Johnny Merritt is a partner at Hajjar Peters LLP and an attorney with over three decades of experience in complex corporate and real estate matters. He has been a transactional attorney for more than 20 years, concentrating in ongoing business operations, organizational structuring, mergers and acquisitions as well as real estate purchases, sales and development.
Johnny graduated from law school during the savings and loan crisis. He was always interested in real estate and corporate transactions, but during the crisis, he worked in litigation for his first ten years. In the 90s, Johnny went full-time into transactional law and as outside general counsel for several large entities. Johnny's exposure is overwhelmingly slanted towards Texas real estate because Texas and Austin specifically are very hot right now, but Johnny does have some current work in New Mexico and Colorado as well.
Entity Structure and Asset Protection for Commercial Real Estate
The LLC is still the way to go in commercial real estate, Johnny estimates it's about 90% of what they do at Hajjar Peters. This can be a standard LLC or structured as Series LLCs. In Series LLCs, the flexibility provides custom treatment for different deals and different investors to receive different exposure or liability based on their tier, or series.
Certainly don't use a C Corp for your real estate. Generally speaking, you also don't want to use an S Corp for rental properties. Johnny, Brandon, and Thomas also highly recommend that investors use an attorney that specializes in that region and fully understands the state and local legislation.
Series LLCs are really newly developed entities. Even for the experienced investor, it's still strongly advised to work with an attorney. It's a mechanism to avoid creating too many different LLCs and overcomplicating structure.
"The Texas legislature has caught up to Delaware, in my opinion."
Consequences of COVID
"The condos in downtown Austin were the hottest thing, and then a week later, people are trying to make a mass exodus to the country. We've never had [expensive] retail in strip shopping centers drag down the shopping center as opposed to the service providers. We've never had warehouses in rural areas as the sexiest investment that you can make. [COVID] has turned real estate on its head quickly."
In some of the smaller towns, stores such as Dollar General and other broad grocery-type stores are available with long-term triple-net leases. Johnny has seen quite a bit of this. Many business are turning additional focus to their capital and are moving some of that from real estate to investing in the core business.
"Grocery retail and home goods are still very hot. Apparel and dining are not doing well. If you think about retail from a historical standpoint, that's a flip. Typically it would be the nice restaurants or the nice clothing stores that are carrying that shopping strip, and that's not true anymore."
On the property that's down, now may be the time to invest. With such low interest rates, the cost of debt is not large.
Force Majeure clause - for 25 years, Johnny has included this clause in most contracts because he thought it was proper to do so. All of a sudden in March 2020, this Act of God clause becomes critically important. This clause may be subject to quite a bit of litigation to determine who is and isn't responsible under the contract. Now and going forward, the word "pandemic" is included in this clause.
Also in leases, you must determine what's in the best interest of your business - landlords, should you enforce all of your terms? If so, who is going to come in and rent? We've had lots of legislation that has helped tenants and not much that has helped landlords. This could become problematic.
In general, there are probably more business issues than legal issues, but there have been endless unique issues arise since COVID hit. In the corporate world, for example, a large entity can't elect new directors if shareholders can't come together to speak and vote in person. Creativity is required.
With eviction moratoriums and mortgage forbearance, there is a lot of uncertainty in real estate. Johnny expects some form of assistance to landlords through additional legislation. On the flip side, aside from office leasing and some retail, all markets are very hot.
"When my clients have gotten in trouble it's because they have not stayed in their lane. If you're going to get out of your lane, study it carefully. Know your banker. If you don't have a great relationship with a banker, go make one... It's very important to have a team. The two people that are primarily important are a CPA and attorney. I try very diligently to stay in my lane."
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