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Recently the president of our national franchise Kevin Maggiacomo of Sperry Van Ness sent an open letter summing up his thoughts and reflections on 2009 and the coming new year. I thought it would be good to share a few of his comments with you as I greatly value his perspectives. As follows:
The Economy
At the year’s close, it is apparent that our worst fears for the economy and our industry have thankfully not been realized. Instead of a protracted period of economic malaise, the weight of evidence now shows that the economy returned to modest growth in the third quarter. Temporary employment numbers (a leading indicator of permanent employment conditions) have improved and job losses have eased substantially, narrowing to a small fraction of the cuts reported at the beginning of the year. As anxiety over record job losses has subsided, consumer and business confidence has improved. Looking forward, the consensus amongst economists and industry leaders calls for measured growth over the next year. Lagging the stabilization in the health of businesses, and barring any unexpected shocks, sustainable job growth is anticipated towards the end of the 2010. This is, of course, welcome news for the commercial real estate industry, since improvements in demand for space depend critically on new jobs replacing the millions that have been lost.
To read the rest Kevin's article go to : http://www.maggiacomoblog.com/new-years-message
The answer may be a resounding YES if you are looking to do a transaction in a rural community. I recently interviewed Dave Chestnut and Matt Harris from the local USDA/Rural Development office in Champaign, Il. Wow! All I can say is that they blew my socks off when it came to the shear number of programs that they have in the USDA playbook to help you get a deal done. Oh and another important point THEY HAVE MONEY! and THEY HAVE A MANDATE TO LEND! That's right in addition to their normal adequately funded budget they have been given an additional $45,000,000.00 to help spur economic development, facilitate the purchase or sale of a business, help a farmer or agribusiness expand or even just help you sell that gas station on the corner! No kidding they have what one might might be tempted to call a "best kept secret" type of thing going if it weren't for the fact that they are doing everything they can to get the word out. Besides all of this they are easy to work with. You start by talking to your banker. That's right your personal neighborhood banker can help you navigate the paperwork and process. The program works best that way simply because there is some paperwork involved which is about the only downside to working with USDA. So if you can handle that (which your banker will help you do) and your deal is not in a community with a population over 50,000 people then USDA may just be the answer to getting your deal done!
The entire interview with Dave Chestnut and Matt Harris can be heard on the radio show Central Illinois Business in January. The program airs Saturday mornings at 11:00a on 1400A.M.
I hope you enjoy my latest interview as much as I did. Rick Siemer and his family have run a very successful milling operation in Teutopolis (near Effingham) for over 125 years. I was very interested to learn why. After all at the turn of the century there was a flour mill in just about every town. There were literally thousands of them! Today that number has been diminished to just over 100 operating mills in the country. And guess what? Siemer Milling is number 15 in the entire country! Right here in our area we have one of the most successful milling operations in the nation. The interview reveals Siemer's management philosophy and gives insight to the corporate culture that allowed them to endure through two world wars and the great depression. They really have a story to tell and its rich with a history of the mid-west, with a people and an outstanding family. Its worth the time to watch! Watch now!
That is a question that I have heard an awful lot lately. Why 1031 exchanges and why now? I would like to share a few thoughts with you on this topic. As many of you know Section 1031 of the IRS tax code contains provisions which allows deferral of taxable gains when the proper conditions are met under the code. I am by no means a tax attorney or an accountant but in layman terms what it amounts to in its simplest form is a tax deferred event when you sell real property, provided that you purchase another property of equal or greater value and you do it according to the rules set forth by IRS to qualify for the deferral. The implications of this are staggering and can mean the difference of thousands of dollars in taxes and possibly millions in equity when even a little planning is done in order to qualify for this aspect of the tax code. Let me be the first to say that this kind of thing is highly technical and the details of any given transaction should properly be reviewed by your tax advisor, your attorney and the other professionals who make it their business to protect your interest and guide you in such matters. Having said that the 1031 rules are something that you may want to learn more about. I see this aspect of the tax code becoming more and more important in the future. For instance, if I were to ask your opinion of the direction of capital gains taxes in the future what would you say? Do you think they will go down? Stay the same? If you are like me you might believe that they have a very good chance of going up. Even if the legislators do nothing the sunset provisions under existing law will take affect within the months ahead and capital gains tax will automatically revert to 20%. I happen to think that there is pressure to drive it higher than that depending on the economy and political climate next year. All the more reason to learn how to use the provisions of Sec. 1031 of the revenue code. I had the privilege of sponsoring a series of webinars for my clients recently hosted by Bill Exeter of EXETER 1031. He did an amazing job of explaining many aspects of the code that allows for tax deferral on all types of transactions not normally thought of as qualifying transactions. If you would like more information about the opportunities provided under this provision of the tax code give me a call I will be happy to make a personal introduction to Bill Exeter, a consummate expert in his field and a man I admire as a true professional.
Reports indicate that 2009 will see one of the highest numbers of bank closings in US history. According to reports the hundredth bank will be closed and taken over by the FDIC next weekend. Just about a week ago the FDIC closed the ninety-ninth bank for the year. California in particular, has been one of the hardest hit states with one of the higher bank failure rates in the country. The FDIC took over the San Joaquin Bank in Bakersfield, California, making it the tenth bank closing in the state. There are reports of more closings to come within the state. Even with this grim news, many believe that 2009 will not have as many bank closings as there were in 1980, which had 534 failures. Reports indicate that 2009 should do better than 1992 as well, which had 181 banks fail. 2009 may not be as bad as previous years, in history, but according to the FDIC, currently there are 416 banks in its “at risk” category. This indicates that there are many more bank failures to come in the months ahead. FDIC does not indicate which banks are in this category, to curb the mass withdrawal of money from the banks at risk of failures. Many bank closings have been caused by the real estate boom of the mid-2000s. It is clear that many banks are still at risk and will continue to be at risk of failure for some time. Written By: Maulik Shah, AVP, Sperry Van Ness | Better Capital Partners.
On Friday November 20th I had the privilege of attending the CCIM annual Black Diamond awards dinner held in Chicago at the Willis Tower (formerly Sears Tower) on South Wacker Drive. The event had an amazing venue at the Metropolitan Club on the 67th floor. Somehow the weather cooperated for a change and the clouds disappeared to reveal beautiful sunshine for my drive to Chicago. When I got to the 67th floor I could hardly believe my eyes! Breathtaking (in this case) is not a cliche. One could see for at least ten or twenty miles! The city lights laid out like electric jewels twinkling against the darkness of the crisp cold fall night.
What really made the event special for me was the people who were attending. Lloyd Berry from Colliers had graciously invited me to share a seat at his table. He is an extraordinary professional and human being and I always enjoy being around him. I was seated next to Polly Parchem (Winner's Edge) and her erudite husband on one side and Thomas Bothen (UIC) and his lovely wife on the other. One might think that this would be a rather stuffy affair but such was not the case. Everyone seemed to enjoy the evening and hours passed like minutes.
Of course it wasn't all just a party. There was some necessary business which required our attention including the awards. There was also a summary of the past year by out going chapter president John Joyce of Epic Realty Partners. He spoke humbly but with a measure of accomplishment for his time in office. The incoming president will be Michael Lunn (ReMax) who also spoke to the group. He promised to continue the legacy established by the past presidents. I have been asked to chair the Candidates committee for 2010.
This was an amazing group. I could not be more impressed with their professionalism, their standing in their respective market niches and their genuine warmth as people. Being a country boy from a smaller market I was a little intimidated to go to the big city and meet all the "Chicago" people but I couldn't have had a more pleasant experience. I was not only made to feel right at home but instantly felt I was among friends. We have a fantastic CCIM Chapter!
 I recently spent four days in Palm Springs California at a national exchange meeting. It was a fantastic experience. I stayed in a hotel which had received the benefit of over 90MM in renovation costs. It was all done in a retro style with the intent to emulate the fifties or sixties. It was impressive. Most of the people that were there were professional investors, developers, principals and brokers from all over the country. In these trying times in the economy these are the folks that are still making things work and getting deals done. People often ask why I spend the time, money and resources to get myself to these events when it seems that they occur in so many disparate parts of the country. There are a host of reasons. The first relates to what I said earlier. The people that attend these events are the real deal. They are the folks that have the cash, have the property or have the expertise to make transactions occur that might otherwise never happen. They also happen to be of the highest integrity of anyone you will meet in the industry. The second is that I want to do all I can to help my clients with their real estate goals. I can't do that sitting at home at my desk waiting for someone to call on a sign. Especially in today's market! I feel strongly that getting out around the country and talking up their property in front of serious players is a big advantage to my clients and that is something very few brokers are capable or willing to do. Whether its IREX, KREE, NEC or SEC I try my best to be there for my clients!
