INVESTMENT PROPERTY NEWS
VOLUME 12
THE TIMES THEY ARE A CHANGIN’ FOR REITS
The “Real Estate Investment Trust Modernization Act
of 1999”, coming before the Senate will change some of the rules under
which REITs operate. For one thing, they will be required to distribute
only 90% of their income. Currently they must distribute 95%.
Mutual funds currently operate under a 90% distribution rule. Also they
will be allowed to provide tenant services that they can not currently
provide, such as valet parking and lifeguard services. These services
will be offered by subsidiaries of the REITs. The subsidiaries will
be taxable entities.
REITs are using subsidiaries now to provide these
services, but there are ownership and control rules that are very cumbersome.
The purpose of the bill is to make REITs more competitive with their competitors.
(Mutual funds and other property owners)
CHECK UTILITY AVAILABILITY IN MEXICO
Mexican business parks often promise electrical capacity
that may be available but not guaranteed. This could mean an expensive
plant built with insufficient power available. You should go directly
to the source of power to find the unused capacity. Then find out
what new uses are proposed in the service area. It may
be possible to reserve the power you need by contract.
Telephones take 6 months or more sometimes. Water and sewer availability
should also be researched thoroughly.
USING REAL ESTATE TO BUILD AND PRESERVE WEALTH.
The IRS calls real estate rent “passive income”.
They have obviously never been in this business. There are some strategies
one can use to make it a little easier, though.
Net leases are an excellent example. They
do not work well on residential properties. They do not reduce the
workload much on multi-tenant commercial properties. They do make
a single tenant commercial property real easy if you have a good tenant.
Why would anybody want a bad tenant?
On single-family residential properties, a contract
for deed works well. This is sometimes called a wrap-around mortgage
when there is a mortgage on the property already.
The owner of the property sells it with seller financing.
Instead of a mortgage or note and deed of trust, a land purchase contract
(sometimes called an installment sale contract) is used. The buyer
will get a deed when the property is paid for. The seller continues
to make payments on the underlying mortgage. This is an excellent
opportunity to get interest on someone else’s money. Do not use this
method on a property that has a due-on-sale clause in the mortgage without
the mortgage holder’s permission. Some states consider that practice
as fraud.
Another method of taking the work out of rental
property is hiring a good manager. Delegate the management of the
property to the manager, but do not abdicate your responsibility
as owner.
Let the manager know that you ride by the property occasionally.
It will improve the attention your property receives.
On multi-tenant properties, require the manager to give move-in and
move-out dates for tenants. When you ride by, make a list of vacancies.
Resident managers are famous for taking a month or two of cash payments
and reporting a unit as empty.
Think about the work involved with the properties you are buying.
Some properties are less management intensive than others. If you
are lazy, (like me) buy easy properties.
Next issue we will talk about exit strategies.
Sometimes people just want to take their money and go home.
BIG BROTHER IS WATCHING YOUR SALE-LEASEBACK
The IRS says they will make the decision, rather than
the landlord and tenant, whether a sale-leaseback is a legitimate
lease transaction or not. A rental agreement will not be disqualified
unless it requires more than $2 million in payments.
If the Landlord or the tenant is a non-taxable entity, the rental agreement
will be closely scrutinized.
IT IS HARDER TO BE BROKE THAN BEFORE
The IRS is changing the rule on insolvency after relief
from debt to make it harder to qualify as insolvent. Under the new
rules, personal residence would not be exempt from consideration of assets.
DEPRECIATION CHANGE ON COMMERCIAL REAL ESTATE
The Tax court ruled, in a 1997 case, that some of the
upfitting on a commercial building is subject to a 5 year depreciationinstead
of 39.5 years. The IRS agreed but intends to scrutinize the returns
that use this. The case involved carpet, movable partitions
and special wiring for equipment. Wiring costs will be examined for
cost-allocation. Any change in an asset’s depreciation method is
considered a change in accounting method and requires advance approval.
This Page last updated 11/2/99