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2023 Changes to Minimum Wage and Overtime Exempt Salary Threshold

Posted: November 14th, 2022

By: Vincent Costa, Esq. email, Zachary Mike, Esq. email

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As the end of the year approaches, it is important to remind New York State employers and employees of the increased minimum wages that affect both hourly and salaried employees.

For hourly, non-exempt workers, please see the chart below for basic hourly minimum wage increases that go into effect as of December 31, 2022:

Minimum Wage Increase

Geographic Location/Increase from 20222023 Rate
NYC$15.00 per hour (no change)
Nassau, Suffolk, & Westchester$15.00 per hour (no change)
Remainder of New York State$14.20 per hour

To the extent your business pays basic minimum wage, it is important to make sure that the increased wages are reflected as of December 31, 2022.

Tip Credit

New York State also allows employers in certain industries to satisfy the minimum wage by combining a cash wage paid by the employer plus a credit for tips the employee receives from customers. The minimum hourly rates New York employers must pay most tipped employees go into effect as of December 31, 2022:

Service Employees

Geographic Location 2023 Rate/Tip Credit
NYC$12.50 / $2.50 (no change)
Nassau, Suffolk, & Westchester$12.50 / $2.50 (no change)
Remainder of New York State$11.85/ $2.35

Food Service Employees

Geographic Location 2023 Rate/Tip Credit
NYC$10.00 / $5.00 (no change)
Nassau, Suffolk, & Westchester$10.00 / $5.00 (no change)
Remainder of New York State$9.45/ $4.75

The “tip credit” rules can be difficult to follow, so it is important to track this information to ensure that tipped employees are receiving at least basic minimum wage, inclusive of tips, when calculating wages.

Increased Salary Threshold for Overtime Exemption

Finally, there are increases in the minimum salary threshold that must be met for exempt employees. As of December 31, 2022, the following minimum salaries must be paid for exempt administrative and executive employees:

Geographic Location 2023 Salary Threshold
NYC$1,125.00 per week ($58,500.00 annually) (no change)
Nassau, Suffolk, & Westchester$1,125.00 per week ($58,500.00 annually) (no change)
Remainder of New York State$1,064.25 per week ($55,341.00 annually)

With the upcoming changes, it is important to update policies and pay practices to stay in compliance.  If you have questions about minimum wage, overtime, or wage and hour exemptions, please contact us or call (631) 738-9100.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

What Employers Need to Know About New York City’s “Salary Transparency Law”

Posted: November 8th, 2022

By: Vincent Costa, Esq. email, Zachary Mike, Esq. email

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As of November 1, 2022, all employers advertising jobs in New York City are now required under the Salary Transparency Law (“Law”) to include a good faith salary range for every job, promotion, and transfer opportunity advertised. This new law, which amends the New York City Human Rights Law (NYCHRL) and is enforced by the New York City Commission on Human Rights (NYCCHR), subjects employers advertising jobs in New York City to a series of additional requirements when posting job advertisements.

What is the Salary Transparency Law?

It is now considered an unlawful discriminatory practice in New York City to advertise a job, promotion, or transfer opportunity without including in the advertisement the employer’s good faith minimum and maximum range of base salary or wage the employer believes at the time of the posting it would pay for the advertised position. Similar legislation is currently pending in the New York State legislature.

Who is covered by the Law?

  • (i) Employment agencies, regardless of their size, and (ii) all employers with four or more employees or one or more domestic workers are covered by the Law, as long as at least one of the employees works in New York City.
  • The four employees do not need to work in the same location, and they do not need to all work in New York City.
  • The Law also applies to postings for either fully remote or hybrid positions, if the position can or will be performed in New York City, in whole or in part, whether from an office, in the field, or remotely from the employee’s home.

What kind of job postings are covered?

