Real Estate Trading

In good economies and bad, real estate exchanging is where it’s at. A real estate exchange or trade expands your opportunities and has everyone thinking outside the box. As a seller, you could take a smaller property in exchange as partial payment for your larger property (unless the smaller property has little or no mortgage and your larger property is heavily leveraged you could still exchange but balancing the equities will be a requirement). Just think of it, if the buyer has the cash or gets a new mortgage on your property as part of the closing, you will most likely get most of your sales price in cash and there are many more buyers for the buyer’s smaller property than for your larger property, making it easier to cash out. You will have substantially increased the depth of the market for your property because now, instead of just looking for buyers with cash, you are also including a much larger audience of “buyers” who have cash and/or equity in a smaller property. If you are a seller with 20 acres to sell and no one is biting, maybe you are not a seller at all. Maybe, you are a buyer…especially if you have a little cash (or a cabin cruiser, a stamp collection or auto, race horse, diamonds, i.e. “boot”) to throw into a deal. Why not trade your “equity” in your 20 acres plus some cash and boot for that half empty shopping center that you know you can “do something with”? But the owner of the center is thinking… “I don’t want 20 acres, five houses and a stamp collection”. Well, if he gets the majority of his purchase price in cash, he can cash out the equity and boot at a discount and still have accomplished all of their goals. (Often, the party trading up will through in paper (an I.O.U.) to balance the equities.) How about an example… Terry Trader owns a 20 unit apartment property that is worth about $1,500,000 and he has paid his mortgage down to $300,000 over the years. Terry also has a $600,000 six unit apartment property that he owns free and clear. His liquidity includes $400,000 in cash. Terry’s broker has buyers lined up for the two apartment properties and also has found a $5,000,000 Walgreens store property under a 20 year triple net lease into which Terry can trade. Terry has $1,800,000 in equity plus the proceeds from a new $2,900,000 first mortgage that he will get on the Walgreens property at closing. That adds up to $4,700,000 to which he adds $300,000 of his cash to balance the equities. I’ve seen transactions where there have been four or even five parties trading up in the same transaction with one of the brokers accepting the equity in the smallest property as their commission! Also, let’s not ignore the tax benefits to the party(ies) trading up (“buying”). If the transaction is structured properly under the requirements of IRC (Internal Revenue Code) Section 1031 – caution, consult your professional tax advisors – there will not be taxes due on the parties’ transaction. The taxes that would have been levied had they sold outright and then repurchased are deferred, possibly forever. This tax savings can also benefit the seller because a “buyer” trading up will be able to pay more for the trade-up property due to their tax savings! Think outside the box. It is amazing the types of transactions you can actually pull off with some creative thinking.

Seller Financing - Now's the Time

Finding it hard to sell your real estate at a "reasonable price" (whatever that means)? Consider carrying back so-called Seller Financing. The benefits can be stellar. You will defer the payment of the majority of your capital gains tax. The cash downpayment that you receive is comprised of return of a portion of your cost basis and the rest will be capital gain. The same goes for the principle portion of the mortgage payments that you receive from your purchaser. (This is simplistic, but you get the idea...consult your tax expert.) The interest portion of those payments will be treated as ordinary passive income, but you have some control there as well by charging the lowest possible interest rate that you can (don't go below the IRS's imputed rate though) in exchange for a higher selling price (which will be taxed at capital gain tax rates ONLY WHEN YOU RECEIVE IT)! This type of sale also gives you the benefit of having a safe place to invest the sale proceeds at a rate of return that is set by you. There are several ways to make sure that your loan doesn't go bad and wind up becoming a liability. A few of those ways include making the buyer maintain a real estate tax escrow with you, providing you with certificates of insurance and actually inspecting your collateral once or twice a year to make sure that it is being maintained (and making it an event of buyer default if it is not). If your property is free and clear, then seller financing is a no-brainer. If your balance is a small one, then just require a downpayment from your buyer that covers your loan balance payoff and other costs of sale. If your loan balance is not small and the loan has due on sale provisions (alienation acceleration) then go in a talk to the lender about your plans. You may be surprised at their relief in hearing that they are not about to get back yet another property!

Valuing Shopping Centers

Here's my answer to a LinkedIn question () asking about how to value shopping centers... "What a good question! I would test all approaches to get an overall feel for the project. The quick and dirty approach would be to determine the Net Operating Income (“NOI” which is gross revenues less operating expenses not reimbursed by tenants). Then consider roughly how much equity you will be investing. Next, “pay yourself first”! What I mean by that is how much cash flow you would like to have on the equity invested. So, if you’re putting down a million dollars and, based on the quality of the income stream, would be satisfied with say 8% cash flow then merely subtract the $80,000 cash flow from the NOI to determine how much is available to go to pay for debt service. Given an amortization schedule and interest rate available to you, you can now solve for the amount you can afford to borrow. Now, just add this resultant loan amount to the equity to solve for how much you can afford to pay for the center. (Don’t forget to deduct from this value the cost of curing any deferred maintenance. Oh, also deduct tenant improvement costs and commissions for any space(s) that will need to be renewed or released.) When you test the more sophisticated approaches to value, don’t just rely on empirically observed capitalization rates, structure you own hypothetical rate by adding up the components of a cap rate, which are RETURN OF investment plus RETURN ON investment. RETURN OF investment is 100% divided by the useful life of the property. RETURN ON investment is the sum of the percentages that you allow for Safe Rate, Loss of Liquidity, Management and Risk. Empirically observed cap rates only determine the position of the property in the current market. The hypothetically structured cap rate helps you to predict “whither the market goeth”. For a more in-depth answer to your question, download my article entitled RETURN ON that you will find in the Box feature on my full LinkedIn profile. Hope this answer has helped! Good luck with it. David M. Kaufman, CCIM"

Federal Is About More Than Money

What's at stake in the current federal debt ceiling impasse is about much more than just money... What is really at stake is the very freedom and liberty historically enjoyed by Americans.

I hope it is not too late to reign in spendthrift Republicans and Democrats alike. If we don't balance our budget, cut spending and stimulate business through tax elimination for business then get ready for the anarchy and dictatorship that will certainly follow.