Real Estate LLC, How to Create One

Most people form an LLC (i.e. Limited Liability Company) to hold and manage their real estate for two reasons. First, if the LLC is formed correctly and there is a claim or lawsuit relating to the real estate, then typically, only the assets owned by the LLC, and not the taxpayer’s personal assets, are subject to the claim or lawsuit. Second, an LLC provides tax advantages over other entity choices. For example, the profit or loss from an LLC with only one owner can be included on the taxpayer’s tax return, and the limited liability company may not have to file a separate tax return. By contrast, a corporation would have to file a separate tax return.

Forming an LLC is a relatively simple process. In most cases, the application can be filed online with the state. You will need to know the name of your business, the tax information for the members of the limited liability company (such as, names, addresses, and social security numbers), and the LLC’s contact information. You will generally pay a filing fee, which varies from state to state.

You can Google limited liability company, and you will find many companies that will create the LLC for you (for a fee). You will need the same tax information, however. Alternatively, you can Google your state name and “Secretary of State” to find your state’s online form. It is also best to create the limited liability company in your own state.

In order to gain the maximum protective benefits from an limited liability company, many taxpayers transfer the property to the LLC, so the LLC becomes the legal owner of the property. If the title is not transferred to the limited liability company, and there is a lawsuit against the property, the taxpayer may be personally liable.

A properly formed limited liability company will generally protect the owner’s personal assets from lawsuit or claims against the limited liability company, but it will not protect one asset owned by the LLC from being used to satisfy a claim relating to another asset owned by that LLC. In other words, all assets owned by the limited liability company are potentially subject to any claim against the limited liability company.

For example, if a limited liability company owned several properties and someone is hurt at one of these properties, then the person could sue the limited liability company. Consequently, all of the properties owned by the LLC could be used to satisfy the judgment – not just the property where the person was hurt. Therefore, the limited liability company could potentially lose everything from a lawsuit relating to only one of its properties.

To avoid these risks, taxpayers can form separate LLCs for each property owned. There are many factors to consider when making this choice. Some of these factors are the number of properties owned, the locations of the properties, and the way the properties are financed. You must also consider, the costs and administrative burdens associated with forming and maintaining numerous LLCs. You should discuss these issues with your tax accountant or CPA.

“No Conflict of Interest” is an Over-Used Canard in Real Estate Representation

Commercial real estate consists of many types of real estate, and a variety of agency types. But when representing a tenant or buyer, that exclusive agency in which the client has been assured of and expects to receive absolute good faith, loyalty, fidelity and non-disclosure is only as strong as its weakest link; and that link is conflict of interest.

Conflicts arise when the same agent representing the tenant breaches loyalty and fidelity either by design (in which they purposely do so), or by default (by allowing or creating the circumstance). The subject of this article is the latter, more sinister, invisible form of conflict of interest found throughout the commercial real estate industry by the “convenient proximity” of conflicting interest to that of the tenant. However, know also that the former, purposeful conflicts, happen all the time as well; and both require the tenant or buyer to strap on strong sensing devices as well as strong legal protection.

Conflicts even occur when there is a buyer’s agency or exclusive agency agreement enumerating in detail the list of good faith, loyalty, fidelity and non-disclosure requirements, but the conflict can still arise at any moment without the client ever knowing it is there. A few examples below reflect that conflicts can be as invisible and as deadly as carbon monoxide gas. It takes a trained sniffer and monitoring system to identify it, but it’s there for sure.

Take, for example, the tenant being represented by an agent of XYZ Company who, among the variety of buildings for the tenant to consider, XYZ Company has listings on several. There have been occasions where the tenant rep agent for the tenant is simultaneously a listing agent for other buildings. Worse, leases have occurred where the tenant, represented by the tenant rep, actually leased space in the tenant rep’s listed building! Smell a rat? But conflicts of interest don’t need to be so obvious and most can be noxious and just as invisible.

Here are a few more real-life examples where conflicts may exist in some hidden primordial form: CBRichard Ellis, known as the largest real estate services in the world also has CB Richard Ellis Realty Trust, a real estate investment trust (REIT) that seeks to invest in income-producing properties in major metropolitan areas (a landlord). And in May 2008 CBRichard Ellis Realty Trust also formed a joint venture with Duke Realty to acquire from Duke Realty up to $800 million of newly developed bulk industrial build-to-suit projects over three years. Yet at the same time CBRE consistently represents tenants, and perhaps even at these buildings. Not to suggest that CBRE engages in conflicts of interest, but the extremely close association of opposing interests in one space, one company or one office provides fertile soil for the possibility.

Another more precise example is the actual company, self-described as largest tenant representation organization (we’ll call it ABC Company); yet when you go down to the local operating unit, you find this company is actually apart of (and owned by) another company who describes themselves as a full service real estate services provider in retail development, property disposition, lease administration, project management, audits, and asset/property management. They then describe their tenant representation as “Our corporate division is the (city) office of ABC Company – one of the nation’s leading corporate real estate firms dedicated to providing corporate real estate services exclusively, including tenant representation, project management, administrative services and strategic planning.” Huh? Tenant Representation INSIDE a developer, management and property sales company?

Jones Lang LaSalle, a financial and professional services firm specializing in real estate services and investment management recently acquired Staubach Company which only represent users of office, industrial and retail space. On the Staubach website it even says, “There are no conflicts of interest”. So, what happens to the “no conflict of interest” now that Staubach is inside the whale of JLL? What happens if or when Staubach represents a tenant at a JLL building? They’ll gnash their teeth and jump up and down proselytizing about never breaching loyalty and fidelity as they all, and always, do.