  • An “advertisement” is broadly defined to capture any written description of an available job, promotion, or transfer opportunity that is publicized to potential applicants, regardless of the method of dissemination. For example, “covered listings” of advertisements include, but are not limited to, postings on internal bulletin boards, internet advertisements such as on LinkedIn and ZipRecruiter, printed flyers, and newspaper advertisements.
  • The Law not only covers advertisements that seek full- or part-time employees, but also interns, domestic workers, and independent contractors.
  • Excluded job postings include temporary employment or positions that cannot, and will not, be performed in New York City (even if the employee lives there) – for example, an in-person role on Long Island.
    • Furthermore, the Law does allow employers to hire or continue hiring without using an advertisement. It does not compel employers to create an advertisement as a condition of hiring.
    • For instance, if a covered employer who is not advertising any job postings decides to directly reach out to a prospective candidate, such as via referral or “word of mouth,” then such action is permissible under the Law.

How does the pay range posting work?

  • Employers must state the minimum and maximum salary range (the range cannot be open-ended) they in good faith believe at the time of the posting they are willing to pay for the advertised job, promotion, or transfer opportunity. “Good faith” is defined as the salary range the employer truly believes at the time they are listing the job advertisement that they are willing to pay prospective employees.
    • For example, “$15 per hour and up” or “maximum $50,000 per year” would be too open-ended and not be consistent with the new requirements.
  • Advertisements that cover multiple jobs, promotions, or transfer opportunities can include salary ranges that are specific to each job opportunity.
  • Salary includes the base annual or hourly wage or rate of pay, regardless of the frequency of payment. For example, it would include an hourly wage of $15 per hour or an annual salary of $50,000 per year.
  • Nevertheless, employers are not required by the new Law to include information in the job advertisement regarding other forms of compensation or benefits offered in connection with the advertised job opportunity, such as health insurance, PTO, severance pay, overtime pay, commissions, or bonuses.

How is the Law enforced?

  • The NYCCHR enforces the law by accepting and investigating complaints from the public regarding alleged violations of the Law.
  • Covered employers who are found to have violated the NYCHRL may have to pay monetary damages to affected employees, amend advertisements and postings, create or update policies, conduct trainings, provide notices of rights to employees or applicants, and engage in other forms of affirmative relief.
  • Employers are given a first warning for failure to comply with the Law, provided that the employer shows they have cured the violation within 30 days of receiving the NYCCHR’s notice of the violation. Failure to cure a first violation may result in civil penalties of up to $250,000.00 as well as for any subsequent violations.

Please contact us for guidance or with any questions.

For additional information, please visit:

https://www1.nyc.gov/assets/cchr/downloads/pdf/publications/Salary-Transparency-Factsheet.pdf

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

EEOC Replaces Required Workplace Poster

Posted: November 1st, 2022

By: Christine Malafi, Esq. email, Zachary Mike, Esq. email

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After over 10 years without an update (the last update being November 2009), the U.S. Equal Employment Opportunity Commission (EEOC) has replaced the familiar “Equal Employment Opportunity is the Law” poster hanging in the breakrooms of most covered employers[1] with the new “Know Your Rights: Workplace Discrimination is Illegal” poster. EEOC regulations require covered employers to post notices that summarize the rights of employees and union members under applicable federal anti-discrimination laws enforced by the EEOC. [2]

The new EEOC poster contains a QR code for applicants or employees that links directly to instructions on how to file a charge of workplace discrimination with the EEOC,  a copy of which can be found at the EEOC’s webpage here, along with information on where to display the poster.

The new poster is touted as containing “plain language” that makes clear that harassment is a form of discrimination, and as making it “easier for employers to understand their legal responsibilities and for workers to understand their legal rights and how to contact EEOC for assistance.”

Further, the new poster makes it clear that sex discrimination includes discrimination based on pregnancy and related conditions, sexual orientation, or gender identity, and contains information about equal pay discrimination for federal contractors.

The poster is currently available in both English and Spanish and will soon be available in additional languages.

Employers should hang the posters in a conspicuous location in the workplace where notices to applicants and employees are customarily posted. The EEOC also “encourages” employers to post the notice digitally on their websites to supplement the physical posting requirement. The federal Americans with Disabilities Act also requires that the poster be placed in a location accessible to applicants and employees with disabilities that limit mobility.

