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By Alex Zylberglait, September 29, 2009 2:49 pm

Consider Tax, Legal, Liability, Succession and Management Issues When Determining How to Hold Title to an Investment Commercial Real Estate

Holding real estate in your name makes investors targets for frivolous lawsuits as property ownership is public record in most parts of the country. There are over 24 million lawsuits in the US each year. Using those numbers, the average American can expect to be sued 3 times in their lifetime. Since it makes no sense paying a lawyer to sue a poor person (and lawyers wouldn’t take a contingency case unless the defendant had easily visibly assets) real estate investors that don’t protect the privacy of their investments will be disproportional sued. Don’t put a target on your head for frivolous lawsuits.

If you have a business, avoid titling real estate in the name of the corporation. Beyond the negative aspects of adding debt to your company’s books (assuming you have financed the property) any suit related to the property will flow through to the company.   You will also face these negative situations:

• Separate taxable entity which will pay corporate tax rates
• No preferred capital gains tax treatment
• No ability to pass through losses to personal income tax

Ultimately, the decision on how to hold title to a property depends on many factors including the number and type of owners in the property, the goals of the investor, and whether that property correlates to a business of the owner.  Creating and properly maintaining a real estate holding entity to hold title to your investment real estate is a critical component to protect your real estate investment from lawsuits against you personally and from lawsuits against the property that is in the entity from spilling over to you personally.  
Properly structured real estate holding companies (LLCs, LLPs, etc) provide asset protection but alone they will not protect you from the time and expense of probate. 

Put Real Estate into a Living Trust to Avoid Probate

Probate means court supervision of your estate at your death.  Probate is expensive and takes time, so most people like to avoid it whenever possible.  Simply having a will does not avoid probate.

A living trust, on the other hand, is a legal document that replaces what you think of as your will.  The living trust makes sure your assets go to the people you choose.  It also avoids probate upon death or a conservatorship proceeding if you become incapacitated.  Properly prepared it allows couples to eliminate or substantially reduce taxes, and eliminate the time and expense of probate. 

Many people that have trusts fail to officially put their properties into the trust (“funding the trust”) which can force them into probate.  In some counties you can petition the court to include the asset in the trust but its prudent simply to place the property in the trust to begin with.

Putting your property directly into a trust for example, “John and Jane Doe Living Trust” does not provide asset protection.  The preferred method is often to place the property into the entity (LLC, LLP, etc) and make the Trust the primary shareholder in the entity.  As always, consult your tax and legal advisors for advice on your particular situation.

Read Part 1. Read Part 2

I will post Part 4 on Thursday, October 1st, 2009.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, September 24, 2009 8:00 am

Match Real Estate Investments to your Tax Bracket and Cash Flow Requirements

As a rule, newer properties that are net leased to strong national tenants provide more stable cash flow but with limited upside potential. Net leased retail properties have been very popular with retirees for many years due to their stability and limited management responsibilities associated with newer properties. At the other end of the spectrum is raw land, which in most cases is a negative cash flow investment through the holding period (remember property taxes and levies) and provides very limited tax benefits (depreciation can only be taken on structures, not land). Well located land however can have phenomenal upside potential for patient investors if it has a high potential for development in the path of growth.

Carefully consider and analyze the “best case”, “expected” and “worst case” financial scenarios for the property. Would the “worst case” scenario force you to sell the property to meet personal financial obligations?

Understand the Difference Between Property Management, Asset Management and Portfolio Management

Property Management: Revolves around the regular, ongoing operations of an investment property. Property management companies often specialize in particular property types, for example shopping center management. Common duties are collecting rents from tenants, ensuring that tenants are in compliance with their lease terms, paying expenses of property, preparing monthly or quarterly reports of property operations and cash flow. May or may not do leasing activities on property.  Typical fees for property managers run between 3 to 5% of the gross rents collected.

Asset Management: Provides strategic direction for a particular property based on the stated goals and requirements of ownership. Ensures that property management and leasing activities and proper and aligned with strategy. Often requires a Leasing Broker who supervises budget preparation by Property Manager. Reviews and approves all potential new leases, construction and capital improvements to the property.   Asset managment fees customarily run between 1-2% of the gross rents collected and are usually only done for large investment properties.

Portfolio Management: Ongoing analysis of multiple real estate investments, associated financing and structure, buy and sell decisions, and 1031 Tax Deferred Exchange decisions, as it relates to the unique financial and personal goals of each investor. Real estate portfolio management is the most overlooked of the three components and is critical to the long term success of real estate investors.

Read Part 1. Read Part 2. Read Part 3.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 22, 2009 5:42 am

Have a Clear Understanding of your Overall Financial Goals, Risk Tolerance, Income Requirements, and Tax Implications Before Making any Real Estate Decision

As an investor you can have extensive information on a particular property and market but still make a wealth draining decision if you have not carefully considered all possible real estate alternatives within the context of your unique tax and financial situation.

Successful commercial real estate investors understand that building and protecting commercial real estate wealth requires expert advice on the following issues:

• Buy, sell, hold, 1031 exchange, refinance or redevelop a property
• Financing structure and impact on operations and holding period
• Amount of financing leverage for the investment to maximize cash flow and tax benefits for a particular investor without adding undue risk
• Before and after tax impact on cash flows for all alternatives
• Ownership structure (LLP, LLC, Partnership, Individually, Living Trust, etc) benefits and limitations
• Decision making when properties have multiple owners with different goals and objectives
• Partnership buy-outs
• Redevelopment and repositioning of property
• Property management operations
• Building facilities maintenance and capital improvements
• Estate planning and wealth transfer planning

Balance Real Estate Holdings by Geography and Property Type to Protect Against Market Downturns

A balanced real estate portfolio can provide for wealth accumulation while managing the risks of downturns in individual property types and markets. It’s the same concept as having a balanced portfolio of stocks and bonds that is appropriate for your personal financial situation.  For instance, when most people retire their investment portfolio is often re-weighted to include less individual stocks and a higher percentage of fixed income investments and annuities. 

Real estate portfolios should be balanced in much the same way that is, changing to reflect the requirements of the investor for their stage in life.  Real estate, like all investments has a certain level of inherent risk.  However it would be rash to simply sell the real estate, pay all of the built up taxes and using whatever is left over to buy bonds and treasury bills.  Instead, adjust your real estate holdings to match your requirements when you enter a new phase of life.

Standby for the continuation on Thursday.
Read Part 2

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.