To be specific, the St. Louis Business Journal (March 13, 2009) announced a deal by JLL. Here is exactly what it says: “Lynn Schenck of Jones Lange LaSalle represented (the tenant), and David Steinbach, also of Jones Lang LaSalle, represented (the Lessor)”. Hello? Excuse me?

Even Mark Fewin, senior managing director of CB Richard Ellis Inc.’s Dallas office stuck his foot in it when quoted in the Dallas Business Journal (8/8/08 issue) about the benefit of Staubach inside JLL, when he said, “The (JLL/Staubach) merger provides final validation to the argument that we have been making for many years – that both tenants’ and landlords’ best interests can be served by one firm.” WRONGO! In my opinion, the merger provides final vindication that tenants’ interests can not be best served by one firm which represents both tenants and landlords.

But, purveyors of conflict of interest situations artfully bob and weave – denying any association whatsoever with any conflict as if to say “Elephant! What Elephant?” I have been involved with many and one in particular stands out. Caught red handed that his tenant representation assignment included a few of his own companies listings, he stammered like a public figure caught in the act of accepting pay-off money, juxtaposing and angling away in flight for life all the while knowing the evidence was immutable.

Tenants who knowingly permit dual agency are ignoring the law that is in their favor – called Buyer’s Agency Laws. Every state has buyers agency laws which specifically apply to tenants. To not have inviolable representation is to have a fool for a patient.

While dual agency and “Chinese walls” are routinely touted as defenses and explanations, it cannot entirely rub out the stain and whiff of conflict. The seed of doubt, once cast, cannot be entirely eliminated.

The best course of action is to understand the insidious nature of overt or covert conflicts and work only with a firm “which can never have a conflict” (emphasis added). Seek out a firm which specializes in tenant representation. Don’t be fooled by the “full-service” come-on the large brokerages serve up. You don’t need their property management skills, you need a person with a poker face. As the tenant, you have every right to make this demand…in practicality, and under the law.

A Guide to Investments in Indian Real Estate

Real estate has traditionally been an avenue for considerable investment per se and investment opportunity for High Net-worth Individuals, Financial institutions as well as individuals looking at viable alternatives for investing money among stocks, bullion, property and other avenues.

Money invested in property for its income and capital growth provides stable and predictable income returns, similar to that of bonds offering both a regular return on investment, if property is rented as well as possibility of capital appreciation. Like all other investment options, real estate investment also has certain risks attached to it, which is quite different from other investments. The available investment opportunities can broadly be categorized into residential, commercial office space and retail sectors.

Investment scenario in real estate

Any investor before considering real estate investments should consider the risk involved in it. This investment option demands a high entry price, suffers from lack of liquidity and an uncertain gestation period. To being illiquid, one cannot sell some units of his property (as one could have done by selling some units of equities, debts or even mutual funds) in case of urgent need of funds.

The maturity period of property investment is uncertain. Investor also has to check the clear property title, especially for the investments in India. The industry experts in this regard claim that property investment should be done by persons who have deeper pockets and longer-term view of their investments. From a long-term financial returns perspective, it is advisable to invest in higher-grade commercial properties.

The returns from property market are comparable to that of certain equities and index funds in longer term. Any investor looking for balancing his portfolio can now look at the real estate sector as a secure means of investment with a certain degree of volatility and risk. A right tenant, location, segmental categories of the Indian property market and individual risk preferences will hence forth prove to be key indicators in achieving the target yields from investments.

The proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors’ point of view. This will also allow small investors to enter the real estate market with contribution as less as INR 10,000.

There is also a demand and need from different market players of the property segment to gradually relax certain norms for FDI in this sector. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario in terms of competition and professionalism of market players.

Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years. This attractiveness of real estate investment would be further enhanced on account of favourable inflation and low interest rate regime.

Looking forward, it is possible that with the progress towards the possible opening up of the real estate mutual funds industry and the participation of financial institutions into property investment business, it will pave the way for more organized investment real estate in India, which would be an apt way for investors to get an alternative to invest in property portfolios at marginal level.

Investor’s Profile

The two most active investor segments are High Net Worth Individuals (HNIs) and Financial Institutions. While the institutions traditionally show a preference to commercial investment, the high net worth individuals show interest in investing in residential as well as commercial properties.

Apart from these, is the third category of Non-Resident Indians (NRIs). There is a clear bias towards investing in residential properties than commercial properties by the NRIs, the fact could be reasoned as emotional attachment and future security sought by the NRIs. As the necessary formalities and documentation for purchasing immovable properties other than agricultural and plantation properties are quite simple and the rental income is freely repatriable outside India, NRIs have increased their role as investors in real estate

Foreign direct investments (FDIs) in real estate form a small portion of the total investments as there are restrictions such as a minimum lock in period of three years, a minimum size of property to be developed and conditional exit. Besides the conditions, the foreign investor will have to deal with a number of government departments and interpret many complex laws/bylaws.

The concept of Real Estate Investment Trust (REIT) is on the verge of introduction in India. But like most other novel financial instruments, there are going to be problems for this new concept to be accepted.

Real Estate Investment Trust (REIT) would be structured as a company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centres, offices and warehouses. A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties.

Some REITs also are engaged in financing real estate. REITs are pass-through entities or companies that are able to distribute the majority of income cash flows to investors, without taxation, at the corporate level. The main purpose of REITs is to pass the profits to the investors in as intact manner as possible. Hence initially, the REIT’s business activities would generally be restricted to generation of property rental income.