There are fines for noncompliance, which are currently capped at $612 for each separate offense.[3] Accordingly, employers should print and post the posters to be in compliance with the law. Please contact us for guidance or with any questions.


[1] A “covered” employer is defined under federal law as an employer with fifteen or more employees. 42 U.S.C. 2000e(b).

[2] 29 CFR 1601.30(a).

[3] 29 CFR 1601.30(b).

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

What Is an “F” Reorganization?

Posted: October 25th, 2022

By: Zachary Mike, Esq. email

Tags: ,

If you have considered purchasing or selling a business treated as an S corporation, you may have heard about structuring the deal as an “F” reorganization for tax purposes. But what exactly is an “F” reorganization and what are its tax consequences?

An “F” reorganization is a type of qualifying tax-free reorganization for corporations under Section 368(a)(1)(F) of the Internal Revenue Code (IRC) that changes the identity or form of a corporation. To satisfy the requirements of this nonrecognition event, a transaction must meet one of the statutory definitions of a “reorganization” while retaining the same essential ownership structure. Private equity firms often take advantage of the “F” reorganization as a means of acquiring an S corporation without engaging in a lengthy consents process while simultaneously gaining the tax benefits of a deemed asset sale.

Congress created the S corporation (small business corporation) in 1958, which provides one level of income tax, passed through to its owners at the individual level. However, S corporations are subject to several limitations, chief among them a limit on the number of shareholders (who must be natural, living persons), capped at 100. Thus, S corporations continue to be a popular tax election for closely held corporations due to their liability protection and tax benefits. Accordingly, many of the closely held businesses that private equity firms wish to acquire are S corporations.

To effectuate an “F” reorganization under the IRC, the IRS has identified the following steps and timing to comply with the proper use of the IRC’s provisions:

  1. The owners of the original S corporation (OldCo) form another corporation (NewCo) that they will elect to be treated as an S corporation under Section 1362(a) of the IRC. While this election is not required for NewCo since OldCo’s s corporation election will remain in effect, NewCo will need to conduct such election to obtain a new employer identification number (EIN). (Diag. A)
  2. The owners of OldCo then transfer 100% of the issued and outstanding shares in OldCo to NewCo in exchange for 100% of the issued and outstanding shares of NewCo. As a result of this contribution and exchange of shares, the owners will own 100% of the issued and outstanding shares of NewCo while NewCo itself owns 100% of the issued and outstanding shares of OldCo. (Diag. B)
  3. Once the contribution and exchange are completed, the owners of NewCo will form a limited liability company (LLC).
  4. NewCo will cause OldCo to make a “qualified subchapter S subsidiary” (QSub) election within the meaning of the IRC to treat OldCo as a disregarded entity for income tax purposes, without being subject to the typical constraints on an S corporation. This reorganization is then followed by the conversion of the OldCo to an LLC via state law merger or conversion, depending on the state’s applicable statutory provisions. (Diag. C)
  5. After the companies merge or convert, the final structure prior to the sale will have the owners owning 100% of the issued and outstanding shares of NewCo, which in turn owns 100% of the equity interest in the LLC.

Due to this reorganization permitted by Section 368(a)(1)(F) of the IRC, the owners of NewCo can now sell the equity of their LLC instead of the equity of the S corporation, which would have been legally prohibited from selling its interest to another business entity. Since the LLC is treated as a division of its parent S corporation, the sale of an interest in a QSub is treated as a sale of an undivided interest in its assets for federal income tax purposes (corresponding to the amount of stock sold), which provides the buyer with a “step-up” in the basis of the acquired assets equal to the amount paid for the LLC’s equity interest, to be used for depreciation and amortization purposes. However, there are several strategies sellers can take to reduce the potential increased tax liability associated with a deemed asset sale including:

  • requesting a “gross-up” from the buyer in the purchase price to compensate the seller for any tax exposure they may incur as a result of not being able to instead sell the equity and be subject to capital gains tax.
  • offering the seller “rollover” equity in the selling company to soften the tax consequences to the seller.

While navigating the complexities of an “F” reorganization may seem daunting, working with an experienced M&A attorney will demystify the process. Please contact us for guidance or with any questions.

