Inside 1031

This Blog Has Moved to a New Location

2010-05-25T12:56:00.000-07:00

The Inside 1031 blog previously hosted at this domain has been moved to the following location:

www.inside1031.com

All previous blogs entries are hosted there and please continue to visit for all the latest 1031 exchange information and analysis.

How Net Lease Zeros Add Up to Big Tax Savings

2010-05-12T10:13:00.000-07:00

Simply speaking a zero transaction is the acquisition of a property using a highly leveraged loan (loan to value usually 88% plus) with all rental income dedicated towards debt service, thus producing “zero income” for the property owner. One of the vehicle’s applications is to defer tax liabilities incurred in a commercial foreclosure.

The Problem

Though it is not widely known, the foreclosure of a commercial property is often a taxable event. How the IRS computes the tax depends on whether the property was financed with a recourse or non-recourse loan. In the case of a recourse loan, tax liability is calculated by taking the difference between a property’s fair market value and its adjusted basis. The tax liability of a non-recourse loan (which the remainder of this piece will be dealing with) is calculated by taking the difference between a property’s outstanding mortgage balance and the property’s adjusted tax basis.

The key element which catches investors off guard is that “outstanding mortgage balance” includes any loan taken out during a refinancing of the property.

For example:

Let’s say you bought a property for $5M (your cost basis) which subsequently has been depreciated to an adjusted tax basis of $3M. Let’s also say you refinanced this property during an upsurge in the market and pulled out $8M of equity. If this transaction was foreclosed upon (without any action to defer tax liabilities), you would face a taxable gain of $5M, i.e. the $8M in outstanding mortgage amount minus the $3M in adjusted tax basis.

Thus, investors who think returning the keys to the bank absolves them of all monetary concern involved in a commercial foreclosure are gravely mistaken. The IRS views any money pulled from a property via loan refinancing to be taxable gain, even though the property is foreclosed upon.

The Solution

With proper scheduling and use of the 1031 exchange, the situation above can be avoided through the purchase of a “zero income” property. The reason a zero income property can be so beneficial is due to its highly leveraged nature and its ability to defer a taxable gain through a 1031 transaction. A portion of the money an investor would have otherwise paid to the IRS can be used instead to acquire the zero income property through the 1031 exchange.

For this transaction to work a few things usually need to be in place:

• Due to the rules of the 1031 exchange, the replacement “zero income” property has to be of equal or more value than the original property. In this case the value the client needs to trade equal or up to is the value of the outstanding mortgage being forgiven.

• Furthermore all 1031 exchange procedures must be followed including preparing exchange agreements, identifying replacement property and closing within 180 days.

• The investor must carefully select the zero income replacement property. The primary characteristics will be a triple net lease (NNN) and an investment grade tenant (usually rated by independent agencies such as S&P or Moody’s). These properties are considered extremely stable real estate investments and are normally the only ones capable of being financed with the highly leveraged loan needed in a zero transaction.

• A “deed in lieu of foreclosure” must be obtained to allow for the appropriate transfer of the original property to the bank. Creditors generally prefer a deed in lieu of foreclosure because it terminates the debtor’s equity of redemption and is quicker, less expensive and less unwieldy than a traditional foreclosure.

In order for the transaction to flow smoothly, it will have to be properly organized and scheduled on an individual basis. It should be noted that a zero transaction is not possible without outside assistance of at least a Qualified Intermediary and qualified professional tax and accounting advice. If done properly, this strategy can be an invaluable tool for investors caught in a foreclosure situation.

Here is how our previous example would be impacted by a zero transaction:

Assuming a tax rate of 25% (Federal capital gains rates, Federal recapture rates and states taxes), the $5M in gain would cost $1.25M in taxes. If instead, a zero transaction was pursued, the investor would need to replace the balance of the debt, $8M. By exchanging into a zero income property for approximately 10% of the $8M debt amount replaced ($800,000), there would be a $450,000 savings ($1.25M-$800,000) and the investor would own NNN property with a very high credit tenant.

Navigating Closing Costs and the 1031 Tax Deferred Exchange

2010-04-29T12:50:00.000-07:00

When entering into a 1031 exchange one often does not consider the ancillary costs that come with closing the transaction. Often the assumption is made that these costs will be subsidized by the 1031 exchange proceeds. However, while some of these costs certainly can be bankrolled by the tax deferred exchange, some cannot. Knowing how to avoid these expenses being deemed boot can keep your transaction out of hot water.

Covered Costs:

It is generally acknowledged that “payment of brokerage commissions from exchange proceeds does not create taxable boot.” Thus, payment of these “non-recurring” costs of sale or purchase from the exchange proceeds should not be considered taxable boot. Brokerage commissions are one example of non-recurring costs; however certain other costs are excluded.

They are as follows:

Real Estate Commissions
Recording Fees
Direct Legal Fees
Title Insurance Premiums
Qualified Intermediary Fees
Agreed Property Inspections
Escrow or Closing Agent Fees
Documentary Transfer Fees

Note: Expenses have to be customary in the jurisdiction (e.g. 6% listing agreement).

Un-Covered Costs:

Certain costs are generally not covered and considered taxable boot if they are involved with anything else besides acquisition of the replacement property. The issue most people run into involves getting a new loan on the replacement property. Because the costs for acquiring the new loan are not related to the acquisition of the replacement property (according to the IRS), they are considered taxable boot.

These Include:

Loan Fees
Points
Prorated Mortgage Insurance

Another issue to consider is that prorated property taxes, insurance payments and rents are considered deductible ongoing expenses. As such, they are not included in the 1031 exchange; however, their payment does not impact the use of the Qualified Intermediary safe harbor.

How to Check Your Tax Refund Status

2010-04-28T10:46:00.000-07:00

If you are a member of the fortunate group currently awaiting a tax refund check, you may be asking yourself “where is my check?” For those who are curious, every state that levies a personal income tax has either a website or hotline which provides taxpayers with the status of their refund. In order to determine whether your refund has been processed, information on your tax reform will need to be provided. Though the requirements differ state by state, you will need to at least provide:

1. Social Security Number (or Individual Taxpayer Identification Number)
2. Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er))
3. Exact Refund Amount Shown on Your Return

For more, including full state by state contact information, click here.

How Your CPA May Cost You 5, 6, or 7 Figures

2010-04-22T10:49:00.000-07:00

When you think of tax planning you think of someone who looks forward to helping you navigate your facts, circumstances and decisions, minimizing the tax liabilities of your investments and business operations. Unfortunately, many CPAs that advise clients look backward, reacting to the year’s events and shaking their heads that you have large tax implications as a result of the business decisions that you have made. This blog addresses those sinister CPAs and their even more sinister sisters- the CPA that confidently advises you – to make bad decisions!
Here are three common examples of how CPAs directly or indirectly impeded successful client tax deferral.

1. Over-focusing on Federal Capital Gains Tax Liability.

The major issue we see in this environment is client’s thinking they are potentially cashing out in a 15% capital gains environment. The client’s indicate, “I may as well cash out now rather than later, because capital gains is going up.” While this point is well-taken, clients are not appreciating the three taxes they defer via 1031 exchange: (1) Federal Capital Gains taxes (15%, soon to be 20%); (2) State Level Capital Gains (ranging from 0-9%); (3) Depreciation Recapture Tax (25-50% depending on straight-line or accelerated depreciation). These three taxes always add up to more than 15% unless you are selling non-depreciable property (land) in a no-state tax jurisdiction like Texas. However, if you have property in high state tax jurisdictions like NJ, NY, DC, or MD, you will want to drill down and determine your actual proposed tax liability before opting to cash out. A cocktail conversation with a CPA about capital gains should not suffice.
2. Simplifying the Personal Use Issues.

Beware of CPAs that speak in general rules. Any tax attorney or CPA that is wise usually answers questions with, “it depends”. We had a classic case of oversimplification last year when a client wanted to sell a North Carolina beach house. Under the taxpayer’s property settlement agreement with his ex-wife, he let her use it 5 weeks out of the year. Five CPAs gave oral advice to the client to cash out as the ex-wife’s use of the property constituted imputed personal use to the taxpayer. Thankfully, the business owner, stubborn and determined to get the accurate answer, asked us for our suggestions. We promptly referred the client (one week before settlement) to a regional 1031 exchange tax attorney superstar that issued a tax opinion for $1,500.00 indicating the ex-wife’s use was analogous to a creditor and that the property settlement agreement stipulations were not the equivalent of letting your brother or sister stay at your vacation property. Therefore the 47 out of 52 weeks of being held out for rent plus the ex-wife’s activity did not squelch the deal. Thankfully, the client deferred hundreds of thousands of dollars of gain and tax liability.

3. Not Adequately Understanding 1031 Tax Basis Issues.

This is where the horror stories come into play. While the prior two categories are a function of CPAs not being familiar with the details of tax deferral, this scenario is egregious beyond belief. A local tax preparer with a history in tax preparation at a major chain that employs more seasonal tax preparers than any other company (hint, hint) was indicating to at least twenty clients per year (he was a good marketer) to cash out of the relinquished property because 1031 exchanges used CARRYOVER basis and you will not get any benefit from new cash or new debt. For those of you who know the rules, you should fall out of your chair here. 1031 exchange uses SUBSTITUTED basis giving taxpayers credit for new cash or debt if they trade up in value. If a tax preparer tells you to simply sell and buy instead of exchange, seek a second and third opinion. The tax preparer was relying on the Form 8824 instructions for his understandings and he rationalized his advice by stating that it was “ambiguous” what replacement property basis would be. This tax preparer had no accounting training, just two summers in a strip mall preparing returns. He filed over 200 returns per year.

April 15th May Cut Short Your 1031 & 8824 Info

2010-04-15T08:19:00.000-07:00

1031 exchanges include a 180 day exchange period unless you started your exchange in the previous year, say 2009, and April 15th cuts short your 180 period. If this is the case you must file for an extension to get the full 180 days.

NOTE: All 1031 exchanges must be filed on IRS Form 8824. For Form 8824 and applicable instructions, click here.

US Apartment Uptick = Net Lease Impact

2010-04-09T09:28:00.000-07:00

It has been recently reported that the US apartment market may have reached bottom and be poised for a rebound. Apartment vacancy rates have stopped rising and rents even showed a modest increase in the first quarter. As life is pumped back into this market, 1031 exchanges could subsequently rise. Apartment investors heavily utilized 1031 exchanges to move from active to passive assets (such as net leases) in the past. Will this trend repeat?

To gain insight, we have solicited the help of James Brennan Esq., LL.M., Managing Director and Corporate Counsel of Exchange Solutions Group, one of the foremost experts of 1031 exchanges.

1. With the possible return to health of the U.S. apartment market, do you expect to see increased 1031 tax exchange action?

The Baby Boom generation flocked to real estate as an investment class, particularly multifamily. With Baby Boom private investors aging and looking to make life decisions regarding retirement, relocation, and estate planning, and all of those activities are distinguishable from the active process of “adding value” to apartment complexes through sweat equity and property management. Many of those B and C investors are looking to get out of active management. After living through this cycle, they want out more now than ever.

2. What makes apartment owners keen to move from an active to passive asset?

Passive triple net leases are net insurance, net utilities, and net taxes to the tenant. Apartment owners that have built a net worth over $5 million are looking to create annuity-like income for their heirs who often are not in the real estate business. These family patriarchs and matriarchs are not looking to burden their heirs who often are busy professionals in metropolitan areas with decisions regarding leasing up property or fixing the roof. Triple net leases provide credit-rated tenants with predictable cashflow.

3. How popular are net leases for those exchanging out of apartments?

Net leases are not only used by multifamily baby-boomers but also multifamily “financial engineers”. While multifamily financing is often favorable from agencies like Fannie and Freddie many borrowers are in troubled financial shape with distressed assets. These assets often don’t pass muster to be financed or refinanced with agency debt. These investors can 1031 exchange either with low equity or after conducting a deed-in-lieu 1031 into a net lease. Once in the net lease asset, the equity can be unlocked fairly easily through either credit-tenant-lease paydown readvance or through a standard refinance. These strategies allow multifamily borrowers to get an asset banks trust more with a credit rating.

4. What is the psychographic profile of a typical investor who executes this strategy?

Apartment developers are often drivers or family stewards. These decision-makers have built wealth from the ground up often not in a traditional white-collar methodology. These hard-driving decision-makers have provided for their family, and also probably have setup life insurance trusts to allow for estate planning liquidity. Triple net leases go well with this concept of transitioning wealth to the next generation without many opportunities for losing value by the heirs. The family stewards have built wealth and are now simply trying to preserve it.

5. Are there any aspects of this strategy conducive to estate planning techniques?

In an effort to defer capital gains while family stewards are still living the patriarch or matriarch often engages in a like-kind exchange to transition between apartment assets and net lease assets. In a like-kind exchange you can trade into multiple replacement properties. Therefore, if you have three children and you sold your apartment complex for $15 million, you can buy three $5 million dollar net lease assets that produce income that can be divided up amongst the heirs. This avoids management by the one heir that may be more real estate savvy.

Equally as important, the credit-rated aspect of net leases allows trust officers and advisors to sleep at night knowing that they made defendable decisions on behalf of the trust. Therefore, if a real estate trust officer is transitioning from apartment assets, net lease income streams are fiduciary friendly.

