Tuesday, November 26, 2013
Monday, November 25, 2013
Tuesday, November 19, 2013
Taxes on Subject to Deal
and Arizona Real Estate Assets
Taxes on subject to deal can be a bit complicated. For example, you buy a property “subject to” an existing loan. You sell the property on an installment land contract or lease/option. What are the tax ramifications?
Part One – Determining Your Basis
Your tax basis is basically what you paid for a property. If you have a seller $2,000 and took a deed subject an existing loan of $189,000, your basis is $191,000. Basically, your basis in a subject to is cash paid to the seller, plus existing loan you are taking over. If you also paid money for back taxes and mortgage payments, that would also be part of your basis. So, if in the above example you paid $3,000 to the lender to cure the back payments, your tax basis is $194,000.
Part Two – Figuring Out Your Gain
If you resell the property for cash, the gain is easy to figure out -sales prices less your basis, less your sales costs (broker fees, closing costs, etc). If you resell the property on a lease/option, you haven’t really sold it at all, since a lease/option is generally not considered a sale until the tenant exercises the option to purchase. During the period of the lease, you would be taking depreciation, so there’s a recapture of that depreciation when you sell at 25%.
If you resell on an installment land contract (aka “contract for deed”), it IS a sale, even though title does not pass to the buyer. Thus, your gain is the sales price on the contract, less your tax basis. This is considered an “installment sale”, so your taxable gain is based on the cash received, plus any principal received in the year of sale. When the buyer pays off the balance of the contract, you have a gain in that tax year for the balance of principal received.
Part Three – The Interest
This part of the equation always gets people confused. In our example above, you bought a property from Sally Seller subject to the existing loan. You then sold it on a land contract to Barney Buyer. Who “owns” the property? For federal income tax purposes, there were two sales – from Sally to you, then from you to Barney. So Barney would be deducting the interest he is paying on schedule “A” of his federal income tax return as the “equitable owner”.
This appears confusing because you have the deed and Barney does not. It is also even more weird because Sally Seller’s lender is sending a form 1098 for the annual mortgage interest to the IRS in Sally’s name! Don’t let that fool you… the basic rule of the interest deduction is that the person who has an ownership interest in the property, uses it as his principal residence, and actually makes the interest payments is the one who is entitled to the deduction. So, in this case, Sally Seller neither owns the house nor makes the payments – she does nothing. Barney Buyer is the “equitable owner”, which give him an ownership interest. And, Barney is also actually making the interest payments, which he can deduct.
One last part of the equation – the interest you are paying on the underlying loan. If you buy subject to and sell on a wraparound, you are collecting payments from Barney Buyer and continuing to make payments on Sally’s underlying loan. The interest you pay is deductible as an offset (business interest) against the interest income you are collecting from Barney Buyer.
Your tax basis is basically what you paid for a property. If you have a seller $2,000 and took a deed subject an existing loan of $189,000, your basis is $191,000. Basically, your basis in a subject to is cash paid to the seller, plus existing loan you are taking over. If you also paid money for back taxes and mortgage payments, that would also be part of your basis. So, if in the above example you paid $3,000 to the lender to cure the back payments, your tax basis is $194,000.
If you resell the property for cash, the gain is easy to figure out -sales prices less your basis, less your sales costs (broker fees, closing costs, etc). If you resell the property on a lease/option, you haven’t really sold it at all, since a lease/option is generally not considered a sale until the tenant exercises the option to purchase. During the period of the lease, you would be taking depreciation, so there’s a recapture of that depreciation when you sell at 25%.
If you resell on an installment land contract (aka “contract for deed”), it IS a sale, even though title does not pass to the buyer. Thus, your gain is the sales price on the contract, less your tax basis. This is considered an “installment sale”, so your taxable gain is based on the cash received, plus any principal received in the year of sale. When the buyer pays off the balance of the contract, you have a gain in that tax year for the balance of principal received.
This part of the equation always gets people confused. In our example above, you bought a property from Sally Seller subject to the existing loan. You then sold it on a land contract to Barney Buyer. Who “owns” the property? For federal income tax purposes, there were two sales – from Sally to you, then from you to Barney. So Barney would be deducting the interest he is paying on schedule “A” of his federal income tax return as the “equitable owner”.