This article is for informational purposes only. For tax advice or guidance, please consult your accountant directly.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

The U.S. Treasury’s Call for Transparency: What Small Businesses Need to Know

Posted: October 13th, 2022

By: Christine Malafi, Esq. email

As of January 1, 2024, most U.S. businesses with fewer than 20 employees will have to register with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department.[1] Read on for what your business needs to know about this new obligation.

The Corporate Transparency Act

In 2021, the Corporate Transparency Act[2] was enacted as part of the National Defense Authorization Act in an effort to better enforce anti-money laundering laws. The law seeks to make it more difficult for business owners to hide unlawfully obtained assets, hide identities, and launder money through the financial system of the United States. The law is also intended to make corporate ownership more transparent. The law became fully effective on September 29, 2022, when the final regulations were issued.[3]

This federal law requires certain business owners to provide the federal government with specific details on the owners of the business, as well as on other persons who benefit from the business operations. A business that must report is called a “Reporting Company,” which the Act defines as a “corporation, limited liability company, or other similar entity that is created by the filing of a document with a Secretary of State or a similar office under the law of a State or Indian Tribe” (so sole proprietorships or partnerships that are not separate entities do not need to report). However, an entity formed outside the United States which registers to do business in a State is subject to the law.

Who Reports What?

Reporting (at approximately $85 per business) is required of those U.S. corporations, LLCs, or similar entities with 20 or fewer employees. Why is 20 employees the threshold? It is believed that most shell companies being used to hide unlawful assets have few, if any, employees.

The largest exemption from filing is believed to be “large operating companies,” those with more than 20 employees, operating in the U.S. (from a physical business address, not a home office) with over $5 million in sales or gross receipts. Additionally, banks, credit unions, insurance companies, accounting firms, public utilities, governmental authorities, security brokers, and others who report ownership to the government under other laws are exempt from registration under the Act.

Existing, active businesses covered by the Act will have one year to report:

  • the company name, trade name(s), business address, state of formation, Employer Identification Number (EIN), and
  • the name, date of birth, residential or business street address, and one unique identification number (i.e., driver’s license, passport, government issued identification) with a copy of the document from which it came, of all “Beneficial Owners,” people who own, substantially control, or create the company (the “company applicant”).

Businesses must make the initial filing, then again every time there is a change in Beneficial Owner status.

Beneficial Owners

A Beneficial Owner is any person who, directly or indirectly, owns or controls 25% or more of the entity, or who exercises substantial control over the entity. Substantial control is defined to include any person who serves as a senior officer, has authority to appoint or remove senior officers or members of the board of directors, or who provides direction or makes decisions about a company’s “important matters.” The ownership or control that triggers reporting obligations may exist in not only corporate or business governance documents, but also through separate contracts, arrangements, relationships, or understandings.

However, Beneficial Owners are not minor children (assuming the child’s parents/guardians are reported), an individual acting solely on behalf of another person (an agent, nominee, custodian, etc.), a non-owner employee of the entity, creditors, or individuals with inheritance interests only.

Penalties

Any changes in Beneficial Owner statuses must be reported within 30 days of the change.

Penalties for willful non-reporting are both civil ($500 per day) and criminal (up to two years in prison and/or a $10,000 fine). The Reporting Companies are required to comply with this reporting law, not the Beneficial Owners themselves. These are most definitely safe harbors, which permit the sidestepping of liability for failure to report.

Safeguarding of Information

The U.S. Treasury Department is tasked to create a database to house the personal information of what is believed to be over thirty million businesses throughout the country.

The database will be accessed only by law enforcement, banks, and the government. FinCEN is responsible for safeguarding the financial system of the United States from illegal activity, including not only money laundering, but also fraud, corruption, and financing of terrorist activities. Ironically, a law intended to combat fraud may lead to potential concerns about safeguarding the sensitive information collected.

For further guidance, compliance information, and updates, please contact us.


[1] According to the New York State Department of Labor figures, in 2021 90% of all businesses on Long Island had between one and 19 employees.

