Real Deal REInvestor Network

With March Madness upon us, I thought I would share this video with the group even though it doesn't relate to real estate, it does have a great life message.  I received this link through an email I get from AllProDad.com.  Enjoy.


College basketball coach John Wooden won 10 NCAA championships at UCLA and was victorious in 88 straight games.  No other coach has ever reached even half of those staggering statistics.  But, more importantly, John is an outstanding human being and an ideal role model for young men.  Watch this moving video and learn about his incredible love for his wife and his secret to marriage.


http://www.allprodad.com/page.php?id=195

In my last blog post, I talked about ways to shift responsibility to pay for damages that may come from an injury on your property. This post will discuss ways to transfer liability away from yourself and further protect your personal assets. The real question is, how can you benefit from ownership but not have the personal liability?

 

There are a number of alternatives available for owning property in the United States. They come in a number of fancy names and an alphabet soup of letter designations including: C corp., S corp., LLC, LLP, LP, General Partnership, FLP, Land Trust, Living Trust, and Children’s Trust, just to name a few. Each entity has its advantages and disadvantages for asset protection purposes. Each entity also has specific tax issues that may affect how much you benefit from it monetarily. When picking an ownership structure you must consider not only liability issues but also tax issues. We will not address the tax issues in this discussion but I highly recommend that you consult your tax advisor (you do have one, don’t you?) prior to purchasing investment property in any structure.

 

The most familiar place to start our discussion is with the corporation. A corporation is a separate legal entity whose purpose is to allow you to contribute a certain amount of capital or an item (i.e. real estate), and generally limit your risk in the business venture to that item or the cash. You might lose what you contributed to the corporation, but the rest of your personal assets would not be at risk. Assuming your investment property is owned by a separate corporation of which you are the sole shareholder, and someone is injured on the property, the corporation would be sued as the owner, not you individually. If your company lost the lawsuit, it might lose the property, but your personal assets would be safe. However, in some states, a director or officer of the company might still be liable if they contributed to the damaging act or they had control over the act causing the damage. The keys to making a corporation work for asset protection purposes are to follow all corporate formalities required by your state and make sure that the corporation has adequate capital for the type of business it conducts. Undercapitalization of corporations is the undoing of many shareholders in protecting their personal assets.

 

The next group of structures is the partnerships which include the General Partnership, Limited Partnership, Family Limited Partnership, and Limited Liability Partnership. A General Partnership is nothing more than an agreement between two persons or entities to go into a business venture together. In this type of partnership, each partner can be held responsible for the other partner’s debts or obligations in the partnership. If your partner signed on a promissory note or opened a credit account and charged it up, the creditor can come after you for payment. This type of partnership offers no asset protection and has no place in your asset protection strategy.

 

A Limited Partnership (LP) is a partnership consisting of a general partner, who is personally liable for all the debts and obligations of the partnership, and one or more limited partners, who are only liable for the amount of money they contributed to the business venture. If the general partner is a corporation, it could limit the risk of the general partner. A Family Limited Partnership (FLP) is the same thing, just with the partners all being within the same family. A Limited Liability Partnership (LLP) varies from a Limited Partnership in that no general partner is required. Therefore each partner risks only the amount he has contributed to the partnership. Many consider a limited partnership one of the best asset protection entities available to real estate investors because it can be structured to severely limit the legal remedies available to those who file lawsuits against it. From a tax standpoint, it also allows you to spread the gains on the sale of assets, thereby reducing taxes. To see if this entity is right for you and your investment goals, see your attorney and your tax advisor.

 

An LLC or Limited Liability Corporation is a relatively new entity, now valid in all states. It provides the limited liability of a corporation with the tax advantages of a partnership. It is structurally similar to an LLP in that it doesn’t require a general partner. It can choose how it wants to be taxed for IRS purposes and can include in its operating agreement the same limitations on legal remedies that Limited Partnerships include to reduce liability. There may be tax issues in your state related to doing business as an LLC so seek competent tax and legal advice before proceeding with any entity structuring.