This appears confusing because you have the deed and Barney does not. It is also even more weird because Sally Seller’s lender is sending a form 1098 for the annual mortgage interest to the IRS in Sally’s name! Don’t let that fool you… the basic rule of the interest deduction is that the person who has an ownership interest in the property, uses it as his principal residence, and actually makes the interest payments is the one who is entitled to the deduction. So, in this case, Sally Seller neither owns the house nor makes the payments – she does nothing. Barney Buyer is the “equitable owner”, which give him an ownership interest. And, Barney is also actually making the interest payments, which he can deduct.
One last part of the equation – the interest you are paying on the underlying loan. If you buy subject to and sell on a wraparound, you are collecting payments from Barney Buyer and continuing to make payments on Sally’s underlying loan. The interest you pay is deductible as an offset (business interest) against the interest income you are collecting from Barney Buyer.
Friday, November 15, 2013
Wednesday, November 13, 2013
Monday, November 11, 2013
The Great Recovery - Woo-Hoo!
I Received an email newsletter from Co-Star this morning. Looking at the top headlines (Below) I was struck by sharp contrast in what's happening in the real world of business contrasted to the rosy picture the politicians and network news keep telling us about this recovery. This Week's Top Watch List Stories |
| Blockbuster News: Video Rental Store Era Comes To an End. Also This Week: ► Snap, Crackle and Shut: Kellogg Serving Up 4-Year Consolidation Plan; ► Up to $600 Million in Cost Synergies Expected from Office Depot-OfficeMax Merger; ► Golf Retailer Could Close up to 50 Stores; ► Big Lots Closing Existing Wholesale Operations; ► Announced Job Cuts Up Slightly in October; and ► Closures and Downsizings in Texas and Pennsylvania. |
Friday, November 8, 2013
AZ job growth expected to continue slowly
PHOENIX — There will finally be as many people working in Arizona at the end of next year as there were employed here in 2005. But a new report Thursday shows it will take perhaps three more years for the state to hit its pre-recession employment peak. And even at that point, the Arizona's jobless rate won't be anywhere close to what it was — below 4 percent — before the economy went into the tank. That's because while there will be as many jobs as there were in 2007, the state's overall population will have grown. In fact, Aruna Murthy, director of economic analysis at of the state Department of Administration, questions whether Arizona will ever see numbers that low again.
The most recent figures put Arizona's jobless rate above 8 percent, and Murthy said that the “new normal” unemployment rate for the state — if and when it gets there — easily could be in the 6-percent range.
Not surprisingly, most of new jobs will be in the Phoenix metro area, where about 70 percent of the population already resides.
But even looking at it another way, Murthy said that area of the state will get more than its fair share of the 59,000 jobs she expects for 2014. She figures 46,700 of them — or four out of every five — will be in Maricopa and Pinal counties.
Pima County is expected to add 7,800 jobs in 2014, with the other 13 counties dividing up the 4,400 remaining.
The report was released the same week that Gov. Jan Brewer announced two new employers for the state: a supplier for Apple and Gigya. That follows a parade of similar announcements by Brewer this year — all for the Phoenix metro area.
Asked what Brewer has done to land companies elsewhere in Arizona, press aide Andrew Wilder provided no specific examples.
Instead, he said the Arizona Commerce Authority, which she chairs, has been “instrumental” in creating 1,300 jobs in rural Arizona since its inception more than two years ago. And he said the authority also provides grants to rural communities to make infrastructure improvements to attract employers.
With the Phoenix area employment propping up the numbers, Murthy said Arizona is posting a faster job growth than the national average.
But even at that, Arizona has recovered fewer than half the more than 300,000 jobs lost since peak employment in late 2007. By contrast, the national average for job recovery is at 78 percent of pre-recession levels.
Even with more jobs being added, Murthy said that will not necessarily translate into better pay for Arizonans.
She said per capita income — a figure of all income against population — now is $34,806. Murthy said that, in inflation indexed dollars, that will actually drop by $2 by 2014.
In 2007, the figure for Arizona was $36,229.
Some of that, though, may be due to the state's increasing elderly population who get added to the equation even though they are not employed. Jack York, a senior economist at the agency, said the output per employee in Arizona is less than the national average.
But Murthy said, whatever the factors, she believes wages in Arizona will remain essentially flat.
Not all segments of the state's economy will grow at the same rate.
One of the biggest increases, at least from a percentage basis, will be Arizona's beleaguered construction industry. Murthy figures employment should increase by 7.1 percent in 2014, but that will bring the total number of people working in that sector up to just 132,700. That's just 54 percent of when it peaked seven years ago.