How to Defer Capital Gains Tax Liability on a Commercial Foreclosure

2010-03-31T09:29:00.000-07:00

Unsuspecting commercial investors are driving to the bank to turn in their keys on projects that did not workout as planned and waking up the following year with an unexpected tax headache. The discharge of the loan can result in a capital gains tax liability. Not only did the clients lose whatever equity they had in the property, but they also face capital gains tax liability for simply how they transferred the property to the bank!

Individuals confuse the property’s tax impacts with the property’s economics. However, these two calculations are different. For tax purposes gain or loss equals the difference between the transfer price to the bank and the adjusted basis. Thus, if you bought a property in 1987 for 700k (your cost basis) and it has been depreciated and now has an adjusted basis of $400K, and it is foreclosed with a 950k loan, this transfer without a 1031 exchange results in a taxable gain of $550K, i.e. $950k transfer price minus the $400K adjusted basis.
Drilling down, the amount of gain for tax purposes depends on whether or not the debt is recourse or nonrecourse. With nonrecourse debt, the taxpayer is charged with gain equal to the difference between the outstanding mortgage amount and the adjusted basis. Thus, the taxable gain equals loan amount minus adjusted basis. To clarify, for nonrecourse debt fair market value of the property is not taken into consideration1 In Commissioner v. Tufts, the Court pointed out that taxpayers receive value when they are relieved of a nonrecourse debt obligation.

For this problem, there is a solution. Exchange Solutions Group designs solutions for property owners facing foreclosure and related imputed gains. By purchasing another property of equal or greater value to the transfer price on the foreclosed property, a like-kind exchange can be used to delay the capital gain. The cash that would have been used to pay the tax liability can alternatively be redeployed into an asset rather than simply used to pay an expense.

To execute this strategy all 1031 exchange procedures need to be followed including preparing exchange agreements, identifying replacement propert(ies), and closing within 180 days. Recall, that even if you are unsuccessful and end up with a “failed exchange” in the next year, you can elect installment sale treatment and push the tax liability to the following tax year, if you structured this as part of a 1031 exchange. To conclude, this market will undoubtedly have challenges but it is how we deal with adversity that defines us!

QI Default? Rev. Proc. 2010-14 can help

2010-03-25T10:37:00.000-07:00

For those who saw their exchange funds evaporate due to a QI declaring bankruptcy, yet still owed taxes on capital gains, Rev. Proc. 2010-14 may provide a much needed solution. Previously, taxpayers who fell victim to a QI default, were obligated to recognize the “gain triggered upon transfer of relinquished property in the tax year in which the transfer occurred.” Rev. Proc. 2010-14 ensures that if an exchange falls apart due to a QI bankruptcy, “gain is deferred until the tax year net liability relief exceeds basis and/or payments attributable to relinquished property are received as a result of the bankruptcy or receivership proceeding.” This applies retroactively to all exchanges past January 1, 2009.

In order for taxpayers to utilize Rev. Proc. 2010-14, they must meet four requirements:

Transfer (or be deemed to transfer) relinquished property to a QI in accordance with §1031(k)-1(g)(4) (the QI safe harbor);
Properly identify replacement property within the 45 day identification period (unless the QI default occurs during that period);
Fail to complete the like-kind exchange solely due to a QI that becomes subject to a bankruptcy or receivership proceeding; and
Do not have actual or constructive receipt of proceeds from sale of relinquished property (other than liability relief) prior to QI’s bankruptcy or receivership proceeding.

For those who qualify, this development could mean substantial money and time saved. It is unfortunate many were hurt by the recklessness which took hold of the 1031 exchange industry (LandAmerica comes to mind) but steps like Rev. Proc. 2010-14 go a long way in providing some solace now and enhanced protection in the future.

Want to 1031 into a Property You Already Own?

2010-03-19T08:32:00.000-07:00

There are times when an investor may want to sell one of his properties and invest its proceeds in another he owns. In the past the IRS forbade 1031 exchanges in such cases, however, today there are means around it. It is known as an “advanced built to suit” transaction and though it has never been explicitly supported by the IRS, it has been upheld by private letter rulings.

The difference between the advanced build to suit transaction and a typical tax deferred exchange (or one with a build to suit component) is the type of property designated as replacement property. In a build to suit tax exchange, the replacement property is owned by a third party, with Exchange Accommodation Titleholder (EAT) obtaining the replacement property’s title, which it holds while the property undergoes its improvements. In the advanced build to suit transaction, the taxpayer is attempting to transfer funds into property already owned by him. However, Rev. Proc. 2004-51 places restrictions on using replacement property owned by the taxpayer within 6 months of the exchange. Thus, the taxpayer is unable to accept either “assignment of the LLC or direct deeding of the Replacement Property after the improvements have been made directly.”

In order to complete this arrangement, the taxpayer must enter into a 1031 like-kind exchange agreement with a QI, after which he enters into QEAA and Construction Management Agreement with the EAT. He would then send cash or agree to a loan with the EAT, allowing the EAT to purchase replacement property and carryout the improvements. The EAT then acquires title to the replacement property and sets it up in a LLC. The EAT also has authority to appoint a Taxpayer General Contractor under the Construction Management Agreement, who acts as Fund Control, making disbursements as construction commences. After 180 days, the QI will direct the EAT to transfer the replacement property directly to the taxpayer, this is accomplished by handing over control of the LLC to the taxpayer.

If completed correctly, with the right guidance and supervision, this transaction allows investors to greatly improve their own properties and consolidate their holdings. This flexibility can be extremely beneficial during recessions or other economic downtimes, when ancillary properties become less valuable and the need to improve core ones increases. Thus, the advanced built to suit exchange gives investors another tool to use in the marketplace.

Syndication Offers New Financing Opportunites

2010-03-15T13:05:00.000-07:00

Though it may seem unlikely, there is an area of commercial real estate which is actually flowering. Headed by companies such as Passco, Inland, and American Realty Capital, “syndication” is becoming a widely popular financing and investment vehicle. Syndication takes advantage of Delaware Statutory Trusts (DSTs) and Tenant in Common (TICs) agreements by combining and funneling many small individual investments into a large commercial asset. In today’s market, where it is impossible for one investor to utilize the high loan to value ratios of the past and unlikely one would have enough cash to purchase a high value property outright, syndication offers a convenient financing alternative.

For more, view my full article here.

The Estate Tax Reanimated

2010-03-03T09:01:00.000-08:00

Many know that the estate tax expired in 2010; however, unless you are fortunate enough to die this year, this expiration will mean nothing. What most stakeholders are banking on is lawmaking that may never happen. Without replacement legislation, the estate tax will make a vigorous return in 2011 and while many know this, the extent of the reanimated tax is not so widely reported. In 2009 the estate tax was 45% for all assets greater than $3.5 million (per spouse); in 2011, if left unaltered, it will be 55% for all assets over $1 million (per spouse).

The thinking was with such a hike in place, it would be politically impossible to let it stand, forcing either the abolition or continuation of the tax at its 2009 rate. This was done well before the auto bailouts, the bank bailouts, cash for clunkers, the stimulus package (or packages) and possibly healthcare. Today it seems realistically impossible not to raise taxes somehow. Thus, sitting idly by and letting the estate tax simply increase on its own is a political windfall.

Needless to say, the reduction of the amount excludable to $1 million and the increased rate of 55% will affect many people. It will no longer be a tax on rich estates in excess of $3.5 million; this will impact a large swath of upper middle class families. Many, who previously wouldn’t have considered themselves rich, will find the IRS has a much different opinion. Two effects of this plan become immediately clear, 1.) the IRS will be very busy; and, 2.) estate tax planners will be very busy. If legislators act, the exemption may be increased to pre 2010 levels (between $3-4 million); however, we are currently in a no man’s land for estate tax planning.

For the many who are concerned, here are some strategies which can be utilized to avoid the estate tax.

Alert: HB 417 Facilitators Act Established in Virginia

2010-02-26T11:36:00.000-08:00

In response to the recent wave of 1031 exchange fraud, highlighted by the Landamerica case, Virginia has enacted a law which it hopes will better protect the integrity of 1031 transactions. Key to the new bill is the establishment of the three requirements, all of which are already standard practices at ES Group:

“Exchange facilitators are required to notify exchange clients of change in control of the exchange facilitator”
Maintain exchange funds in separately identified accounts or in a qualified escrow or qualified trust”
“Maintain errors and omissions insurance or deposit cash or letters of credit; and to account for moneys and property”

Language is also inserted prohibiting exchange facilitators from participating in various forms of fraud as well as the establishment of a max civil penalty of $2,500 for any infraction.

Click here for the full bill.

Declaration of IRS Form 8824

2010-02-18T06:39:00.000-08:00

When in the course of the 1031 tax exchange, it becomes necessary for one party (that of the exchanger) to notify the federal government of its activities, IRS Form 8824 is required. Its purpose is two fold: 1). Ensure the IRS is notified of the exchange in the tax year “in which the first relinquished property is transferred” and 2.) Ensure a “substituted” rather than a “transferred (or carry over)” basis is recorded by the IRS. This second point is of extreme importance as it redefines the taxable basis of the replacement property.

There are two types of basis encountered in the common tax terminology, “substituted basis” and “carryover (or transferred basis)”. In a carryover basis, the basis the property will hold is based on the previously transferred property and cannot be affected by any new capital investment. So if Thomas exchanges a property with a $100K basis, $400K in capital gains and $100K in new capital for one of $600K, the IRS will see the new property has having a basis of $100K.

This perception is incorrect. Section 1031 only embraces a “substituted basis”.

In a “substituted basis” any extra capital invested is added to the previous basis. So in the above example, Thomas would end up with a basis of $200K (the original $100K basis plus the $100K of new capital). This can drastically affect depreciation schedules, altering investment planning and potentially allowing clients to put more money in their pockets.

It is unfortunate that the misconception of a “carryover” basis has become widespread in the 1031 tax exchange community because it hinders further investment. If one was given the choice of investing in two properties both with the same basis but one which required an extra $100K of capital investment, the cheaper alternative would almost invariably be chosen. However, if one knew that $100K in extra capital would create a $100K in depreciable basis, they may be more likely to choose the larger investment. The substituted basis is a rare tool provided by the IRS to encourage investment but in order to function one must know about it.

Development: Roth IRA Offers New Opportunities

2010-01-29T12:39:00.000-08:00

Starting in 2010, the existing income test for converting a traditional IRA to a Roth IRA that kept many commercial real estate investors from ever contemplating a Roth IRA no longer applies. Singles making more than $95K and couples making more than $150K are now eligible for this tax friendly program. As a result, the regulators have offered commercial real estate investors a great tax strategy going forward.

Conversions that occur in 2010 will be able to split the tax liability. Why does this apply to commercial real estate? Investors now have the ability to invest excess money in a property by themselves (if they have the capital) or do so with a group a fellow investors, similar to a TIC. Unfortunately, this knowledge gap stops many advisors and their clients from taking advantage of the opportunity to own commercial real estate.

Roth IRAs are powerful tools. Withdrawals are generally tax-free, but not always and not without certain stipulations (i.e., tax free when the account has been opened for at least 5 years for principal withdrawals and the owner's age is at least 59½ for withdrawals on the growth portion above principal). An advantage of the Roth IRA over a traditional IRA is that there are fewer withdrawal restrictions and requirements. Transactions inside the Roth IRA account (including capital gains, dividends, and interest) do not incur a current tax liability.

For the IRS’s official word, click here.

The limitations of self-directed IRAs are often (i) the amount of money people have in IRA accounts is limited and (ii) the treatment of debt inside an IRA is less attractive triggering an additional tax.

Therefore, many investors are left with a decent amount of money $200,000-$2,000,000 that they have willing to allocate into real estate. If you do not like to flip residential properties, you often self-select yourself out of this self-directed investment. However, there are two important opportunities investors often miss:

1) The ability to combine 1031 proceeds with Self-Directed IRA proceeds and bifurcate a purchase; and,

2) The ability to syndicate investors and buy one larger commercial asset with tenant-in-common ownership (often 2, 3, or 4 partners).

Note: For those of you needing background on these two strategies, you can find applicable FAQ’s here.

If investors plan carefully, they can now open a tax friendly Roth IRA and acquire commercial real estate while its prices remain low. One can never be sure how long opportunities like this will last, as they are subject to the legislation of Capitol Hill and whims of the IRS. However, for those acting now, benefits can surely be had.

The 1031 Tax Exchange Market – Clinical Updates & Prognosis

2010-01-22T06:30:00.000-08:00

Back in November, I was interviewed for the December issue of Shopping Center Business, in a segment entitled “1031 Slowdown”. It was an appropriate title at the time, for 1031’s had indeed decreased, however, today this may not be such an accurate description. Since January 1st ES Group and our partners have seen both a spike in exchange activity of multifamily/retail investments valued between $1-20 million and an increase in conversations with prospective clients. Investment sales in many segments, including multifamily, office and retail are breathing new life into the 1031 exchange market. Many are attributing the spike to newly available commercial loan money.

To bring people up to date on what we are seeing currently, I have composed a list regarding recent trends below:

Increase in proposed 1031 QI legislation at the State Level (is actually on the table today, Jan. 21, 2010)
Increase in commercial sales with credit (BBB+) tenants of $1-20 million.
Increase in financing for buyers of relinquished property $1-10 million.
Increase in residential rental sales in high employment areas with FHA financing as catalyst.
Neutral activity in residential rental in beach communities and low employment areas.
Neutral activity in institutional commercial sales ($30 million +)
Increase in purchase of royalty interests.
Increase in aircraft sales and exchanges.
Increase in securitized debt for commercial buildings ($5 million +)
Decrease in interest rates paid by banks on 1031 deposits since 12 months ago.
Decrease in number of QI’s since 24 months ago (300 in 2006, 75 in 2010).