 

Finally, let’s briefly look at trusts for asset protection purposes. As a general rule, if you control any aspect of the trust, such as being the trustee, you have no protection from creditors. If you are a beneficiary of a trust, such as a land trust, your name might not be readily seen in public records, but in judgment proceedings to levy your assets, you will have to reveal your true ownership interest. Trusts can also create problems when working with banks and mortgage companies to obtain financing and they have their own special tax issues. Therefore, I don’t generally recommend trusts for asset protection. The one exception would be a Children’s Trust where you permanently transfer ownership of your asset or property to the trust for the benefit of your children. This can be good for longer term investments that you intend to give to your children anyway.

 

There are many good books available on asset protection strategies. First get educated. Then talk to your attorney and tax advisor about a strategy that fits your circumstances. Most importantly, start today.

 

 

Ed Young is a Florida licensed attorney who has been practicing law for 22 years in the Tampa Bay area. He is a member of the Board of Advisors and regularly advises clients on entity structuring and asset protection issues. He can be reached at elyoung2909@hotmail.com.

Asset protection is one of those phrases bantered around more and more these days in all sorts of places, especially in real estate investment circles. You’ve probably heard all the statistics about the number of lawsuits in America, so much so that you’d believe me when I say that 3 out of every 2 Americans will be faced with some kind of lawsuit in their lives (credit to Yogi Berra for that kind of statement). But what does it mean to you as a real estate investor and how can you benefit from thinking differently about liability as you go about your real estate business.

 

In its simplest form, asset protection is shifting liability from you to someone or something else. Legal liability generally follows ownership and responsibility. If you own something that causes harm to another, your name will be on the lawsuit to remedy that harm. If you have an employee who discriminates or is involved in harassment, you as the employer are generally responsible for their behavior. Each state may have variations of these principles, but these are the general rules of thumb.

 

The key then to asset protection is don’t own anything and don’t be responsible for anyone. Wow, that was easy! But can you live your life that way or do you even want to? Is there a way to have it all and still not be a target? Let’s explore some possibilites.

 

As a real estate investor, you should be familiar with title insurance to protect you against title defects when you purchase a property, homeowners insurance to protect the house and renter’s insurance to protect your tenants’ property. You may also have a general liability policy for your business or a personal umbrella policy to cover any excess liability. Insurance is generally the first line of defense for common liabilities. Your payment of the premium, shifts the burden of paying for a larger claim against you to the insurance company. The more insurance you have, the less risk you will have of coming out of your own pocket to pay for damages.

 

However, what happens to you if you have a rear end collision with a highly paid neurosurgeon’s car, his injuries leave him a quadriplegic and your auto insurance cannot cover the full amount of the claim. Or a drug deal goes bad at one of your rental properties and your tenant shoots innocent people who then sue you as the home owner for wrongful death of their loved ones. Your insurance company may not cover the full amount of damages and you could still be a target for the remaining amount. This is where your asset protection plan must come into play if you want to keep all your hard earned investments.

 

Your asset protection plan must begin now, BEFORE you actually need it. In a number of court cases, judges have undone asset protection plans that were structured up to three years before a party became liable. In fact, most judges will find a way to undo an asset protection plan that looks like it was structured to avoid liability. How do you overcome this trap? Talk to an attorney who is familiar with your type of business and regularly helps people structure their affairs to avoid liability. If your plan looks like it was put together as a normal part of your business and personal life, it is much more difficult for a judge to undo your plan.

 

What should your plan include? Two components – First, ways to avoid or shift responsibility to pay for damages and second, ways to keep your personal name off your assets. We’ve already touched on one way to shift liability through insurance. Another way to shift liability is to delegate responsibility by contract to someone else. For example, when you have an accountant prepare your taxes, he will accept liability to the IRS for his preparation errors. Similarly, hiring a management company to manage your properties can allow you to shift liability to them for items covered in your contract with them. Again, get an attorney involved in either drafting or reviewing any contract such as this to make sure you know where you stand and your assets are covered. Additionally, if you have others you have delegated authority to, make sure you have procedures in place so they don’t do or say things that they shouldn’t. A written procedures manual will help you be better organized and can potentially save you from liability.

 

In my next post, I will discuss some of the ways to keep your name off your assets so you can reduce the risk of losing everything in one lawsuit.

 

Ed Young is a Florida licensed attorney who has been practicing law for 22 years in the Tampa Bay area. He regularly advises clients on asset protection issues. He can be reached at elyoung2909@hotmail.com.