Murthy said she cannot say whether Arizona will ever need as many construction workers as it had in the boom days, when it made up close to one out of every 10 people in the workforce.
“We may not need that many homes as in 2006 when the rate of population growth was significantly steeper,” she said.
The state's health care industry, which never was affected much by the recession, will continue to grow. The prediction is it will add 12,600 jobs in 2014, a 4.7 percent increase.
At the other extreme, Murthy is predicting anemic growth in the manufacturing industry: It will add just 1,500 jobs, or about 1 percent. She said much of this can be tied to cutbacks in federal spending which directly affects the state's aerospace companies.
The private education industry, which includes such giants as the University of Phoenix, is expected to shed 1,700 jobs overall, a drop of about 3 percent.
Thursday's report also predicts that, when all is said and done by December, Arizona will have gained 48,500 jobs this year. That is 20 percent less than Murthy had predicted in last year's forecast for 2013.
Murthy said, though, there were factors that could not be known at the time.
The biggest is the “sequestration” of federal dollars, the forced cuts in both military and civilian spending after Congress could not agree on an actual budget deal. Murthy figures that move alone lost the state between 10,000 and 15,000 jobs.
On top of that was the increase in the payroll tax rate that took effect earlier this year. And she said the three-week government shutdown also took a toll.
The most recent figures put Arizona's jobless rate above 8 percent, and Murthy said that the “new normal” unemployment rate for the state — if and when it gets there — easily could be in the 6-percent range.
Not surprisingly, most of new jobs will be in the Phoenix metro area, where about 70 percent of the population already resides.
But even looking at it another way, Murthy said that area of the state will get more than its fair share of the 59,000 jobs she expects for 2014. She figures 46,700 of them — or four out of every five — will be in Maricopa and Pinal counties.
Pima County is expected to add 7,800 jobs in 2014, with the other 13 counties dividing up the 4,400 remaining.
The report was released the same week that Gov. Jan Brewer announced two new employers for the state: a supplier for Apple and Gigya. That follows a parade of similar announcements by Brewer this year — all for the Phoenix metro area.
Asked what Brewer has done to land companies elsewhere in Arizona, press aide Andrew Wilder provided no specific examples.
Instead, he said the Arizona Commerce Authority, which she chairs, has been “instrumental” in creating 1,300 jobs in rural Arizona since its inception more than two years ago. And he said the authority also provides grants to rural communities to make infrastructure improvements to attract employers.
With the Phoenix area employment propping up the numbers, Murthy said Arizona is posting a faster job growth than the national average.
But even at that, Arizona has recovered fewer than half the more than 300,000 jobs lost since peak employment in late 2007. By contrast, the national average for job recovery is at 78 percent of pre-recession levels.
Even with more jobs being added, Murthy said that will not necessarily translate into better pay for Arizonans.
She said per capita income — a figure of all income against population — now is $34,806. Murthy said that, in inflation indexed dollars, that will actually drop by $2 by 2014.
In 2007, the figure for Arizona was $36,229.
Some of that, though, may be due to the state's increasing elderly population who get added to the equation even though they are not employed. Jack York, a senior economist at the agency, said the output per employee in Arizona is less than the national average.
But Murthy said, whatever the factors, she believes wages in Arizona will remain essentially flat.
Not all segments of the state's economy will grow at the same rate.
One of the biggest increases, at least from a percentage basis, will be Arizona's beleaguered construction industry. Murthy figures employment should increase by 7.1 percent in 2014, but that will bring the total number of people working in that sector up to just 132,700. That's just 54 percent of when it peaked seven years ago.
Murthy said she cannot say whether Arizona will ever need as many construction workers as it had in the boom days, when it made up close to one out of every 10 people in the workforce.
“We may not need that many homes as in 2006 when the rate of population growth was significantly steeper,” she said.
The state's health care industry, which never was affected much by the recession, will continue to grow. The prediction is it will add 12,600 jobs in 2014, a 4.7 percent increase.
At the other extreme, Murthy is predicting anemic growth in the manufacturing industry: It will add just 1,500 jobs, or about 1 percent. She said much of this can be tied to cutbacks in federal spending which directly affects the state's aerospace companies.
The private education industry, which includes such giants as the University of Phoenix, is expected to shed 1,700 jobs overall, a drop of about 3 percent.
Thursday's report also predicts that, when all is said and done by December, Arizona will have gained 48,500 jobs this year. That is 20 percent less than Murthy had predicted in last year's forecast for 2013.