The role of the investor is instrumental in scenarios where the interest of the seller and the buyer do not match. For example, if the seller is keen to sell the property and the identified occupier intends to lease the property, between them, the deal will never be fructified; however, an investor can have competitive yields by buying the property and leasing it out to the occupier.

Rationale for real estate investment schemes

The activity of real estate includes a wide range of activities such as development and construction of townships, housing and commercial properties, maintenance of existing properties etc.

The construction sector is one the highest employment sector of the economy and directly or indirectly affects the fortunes of many other sectors. It provides employment to a large work force including a substantial proportion of unskilled labor. However for many reasons this sector does not have smooth access to institutional finance. This is perceived as one of the reasons for the sector not performing to its potential.

By channeling small savings into property, investments would greatly increase access to organized institutional finance. Improved activity in the property sector also improves the revenue flows to the State exchequer through-increased sales-tax, octroi and other collections.

Real estate is an important asset class, which is under conventional circumstances not a viable route for investors in India at present, except by means of direct ownership of properties. For many investors the time is ripe for introducing product to enable diversification by allocating some part of their investment portfolio to real estate investment products. This can be effectively achieved through real estate funds.

Property investment products provide opportunity for capital gains as well as regular periodic incomes. The capital gains may arise from properties developed for sale to actual users or direct investors and the income stream arises out of rentals, income from deposits and service charges for property maintenance.

Advantages of investment in real estate

The following are the advantages for investing in Real Estate Investment Schemes

• As an asset class, property is distinct from the other investment avenues available to a small as well as large investor. Investment in property has its own methodology, advantages, and risk factors that are unlike those for conventional investments. A completely different set of factors, including capital formation, economic performance and supply considerations, influence the realty market, leading to a low correlation in price behaviour vis-à-vis other asset classes.

• Historically, over a longer term, real estate provides returns that are comparable with returns on equities. However, the volatility in prices of realty is lower than equities leading to a better risk management to return trade-off for the investment.

• Real estate returns also show a high correlation with inflation. Therefore, real estate investments made over long periods of time provide an inflation hedge and yield real returns

Risks of investment in real estate

The risks involved in investing in real estate are primarily to do with future rental depreciation or general property market risk, liquidity, tenancy risk and property depreciation. The fundamental factors affecting the value of a specific property are:

Location – The location of a building is crucially important and a significant factor in determining its market value. A property investment is likely to be held for several years and the attractiveness of a given location may change over the holding period, for the better or worse. For example, part of a city may be undergoing regeneration, in which case the perception of the location is likely to improve. In contrast, a major new shopping center development may reduce the appeal of existing peaceful, residential properties.

Physical Characteristics – The type and utility of the building will affect its value, i.e. an office or a shop. By utility is meant the benefits an occupier gets from utilizing space within the building. The risk factor is depreciation. All buildings suffer wear and tear but advances in building technology or the requirements of tenants may also render buildings less attractive over time. For example, the need for large magnitude of under-floor cabling in modern city offices has changed the specifications of the required buildings’ space. Also, a building which is designed as an office block may not be usable as a Cineplex, though Cineplex may serve better returns than office space.

Tenant Credit Risk – The value of a building is a function of the rental income that you can expect to receive from owning it. If the tenant defaults then the owner loses the rental income. However, it is not just the risk of outright default that matters. If the credit quality of the tenant were to deteriorate materially during the period of ownership then the sale value will likely be worse than it otherwise would have been.

Lease Length – The length of the leases is also an important consideration. If a building is let to a good quality tenant for a long period then the rental income is assured even if market conditions for property are volatile. This is one of the attractive features of property investment. Because the length of lease is a significant feature, it is important at the time of purchase to consider the length of lease at the point in time when the property is likely to be re-occupied. Many leases incorporate break options, and it is a standard market practice to assume that the lease will terminate at the break point.

Liquidity – All property investment is relatively illiquid to most bonds and equities. Property is slow to transact in normal market conditions and hence illiquid. In poor market conditions it will take even longer to find a buyer. There is a high cost of error in property investments. Thus, while a wrong stock investment can be sold immediately, undoing a wrong real estate investment may be tedious and distress process.

Tax Implications – Apart from income tax which is to be paid on rental income and capital gains, there are two more levies which have to be paid by the investor i.e. property tax and stamp duty. The stamp duty and property tax differ from state to state and can impact the investment returns ones expected from a property.

High Cost Of Investment – Real Estate values are high compared to other forms of investment. This nature of real estate investment puts it out of reach of the common masses. On the other hand, stocks and bonds can now be bought in quantities as small as-one share, thus enabling diversification of the portfolio despite lower outlays. Borrowing for investment in real estate increases the risks further.

Risk Of Single Property – Purchasing a single – property exposes the investor to specific risks associated with the property and does not provide any benefits of diversification. Thus, if the property prices fall, the investor is exposed to a high degree of risk.

Distress Sales – Illiquidity of the real estate market also brings in the risk of lower returns or losses in the event of an urgent need to divest. Distress sales are common in the real estate market and lead to returns that are much lower than the fair value of the property.

Legal Issues – While stock exchanges guarantee, to a certain extent, the legitimacy of a trade in equities or bonds and thus protect against bad delivery or fake and forged shares, no similar safety net is available in the property market. It is also difficult to check the title of a property and requires time, money and expertise.

