 Welcome to the Business in Hawai'i Show. I'm Daelyn Yanagida, and we are broadcasting live from the Think Tech studios in downtown Honolulu. If you want to tune in live, we are at www.thinktechhawaii.com. And while there, please subscribe to our programs and like our mailing list. The theme of Business in Hawai'i is to share with you stories of local businesses by local people. And our guests share with us their journey to building a successful business right here at home. In the Think Tech studio today is Nancy Grekin, Principal of Grekin Law. Nancy, thank you so much for joining me today. Glad to be here. Nancy, I wanted to kind of roll into our segment by asking you about how you got into commercial real estate law, how you rolled into doing that in Hawai'i and what the journey's been like. Well, I have a business degree as an undergraduate and I decided when I decided to go to law school, I was interested in business and not doing litigation. I never had any wish or anything else that you can do in the law. And so I joined a big firm straight out of law school and some real estate lawyers kind of took me under their wing and I learned it and I loved it right from the start. And I've stayed with it all this time. I've always wondered how attorneys pick their specialty area. Did they happen into it? Did they pick it? How does that happen? I think that most people probably do pick it. I don't think I exactly happened into it. And it's funny because in my high school year book, somebody said, you'll make a great lawyer. And I don't remember ever talking about that when I was in high school. Well, I was in high school, girls couldn't be lawyers anyway, you know? But I didn't really happen into it. I knew that I was interested in finance, accounting, business. And I got to know, I was taken under the wing of a real estate lawyer and I started doing construction loans and all kinds of interesting deals like that. And I loved making deals. And I've stuck with it all this time. Fantastic. So in the world of commercial real estate, what's the climate like now in Hawaii? Is it favorable for startups? Yes. Well, the real estate market here is always strong. You can never go on by buying real estate in Hawaii. And yes, we have ups and downs like everywhere else, but we don't have those precipitous downs that they have in other places. After 2008, things went down. They didn't go down as precipitously as they did in other locations in the country. And so the real estate market is always strong. And some markets are stronger than others, but it's always, you know, no matter what you buy, it's always gonna end up probably being a good investment here in Hawaii. Now, I know your specialty is in commercial real estate law, but you also dabble in a whole lot of other things and have done a number of talks and you've even authored a book. And I think that it might be appropriate to ask you, you know, we often hear that Hawaii's unfriendly to small business, new businesses, startups, what are your thoughts about that? There is truth to that. Registering and getting things done at the state government is very difficult. Getting a building permit is like climbing Mount Everest is what my real estate clients tell me. It takes a long time and it's very difficult to accomplish. One of the interesting things about Hawaii is that the state government has done a great job of getting online. You can create an entity easily online and get it back in a couple of days. And you can go search all the entities of the state at DCCAbusinessregistrations.com is the name of the website. You put in the name of an entity and you can find the entity, find who the officers, members, you know, various owners are. And you can see whether it's in good standing and you can find it, it's really great and it's not like a lot of other states. So in that sense, it's good. But really the regulatory environment in Hawaii is very onerous, no matter what it is you're trying to do. And I think that's what people complain about. And the time to get things done is lengthy. So with that, I wanna pick your brain a little bit about starting up a business in Hawaii and perhaps the very first step that needs to happen in that is choosing your business entity. What can you tell us about that? If you want to be an entity, that's the first thing you've gotta think about doing. And the choice of entity, there are multiple types of entities that you can operate in. And the first and probably the most well known is the corporation. And most corporations are what's called a C-Corp. And what that is is sub chapter C of the internal revenue code on corporation taxation. Good news about a C-Corp is the owners do not have any personal liability for any of the debts of the company. The bad news is a C-Corp has suffers from double taxation which means the entity is taxed at the entity level. So when any distributed out of the company whether it be in the form of a salary or dividend, the tax has to be paid again by the shareholder, by taxpayer. Now, there is a form of corporation called sub-S. And if you elect to be taxed as a sub-S, that's another sub chapter of the internal revenue code. If you do that, then you have passed through taxation but it's not really like a