Murthy said, though, there were factors that could not be known at the time.
The biggest is the “sequestration” of federal dollars, the forced cuts in both military and civilian spending after Congress could not agree on an actual budget deal. Murthy figures that move alone lost the state between 10,000 and 15,000 jobs.
On top of that was the increase in the payroll tax rate that took effect earlier this year. And she said the three-week government shutdown also took a toll.
Thursday, November 7, 2013
In Retail Leasing, Advantage is Back in the Landlord’s Court
In National Real Estate Investoe
The era of retail tenants ruling the leasing market appears to have passed, retail real estate brokers say. While retailers in certain product categories and in smaller markets may still be pursuing rent concessions when negotiating lease renewals, in much of the nation negotiating tactics have returned to the status quo.
In addition to the general improvement in leasing fundamentals, the lack of new retail development over the past few years has made existing space more valuable, says John Bemis, executive vice president and retail market lead for the Southeast with real estate services firm Jones Lang LaSalle. That has meant that retailers with access to good locations don’t want to lose them when their leases come up for renewal.
“Concessions are definitely down, we are seeing a much smaller number of those this year and we are starting to see the length of terms on renewals starting to grow longer,” Bemis says.
For the most part, when requests for concessions do come in they involve commodity retailers such as electronics or book sellers and the tenants have to prove they need the concessions to survive for the landlords to consider granting some relief, he adds. Alternatively, retailers in rural markets and in class-C centers may have more leverage to negotiate better lease terms, notes Solomon Ets-Hokin, national chair of the retail services group with Colliers International.
“Retail is always a tale of multiple cities, not only across tenant classifications, but also across product [types],” he says. The same shopping center, for instance, could have multiple tenants clamoring to fill an outparcel pad with great visibility and few retailers willing to take a space with limited frontage just 200 feet away.
Overall, however, it’s now a landlord’s market. There are three kinds of tenants that can hope for concessions today: ones that provide a vital merchandise mix for the shopping center in which they are located; companies that could have a viable future; and retailer that can prove they need the concessions they are requesting, according to Bemis.
Long-term potential
When it comes to renewals, retailers are moving away from the trend of signing for the short-term only—three- to five years—and are more likely to renew for seven to 10 years, Bemis adds, in line with historical norms.
They may feel more comfortable exercising their renewal options now than in the past five years because they’ve gotten into the practice of considering all costs and benefits before deciding to renew. Ets-Hokin notes that they now look at sales levels at any given location and at relocation opportunities to figure out what makes sense before signing up for a longer-term.
“The retailers, prior to the Great Recession, were typically just exercising their options as written, at the stated price,” he says. “And post 2008, it became a very opportunity for [them] to negotiate better deals. You see much more discipline with option exercising; it’s much more about watching every penny.”
For example, a longer-term renewal makes more sense if they are planning to retrofit the store, according to Andrew Goldberg, vice chairman of retail brokerage services with CBRE. The good news for landlords is that “tenants are negotiating hard, but at the end of the day, they don’t want to give up their locations either,” he notes.
In addition to the general improvement in leasing fundamentals, the lack of new retail development over the past few years has made existing space more valuable, says John Bemis, executive vice president and retail market lead for the Southeast with real estate services firm Jones Lang LaSalle. That has meant that retailers with access to good locations don’t want to lose them when their leases come up for renewal.
“Concessions are definitely down, we are seeing a much smaller number of those this year and we are starting to see the length of terms on renewals starting to grow longer,” Bemis says.
For the most part, when requests for concessions do come in they involve commodity retailers such as electronics or book sellers and the tenants have to prove they need the concessions to survive for the landlords to consider granting some relief, he adds. Alternatively, retailers in rural markets and in class-C centers may have more leverage to negotiate better lease terms, notes Solomon Ets-Hokin, national chair of the retail services group with Colliers International.
“Retail is always a tale of multiple cities, not only across tenant classifications, but also across product [types],” he says. The same shopping center, for instance, could have multiple tenants clamoring to fill an outparcel pad with great visibility and few retailers willing to take a space with limited frontage just 200 feet away.
Overall, however, it’s now a landlord’s market. There are three kinds of tenants that can hope for concessions today: ones that provide a vital merchandise mix for the shopping center in which they are located; companies that could have a viable future; and retailer that can prove they need the concessions they are requesting, according to Bemis.
Long-term potential
When it comes to renewals, retailers are moving away from the trend of signing for the short-term only—three- to five years—and are more likely to renew for seven to 10 years, Bemis adds, in line with historical norms.
