Tax Bill on new purchases

This little tip is so basic as to seem not worth mentioning; everyone must know this – right? Guess again.

It is amazing to me, even after 44 years in the real estate business, how many real estate practitioners analyze their investment income-producing listings based on the current property tax. In consultation with the seller they set the asking price based on a certain net operating income; that is, after all expenses are paid, including utilities, maintenance, real property taxes, personal property taxes if any; snow removal, insurance and some other items that may be unique to the property.

What is most often left out is management, which should be included even if the owner does it themselves, and replacement reserve; meaning if the hot water tank or roof has about two years left that should be considered in the sale price and after closing replacement money should be set aside each year based on the life span of that item.

Yes, in real life some of that is tough to negotiate and you may have to compromise if you think the property is worth paying more than the pro-forma.

However, never accept the analysis, i.e. the estimated return on investment, if the real property taxes are based on the current Taxable Value, rather than what the new State Equalized Value might be.

In the State of Michigan increases in the Taxable Value are held to 5% or the rate of inflation, whichever is less. When a property is sold, the tax base then reverts to State Equalized Value and annual Taxable Values are then capped once again. That law, or one similar, may be true in your state, too. After you close the sale you may be looking at a much higher real property tax bill.

Keep that in mind when you are doing your due diligence prior to signing an offer to purchase.

Continuing with energy strategy

So one day you get the idea that you need to figure out how you are doing on energy usage. “I have a large car dealership / small industrial building / large manufacturing plant / apartment community / retail store / – you get the picture.
Your energy bills have always been high but you have told yourself it’s just a cost of doing business. Now you have a nagging feeling that you are giving money to the energy companies that you could be putting into your kids college education fund. So how do you even begin to evaluate the bills for your business?
Will you call a solar company to evaluate installing their solar panels on your building?
Will you call an insulation company to evaluate the efficiency of your insulation?
How about a door company? Are the doors in your building energy efficient?
Ground water heat pump company? Can you even use that in a downtown building?
There is a laundry list of methods and products to conserve, and even create, energy.
You ask yourself, what will I get in return for spending my hard-earned dollars?
What if I spend X amount of dollars on solar panels, doors, insulation, heat pumps…?
What if I could have invested in just one of them and received a 20% return on my investment and not the others which would only return 2-5%.
How do I know that they are out for my best interests and not their own, by selling me on their products and their services?
There is one way to feel easy that you are getting the best advice. Call a company that has no dog in the fight. A company that will say, Brand A out performs Brand D; invest in this and receive 33% IRR and not in this, as it is already pretty efficient and spending the money will only get you a 2% IRR.
A company that will only ask for 15 minutes with you on the phone in order to determine whether or not you should set a meeting to discuss it further.
A company that will show you a list all that should be considered for your building(s), the cost of installation, the payback in months or years and the Internal Rate of Return on those investments.
Would all of that be worth a phone call?
GreenPoint Partners http://www.greenpointpartners.com/ was hired by the owner of a modest-sized manufacturing company to do an energy efficiency evaluation of his plant. He followed the suggestion of having his building manager accompany  him and the GreenPoint Partners evaluator on the tour. Before the evaluation was even finished the owner had his manager go to work on one of the recommendations; one that was simple, quick and seemingly obvious; but nobody had ever thought of doing it. That small change saved the owner a lot of energy, and that translated to a lot of money saved.

That little story paints a nice picture of what GreenPoint Partners can do for you but it should not be considered as the full report. There were many recommendations made to the owner and they all had good returns on investment.

If all of this makes sense to you go to the website for GreenPoint Partners, above. I am affiliated with them but I would not have affiliated with them if I was not comfortable with their ethics and abilities.

Increase your net operating income…

…without raising rents.

The world is fast becoming aware of energy savings; especially in the United States where even the Pentagon has put out a mandate that all branches of the service cut energy usage. Others taking a hard look at energy efficiency are not necessarily the ones who first come to mind; lenders, communities, and of course end users, be they owners or tenants – especially tenants with long term leases. Your customers may also be judging you based on their sense of social responsibility. Any edge you can gain over the competition is a good one.