November 3, 2009: My guest is Craig Lindvahl, Educator/Filmmaker.
I want to tell you all that this was one of the most interesting stories that I have ever had the privelege of bringing to you on the show. Craig is not only a very dedicated and gifted teacher, he is also doing something that is really amazing with the young people in his class. He is teaching them about life by teaching them about business in the real and immediate context of actual businesses. This pragmatic approach to teaching assures learning and retention for students in ways that wrote memorization and conceptual theory does not even approach. As I say in the interview Craig's style of teaching is akin to telling someone about what a beach is by having them put there toes in the sand-not just show them a picture post card of the tropics. I hope you take time to view his interview. I firmly belive that if we had a program like his for all our kids in high schools everywhere our society and communities would benefit tremendously.
WATCH NOW!
One of the most productive uses of my time on behalf of my clients has been spent at real estate marketing sessions. What is a marketing session you ask? It is meeting where real estate professionals gather together for the sole purpose of presenting properties to qualified buyers and brokers representing qualified buyers from all over the country. This goes on for days! Every few minutes another presentation is made to the group and each presenter then asks if there are any takers. I am always amazed at the number of takers on the properties. Not every transaction consumates but if I can show my seller three offers to consider I feel that I am adding value by spending the time and money it takes to be here. This week (Oct 28th and 29th) I am attending the Indiana Real Estate Exchangers (IREX) meeting in Indianapolis. It is the largest such event in Indiana and is held every year. There are many of these sessions held through out the year in different parts of the country. The grand daddy of sessions are the national meetings held by the (SEC) Society of Exchange Counselors. Next month I will be attending the SEC meeting in Palm Springs California. There will be somewhere between 100 and 200 investors, brokers and other real estate professionals there. If you woulld like your property presented to real buyers who can perform call me! There is still plenty of time to get ready for that meeting with a custom marketing package put together by the Ruggieri Team.
On Thursday October 23rd I was able to attend the annual meeting of the Champaign County Economic Development Corporation held at the Alice Campbell Alumni Center on the campus of the University of Illinois. It was a dismal dreary evening outside and everyone had to use an umbrella just to make it into the building without getting drenched. Dismal and dreary outside but warm, exciting and full of energy inside. The venue was positively elegant and the food, refreshments and appointments all impeccable and commensurate with a black tie affair but this evening was not a stuffy one. Current board Chair Tim Hoerr was an outstanding host and conducted the meeting with a deft mix of executive style and disarming humor. The speakers included Quesnell Hartman, President of EPIWORKS a firm specializing in the production of semi-conducting wafers for the communications industry and Gary Durack CTO and CEO of ICYT MISSION TECHNOLOGY a company that produces highly specialized cell sorters and other high technology equipment for the medical and pharmaceutical markets. Both speakers were engaging and very informing of the issues not only germane to their individual industries but also to the larger story of the EDC and what it has done to promote business and jobs in our county. I was particularly happy to see Dr. Hartman on stage as a keynote speaker at such an event. It seems to me that it was only yesterday that I met Quesnell and his partner Dave Ahmari. They were just young graduate students with an idea at the time hunkered down in the old Technology Commercialization lab on the South Farms. When I first met them they were literally running their company from one room in the lab with a one table a few chairs, a computer and a phone. I had the priveledge of working with them to find a building for the new business that they planned to start. Well to make a long story short we found them a building helped them get a clean room designed and built inside of it along with offices and labs and the rest as they say is history. Way to go guys! Champaign County is proud of you! To learn more about EPIWORKS click here http://www.epiworks.com/
Reports indicate that 2009 will see one of the highest numbers of bank closings in US history. According to reports the hundredth bank will be closed and taken over by the FDIC next weekend. Just about a week ago the FDIC closed the ninety-ninth bank for the year. California in particular, has been one of the hardest hit states with one of the higher bank failure rates in the country.
The FDIC took over the San Joaquin Bank in Bakersfield, California, making it the tenth bank closing in the state. There are reports of more closings to come within the state.
Even with this grim news, many believe that 2009 will not have as many bank closings as there were in 1980, which had 534 failures. Reports indicate that 2009 should do better than 1992 as well, which had 181 banks fail. 2009 may not be as bad as previous years, in history, but according to the FDIC, currently there are 416 banks in its “at risk” category.
This indicates that there are many more bank failures to come in the months ahead. FDIC does not indicate which banks are in this category, to curb the mass withdrawal of money from the banks at risk of failures. Many bank closings have been caused by the real estate boom of the mid-2000s. It is clear that many banks are still at risk and will continue to be at risk of failure for some time.
Written By: Maulik Shah, AVP, Sperry Van Ness Better Capital Partners.
Recently I had the privilege of attending a special presentation by entrepreneurs of their business plans to a group of qualified investors. This was at the third annual Investment Forum Sponsored by Prairie Spark and Eastern Illinois University held at Sara Bush Lincoln in Charleston. I must say I was impressed. Not only with the people and the companies that were presenting but with the whole event. Here was a meeting of both business people with their ideas for start ups but also investors who could write checks if they decided to do so! There was also a group of high school students who were allowed to attend the event because of a special program they are enrolled in through their High School in Effingham. So here I was like a fly on the wall watching entrepreneurs make a case for investment in their businesses, investors diligently studying each presentation and students from high scholl drinking it all in! I was blown away! Would that every community could have such synergy between the business comunity, the educators and the banking and investment folks. I think that the are doing realy great things down in Effingham, Matoon and Charleston. Maybe there is something in the water. If so I want to drink the kool-aid! If you would like to learn more click www.eiu.edu/~cei
Watch an all new episode of One on One with Alex Ruggieri featuring Mike Yager.
Mike Yager began his business when as a young man he borrowed $500.00 to purchase some patches and T-shirts which he had planned to sell at a Corvette car show. The rest as they say is history. Today Mike is the largest supplier of Corvette and Volkswagon accessories and supplies. He employs a couple of hundred people and just opened his first office in China. I really enjoy Mike's contagious attitude. He really lights up a room with his smile. The thing is this guy is for real. Its not hype. He carries his passion with him and he loves his business as much as he loves life! I get a kick out of that.
Click here to watch!
I have a good friend by the name of Greg Finley. He is a commercial broker with Sperry Van Ness Fiducia in Garden City MO. I have been following his blog and read a very informative article of his regarding Sale-Lease backs. I am putting a link for you here so that you may also benefit from his expertise!
Commercial Investment Real Estate magazine is the premier national Trade publication for commercial real estate. Recently I was contacted by CIRE magazine. The editor asked if I would be willing to share some of my thoughts on marketing and public relations with their readers. The demographic for CIRE includes real estate professionals from all strata's of the real estate profession including bankers, developers and syndicators. Their readership also includes commercial real estate practitioners as well as a very high percentage of CCIM's. The elite designation of some of the most professional commercial brokers in the country. Naturally I readily agreed. The piece turned out better than I expected because it was set to be a Q and A type interview but when the article came out it was really something more. A full color two page spread featuring a couple of photographs of yours truly. Anyway it was a humbling experience to be asked and I felt it a privilege to be asked to participate is such a prestigious publication. If you would like to read the article click on the photo of CIRE magazine and see pages 12 and 13 or click here.
I've been telling you all about the new TV show we have been recording episodes for these past weeks. Well the very first show will air this Sunday on Channel three at 10:00a and will feature Dr. Rick Workman.
Dr. Workman is President and CEO of HEARTLAND Dental Care a collection of more than 250 hometown dental practices located in multiple states throughout the country. In addition, Heartland Dental Care has served consulting clients throughout the United States, in Puerto Rico and in Canada..
Heartland Dental Care is currently affiliated with more than 320 dentists and more than 2400 team members. In addition to publishing numerous articles in trade and industry publications Dr. Workman has also received many acknowledgements of his achievements in business including the Dental Executive of the Year by Excellence in Dentistry Inc Magazines Top 500 fastest growing companies in America and the Ernst and Young Entrepreneur of the Year award in the Master category.
Put simply Dr. Workman in an amazing guy and I feel that he is a great example of both entreprenuership and business leadership. What a better way to start seasom four of the show and to begin on a new network than with an exceptional interview with Dr. Rick Workman! Hope you all tune in!
