apply the improvement rules in this way can increase the likelihood that expenditures will be required to be capitalized.

Another significant addition to the regulations is the treatment of property dispositions. The regulations allow, and in some cases require, a taxpayer to take a loss on the replacement of a component of a unit of property. Taxpayers will need to familiarize themselves with these rules in order to make certain they implement the regulations properly.

Will taxpayers apply the regulations in the same way?

Yes and no. All taxpayers are required to adopt and conform to the new regulations for tax years beginning on or after January 1, 2012. The regulations provide taxpayers many choices for adopting the new rules. What elections are made will depend on each taxpayer’s unique circumstances.

For example, nonincidental materials and supplies may be deducted when used or consumed. Alternatively, a taxpayer may elect to capitalize and depreciate them. Taxpayers who need to generate taxable income to use expiring net operating loss carryforwards might elect to capitalize and depreciate the materials and supplies over a number of years rather than expensing all amounts in the current year.

Another example includes taxpayers who have written accounting policies for expensing capital expenditures under a specified dollar threshold. The new regulations permit expensing for tax purposes consistent with the financial statements, but only for companies who have applicable financial statements. Furthermore, the total amount expensed may not exceed the greater of 0.1 percent of gross receipts determined under federal tax rules or 2 percent of the taxpayer’s total depreciation and amortization expense reported in its applicable financial statement. Not all taxpayers have an applicable financial statement and only those who do may adopt this method

What actions must companies take in order to comply with the new regulations?

As previously discussed, the regulations are effective for taxable years beginning on or after January 1, 2012. However, taxpayers cannot only focus on 2012 and beyond. To comply with the new regulations, taxpayers must assess policies and procedures implemented in prior years and conform those prior years to the new regulations. The result will require a positive or negative adjustment to taxable income.

The Treasury Department is expected to issue two revenue procedures that will provide taxpayers with specific procedures they must follow to obtain automatic consent to change their tax methods of accounting to conform to the regulations. This is typically done by filing form 3115, Application for Change in Accounting Method.

Taxpayers must consider the various elections, safe harbors and thresholds available in the regulations to select the most advantageous methods for their particular situation and to minimize administrative burdens going forward. It is imperative for taxpayers to begin an initial dialogue with their tax professionals to understand the impact of these regulations.

Josh N. Wheeler is a CPA with Crowe Horwath LLP in the Dallas office. He can be reached at (214) 777-5257 or josh.wheeler@crowehorwath.com. Tom Tyler, CPA, is a partner with Crowe Horwath LLP in the Dallas office. He can be reached at (214) 777-5250 or tom.tyler@crowehorwath.com.

Published in Dallas

Times are tough for many industries, and the development industry is no exception. As a result of the uncertain marketplace, projects in California have been replanned, restructured, redesigned, down-sized, foreclosed upon, have gone into bankruptcy and have come out of bankruptcy.

Through it all, developers have found ways to continue to make deals happen. But in today’s environment, where the market is so unpredictable, laws continuously change, and projects are often transferred and transformed numerous times before the first inch of dirt is moved, the better bargain goes to the dealmaker who foresees and accounts for the potential development pitfalls.

Smart Business learned more about current development challenges from Michele Staples and Gregory Powers, shareholders at Jackson DeMarco Tidus Peckenpaugh.

Are development approvals extended along with the tentative map?

Since 2008, state legislation has been enacted to automatically extend the life of certain tentative maps. The legislation also extends some related development approvals. The most recent legislation (AB 208) extends state agency approvals such as Coastal Commission and Fish and Game permits issued in connection with certain tentative maps. However, AB 208 does not mandate extension of local development approvals.

Developers should be aware that, for tentative maps taking advantage of the legislative extension, AB 208 also reduces protections against the imposition of new conditions of approval and allows the levy of development fees upon building permit issuance.

What are ‘impact fees’ and how can they affect my project?

Development impact fees are payment obligations imposed on a project as a condition of development, and are typically meant to cover the costs of constructing improvements necessitated by the project that will not be built by the developer. Some examples include drainage facility fees, utilities infrastructure fees and traffic mitigation fees.

Impact fee amounts can be shocking. Fee obligations can come from a variety of sources, including local codes and regulations, state laws and written contracts. If a project has been changed in some way since the fees were initially imposed (for example, a modified land plan, changes in density and/or product, etc.), it can open the door to new fee obligations. Nothing can affect the profitability of a project more drastically than impact fees. Early discussions with local agency staff to assess the payment status of a project’s impact fees, along with checking local codes and pre-existing agreements for impact fee obligations, is a critical part of due diligence.

Are continuing security obligations something I need to consider early?

Where ‘broken’ projects are concerned, required improvements are often secured by performance bonds for which premiums may or may not be current. Cities have begun calling such bonds in order to fund needed infrastructure. Unless the obligation has been assigned with the local agency’s consent as part of a change in project ownership, ultimate financial liability may rest on the original developer, the new owner, or both. As part of the transfer, it also may be possible to negotiate a reduction of bonds with the local agency where improvements were partially completed before the project stalled.

What about California’s tangled web of environmental laws?

Whether a project is residential, commercial, industrial, or mixed use, developers can expect some level of environmental review.

The foundation of environmental review is the California Environmental Quality Act (CEQA). The level and complexity of CEQA review required is not necessarily driven by a project’s size, but, rather, its potential environmental impacts. It is a fact-sensitive inquiry that must be handled on a case-by-case basis. Although a project may have ‘survived’ CEQA review already, new or supplemental review may be necessary because of project changes since the initial review was performed. This process can be time-consuming, expensive and risky from the developer’s perspective, so project modifications should be assessed closely when acquiring a partially completed project.