What does all of this anecdotal information translate to with regards to our future? First of all, it supports the self-correcting nature of our regulatory system, legal system, and capital markets. After LandAmerica went bankrupt, VA is passing Qualified Intermediary regulations. After the CMBS market was deemed broken, Wall Street bankers and attorneys have built and rebuilt replacements. Finally, investors have shifted their attention towards risks like the creditworthiness of tenants, which was taken for granted earlier in the cycle.

Hidden Dangers of Partnerships and the 1031 Exchange

2010-01-13T11:40:00.000-08:00

The Section 1031 “like-kind” exchange is a legal tool utilized by many investors to upgrade their real estate holdings while deferring taxation. Theoretically, investors can exchange properties indefinitely without incurring capital gains tax. However, complications can arise when these investments are made by partnerships. It is almost inevitable that somewhere along the process, a partner will want to “cash out” their investment. This can expose the entire partnership to substantial tax liabilities.

If in order to satisfy the exiting partner, the partnership’s property is sold and proceeds distributed, the remaining investors will be subject to substantial taxation on any gains. Simple strategies, such as “buying out” the exiting member or specially allocating the gain, also subject the partners to taxation. However, several options are available to a partnership facing dissolution. These include the “drop and swap”, the “swap and drop”, the “split-off”, and the installment note. With appropriate planning a transaction can be structured that satisfies both parties.

For partnerships that have seen their dissolution ahead of time, the “drop and swap” can be of great use. In this scenario the partnership makes a tax-free distribution of the investment property’s title to the individual investors. Once the individuals possess title, each investor may “cash out” or make a like-kind exchange. The key to executing this strategy is ensuring compliance with Section 1031’s “held for investment” requirement, thus this strategy requires considerable foresight.

If investors do not recognize the tax issue until just before the property is disposed, a “swap and drop” may be effective. This strategy resembles the “drop and swap” but is ordered differently. Here the partnership executes a like-kind exchange, waits to avoid IRS treatment as a “step transaction”, and then drops title to the individual partners or refinances the new property to acquire cash to redeem the leaving partner.

Alternatively, a “split-off” strategy may be effective. In a split-off, the partnership distributes tenancy in common title to the exiting partner only, then the partnership makes an exchange in its name. Since the partnership keeps title in its name, the split-off provides title continuity, satisfying the “held for investment” requirement and allowing the leaving partner to cash out or exchange their interest.

Finally, the investors may sell the original property for cash and an installment note. In this approach the partnership distributes the exiting partner an installment note equal to his interest while the remaining investors receive cash. The remaining partners use the cash to exchange into a new property and the exiting partner only recognizes gain as note payments are received.

The like-kind exchange provides real estate investors with a valuable wealth-building tool. But if the partnership dissolves, serious tax issues arise. Fortunately, with proper planning these risks can be minimized and transactions can be structured that maximize returns for all the partners.

Aaron M. Gregory, JD/MBA Contributed to this Article.

Interview: Telly Fathaly

2010-01-07T11:51:00.000-08:00

For this weeks blog I interviewed Telly Fathaly, Vice President at Sterling Real Estate Capital.

1.) Hi Telly can you tell us a little about yourself and Sterling?

Thank you for this platform to communicate with your readers. Sterling Real Estate Capital, LLC is a Private Equity Advisory Firm that specializes in raising cash for Commercial Real Estate transactions. We serve as an intermediary between high net worth / institutional investors and operators / owners of Commercial Real Estate. Our team has an extensive industry background with principal, private equity, brokerage and Wall Street experience. We have a diversified and updated base of investment contacts and relationships that provide us with insight into the rapidly evolving attitudes and appetites of the Private Equity landscape.

2.) What opportunities currently exist in the commercial real estate space?

From our perspective the top opportunity we’re seeing is the ability for qualified operators to establish Programmatic JV partnerships with institutional investors outside the traditional fund construct. This is a departure from the last cycle where fund managers held more operating control over money being deployed by institutional groups. Whether we’re speaking about separate accounts, pledge funds or a more standard programmatic JV arrangement, the benefits to the operator can be significant. Most of the groups we work with are able to more effectively attract deals and concentrate on execution rather than scramble to raise money for individual opportunities. They’re able to jump out in front of problems and issues ahead of time, allowing for the benefit of playing offense in a market beginning to provide real opportunities for groups that are correctly capitalized.

3) How do commercial brokers work in cooperation with Sterling?

Commercial Brokers are an essential part of our success and it has always been important for us to incentivize client and deal referrals to facilitate continued relationships. Our reputation in this regard is outstanding and we can provide clarity as to broker participation very early in our process.

4) What is your "sweet-spot" of transactions?

Our “sweet spot” consists of a specific type of organization rather than a particular transaction. Our top clients and prospects all have one thing in common, an ability to grow and improve as the realties of our industry continue to manifest. We’re looking for the companies that have what it takes to survive and thrive and help provide them with the cash that will fuel their growth. There’s a window of change and opportunity opening for an undetermined period of time right now. The groups able to solve their problems and get organized will be able to step up to a new level over the next couple of years. We’re already seeing it happen.

5) What asset classes do you like in 2010?

Investors don’t seem to be as particularly focused on asset classes as much as they are on asset specific factors. We’ve seen two types of approaches emerge. The first is a more familiar return driven short-term play. This usually consists of solid real estate in A locations where some sort of circumstance has provided a chance to acquire at an attractive basis. The second is a renewed emphasis on more fundamental strategies of longer investment periods and increased attention to equity yield from cash flow. This is a departure from LP’s who were previously focused on value generation exclusively being quantified by IRR. Here the investors, mostly high net worth family offices, are buying cash flow at a discount and expecting a premium to account for the risks of Real Estate.

6) What are Institutional Investors Looking for from Operators in 2010?

Institutional Investors are looking for experienced operators with expertise in a specific product type and / or geographic area. Equity co-investment and “alignment of interests” has become a key consideration with debt capacity and ability to provide guarantees if necessary. Finally, operators should have a good network for originating off market transactions and provide investors with compelling and unique opportunities.

Please feel free to call or write with any questions or feedback.

Email: telly@sterlingrealestatecapital.com

Phone: (404) 995-1504.

Making Sure Your Goals are SMART

2010-01-02T12:09:00.000-08:00

While this blog covers commercial real estate, investment real estate, and building wealth via like-kind exchange, I would like to take the New Year as an excuse to cover goal-setting in all aspects of your professional and personal life. As New Years Resolutions are set you resolve to take on a commitment that will last you at least a few months. With the fact that many people set unrealistic resolutions for themselves, you should take heed of a standard life coach saying- "the most important promises are the ones we make to ourselves." Seriously, if you can not trust yourself, you lose faith in yourself (equals low self-esteem) and you lose faith in the words and promises of those around you (equally bad). That being said, when setting your yearly goals, make sure they are SMART (to be defined next).

Make sure that your goals are SMART. SMART is an acronym that sports psychologists use to define good goals which are Specific, Measurable, Attainable, Realistic, and Time-anchored. A specific goal answers the questions of who, what, where, when, how (e.g. "Finish the Local 5K on August 22 in less than 21 minutes"). Goals that are measurable let you know when the goal has been achieved and it's time to set new goals (e.g. "Weigh 166 pounds before July 4"). Attainable goals take into account the process you will take to get there (e.g. "Do one hour of exercise, six days a week"). Realistic goals are those which challenge you, but are not impossible. For example, if Betty's training is going well in the first few weeks, it would not be realistic for her to inflate her goal to "Run a sub-three-hour marathon" when her previous best time was 4:15. Time-anchored goals give you a specific end date that is neither so near that you don't have time to reach your goal, nor so far that you lose interest in your goal.

These sports-oriented goals can be crossed-over to your professional life very easily. For job changers it can be, make 3 informational interviews by May 1st with senior executives. For disorganized, busy folks it can be keep inbox to under 50 emails for two months or until March 1, 2010. For the salesmen and saleswomen of the world who have to go through the "No's to get to the Yes's", you can state a weekly goal of 30 cold calls per month with 2 appointments with qualified leads.

So go out there and make promises to yourself that you can keep!

1031 Exchange Case Study Update- Oil and Gas

2009-12-23T12:09:00.000-08:00

The Benefits of Oil and Gas Royalties:

In the past three months Exchange Solutions Group has been witness to a most interesting and ingenious trend. A group of savvy local real estate investors, who owned fully depreciated rental property (Adjusted Basis of practically Zero), desired to defer Capital Gains but lacked the optimism to reinvest locally in rental real estate. To solve this problem, these investors bought oil and gas royalty interests that qualify for 1031 exchange treatment (yes, royalties are "like-kind" with rental real estate). These investments were cash flow rich and chock-full of depletion (depreciation's equivalent in the mineral interest world). Thus, in one fell swoop, investors were able to defer their Capital Gains taxes, obtain property with strong cash flows, AND inherit fresh, tax deductable depletion schedules.

The lesson to be learned is that creativity can be a key component of a successful 1031 exchange. Who says you have to trade office space for other office space, or land for land? No one! Under the correct structuring, the 1031 tax exchange can be quite flexible and fit many needs.

For more information about Oil & Gas Royalties and the 1031 Exchange, click here.

General Growth Bankruptcy: Real Estate’s Foundations are Shaking

2009-12-18T13:30:00.000-08:00

General Growth’s bankruptcy shakes the foundations of the commercial real estate market, and the financing documents that hold it up. The bankruptcy plot touches on a wide range of issues, from the sacredness of corporate entities to director independence to the prevalence of Delaware entities. The GGP plot, thus far, ends at a place that is a happy one for developers and a cautionary one for lenders. Before getting into the specifics, it’s worth noting the overall impact: commercial real estate and its financing structures will never be quite the same.

As background, complex entity structuring pervades the commercial real estate market, from large mall owners such as Simon Property Group and General Growth to more regional investor-developer types, such as Tishman Speyer and the Bonaventure Group. Motivating this are both structuring factors and financing drivers.

From a structuring perspective, commercial real estate holding companies typically have asset organizational charts as complex as an ultra-modern family tree, with different sets of parents, abundant offspring, and multiple sets of grandparents. This structure originates in the need for 3 things: investment facilitation; capital structure layering; and liability reduction. A note as to the latter: liability-shy real estate developers work to mitigate environmental, financial and other legal liability via LLC formations intended to protect the mother-ship or personal family financials from each property’s unique set of risks.

For my entire article click here.

The Death of the Estate Tax?

2009-12-04T12:47:00.000-08:00

The Estate Tax (or Death Tax), which levies a 45% top tax rate on couples estates valued over $7 million and individuals over $3.5 million, is slated to expire on Dec. 31st. However, it is also scheduled, like a beheaded hydra, to reappear with more ferocity in 2011, with top rates of 55% for estates valued over $1 million. This makes 2010 a weird twilight zone because it will effectively be without an estate tax. Assuming people don’t view this as a can’t miss opportunity to dispose of their parents, there could still be affects on investors and their estates.

Many expect some sort of resolution in the near future as the uncertainty which would be caused through the tax’s expiration would cause much confusion. People would like to know what to plan for, rather than going into the future somewhat blind. However, the debate on just what the resolution will be is currently becoming more contentious. Many on the right favor either imposing an estate tax with rates lower than those currently or abolishing it all together. Those on the left tend to favor higher rates or keeping the status quo. One possibility currently making the rounds is that congress will pass a law keeping the tax at current levels around March and apply it retroactively to the previous months. As it stands right now, the House has just passed a law which would extend the current rates but this has not yet been ratified by the Senate.

If the tax should expire, the estate tax would be replaced by a capital gains tax on all but the first $1.3 million in inherited assets. Heirs who sell those assets would pay between 15 to 28 percent in taxes on any appreciation in value those assets observed from the date they were acquired. Whether or not this situation is more preferable to that of the estate tax most likely depends on the wide range of situations investors may find themselves in. In anycase, it seems the fates of many depend on the political machine in Washington and its eventual decision.

Note: A little known fact is that one of the largest supporters of the estate tax is none other than the life insurance lobby. Why? Because they make a lot of money through selling life insurance policies which provide liquidity for those dealing with estate taxes.

Easy Money Can Lead to Uneasy 1031 Exchanges

2009-11-23T06:34:00.000-08:00

Do you know what a 1031 exchange is? Many investors think they have a handle on it. Unfortunately, often they know enough to appreciate the sentiment but not enough to navigate its many nuances. As investors learn the hard way, one false step can lead to millions of dollars forfeited in failed 1031 exchanges.

For starters, a 1031 exchange is a transaction whereby investors are allowed to sell one property and obtain another without paying capital gains tax. But if you went on that definition alone, you would most likely find yourself in violation of the IRS code, because like all things involved the IRS, there are layers. A key element, often missed, is that to be eligible the property must be held “for productive use” (i.e. not for purposes of reselling). This is catching more people lately because in our current economic climate there is a desire to buy now when prices are low and then quickly flip the property.

