Archive for December, 2009

Withdrawing your equity…while staying put

December 16, 2009

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

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What are “Mineral Rights?”

December 9, 2009

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.

SVNLillie_NNN_Listings_12092009

TOMATO SOUP: CONTACT STORE FOR DETAILS

December 2, 2009

Does that sound ridiculous? Yes it does. But that’s the way many real estate listings are marketed.

While creating the weekly list of new real estate listings attached by pdf to my weekly email I am astounded at the way some property is being marketed.

(If you would like to receive my weekly email put Weekly Email in the Subject line of an email and send to gary.lillie@svn.com)

Description: many listings have no descriptions. In the Remarks column the broker writes, “Call for more information.” One broker put 12 new listings up and each said the same. Would you buy canned soup from a store if their flyer stated that you had to phone the store to learn the price, size can, and terms (limited quantity)?

Price: studies show that there are 42% more responses to real estate advertising with the price included. The reaction to marketing with no price can be interpreted as, 1) they want to get my name and number so they can hound me, 2) the price is so high I wouldn’t call if they advertised it, and 3) the price is so high they feel it must be explained.

Real Estate Auctions: by design there is often just 2-3 weeks lead time in the marketing. That’s hardly enough time for a broker to open an email or see an ad, request the package, assess the property, present the information to their buyer(s) and have enough time for the buyer to assess the property before making a decision to bid.

Do an evaluation of the marketing of your property. It is not simply running ads; it’s what entices the prospect if and when they respond to the ad.

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

SVNLillie_NNN_Listings_12022009