In addition to CEQA, there are a host of other environmental regulations to consider. Remediation, indemnification and insurance requirements in connection with hazardous materials and/or contamination at the project site may need to be considered, along with a multitude of federal, state, regional and local environmental protection requirements. Two things are certain when it comes to environmental review and compliance in California: (1) it is highly complex, and (2) it can make or break a project’s bottom line.

Why is storm water a concern when I have not designed my project yet?

Development projects must minimize storm water runoff through site design so that post-development runoff conditions mimic the undeveloped conditions. The regulations are imposed by cities and counties to comply with permits issued to them by the Regional Water Quality Control Boards. Some jurisdictions have more flexible rules than others, allowing alternative compliance approaches or waivers for projects where strict compliance is not feasible. In most cases, the new regulations apply even if the project already has an approved tentative map. Where tentative maps were approved with insufficient consideration of storm water compliance, the project as originally conceived may not be able to comply with the regulations. The problem is most acute in infill projects where the undeveloped area is too small to accommodate storm water infiltration. Project changes may be required to comply with the new regulations, such as adjusting lot lines or reducing the number of developable lots. At some point, the necessary changes may be so extensive as to require an amended tentative map.

The key to a profitable development in today’s challenging market is accounting for the myriad regulatory obligations in the project’s pro forma before closing the deal.

Michele Staples and Gregory Powers are attorneys in the Land Use and Environmental Department of Jackson DeMarco Tidus Peckenpaugh. Reach them at MStaples@jdtplaw.com and GPowers@jdtplaw.com, respectively.

Published in Orange County
Wednesday, 30 November 2011 20:01

How to prepare for the new ADA standards

On July 23, 2010, Attorney General Eric Holder signed final regulations revising the Department of Justice regulations under the Americans with Disabilities Act (ADA). These new regulations address general nondiscrimination requirements relative to people with disabilities and adopt new Standards for Accessible Design that are consistent with the minimum guidelines published by the U.S. Architectural and Transportation Compliance Board (Access Board). These new design standards align the ADA’s requirements with other federal standards, as well as with model building codes, and reflect the experience gained in the 20 years since the first design related regulations were adopted.

The general nondiscrimination requirements became effective on March 15, 2011; however, the Justice Department delayed the effective date until March 15, 2012, to allow sufficient time to plan for implementation. Design professionals and businesses needed time to understand the effects of these new rules and evaluate how to incorporate the modifications into their future plans and projects, says Dale Hermeling, a partner with The Stolar Partnership LLP in St. Louis.

“With the nondiscrimination standards already in effect and with the upcoming March 15, 2012, compliance date on the design standards, now is the time for businesses to review their overall compliance with the ADA,” he says.

Smart Business spoke with Hermeling about the ADA and how the changes could impact a business’s compliance obligations.

Who is affected by these new rules under the Americans with Disabilities Act?

As with the previous rules, these modifications deal with Title II and Title III of the ADA. Title II addresses public entities, which include state and local governments and their various departments and agencies. Title III addresses private entities that operate public accommodations, places such as hotels, restaurants, bars, theaters, retail stores, doctors’ offices, etc. There is no limitation on the size of the business, and each is required to modify its business policies and practices in order to serve customers with disabilities.

These policies and practices need to address considerations for the expanded use of service animals, different types of wheel chairs or other power-driven devices such as Segways, seating requirements in assembly areas and effective ways for communicating with persons with disabilities.

What are the requirements relating to removal of barriers?

Public accommodations have been required under previous regulations to remove architectural barriers where the removal is ‘readily achievable’ or can be carried out without much difficulty or expense. Examples include the installation of ramps, making curb cuts in sidewalks, widening of doors, creating designated parking spaces, etc. All of these types of modifications should already be in place under the previous regulations.

Will building owners be required to modify existing facilities to make them more accessible?

If a building has failed to follow the previous regulations and hasn’t addressed barrier removal under the 1991 standards, it needs to address those now and can use either the 1991 or the 2010 Design Standard until March 15, 2012. If a building has already addressed these issues under the 1991 Design Standard, it is protected by a safe harbor and doesn’t need to take immediate steps, but if it embarks on other alterations to the building or facility, it will need to utilize the new 2010 Design Standards. Any new construction after March 15, 2012, will be covered by the new standard.

Who is responsible for compliance with ADA regulations in a lease arrangement?

Both the landlord who owns a building with a public accommodation and a tenant who owns or operates a business with a public accommodation are subject to the requirements. You may see provisions in the lease that impose the obligation on one party or another, but under the law, both parties are responsible.

Are there any tax benefits available for complying with these new requirements?

Section 44 of the Internal Revenue Code allows a tax credit for small businesses with 30 or fewer full-time employees or total revenue of $1 million or less in the previous tax year. This credit can cover 50 percent of the eligible access expenditures in a year, with a maximum credit of $5,000.

The tax credit can be used to offset costs associated with barrier removal and alterations to improve accessibility, or providing accessible formats for communication such as Braille, or large print signs or audio tapes. Section 190 of the code allows a tax deduction for all businesses, with a maximum deduction of $15,000 per year for costs associated with barrier removal or alterations .

What advice would you give a business owner about complying with the new standards?

The ADA has a variety of components.  Whether it’s issues of general non-discrimination and dealing with the new Design Standards or the employment elements under the EEOC, business owners need to stay on top of these matters as they develop. They need to evaluate their policies and procedures to make sure that they comply with the new requirements and train their work force to help accommodate people with disabilities as required.

It is important that you have a policy in place that addresses how to respond to a person who might lodge a complaint and to document what happened during the course of the discussion. We can anticipate increased enforcement by the Justice Department, which could result in fines and other penalties.

Dale Hermeling is a partner with The Stolar Partnership. Reach him at deh@stolarlaw.com or (314) 641-5135.

Published in St. Louis