Tuesday, September 29, 2009

New Bank Owned Properties Discussion Group on LinkedIn

Yesterday, I created a new discussion group on LinkedIn, the social networking site for business. The group is called: Bank Owned Properties Marketing Group.

The intent of this online forum is to facilitate discussions and problem-solving regarding bank-owned commercial/investment properties. The number of properties coming into the pipeline is increasing, as banks are being forced by federal authoritities to keep more cash on hand. That is causing debt to equity ratios to be changed, and lenders are telling borrowers, "wow you've been a great credit risk and we really enjoy having you as our customer, and your credit rating is still high and you've never missed a payment.....but we need $100,000 in the next two weeks or we have to call your note."

....Which it turning the commercial/investment real estate market on its ear. As a result, more investment properties are coming available, labeled as distressed even though it is an artificial tag foisted on them by rules that were changed even though owners were playing by the rules all along. Of course there are also properties coming available by way of foreclosure that were not properly managed, or because over-eager buyers jumped into the market not knowing what they were doing, or by borrowing funds at high interest rates.

Who's in charge now? Buyers, that's who. And more and more buyers are asking for info on distressed properties. At Prudential Commercial we are working to find buyers for bank owned properties (REOs). Which jump-starts lots of discussions.

...Which is why I created the new discussion/marketing/problem solving forum on LinkedIn. It will be a place where principals, as well as agents, can kick thoughts around.

Stop by if you have a chance and join in the discussion!

Wednesday, September 16, 2009

Ready Or Not: Here Come Green Tenants

A lot of property owners, particularly in office, for a long time scoffed at the idea that tenants would drive the changeover to buildings that are more energy efficient. Smart business owners have long focused on making their properties as efficient as possible, but when it made economic sense (mostly).

Today, with the adoption of the Energy Independence and Security Act of 2007, which requires that all new federal government leases be in Energy Star buildings, and renewals undergo energy-efficiency upgrades starting in 2010, building owners understand now more than ever that the "green" momentum continues. Similarly, many cities have green bilding and/or green lease requirements in place.

Which leads to an interesting observation by some experts -- that in some markets there will not be adequate inventory to meet the demand for green space as these conditions and interests kick in across the United States.

Stimulus finding from the Obama White House is supporting a variety of ventures related to commercial real estaet, including energy audits, retrofits, dvelopment and implementation of advance building codes, inspections and financial incentives for energy efficiency improvements.

Some of these requirements, in my opinion, are heavy-handed and designed to inflate the bureaucracy. But they are there. And even more interestingly, just as the employees of many companies will drive -- or nudge -- their employers to get involved in community programming, so is there growing interest in nudging firms to look at green initiatives as a way to do something for the community.

In fact, the New York Times in march 2009 reported on the growing trend of chief sustainability officers being added to exec rosters at numerous large corporations, including Sun Microsystems, Georgia Pacific and Dupont.

Whats next??????

Monday, September 14, 2009

Strategic Management of Tax Liability

In these pages I have talked much about IR 1031 tax deferred exchanges. A new vehicle on the market this year, approved by the Internal Revenue Service in a private letter of approval, is going to prove a valuable strategic option for owners of commercial/investment real estate.

Occasionally, an investor wants to divest of properties but knows their equity is so significant, that their appreciation is so significant, that they end up holding on and continue to trade up to avoid capital gains. Long the legal way to build significant wealth with investment grade real estate, there still was always that stumbling block of what to do if you decide to get out "before your estate is activated."

If you need a translation of what I wrote in quotations above, email me and I'll clarify.

Anyway, investors worry that they will get killed with taxes and have thought, "well I may as well just let my kids inherit my assets as stepped up value when I pass away."

A new product, The Deferred Sales Trust(tm), is providing a new exit strategy for those who wonder what to do down the road. On March 10 of this year, the Internal Revenue Service issued a highly anticipated Private Letter Ruling that addresses this new tax deferral strategy.

Deferred Sales Trusts provide you with another tax-deferred strategy to defer the payment of your capital gain income tax liabilities when you sell highly appreciated real estate, personal property, business interests or other assets. The Deferred Sales Trust gives you one more tax deferred strategy to choose from when planning the sale of a highly appreciated property or asset. The Deferred Sales Trust is a legal method that allows the seller of the property to defer capital gains taxes due at the time of sale, but over a period of time, even beyond that investor's lifetime. This trust is drafted pursuant to Section 453 of the IR code, just like an installment sale note.

Here is how it works: The investor/seller, "grantor," sells his or her commercial/investment property to a dedicated trust, which in turn sells the property to a buyer. An annuity is created and the seller receives income over time, and is taxed only on that income received during a taxable year. And just as the income is dribbled in, capital gains taxes are not charged to the investor/seller all at once, but also over time. There are no taxes to the trust on the sale since the trust "purchased" the property for what it sold it for to a third party. Best of all, from what I understand in my research, there is no interest or penalty on these deferred payments of the tax. An investor's capital gain is recognized, but it is deferred over a pre-determined period of time that the investor chooses in advance. Everybody wins.

As always, if you get involved in this type of transaction, beyond your experienced real estate investment agent, you should also consult with your attorney and tax professional to make sure you are covered on all bases.

The trust can make a cash sale, also. Sometimes, in order to spread out tax liability, an investor/seller will set up a payment schedule with the buyer ( particularly if the seller finances the transaction). The Deferred Sales Trust appears to be a strong option because invstors never know whether the outside buyer will make all the payments on an installment sale. And trust payments are designed by the investor/seller, or grantor. The investor designs the payment schedule, the payment start date, and amounts to be received, depending on their needs.

Best of all, my research is showing that whatever is left in the trust at the time of the grantor's death appears to passe to the beneficiaries free of estate and gift taxes. Secondly, this transaction does not appear to triger any gift tax consequences, no matter how much trust assets are worth. And third, as is usual, trust assets do not need to go through probate when the grantor dies.

If your commercial real estate agent, CPA or tax adviser go to look up this new tool in the IR code, they will not find the name Deferred Sales Trust, or DST. Those are trademarked names from Exeter Fiduciary Holdings. . However, all of the legal and tax authority used in this type of trust are in the tax code. This is not a loophole. There has been a provision for installment sales for many years in the tax code.

Finally, once the trust is set up, additional commercial/investment property can be sold to the trust.

For some really strong Q&A on the subject, go to http://www.exeter1031.com/. This company is one of the strongest qualified intermediary firms for executing 1031 tax-deferred exchanges. In fact, Exeter is the company that has trademarked the name "Deferred Sales Trust" and asked for this ruling on this new product. They are the company I would recommend if I had a client who wanted to go this route.

Thanks go to Jim Wootten of Standard Realtors for bringing this to my attention during a recent meeting. It really got me thinking about possibilities. For those investors who don't plan to let their existing trusts that hold real estate outlive them, and want to cash out now, this approach offers many strategic possibilities well worth exploring.

Friday, September 4, 2009

Coming Up

The latest tool for investors, a powerful approach for those who exploit the power of 1031 exchanges -- the Deferred Sale Trust.

An overview and its implications in the next few days. STAY TUNED!