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!
Tuesday, September 29, 2009
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??????
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.
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!
An overview and its implications in the next few days. STAY TUNED!
Wednesday, August 26, 2009
Buy And Hold Strategy Is Nothing New
The biggest money, the largest portfolios, the greatest concentrations of wealth that have been built in real estate have come via "buy and hold" strategies.
This is hardly a new concept, and I have written about it at length. By buying "right," and holding, you take advantage of numerous positives: income, cost recovery/depreciation, equity buildup, appreciation, and leverage. And you have the further advantage of being able to utilize tax-deferred exchanges, indefinitely deferring payment of capital gains, as you move up into larger properties.
The idea of grabbing a building, or house, cheap, appeals to a segment of the buying community that, frankly, thinks smaller. They want to "flip" properties in order to pocket (hopefully) some quick cash. But they are unable to take advantage of any tax incentives that come with holding investments. Which is why, as I have said ad infinitum, this approach is not investing. It is gambling. Enough said.
But buying and holding is something that works in the stock market, as well. And interestingly, the authors of a story published at TheStreet.com (again) seem amazed that the returns are so much higher for shareholders when they buy and hold. Rather than buy and sell.
No kidding!
Unless your stock is in free fall and in danger of becoming worthless, and not just off by a quarter or a third, you should hold on to it. In most cases it will come back. Dollar averaging . . . buying some shares at this price, and then buying some more at that price, comes back in a positive way in most instances.
There is, however, one difference in the focus on investing in stocks and holding, vs investing in commercial/investment real estate and holding. Can you guess? Yes, its the tax-deferred exchange. I think everyone should have some money in stocks -- its part of that diversification. Eventually, even in a buy and hold strategy in the market, you will divest and re-invest. BUT, you cannot sell your stocks, and re-invest in another company's shares and avoid capital gains taxes. You will pay either short-term or long-term capital gains. Not so with income producing commercial/investment real estate.
Anyway, check out the story. Its a good one regardless.
This is hardly a new concept, and I have written about it at length. By buying "right," and holding, you take advantage of numerous positives: income, cost recovery/depreciation, equity buildup, appreciation, and leverage. And you have the further advantage of being able to utilize tax-deferred exchanges, indefinitely deferring payment of capital gains, as you move up into larger properties.
The idea of grabbing a building, or house, cheap, appeals to a segment of the buying community that, frankly, thinks smaller. They want to "flip" properties in order to pocket (hopefully) some quick cash. But they are unable to take advantage of any tax incentives that come with holding investments. Which is why, as I have said ad infinitum, this approach is not investing. It is gambling. Enough said.
But buying and holding is something that works in the stock market, as well. And interestingly, the authors of a story published at TheStreet.com (again) seem amazed that the returns are so much higher for shareholders when they buy and hold. Rather than buy and sell.
No kidding!
Unless your stock is in free fall and in danger of becoming worthless, and not just off by a quarter or a third, you should hold on to it. In most cases it will come back. Dollar averaging . . . buying some shares at this price, and then buying some more at that price, comes back in a positive way in most instances.
There is, however, one difference in the focus on investing in stocks and holding, vs investing in commercial/investment real estate and holding. Can you guess? Yes, its the tax-deferred exchange. I think everyone should have some money in stocks -- its part of that diversification. Eventually, even in a buy and hold strategy in the market, you will divest and re-invest. BUT, you cannot sell your stocks, and re-invest in another company's shares and avoid capital gains taxes. You will pay either short-term or long-term capital gains. Not so with income producing commercial/investment real estate.
Anyway, check out the story. Its a good one regardless.
Tuesday, August 25, 2009
401(k)s Decimated By Stock Crash
A report out today on TheStreet.com indicates that Americans with 401(k) retirement plans lost, all told, about $1 trillion in . . . THE STOCK MARKET CRASH.
For some time people have been saying 401(ks) were bad investments. I disagree. It is where that 401(k) money was invested that tanked, not the investment vehicle itself.
Nevertheless, the report says no one was spared. There was no where to hide as even mutual funds were impacted. In many cases, investors saw the value of their portfolios pushed back to values found 10 years ago, analysts say. Further, analysts are reminding investors what they forgot: that the 401(k) was never meant to be a primary investment tool. It is supposed to be a means for employer matching (for those employers still providing matching funds) and a way to defer income taxes on income.
So why do I bring this up? While commercial/investment real estate is experiencing its own pains at this time, values of properties that were bought at reasonable values, with reasonable leverage, are doing fine. Vacancy rates may be up slightly in some markets, and in some industry segments, but people owning income producing buildings do not have a situation where the value of their portfolio has dropped so precipitously that it is valued at a 10 year old price. In fact, with inflation starting to creep into the picture, some values are slowly rising here and there.
Of course, with this news come the usual call for "government oversight." Sigh . . .
Listen, if you want to be paid first, and not last, ownership in commercial/investment property puts you in charge. I have written on this before. And 401(k) funds can be rolled over into self-directed IRAs, and the IRAs pick up properties coming on the market at a bargain.
More to come on this . . .
For some time people have been saying 401(ks) were bad investments. I disagree. It is where that 401(k) money was invested that tanked, not the investment vehicle itself.
Nevertheless, the report says no one was spared. There was no where to hide as even mutual funds were impacted. In many cases, investors saw the value of their portfolios pushed back to values found 10 years ago, analysts say. Further, analysts are reminding investors what they forgot: that the 401(k) was never meant to be a primary investment tool. It is supposed to be a means for employer matching (for those employers still providing matching funds) and a way to defer income taxes on income.