Overall keeping an eye on market trends can reduce most of these risks. For instance, investing in properties where the rentals are at market rates, also, investing in assets that come with high-credit tenants and looking for lease lock-ins to reuse tenancy risk are simple guidelines to follow.

Future Outlook

The real estate market is witnessing a heightened activity from year 2000 both in terms of magnitude of space being developed as well as rational increase in price. Easy availability of housing loans at much lesser rates has encouraged people who are small investors to buy their own house, which may well be their second home too.

High net worth individuals have also demonstrated greater zeal in investing in residential real estate with an intention of reaping capital appreciation and simultaneously securing regular returns.

In the wake of strong economic growth, real estate market should continue to gain momentum resulting in falling vacancies in CBD areas and more development in suburbs; it is unlikely that commercial property prices will rise or fall significantly, beyond rational reasoning.

As the stamp duty on leave and license agreements has been further reduced, it should further attract to deal in this manner encouraging the investors and the occupiers.

With current budget focusing on infrastructure, it will attract quality tenants and add to market growth. Heighten retail activity will give upward push for space requirement.

Further, the proposed introduction of REMF (Real Estate Mutual Funds) and REIT (Real Estate Investment Trust) will boost these real estate investments from the small investors’ point of view. These foreign investments would then mean higher standards of quality infrastructure and hence would change the entire market scenario in terms of competition and professionalism of market players.

Looking forward, it is possible that with evident steps of the possible opening up of the REMF industry and the participation of financial institutions into property investment business, it will pave the way for more organized investment in real estate in India, which would be an apt way for retail investors to get an alternative to invest in property portfolios at all levels. Overall, real estate is expected to offer a good investment alternative to stocks and bonds over the coming years.

Real Estate Terminology Explained

Buying a new home can be a daunting project. If this is your first time there will be words and phrases that are used that might as well be in a foreign language – terms like amortization, mortgage, buyer’s agency, appraisal, home inspections, property surveys, septic systems, and the list goes on. Even if you are a repeat buyer, some of these terms may still be a bit fuzzy, especially if you didn’t have the terms fully explained to you first time around.

Sure, you could research the words yourself, however, it is nice to have them explained in one place, and you may not even realize there are others you could learn about. Also, some terms I have included here may seem obvious but they have been included in order to have as complete a list as possible. However, since this is an introductory article meant to be an introduction to the terms used in the housing market, the information presented is by no means as in-depth as it could be. There could be pages written about each of the items included in this list.

Being an informed buyer is a great place to be when searching for your first home, whether for personal residence or for investment. You need to know what is involved in that dream property!

TERMS

Amortization – the process of spreading payments out over time. In real estate this is the length of time that an owner chooses to take to pay off the mortgage. The amortization period is broken down into shorter lengths of time called terms. So a mortgage is spoken about in terms, for example, of a 30 year amortization with a term of 5 years.

Appraisal – an unbiased determination of the value of a property, used to determine how much a home should be mortgaged for. Typically performed by qualified certified appraisers.

Buyer’s Agent – a real estate agency agreement where the agent works for the buyer. It is becoming more and more popular to have buyer agency agreements signed by the prospective buyer, and this action provides benefits for both the agent and the buyer. The buyer benefits from the determined concerted effort the agent will provide for the buyer during the time of the contract. The agent benefits because if the buyer obtains a home anywhere other than through the agent, the agent will be compensated, again during the length of the contract. The length can be discussed and negotiated between the agent and the buyer.

Closed Mortgage – a mortgage provided by a financial institution that does not allow the borrower to pay off without penalty.

*N.B. – Be careful when signing for a closed mortgage as the financial institution may have very expensive costs associated with paying off a closed mortgage. In some cases, the penalty is 3 months worth of payments and in other cases the penalty is the amount of interest lost by the institution with early payoff. Read the terms carefully.

**N.B.B. – the decision to choose an open or closed mortgage should depend upon your long or short term goals. If you plan on selling the home within a short period of time then it may be a better option to go for an open term even though the rates charged are likely to be higher. It is important to discuss your real estate and financial plans with your banker or mortgage broker in order to get the best possible deal with the least cost.

Condominium – a type of property where a portion is set aside for individual personal ownership and another portion is set aside as common elements for which monthly condo fees are paid to support. Condo fees are collected to pay for common elements such as grounds maintenance, elevators, swim or exercise facilities, lighting and external features. Condominiums have written rules and by-laws that are in effect and where these rules conflict with the landlord and tenant act, it may be that the condo rules hold true. For example, condominium rules may prohibit the ownership of pets. BE sure to read the rules completely and contact legal advice if unsure on any component of the document. It is legally binding on the people who purchase a condominium.

Detached – a stand-alone house. Doesn’t share walls with any other unit.

Duplex – a 2 unit building, typically with one dwelling on top of the other dwelling, but it may also be side by side and with the entire unit being sold as a single entity.

Easement – an easement is a privilege given from one owner to another owner for the purposes of transporting across a piece of land. Farmer A owns a piece of land. Farmer B needs to cross Farmer A’s land to get to his own land. Farmer A allocated a portion of his land as an easement thereby allowing Farmer B unrestricted access to his own property. Easements stay with the property, not with the owner. The easement can be terminated – obtain legal advice.

Encroachment – the real estate definition of an encroachment is the use of an owner property by property belonging to a neighbour. For example, a roof overhang could cross a property boundary and this is an encroachment. It is important to obtain legal counsel if an encroachment is suspected during the buying process.