[2] For full text of Act, see https://www.congress.gov/116/bills/hr2513/BILLS-116hr2513rfs.pdf.

[3] See https://bostontaxinstitute.com/wp-content/uploads/2022/09/boston-tax-institute-public-inspector-regs.pdf  and generally https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

Transferring a Liquor License in New York State May Give Your Business a Hangover. Let Us Help! 

Posted: August 8th, 2022

By: Christine Malafi, Esq. email

When buying or selling a business with a liquor license, many owners assume that they can simply transfer the license from one owner to another. In New York, the transfer of liquor licenses is not so simple. The New York State Liquor Authority (NYSLA) does not allow the direct transfer of a liquor license from one business to another. With the backlog of state and federal agencies, it is important to get started on this process as soon as possible.

To transfer the liquor license, the new owner of the business must go through the same process of applying for a license as the previous liquor license owner did. There are four main groups of liquors licenses, and each license type has its own set of application requirements. Generally, an application for a liquor license includes the application form, proof of citizenship and photo identification for each principal, the lease or deed and photos of the premises, and financial documents. When the application is necessitated by a transfer of the business assets related to the use of the liquor license, the contract of sale of the business must be included as well.

The transfer laws are different for New York City businesses than the rest of the state. Any establishment located in one of the five boroughs must send the prior notice of their application to their corresponding NYC Community Boards. Each borough has its own respective Community Board. Outside of New York City, local municipalities must be notified 30 days prior to the submission of a liquor license application that a person or entity intends to operate a business that needs a liquor license.

The NYSLA must approve the changes in advance if your business corporation or limited liability corporation is changing its corporate structure (i.e., adding or removing an officer or director, adding or removing a managing member, a change in the stockholders or the members, or any change in the stock or membership units held by an existing stockholder or member). However, no approval is needed if there are ten or more stockholders or members, the change involves less than 10% of the stock or ownership interest, and none of the existing stockholders or members with less than a 10% interest have their interest increased to 10% or more.

Be aware that the process for the transfer of license approval may take a long time to process. To help speed along the application process, the NYSLA has an attorney Self-Certification Program, where attorneys filing retail applications for a client can certify that statements and documents provided in the application are true and accurate and that the application meets all the statutory requirements.

The NYSLA’s Community Board FAQ provides detailed information on most requirements for applying for and transferring a liquor license. The experienced attorneys here at CMM are ready to help you through this process as your business evolves, along with any other business transaction needs.

Contact us today for more information.

Thank you to Ashley Cohen, Esq. for her contributions to this article.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

Does Your Business Use Third-Party Payment Apps? What You Need to Know About the Changes to IRS Form 1099-K

Posted: July 20th, 2022

By: Zachary Mike, Esq. email

Tags:

Many small businesses often use third-party payment processors such as PayPal, CashApp, or Venmo to facilitate a frictionless payment experience for goods and services that can be made right from a customer’s smartphone. However, due to recent changes in the law, anyone who receives $600.00 or more as payment for goods and services using any of these payment apps can expect to receive a Form 1099-K.

Form 1099-K, Payment Card and Third Party Network Transactions, is a federal informational tax form used to report payments for goods and services to the Internal Revenue Service (“IRS”). Organizations that facilitate these payments, like debit or credit card companies, PayPal, Venmo, and others, are required by law to file Form 1099-K with the IRS and send copies of them to the payment recipient. The Form 1099-K may include amounts considered to be both included and/or excluded from gross income for federal tax purposes.

Previously, the IRS only required this level of reporting if payments exceeded $20,000.00 or more and over 200 transactions were completed during the year. However, the new tax reporting requirement is a result of a change to the tax code in the American Rescue Plan Act, the $1.9 trillion stimulus package passed by Congress and signed into law March 2021. Beginning January 1, 2022, a payment settlement entity (“PSE”) such as Venmo will be required to file and send its users a Form 1099-K for transactions made during the 2022 tax year. A PSE is defined by the IRS as “a domestic or foreign entity that…has the contractual obligation to make payment to participating payees in settlement of payment card transactions.”

