NORTH CAROLINA GETS A NEW BROWNFIELDS LAW
A new North Carolina law (Senate bill number 125) will allow for more lenient cleanup procedures for some polluted properties. Special deed restrictions may need to be placed on these properties.
Under a new (1995) federal program, brownfields developers and their financiers can get relief from future liability on the project if they follow certain guidelines and enter into an agreement with the federal government.
This, in combination with some provisions in the new tax bill allowing for cleanup expenses to be deducted rather than capitalized, makes development of these properties a more viable option.
PROPERTY RIGHTS BILL WILL IMPROVE OWNER'S ACCESS TO JUSTICE.
HR 1534, The Private Property Rights Implementation Act of 1997, will allow property owners who have suffered adverse actions by local and state authorities access to federal courts without first exhausting (and being exhausted by) all local and state administrative and judicial remedies.
WHY DO PEOPLE BUY INCOME PROPERTIES?
(Continued from volume 1)
Yield is one of the four elements of an investment and one of the major reasons people buy income property. Yield is another word for return.
There are two types of return. Return of capital refers to getting one's money back. Return on capital refers to the profit made. There are many methods of measuring yield. Some measure return on and of capital and some measure only one or the other.
Cash-on-cash compares the income for a period against the amount invested. For example, if a $10,000 investment yields a profit of $1,000 per year, it has a 10% cash-on-cash return.
Cap (Capitalization) rate is the NOI (net operating income) divided by the investment amount. This calculation is an example of the IRV formula at work. IRV stands for Income, Rate and Value. Income (NOI) times rate (cap rate) equals value (investment amount).
Appraisers refer to Cap rate as "Overall rate". They determine this rate by calculating the return on the equity portion of the investment and on the debt portion of the investment separately and then combining them to get the overall rate or cap rate.
Some other measures of yield are the IRR (internal rate of return), FMRR (financial manager's rate of return) and the GRM (gross rent multiplier). Different measures are used in different situations or by different investors.
For most of us, yield is our primary reason for investing, but the other elements are important too. The next issue will discuss safety.
SALE LEASEBACKS: EVERYONE WINS BUT THE TAXMAN
In a typical sale leaseback transaction, an owner-occupied business will sell its facility to an investor, and lease the facility back. The rate of lease depends on the credit-worthiness of the tenant. The terms of the sale-leaseback may even include an option for the business owner to repurchase the facility.
Why not just borrow the money and keep the building? There are several advantages to the sale-leaseback over a mortgage.
GAAP (Generally Accepted Accounting Practices) will usually require that the property be carried on the books at its depreciated value. The mortgage will offset any value remaining in the building and increase the firm's liabilities and its liability-to- assets ratio. A lease is treated differently.
The interest portion of a mortgage payment is a deductible expense. The principal portion is not. In the latter years of a typical amortization schedule, this can result in "phantom income".
Most improvements to a building by the owner must be depreciated over 39 years. Leasehold improvements by the Lessor may be depreciated over the remaining term of the lease.
Certain sale-leaseback transactions are simply disguised financing schemes and are referred to as synthetic leases. In order to receive favorable treatment, synthetic leases must be properly structured. Be sure to consult tax counsel before entering into one of these agreements as an investor or as a business operator.
INTEREST RATES ON THE RISE: According to the Kiplinger Washington letter, interest rates will rise between now and the end of the year. They also say that HUD will be cutting rent subsidies.