I have the priveledge of interviewing one of the great teachers in our area this week. He comes in to the studio tomorrow at Channel 3. His name is Craig Lindvahl.
Craig is a nationally recognized filmmaker and educator. His television work is regularly seen on PBS stations across the country, and has been seen on NBC, CNN, and The Learning Channel. His latest documentary is slated to air on the Major League Baseball Network in December. He is the recipient of twelve Mid America Emmy Awards, for producing, writing, camera work, and composing, and the Studs Terkel Award for contributions to the humanities. He is a recipient of the prestigious Milken National Educator Award, has twice been recognized as a finalist for Illinois Teacher of the year. He was recently named the Illinois “teacher-preneur” of the year, and was also recently honored with a “Leaders in Learning” Award from the cable television industry.
In more than thirty years of teaching, Lindvahl has taught every grade k-12, and in his work as a filmmaker and musical director he has worked in nearly 20 countries and with young people from more than 25 countries. Along with his teaching partner, former Illinois Teacher of the Year Joe Fatheree, Lindvahl has participated in a number of groundbreaking educational endeavors, including the establishment of a nationally known filmmaking program and a new, multi-district entrepreneurship class that is funded almost entirely by business investors. Both Lindvahl and Fatheree devote a great deal of time to mentoring teachers, encouraging young people to enter the field, and assisting schools in hiring and retaining the best possible teachers.
I am so looking forward to meeting. I will certainly post you on when his program will air so that you can tune in!!!!
New episode of Central Illinois Business - September 26 - Featuring Leon Odendaal and Ron Bailey
Last Thursday I was priveledged to be invited to the second annual INNOVATOR"S IMPROV held at Krannert Center at the University of Illinois. The event was sponsored by the Academy of Entrepreneurship from the School of Business. Dr. John Clarke is the Director. It was quite the event. The idea was to have a open forum where people can share their thoughts about business ideas, strategies and synergies. Dr. Clarke had sevral planned speakers of which I was pleased to me one but more importantly the stage was open to the students and others to speak extenporaneously. I feel that we have a vast anount of brain power in the minds of those students. Some of the ideas seemed very poerful and some silly, but the point was that people were talking. How many businesses today sounded completely rediculous to us all just a few years ago. Think E-Bay or Amozon.com!! I want to applaude Dr. John Clarke and his group for all their great work!
We are getting ready to start the TV show on channel 3 WCIA. So far I have recorded three interviews. Dr. Rick Workman, Keith Summers and Mike Yager.
Dr. Workman began his career as a dentist in Effingham, but has built an amazing business based on very fundemental principals of helping new dentists get started in business. He currently has over 320 dentists in his organization and has over 250 dental offices through out the country. His interview will be aired on Oct 4th at 10:00a on channel 3 of course. Watch it! He is an exceptional businessman. You will get a lot out of that show.
Mike Yager began his business when as a young man he borrowed $500.00 to purchase some patches and T-shirts which he had planned to sell at a Corvette car show. The rest as they say is history. Today Mike is the largest supplier of Corvette and Volkswagon accessories and supplies. He employs a couple of hundred people and just opened his first office in China. I really enjoy Mike's contagious attitude. He really lights up a room with his smile. The thing is this guy is for real. Its not hype. He carries his passion with him and he loves his business as much as he loves life! I get a kick out of that.
My interview with Keith Summers was special because he didn't want to tell his story as much as he wanted to tell the story of his parents KC and Pauline Summers. Watch it! You will enjoy the history told inherent in the story of an American family and their ties to America's auto industry.
I have a lot of really good stuff coming up with interviews by very interesting entrepreneurs, inovators, inventors and the like. I learn form them all and I will share anything that I learn from them with you!
This is Alex Ruggieri.
As some of you know I do a radio show on entrepreneurship on WDWS Newstalk 1400 AM. The show normally airs on Saturdays at 11:00a and then is repeated on Sunday at 12:00a. Sometimes they move my show around to accommodate football but generally that's when you will find it on the dial. Any way I thought that it might be fun to blog a little about the folks that I have on the show form time to time.
This week I have two interesting guests. The first is a gentleman by the name of Leon Odendaal. He is from South Africa. He wanted to move his family to America and found that if you purchased a business in the states it is way easier to immigrate than to put ones hat in the ring to win the green card lottery. Anyway I think that you will enjoy his story. It says a lot about how America is viewed in the world by real people and I think it is very complimentary to our community that he and his family chose to locate here. The company he purchased is PDQ printing on North Lincoln Ave.
I also interviewed Ron Bailey. Ron has been a friend of mine since the old days when I attended BNI. He is just a great individual and runs a very solid business called the Blossom Basket. He has two locations. The original store on Vine in Urbana and the new retail store located at Robeson Crossing in Champaign. I think you will get a lot out of the interviews from both of these exceptional people. I hope you enjoy listening to them as much as I enjoyed the interviews.
Also we are starting a new TV show on business leadership on Channel 3 More to come....
New episode of Central Illinois Business featuring Dr. John Clarke, Liezl Bowman, & Leslie Cooperband
Click here to listen!
By William L. Exeter
President and Chief Executive Officer
Exeter 1031 Exchange Services, LLC
This is our third article in a series on Income Tax Strategies for Real Property. The first article summarized the various tax deferred and tax exclusion strategies available to you when disposing of real estate and the second article went into greater detail on the 1033 Exchange or Involuntary Conversion.
This article will explore the 1034 Exchange, which was repealed in 1997, and the 121 Exclusion, which replaced the 1034 Exchange.
The 1034 Exchange and the 121 Exclusion generally apply only to the sale, disposition or exchange of a primary residence. However, there are some great income tax strategies available by combining a 121 Exclusion with a 1031 Exchange.
Build and Maintain Wealth by Deferring Taxes
The ability to defer or exclude the payment of your taxes means that you can keep 100% of your equity (cash) working for you instead of paying it to the Federal and state governments.
This ability to keep your equity working for you by deferring your taxes is a critical component in any wealth building strategy, and makes a huge difference in the long run. It not only helps you build and accumulate wealth, but it also helps you maintain wealth.
1033 Exchanges (Involuntary Conversions)
This article addresses the basic planning issues involved with structuring and completing a 1033 exchange. The majority of advisors do not understand the nuances involved in a 1033 exchange, and there is very little guidance available, because 1033 exchanges are just not that common. However, we are beginning to see more and more of them.
Section 1033 of the Internal Revenue Code (“IRC”) applies to the disposition of real estate when the real property is the subject of an involuntary conversion. This type of tax deferred exchange is generally referred to as a 1033 exchange.
An involuntary conversion refers to the fact that the investor’s real property was taken from them or destroyed against their will either through an Eminent Domain proceeding (condemnation by the government) or a property loss due to a natural disaster such as an earthquake, hurricane, fire or flood, just to name a few.
Generally, the payments received from the government agency due to an Eminent Domain proceeding or the proceeds received from an insurance company due to a loss stemming from a natural disaster result in a taxable event of some type unless the transaction is structured correctly as a 1033 exchange.
Although it is never fun to go through an involuntary conversion, the 1033 exchange can provide the investor with some really nice tax planning opportunities, and, even though painful, can be a more favorable tax-deferred strategy than the 1031 exchange.
Opportunities Afforded by the 1033 Exchange
Here is a quick and concise overview of the 1033 exchange. It should be noted that although there are some similarities to the 1031 exchange and advisors frequently get the two confused, the 1033 exchange is quite different in its structuring and provides some great tax planning opportunities.
Holding Proceeds
There is absolutely no requirement to have the investor’s proceeds held by an independent third party such as a Qualified Intermediary like there is with the 1031 exchange.
The investor can receive, hold and use the proceeds received through a 1033 exchange with absolutely no tax consequences to the investor. This would be disastrous in a 1031 exchange, but not in a 1033 exchange.
Qualification
The investor will qualify for 1033 exchange treatment if the property is taken or destroyed, but he or she will also qualify if they have merely been threatened with an eminent domain proceeding. The investor would only have to prove that he or she was threatened in order to qualify for tax deferred treatment under Section 1033. It has to be an actual threat of an eminent domain action, and not just a hint or offer, but an actual threat that if the investor fails to sell the property to the government agency they will proceed with an eminent domain action.