So where do you begin? My suggestion is to hire a professional firm, with no product to sell, that can give you a thorough audit and written report showing itemized recommendations, the estimate of cost for each renovation, and the estimated payback time. That requires a company with a team of experts in various disciplines; such as solar, energy efficiency, engineering, incentives, alternative heating and cooling, finance, competing products…and the list goes on.

Finally, the report should contain the IRR (internal rate of return) for each of their recommendations or findings. That way you can say, okay, I like this one that gives me a 20% IRR, but this one with a 3% IRR is not worth the disruption. Further, they can suggest strategies such as picking the one with the greatest rate of return and using that savings to fund the other recommendations.

Take a look at this company’s web site. They are a fine example of what I am talking about and since I personally know some of the founders and key personnel it is one company that I can highly recommend. They will not take you further down the road if they cannot show a 10% IRR, overall.

http://www.greenpointpartners.com/

Michigan Commercial Real Estate – returning after the New Year 2011

After taking a long sabbatical from writing my blog I will return with new blogs the first week in January. Hoping you all had a merry Christmas and 2011 will be your best year ever.

Falling prey to my perceived avarice, I hope 2011 is especially good with your real estate investments.

Cost Segregation: free analysis

Without doing an on-site examination, a cost segregation analysis usable for your tax return cannot be given. But, through a strategic alliance Sperry Van Ness advisors (such as I) can get you a pretty close estimate, albeit conservative, of projected tax savings from your real estate investment.

The company we use will run your data through three separate programs to get the best answer. The estimated savings will be given to you in dollar amounts and also stated in the form of an ROI (Return on Investment) of what you would pay for an analysis.

If you can answer these questions, contact me and I will get you your estimate by putting you in touch with the president of the service. Contact info is below.

First, the Depreciation Schedule from your most recent tax filing is vital. Please attach to your email.

The questions:

Purchase Price or cost to build, minus the land value

The month and year you purchased or built the property

Total land square footage

Total building square footage

Flooring: carpet and vinyl stated in % of the building square footage

Parking: % of land that is paved, or the square footage, or the number of parking spaces

Was it a 1031 Exchange? If so, what was the date of the exchange?

The date of your next quarterly estimated tax payment. This is also vital.

That is simple information to look up, given the amount of savings you may realize.

How much might you save? Here are a few averages one company suggests for each $1 million in Depreciable property. They are stated in First-year savings / NPV savings.

Apartments $10,000 / $36,000

Hotels $20,000 / $64,000

Shopping Centers $10,000 / $44,000

Office Buildings $8,000 / $39,000

Car dealerships $11,000 / $51,000

What is your property worth? You have a good idea, so get me the answers and I will get you the estimate.

(734)663-6694 x28                 gary.lillie@svn.com

To see the new commercial, land and investment listings that came into my desktop this week, go here:

February 2

More Cost Segregation

This is a very, very important subject for building owners, so I am revisiting it.

In the past most owners of investment real estate have had no decisions to make when depreciating real property for their IRS Tax returns; it was either 27.5 years for residential rental real estate or 39 years for non-residential real estate.

In the distant past, ignoring the fact that the depreciation schedule was much shorter, there was another decision; accelerated or straight-line depreciation.

With accelerated depreciation you could either take 125% accelerated for residential or 150% for non-residential. The decision was made based on other factors in calculating your current and/or future income tax liability. Straight-line was best for some and accelerated was best for others.

There is now another big decision to be made, known as Cost Segregation. It will take some dollars in investment on your part but the ROI can be major.

I will spend a number of weeks on this subject because it can 1) create a lot of money for you and 2) be retroactive to January 1, 1987! (That was not a typo).

Come back in future weeks and tell your friends to do the same.

To see the commercial, land and investment listings that came into my desktop this week, go here:

January 19, 2010

What is going on?