Home Inspection – a non-invasive check of a home by a qualified home inspector to see if there are major defects that may arise in the near future. Items such as fire systems, water systems, electrical systems, are checked and deficiencies noted. As well, the inspector should look for areas where there is excessive heat loss, the age of the appliances. The inspection should include exterior items as well as interior items along with the age of the home and the related elements.

Land Survey – accurate measurement of a piece of property identifying frontage, width, depth, and includes easements, and encroachments, as well as positioning of existing structures.

Life Lease – type of ownership where the buyer only buys the rights to live in the property. Land transfer taxes are not paid because the ownership doesn’t come to the buyer but remains with the building or corporation. Depending on the corporation a life-lease owner may or may not be eligible to earn a profit on the investment.

Mortgagea fancy term for loan, used in the housing market. Instead of a house loan you have a house mortgage.

Open Mortgage – a mortgage provided by a financial institution that allows the borrower to pay it off completely without penalty. Because it reduces the amount of control that the financial institution has over this particular type of mortgage, the interest amount charged by the institution tends to be higher than a closed mortgage.

Seller’s Agent – the real estate agent who is working directly for the seller. This gives the seller the concerted effort of the agent for the purpose of selling the home.

*N.B. – When two individuals use the same agent to buy and sell the home there is a conflict of interest on the real estate agent. The real estate agent’s objective when selling is to get the highest price possible for the home. The real estate agent’s objective when buying the home is to get the lowest price possible for the home. This in and of itself creates a conflicting environment.

Semi-Detached – a type of home that shares 1 common wall. Land size is usually similar to that of a completely detached home and the homes operate as two separate entities.

Septic Systems – A closed system, self-contained. A sewage disposal system for homes that are not connected to the municipal water systems. A qualified inspection should be performed for capacity, age and structural integrity. As well, it is important to learn how to work with a septic system regarding types of waste that the septic system can safely handle. People on a septic system are also typically on a well-water system – get the water checked by a qualified water tester. Do not by-pass this step or you could end up with a huge bill for digging a new well.

Sewer Systems – these are the systems generally associated with homes in the city limits. There are two types of sewer systems – the external and the internal. The external carries away waste water from the streets and the internal carries away human waste. The external system often empties into a river, or pond or some other body of water. The internal system carries to the waste treatment plant to be cleaned before being emptied into a body of water. One thing to check for when purchasing a home is the type of pipes that are used to carry water into the home – lead or polyvinyl choride or pvc. Grants may be available to assist with the removal of lead pipes in a home.

Status Certificate – this is a set of papers obtained from a property management firm containing information relating to a specific registered condominium property. This report provides detailed financial information about the property along with any possible upcoming special assessments. It also includes information about the condominium rules as they are set out when the property was registered as a legal condominium.

Terms – the shorter time period that an amortization is broken into. This is the length of time for which a bank lends the money at a specific interest rate. The first term in your 30 year amortization could be 5 years with a 3.0% closed term.

Town-house – can also be called row housing. These types of homes have very little personal land, generally share a common municipal address and share at least 1 wall with another unit. Some inside units share 2 walls. Town-houses can be owned or rented. If owned they are known as a townhouse condominium. Condo fees apply where the residences are owned and cover items like grounds maintenance, snow removal, exterior finishes, and at times, exterior lighting and even water.

Variable Mortgage – this type of mortgage has a floating interest rate associated with it. Generally, variable rates are lower than both open and closed mortgages. However, if the interest rates are expected to increase it is wise to “lock in” your interest rate and convert your mortgage to either an open or closed mortgage, with an interest rate that doesn’t change, hence the term “locked-in”. Signing this type of mortgage requires the home-owner to be vigilant with regards to what the interest rate market is doing. Most mortgage companies allow the home-owner to lock-in a mortgage without penalty.

Real Estate Fields

As property ownership developed, real estate has also become a major area of business. Selling, renting and development of properties, homes or buildings are the sources of profit in the real estates business. Buying or purchasing properties is a significant investment. Every parcel of land has its exclusive characteristics that this industry has evolved into many diverse fields.

No two properties are the same and at least differ each in their location. This is the heterogeneous nature of a property as an investment which led to the practice of developing an opinion in the value of a property, usually the market value. This practice is called Real estate appraisal, Property valuation or Land valuation. This appraisal, although no license or certification is required in some areas, is performed by a certified appraiser or property valuer.

In Real Property Brokerage, a party acts as intermediary between the seller and the buyer of a property. In the United States and Canada, this intermediary party is called a Real Estate Broker whose job is to find a seller who wishes to sell his property and buyers who wish to buy and invest on real estates. While in the United Kingdom, as Estate Agent refers to the person or organization who markets these properties on behalf of the clients.

Improving land or replacing buildings for use is called Real Estate Development. These developments is different from building as developers themselves do not build but act as coordinators of activities of converting ideas into real property. Developers buy land, performs the deals, build or have builders build projects, create, imagine, control and orchestrate the process of development from the beginning to end. They work with architects, city planners, engineers, surveyors, inspectors, contractors, leasing agents and more along each step of this process of development.

In addition to ‘rent’, a tenant is also required to pay a Net Lease. This payment covers some or all of the property expenses such as taxes on the property, insurance, maintenance, repairs, utilities and other items. A Net Lease may be single, double, triple or bondable.

Real Estates are operated by property management which may be commercial, industrial or residential. Property management encompasses all processes, systems and manpower necessary to manage an acquired property such as acquisition, control, accountability, maintenance, utilization, and disposition.