The IRS said these changes also extend to people who sell items on internet auction sites such as eBay, and even people who run a “craft business” if they accept credit card payments through these apps. To comply with the new requirements, PayPal and Venmo have offered its users a way to tag their peer-to-peer transactions as either (1) personal, for friends and family, or (2) for Goods and Services. For example, users should select the appropriate category of “Goods and Services” whenever they are sending money to another user to purchase an item or paying for a service.

According to the IRS, these PSEs must then file the Form 1099-K for payments made in settlement of reportable payment transactions for each calendar year, which will then be sent to applicable individuals for income received through electronic forms of payments. PSEs may also request additional information from payment recipients, such as an Employment Identification Number (EIN) or Social Security Number (SSN) to properly report transactions on the Form 1099-K. If any of the payments are incorrectly labelled, payment recipients can contact the PSE directly for assistance. For instance, if the payment recipient reports their business income on a Form 1120, 1120S or 1065 and receives a Form 1099-K in their personal name as an individual (showing a SSN), contact the PSE listed on the Form 1099-K to request a corrected Form 1099-K showing the business’s EIN.

Payment recipients will be required to report such earnings for the 2022 tax year during the 2023 tax season. To issue the Form 1099-K by mail or electronically by January 31, 2023, all tax information should be confirmed with the PSE by December 31, 2022. The sooner the confirmation, the sooner the payment recipient will be able to send, spend, and withdraw money from any payments that might be on hold.

With the new reporting requirements approaching, it is important for payment recipients to keep accurate records, such as receipts and bank statements, and be prepared to determine whether the information reflected on the Form 1099-K is taxable or non-taxable income.

This article is for informational purposes only. For tax advice or guidance, please consult your accountant directly.

Please contact us with any questions.

For additional information, please consult these sources:

https://help.venmo.com/hc/en-us/articles/4407389460499-2022-Tax-FAQ

https://www.irs.gov/forms-pubs/about-form-1099-k

https://www.irs.gov/instructions/i1099k

https://www.forbes.com/advisor/taxes/cash-apps-to-report-payments-of-600-or-more/

https://www.nbcnews.com/news/venmo-paypal-zelle-must-report-600-transactions-irs-rcna11260

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

Effects of Inflation on M&A Deals

Posted: July 19th, 2022

By: Marc Saracino, Esq. email

Tags:

Long-lasting inflation is always a top concern because it decreases the value of currency and weakens the purchasing power of the American dollar. Since 2021, inflationary rates in the United States have increased at a much faster rate than predicted and central banks across the globe are reacting by raising interest rates.[1] Simultaneously, supply chain risks and production prices are increasing.[2] It may be obvious, but these consequences of influence M&A deals and the valuations of target companies. If you are debating on whether to initiate a sale, merger, acquisition, or other similar transaction, or if you have already decided to move forward and are currently in the midst of negotiating a deal, it’s important to understand the various effects that inflation has on M&A deals.

Common Effects on M&A Deals

As inflation continues to rise, buyers and sellers should expect to see more heavily negotiated purchase prices, alternative payment methods, and longer exclusivity periods.[3]

  • Lower Purchase Prices:  The cost of operating a business will increase with inflation and, if buyers cannot mitigate the impact of these costs, then they may begin to offer lower purchase prices.[4] This was evident in February 2022, when the M&A deal value declined by 74.4%.[5] Buyers may be aware of this trend and use it as a negotiation tactic. Sellers should work closely with their attorneys to discuss these tactics and factor in a purchase price buffer to account for such negotiations.  
  • Alternative Payment Methods: Inflation also increases the costs of interest rates, causing buyers to propose alternative payment structures.  In times of inflation, a buyer is less willing to pay cash at the time of closing.   In these situations, sellers should work closely with their attorneys to negotiate alternative payment methods such as installment payments, promissory notes, earnout/revenue milestone payouts, rollover equity and/or payment via other equitable assets.[6] In many cases, sellers’ attorneys will condition the deal on buyer’s ability to obtain satisfactory financing.[7]
  • Exclusivity Periods: Buyers always want to understand the company’s pricing arrangements with its suppliers and the contracting parties’ ability to amend the terms of the agreement; however, this becomes even more critical during times of inflation. Therefore, sellers may start to notice buyers requesting longer exclusivity periods to give the buyers time to perform a more detailed due diligence review.[8]  