A 1031 exchange is not for the “intent to resell”; the IRS has been very clear about this and will invalidate your exchange if it sees that as the true purpose. Furthermore, even if you complete the exchange and then dispose of your new property immediately after, the IRS will retroactively declare your 1031 exchange defunct because the new property was not held for qualified purposes. In short the mantra is intent. There are some common rules of thumb, such as if you hold the property for a year and a day or two tax years you are perceived to be “less aggressive” amongst most groups of tax advisors. But no where does the IRS or congress say this, it is just a general understanding that has evolved. The only way to be “100% buttoned-up” is to contact a CPA or tax attorney before proceeding with any aspect of the exchange and evaluate your unique facts and circumstances. In the end it is important to remember you have to be an investor, not a dealer, to reap the rewards of a 1031 like-kind exchange.

The 1031 Exchange in Relation to Vehicles

2009-11-20T07:53:00.000-08:00

It is widely known that 1031 exchanges apply to different property types, such as office to multifamily or even raw land to oil wells. However there is usually some uncertainty about using a 1031 exchange in the case of vehicles, such as airplanes or boats. The rule of thumb in these circumstances is that 1031 exchanges are acceptable but only within the same asset class. You can trade an airplane for another airplane but not for a boat.

The reasons for exchanging vehicles are slightly less intuitive than those for exchanging real estate assets. The usual purpose behind the 1031 exchange is to defer the tax you incur on appreciation in value in the underlying real estate. Vehicles represent another story, as they rarely appreciate in value. Instead, 1031 exchanges are primarily used with regard to vehicles in order to avoid “depreciation recapture”.

In order to illustrate this point with more clarity, here is an example:

Three smaller trainer Cessna aircrafts from the 1980s were exchanged for a new Cessna. When you buy a plane for 500k, you depreciate it over 5 years to offset its business income. When you get to year 6 your adjusted basis is zero so if you sell you trigger "depreciation recapture" a tax on your 5 years of depreciation. If you buy a plane of equal or greater to 500k, you will defer these gains. Most people "trade up" to get new basis by the amount of the trade up. So in my example you can buy a 650k plane and have 150k "fresh basis".

So here we can see how the 1031 exchange can be of great value to those who own fully depreciated vehicles. This is an important point to remember, as it is often is forgotten, costing many to waste valuable resources on unnecessary taxes.

LandAmerica Settlement Leaves Guidance on How to Handle Proceeds

2009-11-13T13:09:00.000-08:00

Imagine waking up one morning and getting a call from your bank informing you that for every dollar you had, you now have quarters. In other words, there is only 25% of your cash left. This horrible scenario is now dawning over many former LandAmerica 1031 exchange customers and they may have little choice but to accept.

Close to 350 former LandAmerica customers had until November 10 to vote on a plan which would have split the proceeds of a bankruptcy ruling according to the type of 1031 exchange agreement they had in place (A U.S. trustee has filed an objection to the ruling which has delayed proceedings). Customers who set up non-segregated plans would have received only $0.25 for every dollar held, those with segregated accounts would have received $0.70, and those who specified their funds be held in an escrow account would have received $0.97.

The reason this tragedy came about was that those customers in LandAmerica without segregated accounts essentially had their money commingled with other customers’ exchange assets. This cash was then used for investment purposes, in this case, auction rate securities which eventually were frozen. As unimaginable as it may seem, this sort of account process is commonplace among many large corporations who facilitate 1031 exchanges. Once your money is handed to them, unless you have asked the question or direct the QI yourself, your cash is dumped into the communal pool of assets. More importantly, you have the worry that the exchange group does not have any knowledge of where the money is held. Your money may be wired to “Treasury Services” such as what happened at LandAmerica.

What has emerged from this case is that you can obtain the same protection for you assets by having the appropriate contract language in place and making sure your proceeds are in separately identified accounts (which ES Group uses 100% of the time). Had this been done, LandAmerica customers would have been able to obtain higher recoveries. Of course, hindsight is always 20/20 and this provides little consolation to those who have seen their wealth disappear. Cases like LandAmerica demonstrate who you do business with and how you do it, is of paramount importance.

At Exchange Solutions Group, we have always ensured our customers’ investments were safe through allowing customers to identify their own bank in which their money will be held. Though it may seem obvious, this option is not available at most other 1031 exchange corporations. By allowing customers to choose their own bank we allow them to introduce a third party (a banker) who is separate from the exchange and can ensure their investments are alone in a separately identified account. The essence of the 1031 exchange is to defer capital gains taxes and continue your investment; this becomes a failed strategy if it’s derailed by poor corporate decision making, or alternatively not knowing what pitfalls to lookout for!

The Tax Haven that is Delaware

2009-11-05T06:48:00.000-08:00

In a recent survey of the laws, practices and size of inflows in 60 jurisdictions, Delaware was found to be the “most secretive financial destination”. Coming after Delaware were: Luxembourg, Switzerland, the Cayman Islands and the United Kingdom. These findings may strike some as odd due to the well known reputation of the other front runners but upon closer look, what better secret destination could there be than a state few people bother to notice?

In 2007 the U.S., led by Delaware, received $2.6 trillion in deposits from non-resident individuals and corporations. Delaware draws such attention due to its investor friendly laws which give businesses opportunities they cannot find elsewhere. For instance, Delaware does not tax profits realized outside the state or require that companies be physically present. Furthermore, there is no state sales tax or corporate tax, one person may be the only stock holder and hold all executive offices of the corporation and officer names do not need to be listed on the articles on incorporation. Delaware also boasts a uniquely specialized corporate court system known as the Delaware Court of Chancery which uses judges who have expertise in corporate law instead of juries. All told, there are about 700,000 entities active and registered in Delaware, among which nearly half are publicly traded. UBS and Credit Suisse alone have about 200 entities in the state.

Besides 1st year law students, many LLC’s or small businesses don’t concern themselves with have their “corporate veils” pierced. However, much of Delaware’s traffic is driven by their respect for the LLC entity as an independent driving force from the people behind the company. When analyzing potential liability, business owners are always looking to mitigate risk.

A Credit to 1031’s: New Homeowners Get a Tax Credit Extension and Investors Get to Sell

2009-11-02T07:48:00.000-08:00

The Senate is considering a proposition that will both extend a popular tax credit for first-time home buyers past the previous Nov. 30 deadline and expand it to include certain current homeowners. This development has implications which directly affect the market for 1031 like-kind exchanges, as it will propel home purchases, allowing many investors to exchange their rental properties in a 1031 exchange.

So far, ES Group has already facilitated three of these exchanges this week. The reasons for exchange have been somewhat varied. In two cases the owner simply exchanged their previous residential rental property for another, often times with a more desirable location, such as a rental property closer to a daughters college or in a potential ideal retirement community. In the other case, the owner was simply tired of running an active investment and decided to enter into a tenant-in-common syndicated commercial real estate investment (TIC). Either way, the tax credit is having an affect on those interested in utilizing the 1031 exchange.

With the tax credits extension, it seems only logical that there will continue to be an upswing of 1031’s in this area. Especially since residential values have been faring better recently, recovering from their precipitous decline. The economy, though posting a positive GDP in the latest quarter, remains in an economic quagmire with unemployment still high and showing little signs of lessening in the near future. Thus, selling now to people incentivized by tax credits could be less risky than waiting for opportunities during a “jobless recovery”. These government incentives will not continue forever and investors need to constantly keep an eye on where they would like to end up.

If Capital Gains Rates Go Up, 1031 Exchanges and Net Leases Could Too

2009-10-22T10:27:00.000-07:00

If untouched, capital gains rates will automatically revert to 20% on December 31, 2010. Currently the rate stands at 15% and if the Obama Administration makes good on earlier indications, the rate could be raised even higher to 28%.

With capital gains rates set to increase, it only makes sense that more people will want to defer their impending tax burdens by transferring their wealth through 1031 exchanges. Furthermore, it could be possible that the Net Lease market segment will benefit greatly from this.

Net Lease Investments, which are characterized by their long term stability and hands off managerial approach (functioning like a bond), could afford people an opportunity to avoid their large capital gains hit while retaining a revenue producing asset which requires no personal management.

Instead of selling ones $1 million asset and bearing a $200,000 to $280,000 loss through capital gains taxes, you could exchange that asset for a net lease building, defer taxes, and get a monthly income stream.

Timothy Harris: A Man to Remember

2009-10-19T10:38:00.000-07:00

Timothy Harris, an estate planning attorney and founder of Timcor Exchange, passed away two weeks ago after his battle with cancer ended. He was known throughout his profession as a trailblazer and as one insider commented; “a pioneer for all independent exchange companies”.

Timothy Harris will be remembered by the many he inspired and missed by all he knew.

1031 Reverse Exchange Insights

2009-10-15T14:12:00.000-07:00

I recently ran into a very interesting blog by Net Lease Insider on the benefits of the 1031 Reverse Exchange. They interviewed Stan Freeman, President of Exchange Strategies Corporation and he provided some useful insights:

1. You can extend the time limits of your 1031 reverse exchange above 180 days because you are dealing with multiple properties, each with their own schedule.

2. You can actually make enough money from the exchange to offset the fees for completing it. If the properties you own are both producing cash flows, you are still privy to the revenues from them while waiting for the exchange’s completion.

There is more detailed information within the Net Lease Insiders post; those who are interested in 1031 exchanges will find the piece very interesting.

REIT IPOs: The Risks of Going Blind

2009-10-10T09:18:00.001-07:00

REIT IPOs: The Risks of Going Blind

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Watergate: Symbol of Two National Crises

2009-10-07T09:36:00.000-07:00

When someone mentions Watergate, I instinctively think of the Nixon scandal and how that event highlighted and even symbolized the problems our country faced. Government was not to be trusted and our leaders were, contrary to their protests, crooks. Even though the event itself was relatively minor and as the subsequent 1972 election results proved, completely unnecessary, it was a microcosm of all that ailed the nation.

Today I read another story about Watergate, this one about how the hotel part of that complex is about to be sold for around $40 million after its previous owner, “an affiliate of Monument Realty, a Washington D.C. developer, and an affiliate of Lehman Brothers Holdings inc.” defaulted on their $43 million dollar loan. They had planned to redevelop the property “into a boutique hotel with some condominium units”. This story seems to feature all the major players of our current crisis: defaulting loans, foreclosure auctions, and of course Lehman Brothers.

The tale seems all too common and unfortunate, a group over leverages itself on a loan for a building, attempts to redevelop it, then defaults as the credit crises hits. Except here it takes place in our nation’s capitol, with regard to an iconic building, which at one point in time was the symbol of high end property. It is an amazing microcosm, reflecting the fall from grace that has befallen our real estate industry. One has to wonder at how a singular building can find itself mirroring the woes of a country so perfectly on two separate occasions.

When Will Buyers and Sellers Get Together?

2009-09-30T11:35:00.000-07:00

Recently, I have been searching for an automobile to replace my current 1990 Volvo Station Wagon. When I speak to people about this search I often hear about how “this is a great time to buy a car”, the economy is terrible and buyer power is at an all time high. Operating under this assumption, I made multiple visits to various auto dealers, assuming each time a great deal awaited me. But to my surprise and utter frustration, the fabled deals did not exist. Instead I encountered four letters which I thought would be of no value in this climate: MSRP.

In an economy where GDP is shrinking and unemployment is going up, how could MSRP possibly matter? As far as I understood, “MSRP world” went away about 2 years ago and we are now living in something called “discount world”. But this fact did not resonate with dealers; they were intent on getting close to their MSRP value.

When I mentioned this to a co-worker, he exclaimed that the same thing was currently hampering commercial real estate. Buyers and sellers were living on different planets, each with their own set of prices. For proof you can check out this report from CA Real Estate Journal. The divide between the two is eerily reminiscent of those middle school dance scenes we see in movies, where the boy and girls stand on opposite sides of the room, each waiting for the other side to come to them. Likewise, you can imagine buyers and sellers standing on opposite sides of a room, nervously eyeing each other, looking for some sign or signal that the other side may be willing to close the gap and concede to their price point.

Of course in the movies eventually some bold individual breaks the ice, causing a chain reaction whereby both sides meet nicely in the middle. So when will that happen for commercial real estate? When will we find common ground? Well of course if we knew that, there would be no issue, our situation would be resolved. As it is, we must linger in uncertainty, standing on opposite sides of the price spectrum, waiting for that mutual resolution. Until then, I’ll just keep low-balling dealers.

Commercial Real Estate Loans, A Refinancing Time Bomb?

2009-09-23T12:03:00.000-07:00

Like it or not, we could be locked in between two forces heading towards each other at breakneck speed, our fates depending on which one reaches us first. In one corner we have the economy, a once seemingly unassailable force of nature, now hobbled by recession and slowly trying to recover. In the other corner there looms billions of dollars worth of commercial real estate loans, quietly waiting as the seconds tick off towards their maturity date. We stand in the middle, our fates tied to the outcome of this race.

If the economy recovers before the proverbial time bomb of commercial real estate loans detonates, we should be fine. In the next five years, nearly half of all commercial real estate loans mature, Deutsche bank predicts that around 65% of these will not qualify for refinancing. This could represent either a large opportunity or threat, depending on our state of affairs. If the economy has recovered, unemployment is down, credit is flowing and consumers are spending, the glut of properties available to the market should be eagerly grabbed by buyers.