Real Estate Marketing focuses on managing the sales aspect of a business property. There are various ways by which on-sale properties could be advertised and promoted. There is the traditional newspaper classifieds where the property to be sold are listed and printed in newspaper and printed reading materials. Another marketing tool is printed brochure for distribution. There are also modern property advertisement such as building a dedicated website for the properties on-sale, posting the same properties in on-line ads or participating in social networks and bookmarks.

Real Estate Investing comprise the purchase, ownership, management, rental and/or sale of properties for profit. While Relocation Services refers to relocating or transferring people or business to a different location or country.

A Corporate Real Estate describes the real property held or used by a business enterprise for its organizational purposes including the corporate headquarters, branch offices and a number of manufacturing and retail sites.

Real Estate Investment Properties & Ownership

The different types of investment properties that real estate investors consider vary in many different ways. We’ll identify the different types in this article and briefly discuss each one. We’ll also discuss the different ownership structures available. The basic types of investment properties include retail, office, apartment, mixed developments, and hotel/motels.

Retail properties include freestanding buildings and shopping centers. A freestanding building is one where it stands alone, not connected to any others. Shopping centers range from strip malls to super regional malls with many stores located in one area.

Office properties can be small (one, two or three tenants), office parks where many building exist serving different businesses or high rise complexes where many tenants are located in one building. Most will be located in downtown urban areas or in or near suburban towns/developments.

Apartments range from multifamily homes or “mother-daughters” to commercial units. A commercial apartment building will consist of at least 5 units. The larger the apartment complex, the higher the need for on-site management of the property.

Mixed developments consist of a combination of residential apartments, houses, and condos with office space and retail stores. Many communities that are growing at a fast pace have developers who are maximizing the feeling of community by mixing all different types of structures, creating small neighbhorhoods with all the essential aspects of small town, such as restaurants, entertainment, jobs for the local public, and of course, shopping.

Hotels and motels require excellent management if they are to be successful. Their locations near airports, business parks, inner cities and other active areas help to keep their doors open. Their failure rate is relatively high and must be managed correctly in order to remain in business.

These are the basic types of investment properties. The single family home is of course a consideration as well as other types of investments, however the properties featured in this article are appealing due to their income potential.

There are several different types of ownership and ownership structures. These are usually referred to as business entities in which investors hold real property. To keep things simple, we’ll simply cover the very basics of each structure and how each owns property.

A corporation is considered an artificial person. It is a separate legal entity. The corporation conducts its business according to the state law where the entity was created. The key here is “separate legal entity”. Due to the fact that the corporation is considered an artificial person, the real property is considered to be owned by one person, the corporation.

The management of the corporation depends on its board of directors which are elected by shareholders. The important point here is that any person who wishes to form a corporation and purchase real estate must speak to an attorney about managing the corporation appropriately, so that it operates the corporation according to state and federal law (if applicable).

Another business entity that is becoming more popular is the Limited Liability Company. This business entity takes advantage of the same type of liability protections as a corporation, however, it differs from the corporation in that it takes full advantage of the federal tax benefits and flexibility of a partnership. Again, check with your attorney in order to take full advantage of the benefits of this “pass-through” entity. Ownership of real property is also different and consulting an attorney to discuss how the LLC takes ownership of property is wise.

Some of the other entities include real estate investment syndicates, both private and public organized into a corporation, limited liability company, general partnership or limited partnership. Syndicates usually involve one or more projects and different types of ownership (tenancy in common, joint tenancy, etc.).

In conclusion, it’s very important that the new investor has, at the very least, a basic understanding of the different types of investment properties and ownership. It’s often something that is overlooked by new investors due to the complex nature of learning the business of investing, however, without at least consulting an attorney and doing some reading, the new real estate investor is bound to make costly mistakes that are definitely avoidable. It’s a great thing to learn from mistakes, however, making stupid mistakes like avoiding education due to a lack of patience is just plain old dumb!

©2007 noobdogs.com

Commercial Property Management in Orange County

Known for its weather, beautiful scenery, infrastructure, excellent school systems and public safety, Orange County is truly the talk of the town when it comes to real estate. There are various reasons that people are constantly vying for property in this area – both business and residential – and why more individuals and businesses are relying on companies specializing in property management in Orange County.

Located in California, it is the second most populous county in the state. It has become so popular as a business location that today companies are buying virtual property in the area in order to be able to sport an Orange County business card. Currently, it is home to several Fortune 500 companies such as Ingram Micro and First American Corporation. Several well established restaurant and fast food chains also have their headquarters here.

Commercial property management companies play a huge role to play in getting businesses the right property for their company. With relatively high prices, it has become extremely difficult for organizations without any real estate experience to purchase property here. This is where hiring a property management company in Orange County has come into play, as they are instrumental in helping buyers get the property they really want at affordable prices.

Apart from business property, it is also a fantastic residential area. It has some of the most expensive and exclusive neighborhoods in the entire United States. With its warm Mediterranean climate, it has 42 miles of beaches that you can access year-round, which also makes it a great tourist attraction. There are several notable shopping malls as well such as South Coast Plaza – the largest mall in California. It also boasts of being home to Disneyland – the second most visited theme park in the world. With so many reasons to live there, it is almost impossible to buy a house without getting help from a property management company in Orange County.

A good property management company in Orange County is aware of the trends in the locality’s real estate and knows all the properties that are available for sale. This information not only helps buyers but also allows people with property investments to rely on experts to handle them.