Cashing Out
My favorite tax planning opportunity with a 1033 exchange is the ability to pull some or all of the cash equity out of the transaction without paying any taxes what-so-ever. Investors can actually pull cash out through the 1033 exchange. The proceeds do not have to be reinvested like they do in a 1031 exchange. Pulling cash out of a 1031 exchange will result in taxable boot, but not in a 1033 exchange. It’s a great way to free up trapped proceeds without having to pay taxes.
Trade Equal or Up in Value
The only reinvestment requirement is that the investor acquires replacement property or properties that have a fair market value equal to or greater than the property taken or lost through the involuntary conversion. It’s what we call trading equal or up in value. You can trade down and recognize some tax, which is referred to as a partial 1033 exchange.
Investors that have lost property through an eminent domain action will acquire other replacement property. Investors that have lost property to a natural disaster will generally structure a 1033 exchange by rebuilding the destroyed property, but could also reinvest by acquiring other replacement properties, too.
Like Kind Property
The definition of like-kind property under an eminent domain proceeding is essentially the same as under a 1031 exchange. The definition of like kind is a “similar or related in service or use” standard when involved with a natural disaster involuntary conversion.
Deadlines
The 1033 exchange also allows substantially more time to reinvest the proceeds into replacement properties. Investors generally have two (2) years under a natural disaster; three (3) years under an eminent domain proceeding; and four (4) years if it is their primary residence regardless of whether it was a natural disaster or eminent domain proceeding.
And, there you have it. A quick run down of the 1033 exchange.
Our next article will address the 1034 Exchange (repealed in 1997), which was replaced with the 121 exclusion. These tax codes generally apply to the sale of a primary residence, but there are some great tax planning opportunities available and there have been some recent changes that were contained in the 2008 Tax Act. Stay tuned...
By William L. Exeter
President and Chief Executive Officer
Exeter 1031 Exchange Services, LLC
This is my second article in a series of articles on Income Tax Strategies for Real Property. My first article provided a summary of the various tax deferred and tax exclusion strategies available to you when disposing of real estate.
My next few articles will delve deeper into the various tax strategies covered in my first article. I will then focus quite a bit of attention on the 1031 exchange, which is generally the better tax deferral solution in most situations. However, it is still important to be aware of the other tax deferred and tax exclusion solutions that are available in case your situation warrants another approach.
We also need to spend time discussing the various types of taxes that you might encounter when you dispose of real property. The taxes will depend on a number of things, but can include ordinary income taxes, depreciation recapture taxes, and capital gain taxes. I will explore these issues in much greater detail in a future article, so stay tuned.
Build and Maintain Wealth by Deferring Taxes
The ability to defer or exclude the payment of your taxes means that you can keep 100% of your equity (cash) working for you instead of paying it to the Federal and state governments.
This ability to keep your equity working for you by deferring your taxes is a critical component in any wealth building strategy, and makes a huge difference in the long run. It not only helps you build and accumulate wealth, but it also helps you maintain wealth.
1033 Exchanges (Involuntary Conversions)
This article addresses the basic planning issues involved with structuring and completing a 1033 exchange. The majority of advisors do not understand the nuances involved in a 1033 exchange, and there is very little guidance available, because 1033 exchanges are just not that common. However, we are beginning to see more and more of them.
Section 1033 of the Internal Revenue Code (“IRC”) applies to the disposition of real estate when the real property is the subject of an involuntary conversion. This type of tax deferred exchange is generally referred to as a 1033 exchange.
An involuntary conversion refers to the fact that the investor’s real property was taken from them or destroyed against their will either through an Eminent Domain proceeding (condemnation by the government) or a property loss due to a natural disaster such as an earthquake, hurricane, fire or flood, just to name a few.
Generally, the payments received from the government agency due to an Eminent Domain proceeding or the proceeds received from an insurance company due to a loss stemming from a natural disaster result in a taxable event of some type unless the transaction is structured correctly as a 1033 exchange.
Although it is never fun to go through an involuntary conversion, the 1033 exchange can provide the investor with some really nice tax planning opportunities, and, even though painful, can be a more favorable tax-deferred strategy than the 1031 exchange.
Opportunities Afforded by the 1033 Exchange
Here is a quick and concise overview of the 1033 exchange. It should be noted that although there are some similarities to the 1031 exchange and advisors frequently get the two confused, the 1033 exchange is quite different in its structuring and provides some great tax planning opportunities.
Holding Proceeds
There is absolutely no requirement to have the investor’s proceeds held by an independent third party such as a Qualified Intermediary like there is with the 1031 exchange.
The investor can receive, hold and use the proceeds received through a 1033 exchange with absolutely no tax consequences to the investor. This would be disastrous in a 1031 exchange, but not in a 1033 exchange.
Qualification
The investor will qualify for 1033 exchange treatment if the property is taken or destroyed, but he or she will also qualify if they have merely been threatened with an eminent domain proceeding. The investor would only have to prove that he or she was threatened in order to qualify for tax deferred treatment under Section 1033. It has to be an actual threat of an eminent domain action, and not just a hint or offer, but an actual threat that if the investor fails to sell the property to the government agency they will proceed with an eminent domain action.
Cashing Out
My favorite tax planning opportunity with a 1033 exchange is the ability to pull some or all of the cash equity out of the transaction without paying any taxes what-so-ever. Investors can actually pull cash out through the 1033 exchange. The proceeds do not have to be reinvested like they do in a 1031 exchange. Pulling cash out of a 1031 exchange will result in taxable boot, but not in a 1033 exchange. It’s a great way to free up trapped proceeds without having to pay taxes.
Trade Equal or Up in Value
The only reinvestment requirement is that the investor acquires replacement property or properties that have a fair market value equal to or greater than the property taken or lost through the involuntary conversion. It’s what we call trading equal or up in value. You can trade down and recognize some tax, which is referred to as a partial 1033 exchange.
Investors that have lost property through an eminent domain action will acquire other replacement property. Investors that have lost property to a natural disaster will generally structure a 1033 exchange by rebuilding the destroyed property, but could also reinvest by acquiring other replacement properties, too.
Like Kind Property
The definition of like-kind property under an eminent domain proceeding is essentially the same as under a 1031 exchange. The definition of like kind is a “similar or related in service or use” standard when involved with a natural disaster involuntary conversion.
Deadlines
The 1033 exchange also allows substantially more time to reinvest the proceeds into replacement properties. Investors generally have two (2) years under a natural disaster; three (3) years under an eminent domain proceeding; and four (4) years if it is their primary residence regardless of whether it was a natural disaster or eminent domain proceeding.
And, there you have it. A quick run down of the 1033 exchange.
Our next article will address the 1034 Exchange (repealed in 1997), which was replaced with the 121 exclusion. These tax codes generally apply to the sale of a primary residence, but there are some great tax planning opportunities available and there have been some recent changes that were contained in the 2008 Tax Act. Stay tuned...
By William L. Exeter
President and Chief Executive Officer
Exeter 1031 Exchange Services, LLC
The sale of real property, whether it’s commercial or investment real estate or your primary residence or a vacation home, generally means that you will realize ordinary income, depreciation recapture and/or capital gain taxes.
Tax deferral and exclusion strategies can easily and effectively help you reposition your real estate portfolio in order to accomplish any number of investment objectives while deferring or excluding income taxes.
It is important for you to be familiar with the various tax deferral and tax exclusion strategies that are available to you. And, you should always consult with your legal, tax and financial advisors to ensure you select the most appropriate income tax strategy under your circumstances.
This article is the first in a series of articles on Income Tax Strategies for Real Property, and will introduce you to the various strategies available to you when selling real property. We will delve into greater detail on these strategies throughout this series.
Here is a brief summary of some of the Income Tax Strategies for Real Property:
1031 Exchange (Investment Property)
Section 1031 of the Internal Revenue Code allows you to exchange real or personal property that was held for rental or investment purposes, or that was used in your trade or business (relinquished property), for like-kind real or personal property that will be held for rental or investment purposes, or that will be used in your trade or business (replacement property), so that you can defer your capital gain and depreciation recapture income tax liabilities.
1033 Exchange (Involuntary Conversion)
Section 1033 of the Internal Revenue Code provides that real or personal property subject to an involuntary conversion, either from an Eminent Domain proceeding (condemnation by the government) or destruction by a natural disaster, such as an earthquake, hurricane or fire, can be exchanged on a tax-deferred basis for like-kind real or personal property that is similar or related in service or use.