However, if there has been little or no recovery, there is a good chance those properties will lay vacant, property values will drop and banks will be flooded with assets taking a loss. Already there is dire news, July saw a 5.1% drop in the commercial property price indices, marking a 39% fall from its October 2007 high. Furthermore, according to Real Capital Analytics, the number of commercial property sales which are classified as “troubled” (properties in default or close to it) almost doubled to 23% in July from March. Total commercial real estate sales through July of this year have been about 1/3rd of those last year. There has been positive news as well, as Fitch Ratings reports the credit outlook for retailers has improved over the course of 2009.

We know the economy will improve but as with all things, timing is everything. 2012 marks the year most of these loans come due, by then the economy is projected to have mostly recovered. If that is the case, then disaster will probably be averted and 2012 could mark a period of substantial growth and recovery. If not, 2012 could be remembered as an ugly cliff from which we had a nasty fall.

The 1031 Exchange

2009-09-09T12:12:00.000-07:00

For investors interested in real estate, there may be no better and worthwhile tool than the 1031 exchange. In short, it is a process through which capital gains tax liability can be completely deferred. Enabling otherwise lost funds to be used for investment. It can be, however, a complex process, requiring due diligence and planning. But most important of all, it requires knowledge of Its Existence!

The logic behind it is simple enough, if you own real estate for business purposes (i.e. not living there) you can transfer all the wealth invested and appreciated in that property to a new one, free of capital gains. It is seen as a “continuation of investment”, you’re not cashing out, merely transferring your wealth to another enterprise. Needless to say, this changes the picture drastically for real estate investment. Where before one would be working with reduced cash, with the help of a 1031 exchange, the entire basis (plus appreciation) can be utilized.

However, the 1031 exchange is not for everyone, certain requirements must be met:

1. The property involved must be of “like kind”. This does not mean property must be in the same asset class, such as land for land, but only that it must be real estate used for business purposes. So it’s perfectly acceptable to trade an oil field for an office building.

2. A Qualified Intermediary (QI) is required. Unless a direct, simultaneous property swap is done, the current investment will have to be liquidated and the proceeds used in the subsequent purchase. But the second that cash touches the investors hands, capital gains tax is incurred, thus a Qualified Intermediary (QI) is required. A QI takes title to the cash and holds it until the replacement property is found.

3. There are time limits. 45 days after the sale of the original property, a replacement property must be identified. 180 days after the sale, the replacement property must be received.

4. It only makes sense if there is appreciated gain on the property. The 1031 exchange only defers capital gains tax, so if there is no gain to tax the 1031 exchange is of no use.

5. The 1031 exchange cannot be used retroactively. If you’ve already sold your property, you cannot use the 1031 exchange.

If these requirements are met, the 1031 exchange can be a great wealth saving & creating tool. Investors would be wise to pay heed to these benefits and contact a QI or tax attorney for a full explanation and evaluation of their situation. It could mean the difference of thousands of dollars.

Maryland Nonresident Form 505 – Trap for the Unwary

2009-09-02T13:12:00.000-07:00

We often hear talk of the “hidden pleasures” of life, the little things, like enjoying the Sunday paper or catching the fleeting glimpses of a sunset. And as everything seems to have an inverse in this world, there are also “hidden antagonisms” of life, little nondescript and unapparent tortures which spring upon us at our most misfortunate position. Often they come in unassuming yet ominous forms, as is the case of one particularly devilish horror: Form 505 or The Maryland Nonresident Income Tax Return.
Its full name should give some clue as to the nature and power of the Demon, this is no lesser creature; it comes fully charged with the powers and relentless malevolence of a tax collector. However, its most insidious characteristic is one which we are at fault for: the ignorance of its existence. And this is one situation where ignorance has a steep price.
The scheme behind it is simple enough: anyone who has an investment in Maryland, such as a rental property or a sole proprietorship, should be taxed at Maryland’s exorbitant rates, regardless of whether they live there. The taxpayer is usually not warned that they must file anything and years can pass before they ever find out that they needed to file a MD form 505. If you work with a certified public accountant (CPA) he/she should pick up on this and advise the tax payer of their liability if there is one. Since this is common, Maryland can work with the taxpayer to file past returns and keep them in compliance.

For Example, consider this fact set:

Say you owned a rental property in Maryland from 2003 to the present while you held residence in Virginia. Today you have a net of $380k on the property which at 7% makes the Capital Gains tax $26.6k. Also, let’s say you earned $35.2k in income from the rental property which you paid taxes on in Virginia and you never filed a Form 505.
Today if you tried to dispose of the property you would be responsible for the cap gains tax of $26.6k, all the back taxes never paid on the $35.2k in income (regardless of the fact you already paid them to Virginia) and subsequent penalties for not filing Form 505. Clearly, an investor’s paradise.

Again, talking to your CPA is important to find out how to work with the state that you never filed the nonresident return. Most of the time, if you filed the non resident return and paid the taxes accordingly, you can offset resident tax liability as a credit from the nonresident tax liability you have to pay. So going back to this example, if the tax payer would have to pay the nonresident tax to Maryland, he/she could have taken an offsetting credit up to the amount he/she paid taxes to Maryland on his/her Virginia resident return. This helps avoid double taxation. Since each state has different tax rates, the credit may not be dollar for dollar of the taxes paid to the non resident state.

The Solution?

If you are going to invest in rental property or a business that is not in your state, consider speaking to your CPA or lawyer if there will be a nonresident state tax or other requirement for that state.

Creative Reuse of Vacant Retail Space: A Building for Any Other Purpose is Still a Building

2009-08-24T13:15:00.000-07:00

All around the nation retailers are being forced to close their doors in the face of the recession. Once lively malls populated by a host of busy stores are turning into ghost towns as more people enter into bankruptcy, at least that’s how things are made to seem. However, as many retailers make their exit, they are leaving the door open for a wide variety of unconventional tenants ready to spring from the underground. They come in all shapes and sizes: veterinarians, fitness centers, churches, city halls, art galleries, and even advertisers. With prices low and space available, there are some creative uses being found for our nations “empty” space.
Take a tour through downtown New York for example, an area which has been hit hard by many store closings. Instead of seeing the mournful faces of numerous empty (and ugly) buildings, you will more than likely see brightly colored collages emblazoned with corporate logos such as Intel, Nestea, Conservation International and Snickers. Advertisers and property owners are making the best of times by forming symbiotic relationships. Property owners who have had a leaseholder go into bankruptcy and cannot locate a replacement are turning to advertisers to fill that space. With no tenant, their property would languish empty and unkempt. By filling that space with an advertiser, they can ensure their property looks appealing and is paid for. Advertisers on the other hand are finding a great (and cheap) place to put their ads. In this way both sides are helping each other through the recession.
In a recent study released in March by CoStar Group, which overviewed 11,500 leases in the previous six months, various other tenant trends were identified. These covered a wide range including government, educational, medical, and ecclesiastical use. At first glance it may seem improbable that such tenants are taking over the vacant space left from retails fallout. However, after a closer look it becomes apparent that there are some inventive and beneficial developments occurring.
Government entities, which can include DMV’s, City Halls, Military Recruitment Centers and Libraries, accounted for 100 leases in the survey. While such establishments may not be proper for prime real estate, they are suited to occupy the less premium space, such as the wings of a mall. A government entity would need to have access to the entire community, so any potential location would have to be a community center as well, most likely having access to public transportation. Government centers usually sign long term leases (5 to 20 years) but in case of funding difficulties, usually require a 1 year opt out clause contingent on the specific government entity having sufficient appropriations committed for the following year.
Educational facilities, such as Satellite Colleges, Beauty Schools, Daycares and Youth Private Schools, recorded 60 leases. In times of recession, educational services often become popular as people out of work decide to go back to school. They offer the benefits of bringing in a large amount of people who patronize surrounding services and are considered good options to fill “junior anchor and anchor spaces at shopping centers”. Churches are another popular option as they too drive traffic to surrounding stores, accounting for 80 leases.
Medical uses represented 160 leases and are becoming “more and more common in U.S. shopping centers”. Retail locations provide medical services with attractive locations due to their visibility and ease of access. Fitness uses are also becoming more wide spread as 350 leases were recorded. They cover a wide area ranging from dance studios to martial arts centers but are said to be “non-ideal” tenants because of higher turnover rates compared to other categories. Nevertheless, they are becoming increasingly popular in retails absence.
Artists have also been very proactive in occupying vacant space. In the United Kingdom, a £3 million plan was announced which is designed to give small loans of £1,000 to people who find creative use for vacant retail shops. Among these are many artists who are now taking advantage of the opportunity to use space they previously couldn’t afford. The plan was created to combat the predicted 70,000 retail closings in the UK this year. In America a similar movement (surprisingly not funded by the government) is taking place. Collinwood, an area in Cleveland, is the sight of a new 10 block “artist village”, which came about when a community development corporation bought 9 foreclosed properties, some costing only a few thousand dollars. Another example is a shopping mall in St. Louis, where artists are moving into vacant retail space to open studios and event spaces for rents of $100 a month. On both sides of the Atlantic artists taking advantage of venues they previously couldn’t have access to.
The examples listed above are certainly interesting; but there are others which are truly weird. In a book written by Julia Chirstensen last year entitled Big Box Reuse, a number of odd uses for vacant retail are described. Such as a Kmart in Austin, MN converted to a museum dedicated to Spam, A Wal-Mart in Round Rock, TX turned into a go-kart track and an Ames department store in Norfolk, VA transformed into an apartment complex. These cases may not be the norm but they illustrate the extent to which creativity can reshape our surroundings.
We often assume that abandoned retail stores have to sit there until some other Wal-Mart, CVS, or Bed Bath and Beyond decides to take up residence. However, it is clear that there are numerous other uses for these buildings. Retail space that goes out of business does not simply disappear, in many circumstances it is occupied by facilities which meet other needs. When a Border’s closes, a hospital can breathe in new life; where a Men’s Wear House shuts its doors there may be an art gallery ready to open them. Though a recession can slow many things down, one thing which it cannot halt is human creativity.

Navigating Closing Costs and the 1031 Tax Deferred Exchange

2009-08-18T12:04:00.001-07:00

When entering into a 1031 exchange one often does not consider the ancillary costs that come with closing the transaction. Often the assumption is made that these costs will be subsidized by the 1031 exchange proceeds. However, while some of these costs certainly can be bankrolled by the tax deferred exchange, some cannot. Knowing how to avoid these expenses being deemed boot can keep your transaction out of hot water.

Covered Costs:

It is generally acknowledged that “payment of brokerage commissions from exchange proceeds does not create taxable boot.” Thus, payment of these “non-recurring” costs of sale or purchase from the exchange proceeds should not be considered taxable boot. Brokerage commissions are one example of non-recurring costs; however certain other costs are excluded.

They are as follows:

Real Estate Commissions
Recording Fees
Direct Legal Fees
Title Insurance Premiums
Qualified Intermediary Fees
Agreed Property Inspections
Escrow or Closing Agent Fees
Documentary Transfer Fees

Note: Expenses have to be customary in the jurisdiction (e.g. 6% listing agreement).

Un-Covered Costs:

Certain costs are generally not covered and considered taxable boot if they are involved with anything else besides acquisition of the replacement property. The issue most people run into involves getting a new loan on the replacement property. Because the costs for acquiring the new loan are not related to the acquisition of the replacement property (according to the IRS), they are considered taxable boot.

These Include:

Loan Fees
Points
Prorated Mortgage Insurance

Another issue to consider is that prorated property taxes, insurance payments and rents are considered deductible ongoing expenses. As such, they are not included in the 1031 exchange; however, their payment does not impact the use of the Qualified Intermediary safe harbor.

Real Estate: What is it Good For? Absolutely Nothing…

2009-08-17T07:10:00.000-07:00

Yes nothing. Actually, Zero. When was the last time an investment involving a “zero cash flow” sounded appealing? For most of us, that time would be never. However, there are times when “Zero Cash Flow” property can be of the most instrumental use. The benefits lay in the tax implications for those performing 1031 transactions, if used properly, they can allow someone to leverage a property with (if you can believe it) 90% debt. Of course that debt comes at a cost, namely all those rent checks that would normally be going to you, instead go to your lender (hence zero cash flow). However, after you are done paying off the debt, you would be left with a property completely paid off, most likely highly appreciated in value, and a deferment of the impending capital gains taxes.

Here’s how it works:

Say someone, Mr. Fornit for example, needs to sell a property worth $7 million, with only $1 million in equity and the rest in debt. The property was originally bought in 2000 for $2 million and if sold today, faces a $5 million capital gains tax liability. To avoid the impending capital gains tax, Mr. Fornit needs to enter into a 1031 but that means the new property must be of equal or more value. After satisfying the $6 million debt obligation, Fornit only has $1 million of cash to reinvest in a property that must be worth at least $7 million to comply with the 1031 rules. To buy a property you need to provide at least 30% of its price in equity. In this situation, Mr. Fornit’s equity would only equal 14% of the total cost.
By entering into a zero cash flow transaction, he can avoid these problems. A zero cash flow transaction is structured almost like a bond, so a bank will invest the $6 million needed into Mr. Fornit’s property and in return will receive the properties rent checks to pay off the debt. In this way the bank recoups its investment and Mr. Fornit ends up with a wholly owned property that satisfies his 1031 and defers his pesky IOU to Uncle Sam.

Note: This kind of transaction only works with investment grade properties to ensure payment stability.

So you may ask: what do zero cash flows from properties have in common with anti-hawkish music by Edwin Starr? One common theme: the best interests of the common man may not be directly aligned with the interests of Uncle Sam. So avoid your unnecessary taxes and stick it to the man!