partnership. You don't have a hundred percent of the advantages that you have of true pass through taxation. Through pass through taxation, you get first of all in a general partnership. Now, the good news about a general partnership is you get pass through taxation. The bad news is all of the partners have personal liability for any of the debts of the partnership. There is a form of partnership called a limited partnership. A limited partnership has two kinds of partners. It has a general partner and limited partners. The general partner has full liability for the debts of the partnership just like in a general partnership. The limited partners are shielded as they would be if they were shareholders in a corporation. And people don't use this very much anymore and I'll get to why in a moment when I tell my favorite type of editing. But in order to avoid to be shielded from the liability of the general partner, most people when they form sub-S corporations would want to form a corporation to be the general partner because the corporation shielded the shareholders from liability. And the last one that just everyone is using now is called a limited liability company. Hawaii was the 50th of the 50 states to adopt a limited liability company law. What's great about a limited liability company is that you get pass through full on pass through partnership taxation, but the members, and those are the owners of the company have the same liability shield they would have if it was a corporation. There's two kinds of LLCs. The most common one is called member managed and in a member managed LLC, all the members have the right to monitor and to run the company. And they also have full unlimited liability, okay? In a manager managed LLC, you can have an LLC that's managed by a manager and the manager need not be a member. The manager has all the powers and the members don't have the power to do anything or sign anything or anything like that, okay? And one of the reasons people like manager managed LLCs is if you go look this company up at the DCCA, you can't find out who the members are. So it's a great way to obscure membership if that's what you want to do, okay? So one of the advantages, by the way, is tax advantage. The new 2016 tax law gave pass through tax payers the right to deduct 20% of their income. So they actually pay tax on 20% of their income and the effect was a tax break for pass through type entities except for lawyers and doctors. I can't do it, but the rest of you can if you're not a lawyer or a doctor, okay? So you can convert any type of entity, any type of entity. And this is one of the cool things that our state does that actually is easy to do. It's a simple form you file at DCCA. It's got a $25 filing fee. The only thing about it is be careful. If you convert a corporation to an LLC, you're gonna have tax consequences. So it's not, you know, if you want to convert the form of an entity, please go talk to your accountant and be sure you're not gonna have tax consequences from having done that. Now you mentioned that Hawaii was one of the very last states to allow for limited liability companies. Yes. Is Hawaii historically later in the trend? Yeah, I guess. I can't think of anything else that quite equates to limited liability companies. But they had been around for probably 20 years before Hawaii finally got around and we adopted limited liability company law. It's a very good law and it's very easy to deal with. You know, it's easy to operate an LLC because the law is very straightforward and simple. Yeah. Was there some concern from the state about allowing that? I don't know what the, I have no idea. I know that it was in the legislature year after year after year. I'd have no idea. I can't remember if I ever knew why it didn't pass, why it took so long. Because it had been proven out and there were lots of cases and lots of experience with it in many other jurisdictions, you know? And we were the last. And so you're speaking about member managed LLCs. So what if there's a small business and perhaps it's just one person? What's the best avenue for a startup like that? One of the things about LLCs, by the way, is you can have a single member LLC. You cannot have a partnership with only one partner. By definition, it's gotta be at least two people. And so if you want to operate in an entity, you could do so and be the only member. The liability shield has limited effect for a lot of businesses. Because if you are going to borrow money or sign a lease, you're gonna be required to guarantee it. So the liability shield about the only thing it might protect you from is maybe somebody slipping and falling or that type of thing, which you can protect yourself with liability insurance. So it's not always true that it's necessarily beneficial or necessary to operate in an LLC. Depending on the type of business, if you're running a restaurant, that's a great place to have an LLC where you have the liability shield because of the types of, you know, if you poison somebody, you know, or something. That's a great, you know, and one thing about LLCs, and this is what I always suggest to my client, real estate is owned almost exclusively in LLCs now. You don't want to own real estate in a corporation because you