In the last two weeks I have had more inquiries on vacant land than I had in the previous six months.

I have been in the real estate business since 1967 and made an interesting observation in that time. When we are about to come out of a recession an early indicator is vacant land sales. People, be they individuals, developers or builders, start looking at vacant land when they have a confident feeling that things are getting better, or about to get better. In fact, I once brought this to the attention of Crain’s Detroit Business, a weekly publication, and they ran an article about it, beginning with “Who needs Alan Greenspan when we have Gary Lillie?”

I hope I’m right once again. We will soon know.

Back from holiday break – glad to be back

2010 will be a great year!

Withdrawing your equity…while staying put

For various reasons business owners who own their own building find that it makes sense to pull the equity from their building. Reinvest in the business, estate purposes, family matters, etc. There are two ways to do so; let’s compare them.

Refinance:

You don’t actually get all of your equity; only the difference between what you owe and the loan to value (LTV) ratio the lender is willing to loan. In other words, let’s say your building is worth $100,000, you owe $50,000, and your lender loans 75% LTV. That means you get a $75,000 mortgage, pay off the $50,000 and draw out $25,000, minus the cost of the appraisal, environmental assessment, survey, loan fee and perhaps “points;” which are effectively a buy-down cost for getting a lower loan rate. Let’s say those costs are 5% of the loan amount; that’s $3,750. So you end up with $21,250.

Sale/Leaseback:

Using the same scenario as above you list and sell your building for $100,000. In this case you pay off your mortgage and draw out $50,000 minus your sales costs. Commission, title insurance, transfer tax, and other costs equal about 8% of the sales price; that’s $8,000. So, you pay off the mortgage and deduct your sales costs and end up with $42,000 in your bank account.

The costs above are probably high in today’s market, but I like higher costs better for use in an example – “worst case scenario.” There were times in my career, though, where those costs would have been low.

Of the two options above the best choice for one person may not be the best choice for another, so be certain to get some good accounting and legal advice before making the decision. A good commercial real estate broker should also be consulted.

Now, how might you improve the value of the building, defer capital gains tax, and how much will you pay in a lease? That’s a subject for next week. In the meantime, take a hard look at Washington and what will happen to the Capital Gains Tax. That should weigh heavily into your decision and timing.

To see the commercial and investment land listings that came into my desktop this week, go here:

December 15 2009

What are “Mineral Rights?”

I have written several blog entries on allocating the purchase price of land into “Surface Rights” and “Mineral Rights.” Past customers of mine have structured their purchase agreement in that manner. It is clear that surface rights are not depreciable, at least I/we have not yet come up with a way to do it (there must be one – if you figure it out, please let me know). But, past customers have depreciated the mineral rights over a five-year period (not to be confused with depletion, which is taken when the extraction is in progress).

In one case a customer bought a $2,100,000 hunt camp and depreciated $1,500,000 of it over a five-year period.

But what are mineral rights? This definition comes from the State of Michigan Department of Environmental Quality web site – along with a disclaimer that it is not legal advice.

A mineral right is a right to extract a mineral from the earth or to receive payment, in the form of royalty, for the extraction of minerals. “Mineral” may have different meanings depending on the context, and there is no universal definition. However, “mineral” generally includes: • Fossil fuels – oil, natural gas, and coal. • Metals and metal-bearing ores – such as gold, copper, and iron. • Non-metallic minerals and mineable rock products – such as limestone, gypsum, building stones and salt. • May also include sand and gravel, peat, marl, etc.

Of course there is much due diligence to be done prior to even entering into a sales contract and that includes consulting with a good tax and/or real estate attorney and accountant.

One other thought; check on the zoning ordinance governing the property in question. If the zoning does not allow extraction of minerals such as peat, gravel, sand, stone, ore, etc., it may be hard to defend the depreciation of mineral rights.

Go here to view a large selection of new NNN, land and other commercial real estate listings.

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