1031 Mailbag: Can You Do a Reverse Like-Kind Exchange for a Replacement Property Worth Less than the Original?

2009-08-05T10:21:00.000-07:00

We received this inquiry from a successful Realtor® in a resort Community in Maryland- Can You Do a Reverse Like-Kind Exchange for a Replacement Property Worth Less than the Original?

Q: Let’s say you have a place on the market for $1,350,000 and want to buy a place that is less. Can you still perform a 1031 exchange? Furthermore, let’s say you want to take cash out of the place for sale to buy the other prior to the sale of the one your selling, basically a reverse exchange of a property substantially less. Is this possible as well?

A: There are three questions in here:

1) Whether your client is the ideal prospect for a Reverse Exchange? That is an issue we address outside the scope of this blog but in full detail on our site. Some clients are ideal for reverse exchanges some are not.

2) Whether you can do a partial exchange and buy a replacement property for less value than your relinquished property. Absolutely yes you can do that. However, you would want to analyze your cost basis to make sure you do not trade so far below your value that you’re not getting any benefit from the 1031. For instance if you paid $500,000 and sold for $1,300,000 you would get no value by buying $400,000 worth of replacement property. 1031 exchanges defer the liability on gain above the basis not on a “pro rata basis”. So in this case you wouldn’t just be deferring taxes on the $400,000 amount. This area is black and white; it all depends on your basis.

3) The second inquiry, whether you can pull equity out of the relinquished property, is more of a red flag issue for the IRS. First, any refinance of the relinquished property should be as close as possible to one year before sale. The IRS frowns on the refinancing of relinquished properties and generally prefers the refinance of replacement property. The rationale is there is less risk of a predetermined cash out of the replacement property and more likelihood that this transaction is an “independent” transaction. If not the IRS views it as a cash out. It would be preferable for you to get an unsecured line or a line on another property to buy the replacement.

Maryland 1031 Non-Resident Pitfall

2009-08-05T07:29:00.000-07:00

Like-Kind Exchanges are fairly identical state-by-state. However, locally, in Maryland we have a big pitfall to watch out for when conducting a 1031 Exchange. When your seller is a Non-Resident of Maryland (does not personally call Maryland their domicile) and they plan to conduct a like-kind exchange upon the sale of a Maryland property, the client must file an exemption form with the Maryland State Comptroller at least 21 days in advance of the relinquished property settlement.

While this may seem trivial, I have seen this one item derail both portfolio sales of one billion dollars and Baltimore row house sales for $50,000.

To obtain an exemption certificate, nonresident exchangors must submit by mail to the Comptroller of Maryland, twenty-one days in advance of settlement, Maryland Form MW506AE, Application for Certificate of Full or Partial Exemption. The Comptroller’s Office will then issue the taxpayer their certificate.

If a nonresident taxpayer has income from a Maryland property (even if there is a net loss), they need to file a Maryland Form 505, Maryland Nonresidential Income Tax Return, annually. If the Form 505 has not been filed for previous years, the Comptroller’s office may reject the application for exemption as there is no Maryland record that the property was held for business or rental purposes to qualify for the IRC Section 1031 exemption.

No tax will be collected if the seller certifies the property was their principal residence in accordance with the federal rules in IRC Section 121.

If an individual or a corporation has paid withholding tax at settlement in excess of the amount owed, they may file an Application for Tentative Refund of Withholding on Sales of Real Property by Nonresidents (Maryland Form MW506NRS). The request for refund may be filed with the Comptroller after 60 days have elapsed from the date the tax was paid to the Clerk of the Court or Department of Assessments and Taxation.

Here is a link to the form:
http://forms.marylandtaxes.com/current_forms/MW506AE.pdf.

Call with any questions.

As always, for your clients seeking a Qualified Intermediary, don't hesitate to reach out and schedule a free in-person consultation in the DC area.

Sincerely,

James Brennan Esq.,LL.M.
Exchange Solutions Group, LLC
Principal/Corporate Counsel
11150 Sunset Hills Road, Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889

www.1031esgroup.com

Where to Invest?

2009-07-22T08:47:00.000-07:00

Let's play a game. Imagine some super wealthy robber-baron uncle unfortunately passes away and bequeaths a sizeable amount of cash to you. There's one catch, to ensure you don't just spend the money willy-nilly, he states in his Will that it must be used to invest in a property. So what do you do? Where do you invest the money, and in what type of property? Well you'll be responsible for answering those questions:

What asset type would you buy in this market?(polling)

Worst Looking Investment Property

2009-07-16T19:20:00.000-07:00

I have decided to have a throwdown- a contest for the egomaniacs of real estate. While the subjective nature of real estate investments have always driven promoters to suggest certain real estate deals are the "best" or more "solid" than the next, I would like to challenge you to scout out the worst, horrific version of an investment property you see on the internet. Yes, there has to be pictures. Hopefully, a picture so aweful my 1031 exchange clients would laugh. Keep it PG and I will announce a 1st, 2nd, and 3rd place winner August 1st!

Swapping Vacation Homes in a Tax-Deferred Exchange

2009-07-16T14:33:00.001-07:00

Vacation homes are often problematic for tax purposes. While they don't squarely fit in the "primary residence" bucket, they often squarely do not fit in the investment property bucket. This article addresses recent guidance in the 1031 area as discussed by a Smart Money author:

Swapping Vacation Homes in a Tax-Deferred Exchange

Let's Make a Deal: Feature of the Week

2009-07-16T13:45:00.000-07:00

Spectrum Deal in Manassas, Virginia

Kudos to the Kelley Drye Legal Team and Spectrus Development for getting a double digit deal done in this market. Aaron Rosenfeld is a key dealmaker on the team and has consistently been able to provide both business and real estate advice for his clients locally and on a national playing field representing private equity companies and investment houses. Now more than ever creative financing and navigating the banking sector has proven to be a challenge.

Here is a blip from Globe Street on the deal:

Spectrum Buys Manassas Retail for $25M

Conservation Easement: The Greener Side of 1031

2009-07-13T06:57:00.000-07:00

Everybody wants to go green these days and as it turns out, there is a way for those owning real estate to do so as well (without installing solar panels or wind turbines). The solution is found within something known as a “Conservation Easement”, a government provision enacted to provide incentive for private owners who donate their land for conservation purposes. By applying the 1031 exchange to this process, a property owner can both preserve the environment and make a new real estate investment.
A conservation easement is essentially a deeded fee interest that Land Trust Commissions or other government entities buy in order to preserve the natural state of the land. It comes in handy in two distinct situations: 1. You own property and want to sell it but do not want it to be developed for environmental reasons, 2. You own property and want to sell it but cannot find a buyer. In both situations a conservation easement can be beneficial, as the government will use the land in an environmentally friendly way and provide consideration through its purchase of the easement.
An easements value is determined by taking the value of the land without the conservation easement and subtracting that from the value of the land with it. The 1031 comes into play when there has been sufficient appreciation on the property to make the sale of an easement subject to capital gains tax.

For Example:

Mr. Bolan has owned a plot of undeveloped land for 20 years. Over the course of these 20 years the land appreciated in value from $1 million to $10 million. Now Mr. Bolan wants to sell the land but does not want to see it developed, thus he pursues a conservation easement. The land is valued at $4 million with the easement, so $10 million (the lands unrestricted price) - $4 million (the lands price restricted by conservation easement provisions) nets a $6 million easement.

The issue Mr. Bolan runs into is that he will face a substantial capital gains tax, because of the properties appreciation, when he sells the easement. What he can do instead is trade his $6 million easement, in a 1031 exchange, for land of equal value.

Note: This transaction would have to be structured, from the very beginning, as a 1031 to work. To make a 1031 viable, a qualified intermediary would need to take title to both the land and the revenues gained from its sale NOT the actual owner. If the owner were to receive money directly from the sale of the easement a 1031 transaction would be impossible.

Continuing with the example, Mr. Bolan (through his intermediary) receives $6 million from his sale of the easement. The cash is then used to buy an apartment complex, which will provide Mr. Bolan with a steady flow of cash. All of this is done while avoiding the capital gains tax Mr. Bolan would have faced if he just cashed the easement. Through application of the 1031 exchange, he is able to both preserve his previous property and acquire a new one, all the while avoiding capital gains tax.

Warning Signs with a Ponzi Scheme

2009-06-30T06:21:00.000-07:00

(This is a picture of the original Charles Ponzi).

If you were like me you were amazed by the Madoff case. Not because of the amount of money as much as the individuals and entities involved that were deceived by this man. Celebrities, nonprofits, and some of the country's most successful businessmen fell for his ploys.

I wanted to take a few moments to jot down a few "sniff tests" that I use when screening investment vehicles when aggressive sponsors or wholesalers come my way stating their investment is the best investment tool for my 1031 exchange clients. While I am a tax attorney by training, law school does nothing better than cause you to be cynical and jaded. While there are pros and cons to this mindset, the state of mind proves helpful in this arena.

The standard problem is, just like snowflakes and Italian immigrants, no two Ponzis are alike. The classic Ponzi scheme is where an investor take your principal (say $1,000,000) and promises you an above average return (say 12%). However, the "Sponsor" pays you with your money or other investor's money and never "invests" anything. As you can imagine, the concept is very general, so you can twist and adopt the concept as little or as much as you would like.

Here are some tell-tale signs:

1. The documents don't match up. If you invested $880,000 and were promised 8% and you had an understanding how your principal was being invested, make sure that is what your paperwork says. Afterall, these crooked individuals tend to fall a little short on work ethic (as a general rule).

2. If you can't verify the investments with public data. If I have Google stock. I can check daily online and see where my account should be trading at...however, if I own 1/20th of an underground gold mine...there is no real way to verify how my account should be behaving...so, I am forced to take the "Sponsor's word for it".

3. Are the financials of the investment scheme audited? One tell tale sign is the local accounting firm and the local law firm signing off on $500 million in investments. While a traditional CPA and attorney provide prudent counsel for you and me, when you are dealing with investments and securities the legitimate sponsors get public accounting firms to audit their books and investment pools.

4. No transparency. In Madoff's case the hedge fund business allegedly was located on a separate floor from the market-making one. Such a lack of transparency should have been a red flag for anyone willing to look. In the proposed investment being analyzed does it seem as if only one individual has control and his or her underlings are only in charge of one duty (e.g. bringing in new money, sending wires, etc.). If you are dealing with an above-board shop most, if not all, of the principals should have knowledge of exactly what is going on (for the most part).

5. Unverified education or experience. With services like Brokercheck you can see anybody who has registered with Finra or the SEC that has been securities licensed. Many of these frauds have taken place under the guise of investment advice and most of these creatures grew out of some aspect of the financial industry to get a foot hold of what "normal investments look like". However, many are taken by greed and power away from the world of traditional investments.

6. Education and Language. I have taken a few Toastmasters classes and I often say "uhhh" one too many times. However, those of you with $100,000 or more on the sidelines, should recognize if someone sounds a little rough around the edges to be involved in "Capital Markets", "Foreign Currency Trading", or "Mezzanine Financing". If you owned a company and wouldn't let the person work the register, odds are you shouldn't be investing in their vehicle. This often applies in the low-level ponzi schemes focused on the unsophisticated (see an "alternative to Grandma's certificates of deposits").

7. The word "Never". I have seen three big investment scams locally. Each one of the promoters consistently said the following "we have never in our X number of years missed a dividend or interest payment". This is pretty easy to do if you are never investing in anything and constantly bringing in new money...however, if the investment thesis stinks, but the promise sounds good, run away. You can't buy your grandchildren ice cream with promises.

8. The word "guarantee". No such thing. With investments increased returns mean increased risks. If it was guaranteed it would have less risk and less return than treasury bills.

9. No references. If you can't get a human being to drive to that seems credible that invested with this sponsor, get out of town. This person is so fly by night his spouse probably makes him sleep in the basement.

10. You can't understand what is going on. If you have $100,000 in cash, you are more intelligent than most people. If the sponsor or promoter can't explain it to you in ways you can comprehend they don't deserve your money. Warren Buffet, the oracle of Omaha, only invests in products he understands. If it worked for him, it should work for you.

The ABC's of 1031

2009-06-25T08:02:00.000-07:00

James Brennan, Principal of ES group, debuted on ABC Action News with an enlightening interview on his company, Exchange Solutions Group 1031, and the current state of the market. He overviews the ways a 1031 exchange can help many Americans defer their tax liability and speaks on possible future trends. Click on the video below to watch!

15 Year Depreciation, “I’m Lovin’ It”

2009-06-04T10:42:00.000-07:00

Amid the hundreds of pages contained within the Emergency Economic Stabilization Act of 2008, there potentially exists an extremely valuable tool for those interested in real estate investment. A new law enables restaurant buildings and improvements to be depreciated on a 15 year basis if they are placed in service within the calendar year of 2009 and more than 50% of their square footage is dedicated to “the preparation of, and seating for on-site consumption of, prepared meals”. What does this mean for the investor? Well, restaurant real estate generally has to be depreciated on a 39 year basis, which means one could increase their depreciation tax shield by close to 40% if they act within 2009. That translates into large dollar sign increases on after tax income.

Below is an illustration of just how much a depreciation shield increase of close to 40% could affect one’s cash flow. For purposes of the comparison, we will be using a McDonalds and a Home Depot, both with AA credit ratings. Since McDonalds is a restaurant it can take advantage of the accelerated depreciation schedule, unlike Home Depot.