can't sell it or get the money out if it's in a corp because of double taxation. If it's in an LLC, you have the pass-through taxation and you have a lot of variety of interesting things you can do with it being in an LLC. I just last week had a client who wanted to do an exchange in a corporation, but not everybody wanted to exchange. Well, you can't do that in a corporation, but you can do that in an LLC. You know, there's a way to pull that off. I always suggest to my clients that they put each piece of, if you own a bunch of real estate, put each of them in their own LLC. If you own five restaurants, put them each in their own LLC because that protects each of them from losses and liabilities and the others. If one goes under, it goes under, but nothing happens to the rest of your property or your businesses. Nancy, we're gonna go to a short break, but while we come back, I wanna talk more about at what point in a business's lifespan, they're ready to actually either purchase or release property and what the potential pitfalls could be if they're not careful. So we are going to take that short break. This is Business in Hawaii. We'll see you back here shortly. Aloha, I'm Stan Osterman, Stan the Energy Man every Friday here on Think Tech Hawaii. If you're really interested in finding out what's going on in energy, especially here in Hawaii, but also all the way around the world, and especially if it has to do with hydrogen, look into Stan the Energy Man every Friday, 12 o'clock, Think Tech Hawaii, be there, Aloha. Aloha, my name is Duretian. I'm the host of Finding Our Future here on Think Tech Hawaii. I'm here every other Tuesday from one to 1.30 p.m. Here on this show, I cover issues around sustainability, global issues that matter for young people for future generations and other social justice issues. So please join us. It's live streamed on Think Tech Hawaii and also uploaded on YouTube. Okay, okay. Welcome back, this is Business in Hawaii. With us today is Nancy Grekin of Grekin Law. Nancy, thanks again so much for joining us. I know we're picking your brain a lot about tidbits on how to manage the ramp up of a business and you've given us some great information about business entity setup. So say I form an LLC and I'm ready to move into a physical space, hang a shingle if you will. Can you guide me through that process and what I need to be aware of? Yes. I think the first thing that you should do is to find a good commercial real estate agent. I do that too, I'm also a real estate agent because the less he doesn't pay the commission, the less the word does. And a good real estate agent, number one has access to the type of property that you need will make sure that you don't have any zoning issues that you can conduct the business you want to in the location. And they'll check out the quality of the location and the quality of the landlord and all of those different types of things. So the first thing you're going to be concerned with if you're going to lease a premises is the rent. There are two components to rent in a commercial lease. One is what's called the base rent and that's just how much do you pay every single month. The second is an operating expense reimbursement that most commercial leases require of their tenants. Some leases don't require it but it's rare to find a commercial lease that doesn't require an operating expense reimbursement. So you're going to want to know how much that will be. The way your share of operating expenses the ratio of the area of your present premises to the area of the entire building will be what's called pro-rata share. You want to know your pro-rata share but you also want to know an estimate of how much per square foot do those expenses run. They tend to increase every year as everything goes up and in most leases in Hawaii they are what we call an absolute net lease. That means you are paying a part of virtually every expense that your landlord occurs or whatever it is, building, shopping centers, okay. You want to run the numbers on that. And well, let me talk about rent too. Rent will typically in a commercial lease increase by 3% a year. That's the current thing. So count on your rent's not going to stay the same. You're typically going to have a 3% annually increase. And but run the numbers. Look at what you're expected, your anticipated revenues are and look at what those rent expenses are and make sure that you can afford to rent this place you're looking at, okay. Most commercial leases now tend to be about three years of a term. You can get, you can ask for and get a longer term. And if you want to take the chance of having a longer term you might be able to negotiate a better deal on your rent. Maybe you can get more years of fixed lease rent in the beginning of the lease or that type of thing. But if you're just starting out a new business you may not want to take a terribly long lease. Maybe you just want to take three years and have options for review. Because then you can decide when the time comes when the three years are up, how are you doing? Are you doing okay? Can you still afford to stay in this location? So those are the different ways you can do that. And I'm going to throw out a plug here. I'm a lawyer reviewing a lease. I