Law in Order

GENERAL LEGAL CONSIDERATIONS FOR SUPPLIER PARTNERS’ BUSINESSES

By Hari Nathan Kalyan (Partner), Allison Mattocks (Partner) and Mari Garza (Counsel)

In addition to representing multifamily property owners and operators, our firm, Warren Kalyan Mattocks, focuses on providing legal advice and counsel to Supplier Partners operating within the greater multifamily ecosystem. This article provides a general overview of legal considerations for starting, structuring, operating, and growing Supplier Partner businesses within the multifamily real estate industry.

Supplier Partners play a crucial role in the seamless operation and management of multifamily residential properties. They are integral in providing a wide range of services and products necessary for the daily functioning and long-term maintenance of these properties. These partnerships range from supplying basic necessities like cleaning and maintenance supplies to more complex services like property management software, security solutions, and energy- efficient systems. Effective supplier partnerships ensure that multifamily properties remain well- maintained, secure, and up-to-date with the latest technologies and amenities. This not only enhances the living experience for residents but also contributes to the operational efficiency and profitability of the property. The ability of a Supplier Partner to operate, innovate, adapt and grow their business is a key component to supporting the strategic objectives of the property owners and managers.

As members of the Austin Apartment Association, Supplier Partners are likely aware that the multifamily real estate industry is fertile ground for businesses offering a wide variety of products and services. No matter what role a Supplier Partner plays in the multifamily ecosystem, their business’s path is fraught with challenges that need to be faced and overcome. With strategic planning and agility, however, differently, the likelihood of a company’s success depends on how prepared they are to cope with the inevitable challenges that are forthcoming.

Starting A Business:

Legal Foundation liabilities, etc. We also urge Supplier Partners to exercise caution when utilizing online legal services companies that purport to create legal documents without necessarily having to hire a lawyer. It’s always best to do things properly from the outset rather than have to be reactive to poorly drafted legal documents.

Generally, most small to medium size Supplier Partners our firm represents favor the LLC for its limited liability, operational flexibility, and passthrough taxation, but it’s essential to consider the specifics of the company’s business model and longterm goals. Supplier Partners should always consult with a business attorney and a tax professional when making these decisions to ensure that their entity selection aligns with their strategic objectives and provides the best possible advantages under state and federal law.

The most common types of legal entities are as follows: risks involved in real estate dealings and services, LLCs are commonly used due to their liability protections and tax benefits. to local zoning laws that govern land use and building codes. As vendors, Supplier Partners will need to ensure their services or products comply with these regulations. Supplier Partners should check with city and county planning departments for any zoning restrictions that may affect their ability to operate or deliver services to multifamily properties. If their business operations don’t conform to zoning laws, they may need to apply for a variance or a special use permit.

Sole Proprietorship. The oldest and simplest form of business entity. There’s no distinction between the business and the owner. The owner has unlimited personal liability for business debts. Income is reported on the owner’s personal tax return.

Partnership: A traditional business structure for businesses with more than one owner. Partners have joint and several liabilities for business debts, although in Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs), some partners have limited liability. Income is passed through to partners’ tax returns.

Corporation (C-Corp and S-Corp). The concept of the corporation as a separate legal entity dates back to ancient Rome. The modern corporation with its structure and governance features developed more fully in the 19th century. Shareholders have limited liability. C-Corps are taxed at the corporate level and then again at the shareholder level on dividends (double taxation), while S-Corps have pass-through taxation but must adhere to strict criteria.

Licensing and Permitting. Depending on the service or product, various state and local licenses may be necessary, so a Supplier Partner will need to check with their local and state government for specific licensing requirements. This may involve applying for a general business license, specific trade licenses (like a contractor’s license), and obtaining necessary permits for operations.

Texas does not have a general business license requirement, but Supplier Partners must comply with licensing and permit regulations that pertain to their specific industry. For example, construction-related Supplier Partners need to obtain a contractor’s license. There may be additional specialized licenses for electricians, plumbers, HVAC technicians, etc. If they’re involved in property management, Texas requires a real estate broker’s license to manage property for others.

Pest control services require licensing through the Texas Department of Agriculture. All Supplier Partners selling products or taxable services in Texas must obtain a Sales and Use Tax Permit from the Texas Comptroller’s office. Cities or counties may have additional requirements, such as a building permit for construction or signage permits for advertising.

Structuring A Business: Contracts and Agreements

Operating Agreements. Especially for LLCs, having a well-drafted Operating Agreement for a business is essential. It outlines the management structure, distribution of profits and losses, member duties, and other critical operational rules.

Service Agreements. It is essential to draft clear service agreements outlining the scope of work, pricing, timelines, and terms of service. An attorney can work with Supplier Partners to create templates for such service agreements that includes detailed descriptions of services, payment terms, timelines, confidentiality clauses, and liability limitations. Supplier Partners will want to be sure their service agreements include terms for dispute resolution such as mediation or arbitration, and clearly state the conditions for termination of the contract.