1034 Exchange (Repealed in 1997)
Section 1034 of the Internal Revenue Code was repealed and replaced by Section 121 (see following) in 1997. The 1034 exchange allowed you to sell your primary residence and defer or roll over your capital gain by acquiring another primary residence of equal or greater value.
121 Exclusion (Primary Residence)
The Taxpayer Relief Act of 1997 repealed and replaced the tax deferral rollover provisions of Section 1034 with the tax-free exclusion provision under Section 121 of the Internal Revenue Code. Generally, you can sell your primary residence and exclude from gross income up to $250,000 in capital gains ($250,000 per taxpayer, $500,000 for a married couple). You must have owned and lived in the property as your primary residence for at least 24 of the last 60 months.
453 Installment Sale Treatment (Seller Carry Back Note)
Section 453 of the Internal Revenue Code allows you to sell real property and help your buyer finance the purchase of your property by carrying back an installment note (seller carry-back financing) while deferring the recognition and payment of your capital gain income tax liability until you receive principal payments. Depreciation recapture income tax liabilities can not be deferred under Section 453 and are due and payable in the year in which you sold your relinquished property. You can also accomplish this through a Deferred Sales Trust™.
721 Exchange (upREIT or 1031/721)
Section 721 of the Internal Revenue Code allows you to exchange investment real estate for an interest in a Real Estate Investment Trust (REIT). This is also referred to as an upREIT, or 1031/721 exchange.
The majority of investors will end up using the 1031 exchange to defer the payment of their capital gain and depreciation recapture taxes upon the sale of relinquished property and the subsequent acquisition of replacement property, so our series on Income Tax Strategies for Real Property will spend quite a bit of time discussing the 1031 exchange.
You can find both of the new episodes of Central Illinois Business at http://www.ruggieriteam.com/radio
- August 29, 2009: Matt Hutton & David Ikenberry
- August 22, 2009: Dr. John Clarke & Melia Smith
The following article is from an interview between Jerry Anderson and Angela Pruitt of Dow Jones. This article also ran on wsj.com and smartmoney.com.
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By A.D. Pruitt, Of DOW JONES NEWSWIRES
NEW YORK: (Dow Jones) Investors looking for blue-light specials on distressed commercial property are finding the pickings surprisingly slim as banks refrain from holding fire sales on troubled assets.
Despite rising loan delinquencies and foreclosures on hotels and on retail, apartment and office buildings, banks are reluctant to unload troubled assets at bargain-basement prices amid a lack of transparency and agreement on fair valuations. This deepens an impasse with distressed investors who have been aggressively setting up funds and other vehicles to acquire assets for a song.
"Quite frankly, I had predicted that the waterfall would have started by now. I thought there would be a tremendous amount of properties that were distressed from the lending world that a bank would have foreclosed on," said Jerry Anderson, executive managing director of the asset recovery team at Sperry Van Ness, a commercial real estate advisory firm. "That has not happened.
"We got folks calling us to let them know when the bank is willing to dump ( assets) for 20 cents on the loan value," he said. "There's nothing for them to buy yet at that type of a deep discount."
There are expectations the commercial real estate market is in the clutches of a free-fall similar or worse than the crisis in the early 1990s. Troubled commercial properties have more than doubled this year with the value of assets in default, foreclosure or bankruptcy topping $108 billion, according to a recent report by Real Capital Analytics.
Investors are getting prepared to pounce on distressed deals. For instance, over the last couple of months more than six real-estate investment trusts filed paperwork to launch initial public offerings, including Starwood Property Trust Inc., managed by an affiliate of Starwood Capital Group; and Colony Financial Inc., spawned by Colony Capital LLC, the owner of casinos, hotels and the late Michael Jackson's Neverland Ranch.
"There's still about a 20% to 30% differential between what the banks are willing to sell the assets (for) and what the market is willing to pay," said Edward Mermelstein, a real estate attorney in New York.
"If (banks) actually marked assets down to levels where the market is right now, most of these major lenders would have a very...serious problem," he said.
Even if investors are able to buy an office or retail property on the cheap, if occupancy rates remain low, they aren't likely to see a decent return on their investment in the short to medium term, experts say.
An influx of distressed commercial assets isn't expected to hit the market until after the first quarter of 2010 amid expectations that the Federal Deposit Insurance Corp. will have to shed portfolios of failed banks that it has taken over. So far, that total has reached 64 this year.
Jay Leupp, the portfolio manager for Grubb & Ellis AGA Realty Income Fund, said investors are looking for the same level of real estate asset sales executed by the Resolution Trust Corp. after the savings and loan crisis of the 1980s.
"It was essentially the sale of the century in terms of commercial real estate and a lot investors...made millions of dollars buying the properties very inexpensively," he said. "It will be a very long time before" those types of opportunities arise.
— By A.D. Pruitt, Dow Jones Newswires
(Lynn Cowan contributed to this report)
Industry Consulting Firm G. Palmer & Associates’ Quarterly Forecast Assists in Previewing Near-Term Hiring Patterns. Palmer & Associates is headed by Greg Palmer, who is also a member of the Sperry Van Ness Board of Directors.
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Newport Beach, Calif., July 7, 2009 — Demand for temporary workers in the United States is expected to fall 22.2% on a seasonally adjusted basis for the 2009 third quarter over the same period in 2008, according to the Palmer Forecast™, released today.
The Palmer Forecast™ indicated a 24.0% decline in temporary help for the just-ended 2009 second quarter, which came in at a 27.2 % decline—wider than anticipated, primarily because of higher than expected unemployment figures.
“Our 2009 third quarter forecast, as expected, shows another anticipated decline in demand for temporary workers—a trend marking ten consecutive quarters, that we now believe will continue through early 2010,” said Greg Palmer, founder and chief executive officer of G. Palmer & Associates, an Orange County, Calif.-based staffing industry consulting firm.
The Bureau of Labor Statistics (BLS) reported that seasonally adjusted temp jobs were down 27.2% year over year in June, deteriorating from May's 26.9% year-over-year decline. Temp jobs, seasonally adjusted, were down 2.1% sequentially, versus the normal 0.3% sequential increase from May to June.
The unemployment rate inched up to 9.5% in June from 9.4% in May, representing the highest jobless rate since August 1983. The Labor Department report also indicated that 467,000 non-farm jobs were eliminated in June, which was up from May’s loss of 322,000. For the first six months of 2009, the economy shed nearly 3.4 million jobs.
Palmer said unemployment during this recession has had wide reaching effects across a broad spectrum of workers. As reported by the BLS, workers with college degrees experienced a slight decrease in their rate of unemployment in June to 4.7% vs. 4.8% in May. Workers with less than high school degrees during the same period held their rate at 15.5%. The U6 unemployment rate, which tracks those who are unemployed, as well as those who are underemployed and are working part time for economic reasons, was 16.6%. The U6 rate is considered the rate that most clearly depicts those most affected by the downturn.
The next few quarters...
“We expect to see the unemployment rate continuing to increase, approaching 10%, but at the same time, we believe temp help declines are nearing the bottom and will likely turn positive by the second quarter of 2010,” Palmer said. “With temp help being a leading labor indicator, and unemployment a lagging barometer, we expect to see between a 1.2% - 1.7% improvement in temp labor demand from second quarter 2009 to third quarter 2009. While the economy has not yet turned the corner, there certainly are signs that we are likely nearing the bottom in the current economic cycle as it relates to temp labor. These views are predicated on generally anticipated GDP improvement for the 2009 fourth quarter, continuing into 2010,” Palmer added.
The Palmer Forecast™ is based, in part, on BLS and other key indicators. The model was initially developed by The A. Gary Anderson Center for Economic Research at Chapman University and serves as an indicator of economic activity. Companies that employ temporary staff use the forecast as a guide to navigate through fluctuating economic conditions in managing their workforce to meet business demands.
About G. Palmer & Associates
G. Palmer & Associates, founded in 2006, advises companies in the human capital sector with sales, operations and margin enhancement, and to explore strategic alternatives for increasing shareholder value. Founder Greg Palmer has served on the board of the American Staffing Association and was president and chief executive officer of RemedyTemp, Inc., one of the nation’s largest temporary staffing companies, prior to its sale in June 2006. For more information, visit www.GPalmerandAssociates.com.
The Sperry Van Ness Legacy Foundation provided funds to The Chicago Community Loan Fund, which is a 501c3, providing low-cost, flexible financing to non- and for-profit community development organizations for the revitalization of low- and moderate-income neighborhoods throughout metropolitan Chicago.