have a lot of clients and they were my clients and they're my clients now who signed a lot of tenants just signed the lease. And a lot of landlords open think that their tenants aren't going to use a lawyer. And so they'll put a lot of really outrageous things in the lease, okay? And I've had clients that, my favorite one is you want to be able to assign the lease if you decide you want to get out. And what you want is a provision that says Santa's landlord will not be unreasonably withheld. And what that means is if the proposed capacity is credit worthy, the landlord has to consent to the assignment, okay? I had a client running, he has a lot of restaurants and if he doesn't, he's doing well, he gets out. He went to the side of the lease. Well, he didn't have me look at the lease and the lease didn't say that. It said the landlord could withhold consent and the landlord was withholding the consent. I got him out of it. They took time and it took money and now he won't open a restaurant without looking me looking. So hire a lawyer to look at your lease. It's not gonna cost a lot if you go to somebody who knows what they're doing. And if there are any issues like that in the lease, get them resolved before you sign the lease. So let me understand this. So there's a base rent and then commercial real estate property could also tack on an additional, is that based on revenues per square foot or how does that work? It's based on what the actual expenses of operation are. So it includes things like insurance, property taxes, management fees, various types of maintenance of the property. It includes a whole variety of things, okay? And those are added up each year and then divided up among the tenants by their pro-rata share, whatever it might be. And then the typical lease will say that once a year the landlord tells the tenant, this is how much the operating expenses will be and this is what your share will be and this is how much you have to, you pay one 12th of it every month. Some leases will say if it goes up the landlord can increase it during the course of the year. But it's based upon the actual expenses and you can count on those going up. Everything seems to go up every year. It's not gonna stay the same. Wow, I guess like everything else, right? Everything keeps going up. Right, right. So once I've set up my business entity the right way and I've secured the right attorney to help me through my, before I sign a lease, are there tax advantages that we can enjoy that were perhaps passed in the 2019 ledge that's going to be beneficial to us in this coming year? I am not aware of anything. It's funny, because the legislature you never know what's gonna happen. And if you try to follow it during the legislature it could change completely. And so I don't follow it, I just wait till the end of the year and find out what they're, I wouldn't expect that there's going to be any kind of tax advantage adopted by the legislature. The Hawaii follows the internal revenue code. So I'm assuming that that 20% deal for pass through entities is probably in effect for state taxes here as well. But they're about the only tax benefit that has happened recently is this 20% off deal in the 2017 federal tax app. So, and that was, you know, beneficial. And a good reason to have a pass through entity, you know? Yeah. Well, I think we knew that this would happen but I think we could go through a ton more questions but we are running out of time. And I wanted to give you an opportunity to of course let everyone know how to find you because I know that you are at Gregg-in-law but how folks can find you and any other two bits that you want to speak. I want to throw out one more thing and it's if you start a business, get yourself a domain name. It's easy to do with Google or a whole lot of other places on the internet. And then you can have an email address like Nancy at Gregg-in-law instead of John at aol.com. You know, it makes you look more professional if you get yourself a domain name. So I am at Gregg-in-law.com. I got myself a domain name and I have got myself a website. That's another thing, you know, give Siri a very, very serious consideration to having a website for your business. It's, you know, and I know a lot of business now are in social media and they're doing all that kind of thing. I don't do that but I think it's good for a lot of business. But get yourself a domain name, get yourself a website and my domain name is Gregg-in-law.com And so my email address is Nancy at Gregg-in-law.com and my website is at Gregg-in-law.com and it tells everything about all the different things that I do and it has all my contact information in there. Fantastic. I've so enjoyed having you. I appreciate you fielding all my questions. Sometimes it's hard to get the advice that you need. Yes. Well, put in a plug, call a lawyer. That's right, that's right. Again, I appreciate your time. Unfortunately we've hit the end of our show but a big thank you to Nancy again for joining us and a huge thank you to the great production staff here in the studio. If you want to be a guest on our show please like us below and subscribe, leave a comment. Business in Hawaii airs every Thursday at 2 p.m. and we look forward to seeing you here next week.