They may feel more comfortable exercising their renewal options now than in the past five years because they’ve gotten into the practice of considering all costs and benefits before deciding to renew. Ets-Hokin notes that they now look at sales levels at any given location and at relocation opportunities to figure out what makes sense before signing up for a longer-term.
“The retailers, prior to the Great Recession, were typically just exercising their options as written, at the stated price,” he says. “And post 2008, it became a very opportunity for [them] to negotiate better deals. You see much more discipline with option exercising; it’s much more about watching every penny.”
For example, a longer-term renewal makes more sense if they are planning to retrofit the store, according to Andrew Goldberg, vice chairman of retail brokerage services with CBRE. The good news for landlords is that “tenants are negotiating hard, but at the end of the day, they don’t want to give up their locations either,” he notes.
Wednesday, November 6, 2013
S&S Southwestern Management, LLCTalented Agents
We are looking for talented agents and teams to build our brokerage. Opportunities in residential sales, commercial sales and leasing, investment sales and property management. A variety of agent plans to fit your needs. Call today to schedule a confidential interview.
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Sondra Hale, Managing Member
Frank Nicholson, Designated Broker
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Apple deal: First Solar factory sold for $113.6M
- Kristena Hansen
- Reporter- Phoenix Business Journal
- Email | LinkedIn | Twitter | Google+
The buying entity on record is Platypus Development LLC, a Delaware corporation formed on Oct. 24 that is listed under its Phoenix law firm Greenberg Traurig LLP.
While this Platypus entity doesn’t show any obvious connection to Apple Inc., various news reports, such as from Tech Crunch, said Apple was purchasing the facility for its supplier, GT Advanced Technologies.
In an 8-K filing Tuesday with the U.S. Securities and Exchange Commission, GT said that on Oct. 31 — the same day the First Solar plant closed escrow — it had “entered into a lease agreement ... with an affiliate of Apple in order to lease a facility in Mesa, Ariz. that (GT) will use for the purpose of manufacturing the sapphire goods ...”
The transaction included the 1.32 million-square-foot-facility and 83 acres at the southwest corner of Elliot and Signal Butte roads, which is within the former GM Proving Ground now known as the Eastmark master-planned community.
In mid October, First Solar also sold 50 acres directly west of the plant for $3.48 million to an entity controlled by Bright International Corp., a manufacturer and product development services company to the professional and home hair, skin and personal care product industries based in Coolidge.
Saturday, November 2, 2013
What are the top cities for Arizona job growth? The answer will surprise you
- Tim Gallen
- Reporter- Phoenix Business Journal
- Email | LinkedIn | Twitter | Google+
If you said Phoenix you’re wrong.
Scottsdale? Guess again.
Give up?
Sahuarita.
The mining town 15 miles south of Tucson topped the list of best places in Arizona for job seekers by NerdWallet.
With an unemployment rate of 6.9 percent and a healthy 13.1 percent growth in the working-age population between 2009 and 2011, Sahuarita, near Green Valley, has a strong mining employment presence with Freeport-McMoRan and Asarco.
Residents in the southern Arizona town earn a median income of $72,781, according to NerdWallet.
Flagstaff ranked No. 2 followed by El Mirage, a suburb northwest of Phoenix.
With its 11.7 percent growth in working-age population between 2009 and 2011, as well as its low 6.3 percent unemploymen rate, Flagstaff’s presence on the list makes sense to me.
But El Mirage?
No offense intended to the residents in that northwest Valley suburb, but the inclusion of the landlocked 12-square-mile city, whose largest employers are the local school district, Walmart and a garbage company, has me scratching my head.
NerdWallet based its list on cities’ growth of working-age population, household income and unemployment rate.
Apparently, El Mirage fit the bill.
“The town government has embarked on an ambitious plan to build up El Mirage’s economy by revitalizing the downtown area and attracting new businesses,” reads NerdWallet’s blurb about El Mirage.
Last I knew, El Mirage’s downtown was in desperate need of a makeover. Granted, it’s been a while since I’ve cruised through El Mirage’s downtown, so maybe it has seen improvement.
But how much of a job creator such a revitalization effort will be remains to be seen.
The full top 10 list is below. To read more about the list, click here.
- Sahuarita
- Flagstaff
- El Mirage
- Queen Creek
- Surprise
- Goodyear
- Gilbert
- Marana
- Chandler
- Maricopa
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