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The Chicago Community Loan Fund (CCLF) is so grateful for the support we have received and we would like to share with you some highlights from the last fiscal year. With all the economic concerns these days, I am sure that you welcome some good news.
The $5,515,000 in loans closed in 2008 served 15 low to moderate income communities. This single year’s community impact was the most significant in our history. To date, CCLF ‘s programs have impacted 4,996 units of affordable housing, 1,075 jobs and 1,724,235 square feet of commercial/retail space to serve the target areas. As we have no doubt told you in the past, but it is always good to celebrate it again, CCLF loan dollars leveraged funds from other sources totaling $775,107,770. This was all made possible by you, the investor.
CCLF has positive cash flow, return on investment and liquidity, all while maintaining expenses. Management has been diligently monitoring reserve levels and applying a conservative methodology when reviewing them, leading to higher reserves, which we believe is appropriate in the current economic environment. Further, several highly qualified and experienced staff joined the team to augment the existing, tenured leadership.
At the writing of this letter, there is even more exciting news. CCLF was honored with the MacArthur Award for Creative and Effective Institutions that will allow us to expand and strengthen our sustainable building programming. CCLF was one of three organizations in the United States to receive this recognition.
The following article is from an article by Jerry Anderson, CCIM.
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By Jerry Anderson, CCIM
I am so tired of reading and hearing the bad news in the industry of my passion - commercial real estate, that I've stopped talking to nay sayers and am taking proactive aggressive action. We all know values have tanked, but how can we personally take advantage and help our clients through the maze? Lenders are not any fun to deal with these days. Any type of what we used to consider reasonable leverage seems impossible. What precious stash of cash we do have, we are not willing to risk on one particular deal, so forget 50%-60% down and borrowing the balance with unreasonable terms and high closing costs. Success in commercial real estate investment is usually a matter of how fast you can adapt to changes that create opportunity. The only position to occupy in today's market is that of buyer; a buyer with cash that can perform quickly. The answer lies not in borrowing to buy assets like in the past, but reversing the leverage scenario – yes, put in MORE cash. But diversification and partners is the key.
Group investing has been around a long time. I was a General Partner in many partnerships in the 70's and 80's and got away from it when money became so easy to borrow. The heck with borrowing from lenders, organize small groups and put a boatload of money down, if not pay all cash. Don't put too much in any one deal and raise enough to weather any storm on the horizon. If you are going to capitalize on the market we find ourselves in right now – adapt! More cash, less leverage and keep it simple without depending on the future - buy based on, quality of the asset and location, cash flow and a low % of what it would cost to replace the structure. I've preached that quality; quantity and durability of the income stream are the three legs of any commercial real estate investment for years. It is never truer than now.
For an overview of group investing visit www.groupsponsor.com I have no affiliation whatsoever with Gene Trowbridge, CCIM but have used his material and known he and his organization for over 25 years. His information is a good place to start and your local Commercial Real Estate advisor; local legal counsel and accounting professionals are the next step. Good luck. Go slow be deliberate. As a friend of mine says - Pigs get fat and hogs get slaughtered.
by Ken Pirok
Business Consultant
www.kenpirok.com
Banks are still making loans. It may be a bit tougher to get approved these days, but low property values and low interest rates are creating opportunities in real estate. It is, perhaps, more important than ever to understand how banks approve commercial loans and to be savvy when it comes to applying for a mortgage. Contrary to popular belief, the collateral value of your property is not the primary concern of the bank. Liquidation of collateral only happens when loans go bad. The primary source of repayment and the most important factor to your bank is cash flow. Most banks measure cash flow using the Debt Service Coverage Ratio. Debt Service Coverage Ratio = Net Operating Income ÷ Annual Debt Service Net operating income or "NOI" includes all cash income, expenses, and taxes, and it is presented on an annual basis. NOI excludes non-cash expenses such as depreciation, and it also excludes interest expense, since interest is included in the denominator of the ratio. For prior years, you will provide the bank with your actual numbers. For future periods, you should assume some reasonable amount of vacancy and bad debt in your calculations. The annual debt service requirement includes all scheduled principal and interest payments on any mortgages for a property. Banks usually prefer to see debt service coverage of at least 125% as a cushion in case times get tough. The secondary source of repayment is collateral, which is a backup to the bank. Banks measure the collateral value of properties using the loan to value ratio or "LTV". Loan to Value = Mortgage Principal Balance ÷ Appraised Value of Property Obviously, banks like to see loan to values of at least seventy-five or eighty percent, but sometimes if the cash flow looks good, and the property is marketable, a bank might loan even an even greater amount. Here are a few hints to help you maximize the debt service coverage ratio or appraised value of your property. Tell your banker or your appraiser about any discretionary or unusual expenses. Maybe you paid your brother-in-law a lot more than the going rate to paint your property, or you provided extra landscaping and a garden at your apartment building, or maybe you donated money to charity. You can create "pro forma" financial statements showing what your cash flow would look like if you had not incurred such hefty expenses. You don't want to be penalized for going the extra mile. Watch your depreciation too. If you have assets with accelerated depreciation schedules or if the IRS allows you a big write-off when you purchase a piece of equipment or remodel a unit, then tell your banker or your appraiser. They may add back some of the depreciation or expense to your NOI. A third and final source of repayment to the bank is your personal assets and resources, which the bank ties up using a personal guarantee or by requiring your signature on the mortgage as an individual. When you apply for a mortgage, the bank will ask you to fill out a personal financial statement, which they will use to measure your personal wherewithal. Before you turn this form in to them, be sure to double check your math. You would be surprised how many people submit numbers that just don't add up. If you would like to learn more about commercial borrowing, visit www.kenpirok.com or call us at 217.840.7726.
Central Illinois Business with Alex Ruggieri
Welcome to the 4th issue (Volume 1, Issue 4) of the Sperry Van Ness | Better Capital Partners-Capital Market and Interest Rate Update Newsletter. For those readers that missed our first few issues, each week or so we will provide our readers with an overview of the following: National commercial real estate interest rates and underwriting for the major property types, marketplace conditions and how they affect various property types nationwide, insightful capital market analysis with a personal viewpoint and focused subject matter in every newsletter.
Read full article.
Central Illinois Business with Alex Ruggieri
by Mike Henning
Henning Family Business Center
Phone: 217-342-3728
www.mikehenning.com
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Focus on Cash Flow rather than Paper Profits
Cash is king in business, and no company can survive for very long without a positive cash flow. Cash flow is defined as a company’s cash inflows minus its cash outflows over a given period of time. If a company cannot cash flow operations, consider alternatives. Yes, a company can stay in business while showing operating losses if they have strong cash flow.
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Collect Accounts Receivable
In order to protect your cash, you company, and your family business’ future, you have to be ruthless and tireless in collecting accounts receivable.
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Focus on Lender Relations, and keep them Informed
Bands do not like surprises. Whether you’re doing okay or whether you’re experiencing some recession difficulties, now is the time to invest a few hours in keeping your banker informed. Adhere to all your loan covenants.
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Reduce Tax Payments
Don’t always focus only on state and federal taxes alone, take a look at real property and personal property valuations to make sure you’re not overpaying.
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Know Your Break Even Point
This is the point at which a product or service stops costing you money to produce and sell and starts to generate a profit for your company.
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Know Your Burn Rate
Burn rate analysis can tell owners whether a company is self-sustaining going forward or if the signals indicate that there is a need for outside financing.
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Forecast a rolling 13 week cash flow projection
Protecting yourself in hard times means you must become intimately familiar with cash flow and must be able to predict it with stunning accuracy. A cash flow statement is a compressed corporate checkbook analysis. It helps avoid liquidity problems.
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Invoice your Customers more Frequently
As a general rule, by invoicing your customers more frequently means you’ll have opportunities to collect their payments sooner.
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Drop those Pain-in-the-Neck customers
In hard times, you need to be focused on core businesses and their highest pay off activities.
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Sell underutilized assets and those not producing return on investment
All too often is to observe vehicles or equipment which is idle.
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Borrow money from the corporation’s Cash Value Life Insurance Policies
Wonder if your cash flow analysis shows you will need cash in four months. Examine company paid insurance policies that have a cash value build-up, and if possible, borrow some of the cash for your business use.
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Charge and enforce late fees.
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Seek shareholder and family loans where possible.
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Negotiate terms with vendors and suppliers.