Another claim to fame of the county is that it is host to The Orange County Fair – a 23 day extravaganza held every summer in Costa Mesa. With over a million visitors every year and countless international artists who perform, this is the ninth largest fair in the United States. So popular has this place become that it is commonly depicted in popular culture. Take television shows such as The O.C., Modern Family and Arrested Development, for example, that are based on and set in this county.

If you’re looking for real estate in the area – which you have every reason to want – a property management company in Orange County is a must.

Seven Habits of Highly-Successful Real Estate Investors

I have been asked a number of times about the common traits of successful real estate investors, owners and operators. So I’ve given it a little thought and stolen a catch phrase from Stephen Covey and originated the following Seven Habits of Highly Successful Real Estate Investors. Whether you’re investing for wealth development, income, tax shelter or asset growth, these habits will hold true for you. At least give them a read and a thought or two. They can help and I hope they’ll help you.

From my experience I believe that the following seven principles are consistently understood and implemented by successful investors. Let’s review what they are and why they’re important.

1. Reduce the risk of negative cash flow by not overleveraging. When you over borrow for a piece of real estate the property must earn enough money to pay its traditional operating expenses and debt service. Unless you are able to buy the property at significantly below its value, when you over-leverage you will put the property at a huge disadvantage that will typically result in significant negative cash flow. I can’t speak for all investors, but I don’t like negative cash flow!

2. Reduce the risk of property/ casualty losses or related law suits by purchasing adequate coverage from a reputable insurance firm. Sometimes an owner may think that insurance is an unnecessary expense, after all, they never plan to use it. So they get the cheapest coverage they can find. The biggest reason some policies are cheap is because they don’t cover much. This looks good until the disaster occurs and then you are financially crippled. Better to get adequate coverage and not worry about it. It says in the Good Book that if you are prepared you shall not fear. Proper insurance makes for proper preparation.

3. Reduce the risk of financial devastation caused by major repairs or upgrades by initiating an inexpensive preventative maintenance program. By keeping a property in decent operating condition, all components will last longer, upkeep will be minimal and revenue sustained. If you let a property deteriorate, you will have major capital expenses, loss of revenue from down rooms, apartments or units and a drop in value. Better to spend a little now than lose a boat-load tomorrow.

4. Reduce the risk of tenant problems by actually doing a credit and rental history check on applicants. Just because somebody is vertical and ventilating does not mean you should rent to them. There are lots of firms that will do the research for you (for a small fee) to tell you whether an applicant has a history of suing landlords, running on leases or not making payments. You cannot make good decisions without accurate information. Credit and rental checks give you the data you need.

5. Reduce the risk of personal financial ruin by using a properly formed and maintained legal entity to own the real estate. The business value of using an LLC, Corporation or Partnership to own real estate is well documented. While it may be easier to just “do it in your name”, that would will allow any financial or legal problems to follow you home from work and invade your personal assets, bank accounts and investments. Chances are that you will sleep better being a stockholder or interest holder than you would as a sole owner.

6. Reduce the risk of business failure by implementing an effective property management system. With a few simple protocols and practices you can take the headache out of property management. Simple timed activities will remarkably reduce the time, effort and frustration of being a property manager. Take the time to establish your program early on or you’ll be investing tons more time than you need to in the future.

7. Reduce the risk of tax problems by keeping accurate books and records and using a CPA at tax time. You cannot manage what you cannot measure. You cannot measure what you cannot monitor. You need accurate books and records if you expect to be successful long term. Without good financial records you will never be able to maximize your yield. Get them started and keep them up to date.

There they are, seven habits that are simple, sweet, straight to the point and sure to work. While virtually every property owner you will ever meet will agree with these principles, yet only a few will actually live by them. It will be easy to recognize the difference. Those that put these principles into play will smile a lot and visit the bank to make deposits. Those that don’t will frown more and need to visit the bank to get extensions or new loans. I know which one I’d rather be. Keep smiling. If we can help we’d be glad to.

Triple-Net (NNN) Leased Real Estate – Ideal For Section 1031 Exchanges?

Section 1031 exchanges allow real estate investors to sell their investment properties and exchange them for similar or like-kind investments and defer the tax on the accumulated capital gains. Real estate is by far and away the most exchanged asset class allowed by the code. Triple-Net (NNN) Leased Real Estate could be a suitable replacement property when conducting an exchange. A Net lease refers to a tenant paying all or some of the properties’ operating expenses plus the rent. Before getting into the specifics of the NNN lease, one must know that there are several types of leases:

*Bond lease – The tenant is fully responsible for operating expenses, maintenance, repairs and replacement cost.

* Triple Net (NNN) lease – There are usually limitations on capital expenses. Lessee is responsible for property expenses including tax, insurance and maintenance.

* Net Net (NN) lease – Similar to NNN lease, except that landlord may be responsible for structural damage such as roof or bearing walls.

*Modified Net lease – The tenant pays utilities, maintenance, repairs and insurance. Landlord is responsible for property taxes and everything else.

Investors seeking suitable replacement property for their 1031 exchange look to NNN properties for following reasons: the structure may provide relief of management obligations, such as multi-family apartment complex owners that are looking for relief but still need the income, want to defer their tax responsibilities, and no longer want intensive landlord responsibilities. Investors may also consider NNN properties for assured income, pride of individual ownership and preservation of capital. NNN leases may also interest investors that want to provide a relatively easy estate asset for their heirs.