It’s always best to do things properly from the outset rather than have to be reactive to poorly drafted legal documents.

these hurdles can be transformed into opportunities for growth and success.

The multifamily industry presents a unique set of opportunities and challenges for Supplier Partners looking to establish and expand their businesses.

Navigating the intricate web of corporate and business law is essential to not only start but also successfully grow a vendor business within this industry. Success hinges on a company’s ability to innovate, adapt, and maintain robust relationships within the industry. Put

Entity Formation. As a service provider within the multifamily ecosystem, choosing the right corporate entity is a foundational step that will impact a business for years to come. When selecting a business entity, businesses should consider the level of personal liability protection, tax implications, management structure, and the flexibility a Supplier Partner will require in the operation of the business. Supplier Partners are advised to consult with a business attorney to understand the implications of each structure as well as the nature of their business, plans for growth, manage tax

Limited Liability Company (LLC). The LLC is a relatively recent innovation in American business. Wyoming was the first state to legislate the formation of LLCs in 1977, borrowing the concept from the German “GmbH” and the Panamanian “Sociedad de Responsabilidad Limitada.” It became more popular after the IRS ruled in 1988 that it would allow LLCs to have pass-through taxation. Members have limited liability and taxation is typically pass-through, avoiding the double taxation issue that affects C-Corps, unless it elects to be taxed as a corporation.

LLCs can be member-managed or manager-managed, providing flexibility in operation. Given the liability

Is it imperative that Supplier Partners stay updated with the licensing requirements as they can change, and ensure renewals are managed in a timely manner to avoid lapses.

Zoning and Land Use. Supplier Partners want to ensure that their business operations comply with local zoning laws, especially if they maintain a physical presence or storage facilities. They should also confirm that the location of their business complies with local zoning laws which can be verified at their local zoning office or city hall. If necessary, Supplier Partners can apply for a variance or a conditional use permit if their business activities do not completely align with local zoning regulations.

Multifamily properties are subject

Vendor Agreements. For goods suppliers, vendor agreements are critical. These should specify terms related to delivery, risk of loss, payment terms, and quality assurances. Vendor agreements should clearly define the quality and condition standards for products, delivery schedules, pricing, payment terms, and penalties for non-compliance. A “force majeure” clause to protect against liability for unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling obligations should also be included in a vendor agreement.

Subcontractor Relations. If subcontracting, a Supplier Partner should have detailed contracts that set forth the expectations and legal obligations of all parties, including compliance with applicable laws and insurance requirements. They should ensure that subcontractor agreements include clauses that require adherence to safety standards, insurance requirements, indemnification clauses, and detailed scopes of work. Supplier Partners also want to make sure they are establishing a clear process for monitoring and evaluating subcontractor performance to ensure compliance with their standards and contractual agreements.

Intellectual Property. If the Supplier Partner’s business model relies on proprietary software or unique systems, it is a good idea to protect their intellectual property through appropriate trademarks, patents, or copyrights. They should file for trademarks to protect their brand identity, patents to protect inventions, or copyrights to protect original works. Supplier Partners should include confidentiality and non-disclosure agreements (NDAs) in their contracts when disclosing proprietary information to third parties.

Operating A Business:

Regulatory Compliance

Fair Housing Laws. Supplier Partners must understand and comply with the Fair Housing Act, ensuring that their services or products do not enable or suggest discriminatory practices. They should implement a company-wide policy that adheres to Fair Housing regulations, ensuring that all employees understand and follow non-discriminatory practices. Supplier Partners should regularly train staff on fair housing laws and keep records of this training. Multifamily properties must comply with local, state, and federal Fair Housing laws, as well as with the Americans with Disabilities Act (the ADA). Although some terminology overlaps between the two federal laws, they are two distinct sources of legal authority.

Environmental Regulations. Compliance with environmental regulations is a must, especially if a Supplier Partner’s business deals with waste management, construction, or property maintenance. If handling hazardous materials, Supplier Partners need to ensure compliance with the Resource Conservation and Recovery Act (RCRA) and other relevant environmental regulations. They should regularly review their operations for compliance with the Environmental Protection Agency (EPA) standards and local environmental laws. For further context as to the dangers of biohazard removal and of bloodborne pathogens as it concerns crime scene cleanup and the death of a resident, we encourage attendance at the AAA’s May 2024 seminar WKM is presenting with Emergency Cleaning Solutions (ECS).

Labor Laws. Businesses should stay abreast of federal, state, and local labor laws, including wage and hour laws, worker classification, and occupational safety. They should always keep informed about the Fair Labor Standards Act (FLSA) for wage and hour standards and verify compliance with the Occupational Safety and Health Administration (OSHA) for workplace safety. Supplier Partners ought to understand the distinction between employees and independent contractors and classify them correctly to avoid penalties. The Texas Workforce Commission (TWC) is our state’s governmental agency that is responsible for administering and enforcing the laws of Texas relating to employment in Texas. The TWC is a valuable resource for employment rules and resources. Both the TWC and the U.S. Department of Housing and Urban Development (HUD) handle housing discrimination complaints.