Now is the time to make every effort to reduce your overhead while maintaining sound business relationships with suppliers. Negotiating in good faith with vendors could save serious money in hard times.
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Be ruthless and dispassionate about cost reduction
Be diligent, thorough, and dispassionate about seeking belt tightening opportunities.
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Utilize zero based budgeting.
ZBB is a method of budgeting in which all expenses must be justified for each new period. (30 days, quarter, etc.)
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Focus on executive duties instead of personal production.
Experts estimate that most executives spend up to 50% of their time doing things that others could do as well or better and at lower costs. Focus like a laser beam on the highest payoff activities.
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Communicate Openly to Your Employees
Business leaders make sure you are communicating to the rest of the team what the plans for the future are. How will the company weather the current poor economy? What changes need to be made and will be made? Etc.
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Communicate openly to Company Stakeholders
Bankers and other advisors do not like surprises. Being proactive increases your chances for working out a win-win solution.
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Careful Not to Lose Focus on Your Core Business
Define what it is that constitutes your core business and stick to it! Never say never to entrepreneurial opportunities, but make sure the goose that lays golden eggs remains healthy in order to lay golden eggs after the current recession is over.
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Developing a Marketing Plan with Accountability
A good marketing plan is based on formal or informal customer research. Customers, suppliers and advisors my have insightful things to tell you that may surprise you about your business and your core competencies.
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Protect Customer Relationships
Make sure you are devoting sufficient tender loving care to your existing customers.
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Establish internal best practices and knowledge sharing
In slower times we generally speaking have more time to work on internal systems and processes. One of the highest payoff areas is to put your people together so that they can learn from one another and share knowledge.
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Don’t try to do too much too fast
Change is necessary in hard times. However, when making changes, it’s best to make one at a time, digest them a bit, then move on to the next.
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Don’t do too little too slowly
Not having a track record to run on can be an issue, and some companies run the risk of not taking action swiftly enough to stave off disaster. Once the need for change becomes obvious, move decisively.
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Focus on product or service margins rather than top line sales
It’s easy in hard times to take almost any new business that comes in your door. However, taking any business in order to keep your employees busy can be a fateful mistake.
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When time is of the essence, develop Decision Making Criteria
Tough times require that business make swift, sure decisions on strategy and direction. There maybe windows of opportunity which are even now closing, and slow decision-making or making no decision at all, are the worst things you can do in tough times.
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Buy distressed assets or competitors
If there is a fire sale going on that involves equipment, property, HR talent, or even an operating business, there are a lot of people hurting and are willing to give-up.
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Join a Peer Review or Performance Roundtable Group
Yes, it is lonely at the top. Seek out non-competing peers to bring questions and concern to. In some cases it would be prudent to begin an advisory board of risk-taking peers for your own operation. These groups address such topics as financial, investments, direction, top management, etc.
Directions: Upon returning to your business, sit down with your top managers and go over the topics you have marked or highlighted during our presentation. Remember, getting a good idea to help support your company’s success is worth nothing unless you take action.
Suggestions Follow...
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You must have an active R&D effort consisting of market study, reading, researching,
testing services, products, communications and thoughts of diversification.
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You will need a dynamic sales and marketing effort.
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Invest in infrastructure every year to remain current in such areas as facilities,
computers, building renovations, equipment, etc.
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Be willing to engage top talent or outsource for what we lack in expertise.
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Our operational piece of the business must include purchasing, inventory control, job
flow chart controls, billing guidelines and collection policy.
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We must develop a fiscal discipline regarding the big sales/revenue month or quarter
that we retain a healthy percentage of this cash to give us the “life blood” of any
organization—cash flow.
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We must be flexible but not forget our “core” focus or expertise.
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We need the best possible support network we can find. For example, our staff of
employees, family, friends, National and Regional Associations.
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In truly tough business times, we can use a lot of spiritual support.
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The ole saying, “take your work seriously but not yourselves.”
By William L. Exeter
President and Chief Executive Officer
Exeter 1031 Exchange Services, LLC
www.exeter1031.com
william.exeter@exeterco.com
The sale of real property, whether it’s commercial or investment real estate or your primary residence or a vacation home, generally means that you will realize ordinary income, depreciation recapture and/or capital gain taxes. Tax deferral and exclusion strategies can easily and effectively help you reposition your real estate portfolio in order to accomplish any number of investment objectives while deferring or excluding income taxes. It is important for you to be familiar with the various tax deferral and tax exclusion strategies that are available to you. And, you should always consult with your legal, tax and financial advisors to ensure you select the most appropriate income tax strategy under your circumstances. This article is the first in a series of articles on Income Tax Strategies for Real Property, and will introduce you to the various strategies available to you when selling real property. We will delve into greater detail on these strategies throughout this series. Here is a brief summary of some of the Income Tax Strategies for Real Property: 1031 Exchange (Investment Property)Section 1031 of the Internal Revenue Code allows you to exchange real or personal property that was held for rental or investment purposes, or that was used in your trade or business (relinquished property), for like-kind real or personal property that will be held for rental or investment purposes, or that will be used in your trade or business (replacement property), so that you can defer your capital gain and depreciation recapture income tax liabilities. 1033 Exchange (Involuntary Conversion)Section 1033 of the Internal Revenue Code provides that real or personal property subject to an involuntary conversion, either from an Eminent Domain proceeding (condemnation by the government) or destruction by a natural disaster, such as an earthquake, hurricane or fire, can be exchanged on a tax-deferred basis for like-kind real or personal property that is similar or related in service or use. 1034 Exchange (Repealed in 1997)Section 1034 of the Internal Revenue Code was repealed and replaced by Section 121 (see following) in 1997. The 1034 exchange allowed you to sell your primary residence and defer or roll over your capital gain by acquiring another primary residence of equal or greater value. 121 Exclusion (Primary Residence)The Taxpayer Relief Act of 1997 repealed and replaced the tax deferral rollover provisions of Section 1034 with the tax-free exclusion provision under Section 121 of the Internal Revenue Code. Generally, you can sell your primary residence and exclude from gross income up to $250,000 in capital gains ($250,000 per taxpayer, $500,000 for a married couple). You must have owned and lived in the property as your primary residence for at least 24 of the last 60 months. 453 Installment Sale Treatment (Seller Carry Back Note)Section 453 of the Internal Revenue Code allows you to sell real property and help your buyer finance the purchase of your property by carrying back an installment note (seller carry-back financing) while deferring the recognition and payment of your capital gain income tax liability until you receive principal payments. Depreciation recapture income tax liabilities can not be deferred under Section 453 and are due and payable in the year in which you sold your relinquished property. You can also accomplish this through a Deferred Sales Trust™. 721 Exchange (upREIT or 1031/721)Section 721 of the Internal Revenue Code allows you to exchange investment real estate for an interest in a Real Estate Investment Trust (REIT). This is also referred to as an upREIT, or 1031/721 exchange.
The majority of investors will end up using the 1031 exchange to defer the payment of their capital gain and depreciation recapture taxes upon the sale of relinquished property and the subsequent acquisition of replacement property, so our series on Income Tax Strategies for Real Property will spend quite a bit of time discussing the 1031 exchange.
Welcome to the 2nd issue (Volume 1, Issue 2) of the Sperry Van Ness | Better Capital Partners-Capital Market and Interest Rate Update Newsletter. For those readers that missed the inaugural issue, each week we will provide our readers with an overview of the following: National commercial real estate interest rates and underwriting for the major property types, marketplace conditions and how they affect various property types nationwide, insightful capital market analysis with a personal viewpoint and focused subject matter in every newsletter. You will notice that national interest rates are located on page (1) of this newsletter, and are broken down into two categories (multi-family and commercial) and provide a sample of our national, regional and local commercial real estate financing programs. These rates are derived from portfolio lenders, life companies, credit unions, agency and exclusive national correspondent relationships. Many of our lenders and exclusive correspondent relationships have the ability to lower these interest rates by 15-30 basis points if a borrower is interested in establishing a business or personal banking relationship.
Major Property Types:
Let's begin by taking a closer look at the major commercial real estate property types: multi-family, office, industrial, and retail.
Multi-Family: This property type covers residential, senior and student apartments, assisted and independent living and mobile home parks. Nonrecourse adjustable financing programs are still aggressively priced starting at 4.35%. Loan-to-values (LTV's) can still underwrite as high as 80% and underwriting debt service coverage ratios (DSCR) can go as low as a 1.00 breakeven.