While NNN properties appear to be easy to own and operate, they can be a challenging type of real estate investment if the investor does not fully understand lease structure, such as lease term, which can be as long as 50 years. Even more so than typical commercial real estate, there is significant value in the lease; the lease can be more important than the building and/or the land to determining value of the real estate.

Due Diligence

It is important that investors understand the variations in different NNN properties before investing. One should review the investment, lease document, tenant, the real estate itself, and the type of seller. After finding potential property, one needs to obtain a copy of the lease and review thoroughly before getting into other due diligence aspects, which also include inflation, local tax risk, credit worthiness and type of use.

An investor must take inflation into consideration when deciding upon an NNN lease to invest in. Frequently, rent increases are not included in the lease. This is particularly prevalent with large publicly traded retail drugstore leases. . Leases that call for rent decreases are actually prevalent in older NNN lease. The theory was that the loan would be paid off so the landlord’s spendable income would be reduced. These leases are not common today, but careful consideration should be given to the affects of inflation on these two structures.

Secondly, there are tax risks to be considered with NNN real-estate. Local laws may affect the lease values. Taxes may increase during reassessment after sale, creating additional tax burdens that may not be covered in the lease, shifting responsibility to new landlord.

Furthermore, consider the credit worthiness of the investment. Again, there is considerable value in the lease so tenant quality is a critical factor of pricing NNN leased assets. Property price should reflect the tenant’s ability to meet the terms of the lease. Capitalization rate (annual rent divided by purchase price) should adequately indicate this variable risk factor. If there is a higher risk that the tenant should become insolvent over the long term, the capitalization rate should accurately reflect the increase in risk absorbed.

It is easy to find information on publicly traded companies but it is considerably trickier for privately held entities. Many were caught off-guard by Vicorp Restaurant, Inc.’s Chapter 11 filing, which is a private corporation. However, there are investigation options for potential purchases also through fee-based tenant underwriting services and they should be considered. In an ideal situation, your broker will provide some of this research for you and at least give you an opportunity to weed out poor credit risks prior to investing significant time and energy in the due diligence process.

Even with a substantial credit rating, one needs to consider how the type of business may affect investment value. General purpose properties that are easily converted to multiple tenant needs are more desirable than a single purpose property. Manufacturing facilities are prime examples where investment or building is designed specifically for that tenant, frequently without consideration for the market as a whole.

It is not unusual with Triple Net leased properties for the purchase price to exceed replacement costs and comparable sales on a per square foot basis. Be wary of over-market rent that can’t be achieved with another tenant in the future, particularly if the tenant’s credit quality is weak.

Types of NNN Sellers

NNN sellers fall into 3 categories – Investor Owner, Owner User and Build to Suit Developer.

With an Investment Owner, the primary lease has a limited amount of time remaining. Pay careful consideration to base rent, payment/expense history, and sales volume history to determine the likelihood of the tenant remaining in the property.

Secondly, the Owner User type of seller indicates that the NNN lease is well-suited for sale/lease back. Why would the owner want to become a tenant? Simply, the seller frees up capital and makes it easier to grow his/her business. Generally, real estate returns are lower than the returns the business is generating, so selling the underlying real estate and leasing back the property enables the owner to free up cash held in the real estate to invest in the more profitable business that occupies the property. Also, sale/leaseback leases are highly flexible, but investors should be particularly aware of any stipulated methods of rent increases and the possibility that the seller over improved the property to meet the company’s needs.

Finally, the build to suit developer is probably the most straight forward form of seller. They are professionals who have set up a system for the building and disposition of assets and readily have standard information available in packages for potential purchasers. Typically, their leases are more standardized, reducing contractual surprises. However, the downside to purchasing from a developer is the lack of or limited amount of performance history for the site. It is valuable to look at developer’s past projects to see how they fared.

Summary

In conclusion, when carefully structured and underwritten, NNN investments are a terrific, viable option for Section 1031 replacement property. They can help investors reduce their management responsibilities and hold a long term lease with a strong credited tenant. Due to long term nature of this type of real estate investment, however due diligence may be even more important than with other types of real estate investment.

Some critical factors to be observed when considering a NNN lease are:

*Is the lease actually NNN?

* Will the tenant succeed in the location?

*Are there any additional local tax issues?

*Is there adequate inflation protection in the lease?

Triple Net Leased Investments

Real Estate and Franchising

It is often discussed in Business Management Program or MBA School history books that Ray Kroc’s McDonalds was successful due to the fact that they controlled the real estate underneath every store, and the appreciation was their true asset. There is some truth to this, but that is not the only thing that made Ray Kroc successful.

Nevertheless, a business-person who can control their costs through owning the real estate and their business location, has a huge advantage and franchisors know the value of being able to control the real estate. Most franchisors, which sell franchised outlets that include locations, at minimum want to have a master lease, which allows them to terminate a franchisee, kick them out and control the location, until they put in a new franchisee.

Franchisors often have site selection teams, and now there are tools used by Commercial Real Estate people, along with ESRI software, can give location intelligence in a heartbeat. Smaller Franchisors just starting out use all sorts of strategies, some use very simple solutions, as all you need is someone who knows how to run it, in a room with a computer, online, even a stay at home mom, former Real Estate person. Then quick overview of the area or territory from locals. Large franchisors of course, have large real-estate departments.

Not all Franchised businesses need locations, those that do, well their franchisees can use help in securing funding, but owning the real estate does not “Always” make sense. When it does, it pays to have a real-estate person to be a go-between with franchisees, franchisors and locals who understand the market. Real Estate is a big part of modern day franchising for many franchised companies.