CHANGES PROPOSED IN SINGLE ASSET BANKRUPTCY RULES
Several years ago, bankruptcy rules were changed to create an entity called a "single asset corporation". This special class was limited to single asset real estate holding corporations with mortgages of less than $4,000,000.
These corporations were exempted from the automatic stay of foreclosure, normally granted in bankruptcy cases. This legislation was a part of broader legislation that allowed for securitization of commercial real estate mortgages by making creditors' positions more secure.
New legislation would remove the $4,000,000 limit and make a few structural changes. This would allow for easier securitization of larger real estate mortgages.
WHY DO PEOPLE BUY INVESTMENT PROPERTY
(Continued from Vol.3) Control is the third element of an investment. This element interacts in a major way with all of the other three elements.
Control can affect yield in a positive or negative way. Because it means work for the investor and an increase in risk, it normally is offset by an increase in yield. This increase may in some cases be only a perceived increase. When the investor assigns a value to his or her own time, the yield may actually decrease.
The control factor that increases risk is two fold. On one hand, there is an increase in risk due to the possibility that the investor will foul up something. On the other hand, the investor may have an opportunity to improve the yield and the quality of the investment by sagacious management.
The other downside to increased control is that a highly involved investor may get sick or die and leave his investment vessel with no hand, or a weak hand, at the helm. Investors also run this risk when they give up control in a managed investment or a syndication.
Whether you are taking control or giving up control as an element of your investment, always examine the person who is in control, especially if it is yourself.
The next installment of this ongoing article in Volume 6 will be leverage.
NEW WETLAND RULES
The Army Corps of Engineers is preparing a new set of wetland regulations. They probably will not make development any easier.
WATCH FOR THE TAX TRAP ON EQUITY LINES
Investors sometimes use home equity lines to make down payments or tie up property. The interest is deductible on Schedule A itemized deductions. The trap is that now you can get 125% of the value of your home.
Unfortunately, the interest is deductible only on the portion of the loan that corresponds to the actual value of your home.
NEW NC FRAUDULENT TRANSFER ACT
Became effective October 1, 1997. This law replaces the old English Common Law, "Statute of Elizabeth". The new law is called the "North Carolina Uniform Transfer Act of 1997".
This law prevents transfer of property for the purpose of defrauding creditors. It has two parts.
Part 1 covers transfers involving an actual fraudulent intent on the part of the transferor.
Part 2 involves those transfers involving other factors harmful to creditors, but without the necessity of fraudulent intent. This circumstance is referred to as "Constructive Fraud".
Why is this important to real estate investors? We often buy properties from persons who are in financial difficulty. There is a possibility that a bankruptcy court could reverse a sale that it deemed fraudulent. If there was no money to return to the buyer, the buyer would become another creditor.
WHAT DOES GLOBAL WARMING HAVE TO DO WITH REAL ESTATE?
A study by the federal government has found that 34% of total energy consumption and related greenhouse gas emissions in the US is caused by buildings.
The Kyoto Accords requires that greenhouse gas emissions be reduced by 7% below 1990 levels in the years 2008 to 2012 in the US. This means we have to start being more efficient.
OVERHAUL OF THE IRS MAY CHANGE CPA CLIENT RELATIONSHIP At present it is usually better to use an attorney licensed to practice before the IRS for your tax issues than a CPA because an attorney can use attorney client privilege to withhold information shared with him by his client. A CPA does not have this ability at present. This is one of the things that will probably be changed in the upcoming overhaul of the IRS.