Non-recourse fixed 5, 7 and 10 year terms are starting at 4.93%. Loan-tovalues (LTV's) are as high as 80% and DSCR's are starting at 1.20 for our correspondent small loan permanentprograms and 1.25 for our regular permanent programs. Please note that Sperry Van Ness | Better Capital Partners offers a Small Loan correspondent program with a fast track option. This program does not require tax returns and can close within 45 days. We also offer non-recourse multi-family financing programs that do not have any origination fees other than third party expenses (appraisal, environmental etc.) and closing costs.
Be aware that intel at a very high level has informed us the Fannie, Freddie and HUD financing programs may be tightening their underwriting guidelines again at the end of this month. This could further restrict some buyers from acquiring multi-family properties in this marketplace. However on a positive note, many of our local and regional lenders are stepping up to the plate and utilizing TARP money to portfolio lend on multi-family with the intention of selling the portfolio to Fannie Mae over the next 12-18 months. Construction lending is still available nationwide through our correspondent relationships at very aggressive terms. Qualified developers/borrowers of multifamily, healthcare and senior apartment projects can still qualify for a loan-tocost (LTC) up to 90% with an interest rate in the low 6% range with a 40 year fixed rate built into the construction package.
Office: The office market is expected to continue its downward decline throughout 2009. Each metro and submarket will ride out the recession in a slightly different manner and all will recover with their own timeline. The major risk facing the office market is lack of demand, oversupply is not an issue. Actually the distance between new supply and demand continues to expand. The office market is in a transition; we expect to see continued declines in demand and decreases in rent growth throughout 2009. This will push cap rates even higher. Core assets will be considered the most desired by investors, and only a small number of investors will take on a value-added office opportunity, especially, while there is still a large amount of shortterm leasing risk. The flow of capital for speculative new developments will more than likely decrease throughout the year. Lender underwriting for office properties are expected to continue to tighten and cap rates are estimated to increase another 50 basis points by the end of the year.
On the flip side, it appears that office medical buildings are still attracting buyers and selling quite well, offering very little vacancy and limited risk. Additionally, government leased office building also appear to be enticing buyers. Specifically those that don't offer short-term lease termination options.
Nationwide Interest rates are ranging from a low of 6% to a high of 7% for a 10 year term. On average a 5 year fixed is around 6.25-6.50% and may be lower. National lenders are offering the lowest fixed rates for 2 and 3 year term programs.
Industrial: The industrial sector is beginning to experience sizeable tenant vacancies, specifically in the warehouse and distribution centers nationwide. However, asking rents for new tenants and renewing tenants only saw modest declines. The shipping, freight, rail and trucking industries are taking the biggest hit with double digit declines. Industrial ports are also seeing sharp declines in shipping. The West coast ports in particular seem to be the most affected. On a positive note, tenants servicing the fast food, pharmaceutical, medical industries and the sector of the retail industry dealing in basic household consumables are doing well and may even grow in '09. LTV's can still underwrite as high as 80% and Small Business Administration (SBA) programs can underwrite as high as 90%. The SBA has recently eliminated or drastically reduced their origination fees to make an SBA loan that much more attractive for a borrower.
Nationwide, fixed 5, 7 and 10 year terms are starting at 5.75% for permanent owner-user programs and 6.25% to 6.75% for investment properties with 25 and 30 year amortization.
Retail: Retail properties can still be aggressively financed. Interest rates for retail are still ranging in the 6% to 7% range with 25 and 30 year amortizations and DSCR's in the 1.20-1.35+ range. If you're looking for aggressive retail financing, the name of the game is low leverage and strong sponsorship, and a swap program.
The current recession is posing a real challenge for many retailers. Vacancies are up nationwide and many businesses are closing underperforming locations. Single tenant transactions are also expected to be down year-to-year. The trend the past few years has been for multi-family owners to exchange into single tenant properties like quick service restaurants. However, the recession and liquidity crisis has made it difficult to sell many of these multifamily properties at capitalization rates that are acceptable to the owner. As a result, there will be an over-supply of this specific type of commercial real estate property and cash buyers will be on the prowl to acquire some of these distressed assets. Here is a snap shot of what we are seeing in the Single- Tenant Retail Market nationwide. Quick Service Restaurants: Starbucks is moving forward with its plans to close 600 stores and has cancelled its plan to launch 1000 new stores in 2009 and beyond. Icons like Mc Donald's and Wendy's are focused on inexpensive menu items with the intention of increasing customer traffic. Convenience Stores/Gas Stations: Higher gas prices have a dramatic effect on instore items that provide high profit margins for the owner. As gas prices continue to stabilize, we expect a significant increase in purchasing by consumers. Casual Dining: Families nationwide are tightening the purse strings and are eating out less frequently. Restaurant sales are down; many locations are shutting down and scaling back market expansion plans. Drugstores: It appears that CVS and Walgreens will continue to lead the market and are the preferred chains by most lenders. Rite Aid's still appear to be the most difficult to finance. However, they do offer some of the best capitalization rates in this category. Grocery Stores: The small local grocer is getting hit the hardest. The larger warehouses like Costco have cost efficiencies and can price very aggressively.
Interest rates for retail are still ranging in the 6% to 7% range with 25 and 30 year amortizations and DSCR's in the 1.20-1.35+ range.
Capital Markets Financing Shortfalls
Recently Foresight Analytics (FA), a locally based provider of national real estate analysis and projections produced some very interesting insight into the debt market. Below is my overview on their analysis:
FA's analysis utilized key data from the FDIC and focused on the increasing need for commercial real estate debt during this financial crisis. It is estimated that $814 billion in commercial and multifamily mortgages will mature during 2009 to 2011. This breaks down to approximately $594 billion in commercial mortgages and $220 billion in multi-family mortgages over the next three years. It is estimated that nearly $250 billion in combined commercial and multifamily mortgages will mature in 2009 and will increase to approximately $300 billion per year during 2011 to 2013. Maturing mortgages should settle back after 2013 but will still remain historically high exceeding $200 billion annually through 2017.
How did this happen? Taking an historical snapshot, the majority of the new debt growth occurred in 2005, 2006 and 2007, with more than $300 billion in net growth in each year. 2007 hit a high with $379 billion in net growth. Actually between 2000 and 2007 approximately $1.8 trillion in new debt for commercial and multifamily real estate was created.
In 2007 the issuance of commercial mortgage backed securities (CMBS) came to a standstill, created a major liquidity problem for commercial real estate borrowers nationwide. Banks and Thrifts have appeared to fill some of the void providing some recent net growth in the marketplace. Overall net volume is down dramatically, from around $33 billion per quarter in 2006 and 2007 to only $21 billion per quarter in the second half of 2008. Life companies still remain net contributors to growth in this market.
Life companies accounted for approximately $1.7 billion per quarter or 12% of the net growth during the second half of 2008. Their share is actually up from 2006 and 2007, but the dollar volume is down by about 50%.
CMBS itself has been contracting, due to defaults and foreclosure activity and loans being paid off. This is a substantial change from 2006 and 2007 when CMBS loans accounted for 41% of net inflows to the commercial mortgage marketplace. Today they account for net outflow to the marketplace.
It appears that serious financing shortfalls beyond the current environment could appear on the horizon shortly. Borrowers need to refinance and acquisitions need new debt as well. One of the biggest obstacles to refinancing a property today is the inability of these properties to qualify. Today properties have lower valuations, lower loan-to-value ratio's, and in most cases higher interest rates and shorter loan terms.
Some relief has been reported by the existing portfolio lenders and CMBS servicers. Many are providing temporary one-year extensions for maturing mortgages if a borrower or borrowing entity can't obtain or qualify for refinancing. This will ease those loans coming due in 2009 but add to the refinancing volume in 2010.
If current conditions like values and cash flows remain flat or negative beyond 2010, a significant portion of the $300 billion of maturing loans from 2011 to 2013 will be at risk. If the lending community can stabilize and obtain liquidity in the years ahead, a large number of defaults and foreclosures could be avoided.
As early as 2008, the lending community saw refinancing requests exceed new lending debt requirements. It is expected that this trend will continue over the next few years. If this assumed shortfall does develop, we may see minimal net growth in the commercial real estate financial market over the next ten years or so. Financing for acquisition and refinance. For a soft or hard quote, or to refer a client, please visit our corporate website at www.svnbcp.com or contact Eric Better for further information.
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