How to Avoid the Negative Side Effects of Inflation

Inflation may deter buyers from offering higher purchase prices because they may worry that the ultimate payout won’t be as good as it would be in a non-inflationary scenario. However, in many cases, sellers can work with their accounting and legal advisors to demonstrate that their rate of profit growth will outpace the rate of inflation.[9] Sellers may choose to provide that data in terms of units sold and/or the dollar value. [10]

Ultimately, inflation matters in deals, especially when inflation rates are high and the duration of the inflationary period is long term. Inflation may be a concern when it comes to deal discussions; however, it should not derail the sale process. Buyers and sellers should work closely with attorneys to understand the potential implications of inflation on their M&A deals and to make sure they are negotiating the proper purchase price.  

Thank you to Kimberly Lee for her research and writing assistance on this article.


[1] Tom Manion, Principal, Valuation & Capital Market Analysis, BDO (May 2022), https://www.bdo.com/insights/industries/technology/how-interest-rates,-inflation,-and-geopolitical-un

[2] Id.

[3] Ana Calves, The Potential Impact of Inflation on M&A, Mergers & Acquisitions (June 7, 2022),  https://www.themiddlemarket.com/opinion/the-potential-impact-of-inflation-on-ma

[4] Calves, supra note 3.

[5] Brian Scheid, Peter Brennan, & Annie Sabater, Inflation Puts Dent in M&A After White-Hot 2021, SPA Global (Apr. 4, 2022) https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/inflation-puts-dent-in-m-a-after-white-hot-2021-69551549.

[6] Calves, supra note 3.

[7] Id.

[8] Id.

[9] Michael Collins, How Does Inflation Affect an M&A Deal, ProSales (Apr. 5, 2021) https://www.prosalesmagazine.com/business/how-does-inflation-affect-an-m-a-deal_o

[10] Id.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.

Navigating Your Commercial Lease Agreement During Inflation

Posted: June 22nd, 2022

By: Arthur Yermash, Esq. email

Tags: ,

Updated July 21, 2022, as published in Law360
https://www.law360.com/real-estate-authority/articles/1512083/negotiating-a-commercial-lease-agreement-during-inflation

Rising inflation is influencing virtually every aspect of life. For commercial landlords and tenants alike, it is more important than ever to focus on rent escalation provisions in your commercial lease agreement.

Instead of fixed and consistent increases in rent, some commercial leases provide for rent to increase in line with certain economic metrics: for example, the consumer price index. This is especially relevant as it relates to tenant renewal options. Where inflation is especially notable, as has been the case this year, rent increase formulas that rely on economic metrics to calculate an increase in rent may yield unexpectedly high rent for a commercial tenant, and may result in an unexpected windfall for a commercial landlord. Since the commercial real estate market relies on certain market equilibrium, unexpected or unanticipated increases in formulaic rent may have unintended disruptive market consequences. Focusing on these issues now will help minimize disputes and non-payment for commercial landlords and business risk for commercial tenants.

Negotiating Your Commercial Lease Agreement

For commercial landlords, protecting property interests and maintaining consistent profitability are two focal points when drafting and negotiating a commercial lease agreement. For commercial tenants, managing risk and expense (as well as minimizing future rent increases) is a vital part of negotiating a commercial lease agreement. Inflation and rent escalation clauses that are tied to economic metrics go hand in hand – when inflation rises, rents rise along with it. While inflation is not a new economic concept, rising inflation at exceedingly high percentages creates unanticipated results for all involved.

Clarity on rent and rent increase is an integral part of any lease. Most commonly, commercial leases provide for annual rent increases at a fixed rate. Sometimes, these increases are not annual, but every few years. Where things become more complex is when increases are tied to economic metrics. As we address the four common commercial lease rent structures, it is important to think about these in the context of periods of high inflation. 

Most commercial leases use a combination of methods to provide for escalation various rental components.