So why do I bring this up? While commercial/investment real estate is experiencing its own pains at this time, values of properties that were bought at reasonable values, with reasonable leverage, are doing fine. Vacancy rates may be up slightly in some markets, and in some industry segments, but people owning income producing buildings do not have a situation where the value of their portfolio has dropped so precipitously that it is valued at a 10 year old price. In fact, with inflation starting to creep into the picture, some values are slowly rising here and there.
Of course, with this news come the usual call for "government oversight." Sigh . . .
Listen, if you want to be paid first, and not last, ownership in commercial/investment property puts you in charge. I have written on this before. And 401(k) funds can be rolled over into self-directed IRAs, and the IRAs pick up properties coming on the market at a bargain.
More to come on this . . .
Sunday, August 23, 2009
Prudential Analysis of U.S. Market Illustrates Problems, Opportunities Facing Investors
As the economic spiral facing the United States markets appears to be slowing -- some suggest it is even bottoming out -- opportunities exist for both investors and owners alike, depending on the types of properties they either are acquiring or currently own.
I have written in these pages previously that multifamily is the only sector that seems to have some stability. Most of the others -- retail, industrial, office -- are hurting in different ways. Each of these situations provide significant opportunities for investors, who will be able to pick up somewhat discounted properties as pressure builds on owners to refinance (if they can) or deal with vacancy rates that cannot be sustained because of the cost of money when they acquired the properties.
As such, owners are selling, or will be selling, because of pressure from lenders or a wish not to deal with vacancies and tenants who are having a tougher time in their own industries.
With multifamily there also are some properties that will be coming to market around the nation due to lender standards (driven by the U.S. Treasury Department) demanding commercial borrowers to add additional capital or have their notes called. Though I am a fan of leveraging investments, those owners who are over-leveraged will find that this market and new government requirements being imposed on banks may be their un-doing.
Prudential Real Estate Investment, the equity management arm of our organization, has a new report out discussing the outlook for the market in the United States. In the quarterly report, analysts pretty much discuss much of what I have outlined in previous months -- only with a bit more detailed analysis. We are not yet seeing a lot of distressed properties come on the market, but we will. It will be an investor's dream scenario.
Interestingly, the multifamily market sector, while experiencing some hiccups, is relatively stable, depending on where you are in the nation. Some markets are stronger than others, but, in fact, multifamily is going to remain strong for another reason -- not just because people are losing their homes and need a place to live.
A new story published by Multifamily Executive magazine notes that with so little new multifamily product being built anywhere in the United States right now, pressure is on these properties and rents are stable and will soon be rising, if they aren't already. And all these factors are going to create a shortage of a new kind -- which creates opportunities for investors.
Low-income housing.
Whether it is multifamily, or single family, pretty much all indicators are pointing to as long as a decade of shortage of low-income housing. An opportunity for individual and corporate investors, in my opinion, as we will likely see municipally-funded low-income housing in decline. Cities and other government agencies are bankrupt, stretched beyond their limits. It will be more and more difficult for public funds to be earmarked for housing. That is, unless the Obama administration decides to allocate more funds from stimulus packages or other programs toward low-income housing.
I will write more on this in the coming days. I am still digesting the Multifamily Executive magazine piece, and will share more as I have thoughts on it.
If you have time, please take a look at the Prudential quarterly review of commercial real estate trends. It is a fairly succinct snapshot of the pitfalls -- and opportunities -- facing the investment real estate community.
I have written in these pages previously that multifamily is the only sector that seems to have some stability. Most of the others -- retail, industrial, office -- are hurting in different ways. Each of these situations provide significant opportunities for investors, who will be able to pick up somewhat discounted properties as pressure builds on owners to refinance (if they can) or deal with vacancy rates that cannot be sustained because of the cost of money when they acquired the properties.
As such, owners are selling, or will be selling, because of pressure from lenders or a wish not to deal with vacancies and tenants who are having a tougher time in their own industries.
With multifamily there also are some properties that will be coming to market around the nation due to lender standards (driven by the U.S. Treasury Department) demanding commercial borrowers to add additional capital or have their notes called. Though I am a fan of leveraging investments, those owners who are over-leveraged will find that this market and new government requirements being imposed on banks may be their un-doing.
Prudential Real Estate Investment, the equity management arm of our organization, has a new report out discussing the outlook for the market in the United States. In the quarterly report, analysts pretty much discuss much of what I have outlined in previous months -- only with a bit more detailed analysis. We are not yet seeing a lot of distressed properties come on the market, but we will. It will be an investor's dream scenario.
Interestingly, the multifamily market sector, while experiencing some hiccups, is relatively stable, depending on where you are in the nation. Some markets are stronger than others, but, in fact, multifamily is going to remain strong for another reason -- not just because people are losing their homes and need a place to live.
A new story published by Multifamily Executive magazine notes that with so little new multifamily product being built anywhere in the United States right now, pressure is on these properties and rents are stable and will soon be rising, if they aren't already. And all these factors are going to create a shortage of a new kind -- which creates opportunities for investors.
Low-income housing.
Whether it is multifamily, or single family, pretty much all indicators are pointing to as long as a decade of shortage of low-income housing. An opportunity for individual and corporate investors, in my opinion, as we will likely see municipally-funded low-income housing in decline. Cities and other government agencies are bankrupt, stretched beyond their limits. It will be more and more difficult for public funds to be earmarked for housing. That is, unless the Obama administration decides to allocate more funds from stimulus packages or other programs toward low-income housing.
I will write more on this in the coming days. I am still digesting the Multifamily Executive magazine piece, and will share more as I have thoughts on it.
If you have time, please take a look at the Prudential quarterly review of commercial real estate trends. It is a fairly succinct snapshot of the pitfalls -- and opportunities -- facing the investment real estate community.
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