COMMERCIAL REAL ESTATE MARKET IN ST. PETERSBURG RUSSIA UNCHANGED FROM BEFORE CRISIS

Due to the political instability, most western companies in Russia lease their real estate.  The commercial real estate market, according to “BISNIS”, is pretty much unchanged from pre-crisis days. Class A office space rents in St. Petersburg range from $600 to $800 per square meter per year.  In the better areas, retail rents can range from $1000 to $1500 per square meter per year. Class B space has dropped to $300 to $500 per square meter per year.  Questions should be asked about parking and availability of utilities and telephones in these spaces.

A Russian company may not receive rents in an offshore account; but a foreign owner may provided a 20% withholding tax has been paid.  If rent is paid in Russia, a 20% VAT tax is added.  Under certain conditions, the VAT tax can be reclaimed.
In many buildings, a “communal services” charge is added to the rent. This is similar to CAM charges. There are many other things that can cause surprises later. It is a good idea to work with a competent property specialist.

St. Petersburg has several advantages over Moscow.  It has cheaper rents, is a port city, and the local government is working on some incentives for foreign businesses.

MORE ABOUT NY CASE

The case in NY that was referred to in the last issue dealt with notice to tenants.  This was a state court making a case based on a federal law.  The law had to do with attorneys filing eviction cases.  The ruling would not apply to landlords or property owners.
If there is a lesson for people in other states as well as NY, it would be that the landlord or the property manager should sign the complaints for eviction, even if an attorney files them.

USING REAL ESTATE TO BUILD AND PRESERVE WEALTH.

Before we can use real estate to build and preserve wealth we have to own it.  huh?  Not always…  This article is more about controlling real estate than owning it. One can use almost every technique with real estate that one uses with securities.  I have not found a way to sell short yet: but I am sure there is a way.

Financing real estate is like buying stocks on margin.  The real estate investor is less likely than the stock investor to face a margin call if the value drops. We did see a similar situation in the RTC days. Banks were forced to “mark to market”, and sometimes they required borrowers to reduce their mortgages.  Sometimes the bank was required to reduce the mortgage in order to foreclose or to preserve the quality of the loan on their books.  This was called a “cram down”, and had serious tax implications for the borrower.  Relief from debt, in most cases, is treated the same as income.

On single-tenant commercial properties, one can use the strength of the tenant to secure financing, even if the owner/buyer is not credit-worthy.  Most institutional financing, however, requires good credit, in addition to extremely good liquidity.

Owner financing has always been my favorite form of leverage.  When loans were assumable and properties were hard to sell, this was easy to obtain.  It is still possible; but we need to be better at explaining the advantages to the seller. Owner financing is still sometimes available on undesirable properties.  Since undesirable is a relative term, there is always a possibility for some acquisitions.  Assumable loans are becoming very rare.  Avoiding a due-on-sale clause can be an excellent way to lose a real estate license.  I have two techniques that work well.

A master lease with a purchase option is an excellent way to control property.  Always tie the price to the mortgage balance.  This lets the buyer/lessor build up equity. The second works in NC.  Check your own state’s foreclosure laws. In NC, when a holder of a subordinate mortgage forecloses, he can assume any superior mortgages under the present terms and conditions.  Loaning someone the money to catch up a mortgage can be profitable if there is sufficient equity in the property.
More acquisition strategy next issue.

IRS RULING CLARIFIES ALLOCATING DEBT IN A PARTNERSHIP

LTR 9815001 allows that a general obligation liability of a partnership can be allocated among the partnership properties in the same manner as repaid debt in a refinance. This can be important in a partnership, where partners pool assets that are already encumbered and refinance the entire package.  A different allocation could cause unpleasant tax consequences for a partner who finds himself in a debt over basis situation after a refinance.

Mark Brumbaugh describes this situation in detail in the January 99 issue of REAL ESTATE FORUM