Common Forms of Rent Escalation

  1. Fixed Increases (also known as Stepped or Percentage Increases) allow landlords to increase rent by a set amount at specific points in the duration of the lease agreement. This is one of the most commonly implemented for base rent and is a popular option because it is a relatively straightforward method. However, a landlord may feel cheated out of profits if costs have gone up and a tenant may feel like they lost out on potential savings if costs have gone down.  This also does not account for the market environment that may be shifting throughout the lease term.
  2. Pass Through Escalation is a form of rent escalation that is initiated only when the landlord experiences an increase in costs that have been specified in the commercial lease agreement. This is most commonly implemented in scenarios where a commercial tenant is responsible for compensating landlord for building operating expenses.
  3. Direct Operating Cost Escalation is similar to the Pass-Through option, except here the escalation is based on the increases of all the operating costs such as utilities, security, and maintenance.
  4. Indexed/Variable Escalation (Consumer Price Index or another inflation index) – This option allows landlords to increase rent in proportion to increases in established economic indexes.  This method is commonly used when to establish rent after an initial term to adjust and align rent with the economic environment, for example, when tenant exercises a right to renew. This option may not be favorable to tenants because index increases can be very unpredictable and dramatic.  In addition, while it may align with national economic trends, it may not represent local real estate economic trends.

Understanding the various rent escalation options is critical for commercial landlords and tenants negotiating new leases.

For existing leases that have rent escalations tied to inflation risk, it is critical to understand how the current economic environment will impact future rent. A common issue is whether a commercial tenant should exercise a right it may have in the lease to renew. Often, tenant renewal options provide for rent to be calculated using market metrics. Conceptually, this generally works well where the economic environment is stable, and inflation is low. In such cases, the formulaic rent escalations adjust the rent to where the market suggests it should be and mostly everyone is satisfied. However, in situations where the economic market is unstable and inflation is especially high, the formulaic rent escalations could adjust the rent to extreme amounts not expected by landlords or tenants. For tenants, this could create an increase in rental expenses beyond what may been budgeted or sustainable by the business. For landlords, this could create scenarios where multiple tenants are unable to afford the drastically increased rent, leading to higher rate of default.

Since the goal for most commercial tenants is to pay a fair market rent, while the goal for most commercial landlords is to ensure steady rent payments, the parties may be aligned in the interest of fairness.  To that end, before a commercial tenant exercises any option where its rent would be significantly above market considering current market indicators, the first step would be to communicate concerns to the landlord.  A reasonable commercial landlord would often welcome reasonable dialogue to find common ground to address the unintended and unexpected impact of present economic conditions.  Often, a negotiated extension, while delaying exercising a right to automatically renew may be an appropriate alternative to economic index impact.  Since a commercial lease has many components there are many intangibles that can be negotiated to equalize what each party may be giving up.  These could include improvements to the space, longer term, and other aspects of the lease agreement.  A commercial tenant may also, or as an alternative, explore other market opportunities to identify similar properties at more reasonable rent, considering buildout and moving costs.

For commercial leases being negotiated, instead of agreeing to standard provisions that directly use economic metrics to determine future rent, landlords and tenants may explore other options to mitigate against unintended results.  One option is to provide for limits, or caps, on increases affected by unstable indices.  Another option is to identify and use localized real estate market metrics as the basis for increasing future rent instead of using national economic metrics.  By focusing more on the regional real estate market trends, the resulting rent is more likely to be better aligned with the real estate market instead of national economic trends.  For multi-tenant commercial buildings, a close look at existing rents and escalations can also be a determinative metric for determining what a fair rent escalation could be.  Occasionally, real estate professionals with knowledge of the local real estate environment may be used to help the parties determine the best approach. Ultimately, evaluating all aspects of lease terms to find reasonable alternative methods for determining future rent increases.

Please contact us to discuss options.

Thank you to Ashley Cohen, Esq. for her contributions to this article.

The information contained in this article is provided for informational purposes only and is not and should not be construed as legal advice on any subject matter. The firm provides legal advice and other services only to persons or entities with which it has established an attorney-client relationship.