What is evident from this example is that restaurant real estate is the place to invest in 2009. In this case we saw an after tax cash flow difference of $55,671 in favor of McDonalds for one year. If all else holds equal, over 15 years that becomes an $835,065 difference. This could make a huge difference to all who are thinking of investing in 2009 and goes to show that change on Capital Hill can turn into cash in your pockets.

California Claw-Back Provision: What Happens in California, Will be Taxed

2009-06-03T09:47:00.000-07:00

The 1031 exchange is a great instrument for property owners who wish to defer their capital gains tax. However, not all states treat 1031 exchanges equally. California regulations stipulate that any appreciation in property value accrued in California is subject to their state taxes, regardless of whether or not that property was exchanged for one in another state before its sale. This means that CA property owners cannot escape CA state taxes, even if they exchange their property for one in another state.
Most states conform to federal income tax treatment of like kind (1031) exchanges, where all capital gains taxes are deferred until the properties eventual sale. This is generally interpreted to mean that one is only subject to taxes of the state where the property is sold, discounting the state taxes of any state where the property was exchanged from. Meaning that if I owned a property in NV, exchanged it for one in ID and subsequently sold it, I would only be responsible for federal and ID taxes, not those from NV.
California is a notable exception to this. It employs a “claw-back” provision, entitling the state to tax any gain on property that occurs in California, regardless of where the property is eventually sold.

For example:

Say Mr. Newcombe bought a property in CA for $100. After appreciating to $200, he exchanges it for one in ID. While in ID the property further appreciates to $400. Feeling he has had enough of owning property, he sells it for $400, showing a total capital gain of $300. Mr. Newcombe would not only be liable for $300 of capital gains taxes in ID, but $100 of capital gains taxes in CA as well.

Note: The reciprocal of this situation does not come into effect. If Mr. Newcombe owned property in ID and exchanged for property in CA, he would only be subject to CA state taxes, not those of ID.

From the above example it is clear that owning property in California and exchanging it for property in another state leaves one open to double taxation. There is no way to avoid this situation unless one stays out of CA entirely or performs the final sale there. Being taxed in CA would of course be undesirable because it has some of the highest income tax rates, 9.55% and 10.55% for earnings over $47,055 and $1,000,000 respectively. The claw-back provision really hurts people when they try to exchange out of California’s stringent tax system into a friendlier one such as Texas, which has no income tax. In situations such as this, the “claw-back” provision acts like a hand reaching out of the grave to grab and tax people one last time. Needless to say, before making an investment in CA, ensure it will be worth the high amount of taxes you will eventually pay for it.

Note: For further illustration of this topic, Lou Weller provides a great presentation.

Friends Don't Let Friends Buy Real Estate in C-Corporations

2009-05-13T12:37:00.000-07:00

In matters of taxation, “form” consistently trumps “substance”. In-fact, there is an entire industry of lawyers and specialists dedicated to the study and application of these forms. Like chemists or biologists they analyze the different ways they interact with stimuli (tax laws) and the forces of nature (the IRS) governing them. Much has been learned from these studies and today with the right person’s help, you can avoid many of the arduous taxes which befall the unsuspecting. One of the more clear and poignant lessons learned is also one which many people may find themselves in violation of: Do Not Buy Real Estate as a C-Corporation!
We all learned in business school that c-corporations are taxed twice, once on income received at the corporate entity level and another time on income distributed to shareholders or employees at an individual level. In real estate the same rule applies on its two sources of income, direct income and appreciation. The catch is, if you are a c-corporation, you don’t have to own real estate directly, you can hold title to it in a tax friendly LLC or s-corporation. The advantage of each is that income is only taxed once when it is distributed at the individual level, you skip a whole level of taxation! So if you own a c-corporation and are acquiring any real estate, consult a specialist and ensure you are not taken advantage of by the IRS.
Now, let’s say someone, “Mr. Bowie” for example, owns real estate in a c-corporation and after realizing his folly wishes to transfer it to an s-corporation or LCC. Is there anything he can do? The answer is: YES. The real estate can still be transferred to a more tax friendly entity; however, certain rules apply:

1. As was said before, real estate earns income both directly and through appreciation. The direct income is realized immediately when it is received, and thus in the above example would have already been taxed at the corporate entity level, thus subject to double taxation (translation: there is nothing Mr. Bowie can do about the direct income received while a c-corporation).

2. However, the appreciation is another matter. Income from appreciation is only realized at the properties sale and since that has not happened yet, can be avoided. The problem is the IRS has made a rule stating you have to wait 10 years after placing the property in an LLC or s-corporation before you can sell it and avoid the double tax. However, the law has oddly been changed recently; shortening the time period to 7 years but only if the transfer is made in 2009 or 2010. If transferred in either 2009 or 2010 Mr. Bowie would only have to wait 7 years before selling.

What is obvious from all this, is that the form in which you do business is of the most paramount importance. Furthermore, there are people who have spent their whole lives studying these topics and are ready to help those in need. Do not hesitate to contact one of these people or do research on your own, a single call could make a huge difference. Remember, with the IRS you get only one chance to make a good first impression.

From Starker to 1031

2009-05-01T14:13:00.000-07:00

Ask members of an older generation about a tax deferred exchange and they will most likely respond with the words “a starker exchange” making no mention of the commonly known term “1031”. Indeed, in the old lexicon “1031” is a meaningless unassigned number. “Starker”, on the other hand, represents a discernable moment in time, more specifically a court case (T.J. Starker v. U.S., 602 F. 2d 1341 9th Cir. 1979), when the tax deferred exchange was given relevancy.
Before “Starker” the 1031 exchange was a cumbersome, expensive, and almost impossible venture. Originally created in 1921, the belief was that the exchange of properties must take place simultaneously, making exchanges inordinately difficult. It required that parties directly swap their properties, such as in a deed swap. The problem was it was almost impossible to find two people who wanted to exchange their properties. Sometimes, deals involving 4 or 5 parties would be attempted, but such endeavors would be routinely fraught with complications and fall apart.
Enter T.J. Starker, a former professor at the University of Michigan, he was wise enough to begin buying “second-growth” forest parcels in 1936 and eventually acquired substantial holdings. A “second-growth” forest is land which was originally de-forested and then replanted, thus having to grow a second time. The genius in buying these parcels was at the time they were severely undervalued. It may seem like common knowledge today, but in Starker’s day forests were seen to be a somewhat inexhaustible resource. There simply was not a large market for second-growth forests because people believed there were a multitude of old-growth forests to choose from. Of course the reality of the situation soon dawned on people and logging companies became eager to pay high prices for land, which a few years prior, they had not considered worth the cost.
Thus we are brought to the Starker case. In 1967 two timber companies, Crown Zellerbach and Longview Fibre, offered to purchase 1,843 acres of land owned by T.J. Starker, his son Bruce and daughter-in-law Elizabeth. The parties encountered a problem when both companies expressed a need to start logging immediately, before the Starker’s had chosen their replacement property. The Starker’s would only concede to hand over their property if it was part of a tax deferred exchange, so the parties struck a deal which would lay the groundwork for the 1031 as we know it today. The Starker’s transferred their land to the respective companies and in exchange credit accounts were set up at each company to be called upon when the Starker’s had settled on a replacement property. Control of cash would never be given to the Starkers, when they settled upon a property it would be purchased by the companies and subsequently transferred. That year the Starker’s tax returns were filed with the transactions treated as being tax exempt.
Enter the IRS, who very quickly disallowed the exchanges because the properties were not exchanged simultaneously. They claimed there could not be a time differential between the transfer of properties and demanded the Starkers pay their taxes. The Starkers paid the taxes and subsequently filed suit, resulting in three court cases.

Starker I (1975)

The first case concerned only Bruce and Elizabeth, they simply sued for a refund of the taxes they paid. Surprisingly, the court sided with them and ordered the IRS to issue the refund. However, no mention was made of the mechanics of the property exchange.

Starker II (1977)

The IRS struck back in the second case, as the court (the same one presiding over Starker I) essentially reversed its decision and claimed that no legal exchange had taken place. The exchange of property for a promise to replace it with suitable property was not deemed to be “like kind” and the deal was declared taxable.

Starker III (1979)

The third time was the charm; in 1979 T.J. Starker filed an appeal with the 9th circuit court contesting the 1977 ruling. The court not only ruled that Starker I barred the government from re-litigating the transfers which were overturned in Starker II but that the requirement for the “simultaneous” exchange in fact did not exist. People were now free to exchange their properties with the delay we currently see as such a common and integral feature today.

So there you have it, the defining moment of the 1031 exchange in a nutshell. Today 1031’s are an invaluable tool people use to continue their investments by deferring the capital gains tax. But the incarnation we have today had to be fought for, had to be won in a battle between one man and the IRS (who desperately did not want it to be easier for people to avoid their taxes). Strange then that we now choose to call such an irreplaceable, tax saving tool by the name the IRS gave it, rather than the name of the man who made it work.

1031 Thy Name is Diversity

2009-05-01T14:10:00.000-07:00

It is common to think of a 1031 transaction as one involving land for land or buildings for buildings. However, this is a tragic oversimplification.1031 transactions deal with “like-kind” property and in most people’s minds “like-kind” means both pieces of property are alike, such as trading land for land. But do not follow this train of thought when dealing with real estate; in the eyes of the IRS “like-kind” refers to all “qualified real estate”, opening the doors to a wide array of transactions.

For example:

In one case a person wished to exchange18 oil wells valued at 1.375 million for an apartment or office building. If they were to simply sell the oil wells and buy their building of choice, they would face a substantial capital gains tax; however, through the use of a 1031 they are now making this exchange tax free. That is because oil wells are considered qualified real estate and are eligible for a 1031 involving all other qualified real estate. Other qualified real estate types include: Coal mines, mineral rights, timber, and vineyards.

This all means that investors have an immense selection of properties to both acquire and exchange using a 1031.

Note: The example above pertains to real estate. A 1031 can also be used for property other than real estate such as medical equipment or airplanes, in which case the property would have to be alike i.e.: airplanes for airplanes, medical equipment for medical equipment.

2009-04-28T06:33:00.000-07:00

How Seller Financing Can Provide the Financial Flexibility the Market Craves

We often hear about how the lines of credit have dried up in our current market. Banks are hesitant to lend even to the most credit-worthy individuals, and as for those of us who may not be as qualified…well let’s just say our inquiries are not being fielded at the moment. This creates a somewhat paradoxical problem; because we are also hearing that with prices at such low levels, now is the time to buy. So the question is: How can the enterprising amongst us take advantage of real estates low prices without the support of the traditional banking structure? The answer could lie in something which most people look upon with a sense of abject suspicion, the Promissory Note.

To demonstrate how a Promissory Note can be of invaluable support, let’s look at a quick example:

Suppose Mr. X wanted to sell his current land, valued at $5 million, through a tax deferred 1031, and use those proceeds to purchase an office building alternatively valued at $5 million. A complication is encountered when Mr. Y, the one person willing to buy Mr. X’s land, has only $2.5 million available. In credits better days there was a simple solution, Mr. Y would take out a $2.5 million loan from the bank and thus be able to pay Mr. X the $5 million in cash. But these are not credits better days, and there is little chance of Mr. Y getting a loan. Especially since this transaction involves land, which already populates the balance sheets of many banks, and the opportunity to own more is not welcome. The solution is Mr. Y contracts to give Mr. X $2.5 million in cash and a $2.5 million note, thus covering the $5 million total. Essentially, with the lack of banking support, Mr. X acts as a surrogate bank and enables the deal to go through.

Note: Because this is a 1031 exchange neither cash nor note would go to Mr. X directly, but to his Qualified Intermediary (QI).

As we can see, where a deal normally wouldn’t be completed, the assistance of a note pushed it to fruition. However, the question that invariably arises is “what does Mr. X do with that piece of paper?” This is a problem because though the note may say $2.5 million no one in the market will buy it for its face value. Traditionally, if a note is sold it is always at a discount, requiring Mr. X to take a “haircut” on the value of the note. However, as you will see, the discount may be worth it.

In terms of a 1031 exchange, there are three options for dealing with a note:

1. If Mr. X has the available cash he can simply buy it back from his QI, who is required to hold it by law pursuant to the exchange rules. This is the best case scenario in which Mr. X takes no loss on the note and still has the necessary capital to make his exchange possible. The problem of course is that it is rare someone has the spare cash to make this transaction, especially in a commercial transaction.

2. Mr. X or his broker can sell the note to a third party. This would provide an instant inflow of cash but it would inalterably be less than the face value. For example, a buyer may only be willing to pay $2.1 million for the note which is valued at $2.5 million.

3. Someone can be found who will accept the note in conjunction with cash in the property exchange. Here you simply side step the issue of having to sell the note for cash and instead directly included it in the deal. The problem again is that this will most likely require you to pay more cash to compensate for the note. So where normally a property would cost Mr. X $5 million, with a $2.5 million note that price may go up to $5.5 million.

Essentially it all comes back to converting the note for cash which inherently is a shifting of risk. So the question begs to be answered, “why are notes effective?” The answer is they can provide brokers an opportunity to do what they do best, put people together, and create a win-win situation for all parties. If properly executed, you can have a seller with a successful 1031, a broker who has sold both the “old” and “new” properties; and a satisfied buyer of a note who achieves opportunistic, superior returns in this tumultuous market.