Growing A Business: Expansion and Risk Management

Mergers and Acquisitions. As a Supplier Partner’s business expands, they will need to consider mergers or acquisitions to grow their market share. This will involve due diligence, regulatory approvals, and restructuring. Supplier Partners must conduct thorough due diligence on potential acquisition targets or merger partners, examine financials, legal standing, operational compatibility, and cultural fit. They should also give thought to engaging legal and financial advisors early in the process to navigate the complexities of M&A, from negotiation to closing.

Financing. Supplier Partners need to understand the legal aspects of various financing options, including loans, lines of credit, and equity financing. It is imperative they ensure that all financial agreements comply with applicable laws and regulations. Most importantly, they’ll want to review the terms of any loan or credit agreement, to ensure they understand the covenants, obligations, and events of default. When seeking investors, they should be mindful of securities laws and the implications of bringing on shareholders. Supplier Partners should engage legal and financial partners who are qualified to answer questions regarding U.S. Small Business Administration (SBA) facilities (such as the Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program (PPP)).

Insurance. Supplier Partners will want to obtain comprehensive insurance coverage to mitigate risks associated with their operations. They should work with a trusted insurance broker to identify potential risks and obtain the right type and amount of insurance coverage. The following are types of policies that should be considered:

General Liability Insurance. Protects against financial loss due to bodily injury, property damage, medical expenses, libel, slander, defending lawsuits, and settlement bonds or judgments.

Professional Liability Insurance. Also known as Errors and Omissions (E&O) insurance, this is crucial if a business provides advisory services.

Workers’ Compensation. Texas is unique in that it does not require employers to carry workers’ compensation coverage. However, it’s highly recommended to protect a Supplier Partner’s employees and business.

Commercial Auto Insurance. In order to operate vehicles for business purposes in Texas, a business must carry a minimum amount of commercial auto insurance. Ensuring that all vehicle operators are listed as drivers on the company’s policy is essential in order to avoid being denied coverage for an accident which occurred during the course and scope of employment.

Property Insurance. If they own a building or have business personal property like office equipment or tools,

Supplier Partners ought to consider property insurance to protect against loss or damage.

Umbrella Insurance. This can provide additional liability protection above and beyond the limits of their other policies.

Considerations

Specific to Texas

Texas Accessibility Standards (TAS). If a business alters, constructs, or leases to multifamily dwellings, Supplier Partners must ensure compliance with TAS for individuals with disabilities. The TAS are located in the Texas Government Code and are administered by the Texas Department of Licensing and Regulation (TDLR). TAS has some differences and variations from other accessibility standards, like the Americans with Disabilities Act (ADA) standards. However, both TAS and ADA standards must be consulted when designing, constructing, or altering buildings and facilities in Texas.

Environmental Regulations. The Texas Commission on Environmental Quality (TCEQ) enforces state environmental laws, and compliance is critical for construction, renovation, and waste management operations.

Water Rights. Vendors involved in landscaping or irrigation services need to be aware of Texas water rights and regulations due to the state’s frequent drought conditions. Moreover, utilities in Texas, including water and sewer utilities are regulated by the Public Utility Commission of Texas (the PUC). The PUC rules regarding water billing and metering must be strictly adhered to by landlords, property managers, and third-party billing companies in order to avoid a PUC complaint. Vulnerabilities in water billing from amenities or landscaping irrigation may show up in this heavily regulated area.

Heat Stress Regulations. Texas can be extremely hot; thus, if Supplier Partners have employees working outside, they need to follow Occupational Safety and Health Administration (OSHA) guidelines to prevent heat stress or heatstroke.

Texas Department of Housing and Community Affairs (TDHCA). If Supplier Partners provide services related to affordable housing, they ought to be staying informed about the TDHCA regulations and requirements.

Conclusion

For Supplier Partners within the multifamily real estate industry, success depends on more than just an understanding of the market; it requires a keen awareness of the legal environment. Before Supplier Partners begin operations as a vendor to multifamily properties in Texas, thorough due diligence in licensing, zoning, insurance, and other local regulations is crucial. This ensures not only the legality of their business operations but also the safety and protection of their business assets, employees, and the residents of the properties they service. Given the complexity and local nuances of the Texas legal and regulatory environment, consulting with legal and industry-specific professionals is advisable to navigate these requirements effectively. Each section of a Supplier Partner’s business requires careful planning and legal consideration. By attending to the details and preparing comprehensive structures and policies, Supplier Partners in the multifamily real estate industry can establish a solid foundation, minimize risk, and position themselves for successful growth. They should always seek professional legal counsel to address specific issues related to their business. With legal savvy as part of their business toolkit, they’ll be well-equipped to build a resilient and thriving presence in the multifamily real estate landscape. By laying a strong legal foundation, structuring relationships wisely, maintaining regulatory compliance, and strategically managing growth risks, Supplier Partners can position themselves for long-term prosperity in this dynamic field.