So in the example above, Mr. X could take the cash he received from Mr. Y, combine that with the revenue from the sale of the note and leverage that money with a little extra cash of his own to buy the office building he desired. Essentially trading a piece of land which earns no rent for a building which can earn substantial returns each month. Or if he didn’t want to invest extra cash, Mr. X could simply trade down to a less expensive property, say a $4 million dollar Walgreens, not add extra cash and enjoy the constant stream of revenue the Walgreens would provide. The point is that in a market which many are finding hard to transact business in, there are ways as simple as a note to make profitable deals happen.

Hot Off the Press! Net Lease Advisor First Quarter 2009

2009-03-10T14:15:00.000-07:00

www.calkain.com/news/newsletter/2009/2009Q1Newsletter.pdf

ES group was featured in the First Quarter edition of the Net Lease Advisor. Please give us feedback on our business model as we are constantly refining our value proposition!

Opportunistic Prospective Buyer Seeks to Hire Realtor

2009-03-01T17:16:00.001-08:00

Seeking to hire a Realtor for what could possibly be a Three-Year Assignment. Fickle, sarcastic, brash prospective buyer seeks to interview Realtors for a trying, challenging job assignment. You will earn your 3% on this deal and you will celebrate with your family and friends when this one is off your desk. If you have ever participated in sales training and the speakers suggest you should fire the clients that "spin your wheels" and "waste your time", I am who they are describing.

I have no sense of urgency. Actually, the only urgency I have is the window before my wife and I could lose our jobs and this prequalification letter can turn null and void. My lack of urgency could come into direct opposition of your need for a commission. I encourage you to not spend the 3% before the settlement happens and the check clears in your bank.

I am seeking to make offers on properties at least 25% below their 2009 assessed values. I don't plan on making more than 10 offers on properties; however you may show me hundreds.

Motivation: At the heart of every buying decision there are underlying motivations unrelated often to real estate that drive the decision. Or objectives are to acquire a property that my wife and I can have children in, enjoy the school districts, and stay for 10 years after purchase. Secondarily, we would like to be close to Reston and Rockville, MD, as that is where we work. We will only live in Virginia so access to 270, 495, Route 7 is a must. Third, we would like to have an heirloom from this recession if we survive.

Price Range:
Who's kidding who? There is no floor; however we acknowledge most likely that single family detached homes in these areas below tend not to be below 200,000; however, feel free to educate us if you find something cheaper. Our max is $400,000. Ideally the property would have been assessed for $500,000-$800,000 in 2009. We plan to offer between $250,000 and $375,000.

Property Must Haves:
Two Levels. Ideally most of the bedrooms would be upstairs.
We generally like colonials.
At least .3 Acres.
Bedrooms: 4+
Square Footage: 2000+
Bathrooms: 2.5+
Location: We like Fairfax County for the school districts. Vienna, Great Falls, McLean, Arlington, Alexandria, Falls Church, Reston, Belle Haven, Oakton, Tysons Corner, Lake Barcroft.

Nice to Haves:
A garage, a new kitchen, a large fenced-in backyard, access to a running trail, built after 1985. Proximity to a dog park. A garage. A built-in bar. A flat screen TV that conveys. A pool.

Can't Haves:

A rambler or townhouse. Anything with a chain-link fence. Anything with mold. Any property where suicide occurred, cults were formed, or meth labs were operated. A hot tub.

Any structural problems like a falling-in roof, a basement that floods, a loose supporting wall.
Locations: Springfield, Annandale, Chantilly, Centreville, Merrifield, Fort Belvoir, Fort Hunt.

Challenges:

My Greed
My wife's fear

The ideal realtor would be one that either has low self-esteem or has dealt with idiots like me before. If you can wrangle in my wife and I and see what motivates us and prompt us to make a decision sooner than later, than you are the right guy or girl for the job.

Principals/Owners Only!

If you have lost your job, recently gotten divorced, had a nervous breakdown, or been jailed please contact me directly.

For Realtors please send your emails with attachment to jbrennan@1031esgroup.com. Thank you for your time and patience.

Structured Networking and This Market

2009-02-28T15:49:00.000-08:00

I have had anecdotal feedback from commercial real estate players like Bill Graham of Sperry Van Ness and Telly Fathaly of the Meridian Cos that even these industry veterans who have made over a half a million per year in past years selling and developing commercial real estate that they appreciate in this market they need to stay open-minded on how they get deals done. Bill suggested a current deal where he had encountered a bankrupt TIC (tenant-in-common) deal that arguably overpaid for a property. We called Deborah Froling from Arent Fox to discuss ways to convert out of TIC ownership into a partnership to make decision-making in a tough situation easier and more unified. Deborah offered great insight into the trials and tribulations of TIC ownership, DST ownership, and even lender docs that could trigger recourse liability in a nonrecourse situation. Believe it or not there are ways to trigger capital gain tax liability when getting foreclosed upon. Yes, you lose all your equity and when the property transfers to the bank you are triggering a sale and thus have a tax liability. We discussed ways to either defer taxes via reinvestment into a property or attempting to do a 1031 with the possibility (worst-case) that you push the tax liability forward into future years. These advanced situations call for a multitude of investment advisors including a tax attorney, a CPA, a broker, a financial planner, an entity attorney, and a real estate attorney. Hillary wasn't kidding when she said it "takes a village"...

Zig Ziglar

2009-02-23T19:32:00.000-08:00

"You can have everything you want in life, if you will just help other people get what they want."- Zig Ziglar.

Zig Ziglar was a motivational speaker known for pumping up the average Joe as he faced life's challenges. Similar to Joel Osteen, Zig hailed from Texas and incorporated Christianity into his message.

A friend of mine indicated that true connections with people revolve around "agape". Agape is a Greek word for love meaning "wide open" (as in your heart). It denotes a connection between people which they are committed to reciprocating and practicing self-sacrificing love towards God and among one another.

In today's day and age do we often find ourselves helping people and making sacrifices to do so--or do we only do it when it is convenient?

A Week in the Life of a QI

2009-02-20T12:41:00.000-08:00

First, what's a QI right?

Those two letters keep me employed. Functioning as a qualified intermediary is actually not a complicated process. However, educating clients on how to execute a 1031 exchange is a difficult undertaking. Most clients, attorneys, CPAs grasp the concept of capital gains. However, rolling out a marketing plan on alternative ways to redploy capital in a tax-efficient way is difficult.

This week was a good example of a cross-section of my activities:

I conducted a realtor seminar for McEnearney Real Estate in Washington, DC. McEnearney has long been a dominant player in Washington DC's Alexandria submarket. However, they recently opened a DC office and actually converted many agents from Long and Foster and Randall Hagner in that region.

Every 1031 seminar I have been to in years besides my own has a slide like this:

Now when looking at this slide can you figure out what a QI or 1031 is? Does it remind you of an Earth Science diagram from middle school?

I have always simply described the process with a diagram of the "Old Property" Closing and the "New Property" Closing and showed the QI in-between the two. Usually that diagram suffices for the average person's understanding that we are literally the go-between, middleman, and they don't call us"intermediary" for nothing!

After the seminar at McEnearney, I taught a 1.5 hour Continuing Ed seminar at the Southern Maryland Association of Realtors. SMAR (as they are endearingly called) has a great platform with updated classes. I was impressed that 2/3 of the room had already done a 1031 in the past. Carolyn Guy, the moderator, had actually conducted a Reverse Exchange. This is where you Buy the New Property before you Sell your Old Property. It is fairly complex as you have to create an EAT (Exchange Accomodating Titleholder) to hold title to the New Property while you sell your Old Property.

Wednesday night turned to fun with the ICSC crowd. Jay Steele of Hirschler Fleischler was kind enough to take 14 of us out to eat at Washington, DC's Caucus Room. It was DC's Restaraunt Week so the place was packed; however, we had a private room. With our room filled with brokers, engineers, and attorneys was filled with the current war stories on operating in this unprecedented time. Thankfully, Jon Hipp of Calkain was still able to lighten the mood with his story of attending the Super Bowl and riding around Tampa in a Lamborghini in 2009. Obviously, there are bright spots in the Economy!

This morning I attended a great event by Accelerent. The event had hundreds of people. I was invited by John McManus of Virginia Commerce. The keynote speaker was Cynthia Cooper.

Ms. Cooper shared an awe-inspiring tale of how she dealt with the ethical dilemma of uncovering fraud in a corporate environment and blowing the whistle on her employee counterparts after discovering accounting fictions. This was a great tale of ethical dilemmas we all face.

Overall, these highlights set the tone. Under all this outbound stuff we still had to actually conduct business and service our clients. Its a tough juggling act sometimes. So I better go return some calls!

Athens, GA, and Reynolds Plantation

2009-02-16T18:50:00.000-08:00

Just arrived back from a 3 day excursion to Georgia visiting the city, its University, and nearby Reynolds Plantation on Lake Oconee. The area is home to many rental properties and second homes for affluent Atlanta residents. So many 1031s are done here that the Board of Realtors site has a link to "1031 Tax Exchange". Unfortunately they have no content now (February 16th) but I just emailed them to rectify their void in the marketplace!

Athens, Georgia, is home to the University of Georgia. In commercial real estate, Georgia's Terry School of Business is one of the top ranked programs for specializations in both Real Estate and Insurance.

The University has seen its academic reputation rise exponentially since Georgia's Hope scholarship program was started in 1993. The merit-based scholarship allows any resident of the state of Georgia to attend any public college in the state without paying tuition, provided they maintain a 3.0 GPA. The arch on the right, however, supposedly has a curse that if you walk under it as a Freshman you may not graduate in four years.

During our visit, we watched a very close basketball game between the Florida Gators and the Georgia Bulldogs. The game had a very surprising outcome for most locals. The Georgia basketball team managed to avoid a winless conference season by knocking off Florida 88-86 in front of a lively squad of 'Dawgs. We proceeded to grab dinner at East West Bistro in Downtown Athens. After dinner, we slept, ran a 5k, and moved on to Lake Oconee.

The Reynolds plantation offered many real estate opportunities. Houses for sale crossed most demographics with some homes like this one being pretty much out of 99% of the population's' wallet:

The History of the Reynolds Plantation from the Reynolds marketing collateral is:

"Reynolds Plantation is part of what was once known as "Cracker's Neck," a highly favored section of Greene County (named for Revolutionary War hero General Nathaniel Greene). After a period of decline, approximately 7,000 acres of Cracker's Neck were reclaimed by Mercer Reynolds Sr., who built a hunting retreat named "Linger Longer." A Greene County native, Reynolds was a highly successful businessman and inventor, earning a patent for his process of solidifying cottonseed oil. Although he moved to Chattanooga in the 1920s, he maintained ties to the area, often returning to Linger Longer to hunt, fish and relax.

During this same period, James Madison Reynolds, Sr., Mercer's cousin, was assembling land in the area for timber production. By the late 1930s the combined land holdings of the Reynolds family approximated 10,000 acres, which were left in a trust. In 1985, the trust was released to his grandchildren.

The owners of Reynolds Plantation began working to determine the best use of the land that their family had owned for so many years. As development of Reynolds Plantation continues, members of the Reynolds family remain intensely mindful of the historical value of the land and the need to preserve, and enhance, its natural beauty and legacy."

We stayed at the Ritz-Carlton Lodge. My wife had surprised me with massages after a 5k race we ran. The massage was terrific and I have learned that I need to stretch my IT band and calves better according to the wonderful and talented Ms. Vicki.

The takeaways from the trip: college students have the best life ever and a close second are the residents of Reynolds Plantation. Overall, I suggest a visit to both!

Charm City and Retail Real Estate

2009-02-11T20:24:00.000-08:00

I just returned from a visit to Charm City Baltimore to attend a commercial real estate happy hour focusing on retail real estate. For any of you who aren't familiar with retail real estate, think of your local mall or strip mall-- these brokers and developers build and tenant these buildings. I attended the meeting with a colleague, Jeff Bogart, of Calkain Cos. Jeff was eager as well to see how Baltimore compared to the DC market. We both were invited to the event by Eastern Construction's marketing exec, Teralynn Lueben.

International Council of Shopping Centers is the trade association representing this segment of the commercial real estate market. If you would like to learn more about this market segment you should attend one of their Regional or National dealmaking conferences. I have attended DC, NY, and the National convention in Las Vegas.

Back to Baltimore- I never have really had dealings with Baltimore's retail broker population. I have conducted office 1031 exchanges and residential investment property transactions; however, Baltimore retail is new to me.

What really blew my mind about the trip is Baltimore's "newer section of town", Harbor East.

Harbor East is described on Baltimore's city website as "(a)n entirely transformed and swiftly emerging neighborhood located between the Inner Harbor and Fell's Point, Harbor East is becoming the place for modern cuisine. Sophisticated fine dining is without a doubt Harbor East's forte. Witha new arts-theater and endless restaurants to choose from, it is Baltimore's latest neighborhood to gain insatiable interest from both locals and visitors alike."

The event we attended was at James Joycce, an Irish bar in this section of town. After visiting Flemings and Oceanaire. we strolled over and met the crowd.

Dan Klein and Geoff Mackler were two of the gentlemen I had the good fortune of meeting while attending the function. Dan has the unique perspective of being an owner and conducting leasing himself. I was impressed with his comprehensive knowledge of investment sales and leasing. Geoff, as well, seems to be a driving force in Baltimore real estate.

I made plans with several brokers to meet next week at ICSC. We shall see how things develop, but overall the scene looks promising for 1031 activity.