“Commercial and multifamily mortgage originations picked up in the fourth quarter, but remain at a low level in absolute terms,” said Jamie Woodwell, Vice President of Commercial Real Estate Research at the MBA. ”The trend shows stability coming back to the market, but the pick-up in volumes really indicates just how low origination levels had fallen.”

FOURTH QUARTER 2009 12 PERCENT HIGHER THAN FOURTH QUARTER 2008

The 12 percent overall increase in commercial/multifamily lending activity during the fourth quarter was driven by increases in originations for all property types except multifamily. When compared to the fourth quarter of 2008, the increase included a 105 percent increase in loans for hotel properties, a 101 percent increase in loans for retail properties, a 59 percent increase in loans for industrial properties, a four percent increase in loans for office properties, a one percent increase in health care property loans, and an eight percent decrease in multifamily property loans.

Among investor types, loans for life insurance companies saw an increase of 112 percent compared to last year’s fourth quarter. There was also a 17 percent increase in loans for commercial bank portfolios, an 82 percent decrease in loans for conduits for CMBS, and the dollar volume of loans for Government Sponsored Enterprises (or GSEs – Fannie Mae and Freddie Mac) saw a decrease of 26 percent.

FOURTH QUARTER 2009 15 PERCENT HIGHER THAN THIRD QUARTER 2009

Fourth quarter 2009 mortgage originations were 15 percent higher than originations in the third quarter 2009. Among investor types, loans for commercial bank portfolios saw an increase in loan volume of 39 percent compared to the third quarter 2009, loans for life insurance companies saw an increase in loan volume of 35 percent compared to the third quarter 2009, conduits for CMBS decreased by 50 percent during the same time span, and originations for GSEs decreased 15 percent from the third quarter to the fourth quarter 2009.

Compared to the third quarter of 2009, fourth quarter originations for health care properties saw a 58 percent increase. There was a 34 percent increase for retail properties, a 30 percent increase for hotel properties, a 19 percent increase for industrial properties, a four percent increase for multifamily properties, and a 12 percent decrease for office properties.

My observations:
This might be the start of the turnaround in commercial real estate, but still may be too early to tell.  Since this data is lagging the real market, it is never the cutting edge of the market.  From the last paragraph, it appears to me that loan applications are following the anticipated job opportunities, which is one of the keys to investing in commercial and residential properties.

Ed Young
HIS Real Estate Network

The Red Cross is pouring aid into Haiti after that 7.0 earthquake yesterday.  I found a way for each of us to help out with the relief effort for as little as $10.  Here is a piece from the Red Cross website explaining how we can be a part of the effort.

To help, people can make an unrestricted donation to the International Response Fund at www.redcross.org or by calling 1-800-REDCROSS (1-800-733-2767). The public can also help by texting “Haiti” to 90999 to send a $10 donation to the Red Cross, through an effort backed by the U.S. State Department. Funds will go to support American Red Cross relief efforts in Haiti.    

I also got an email from my missionary friend in NW Haiti after the quake and he says they were not severely impacted where they were, but felt the quake and after shocks.  He asks for prayer for other on their team who are in Port au Prince.

Ed Young
HIS real Estate Network

I came across a thought provoking article on All Pro Dads email that I get.  A portion of it is as follows:

Michael Jordan once commented that the word "if" is the worst word in the English language. Think about it. We spend so much time worrying... "if I lose my job" or "if I get sick" or "if my child does drugs." Or, as Mark Twain supposedly said, "The worst things that ever happened to me never happened."

There are a lot of reasons to worry about any situation in life.  As an attorney, I usually have to advise clients of all the "what if's" but ultimately I tell them, this is a business decision that needs you to take action.  So make the decision as best you can with all the information available and move on. 

This also reminds me of that famous line from the cartoon movie Meet the Robinsons - "Keep Moving Forward".  The whole family applauded and cheered for something that didn't work because it was a way to keep encouraging a person to move forward past their failure.  If only we could see things that way all the time.

Some days we really need to hear that from our friends and partners.

Ed Young
His Real Estate Network

This is amazing technology.  Just watching this will make you realize how brilliant creative minds think.  Now if I could just get my mind in gear like that!

http://www.ted.com/talks/lang/eng/pranav_mistry_the_thrilling_potential_of_sixthsense_technology.html

I had some one send me a bit of humor today in an email and  I wanted to share it with the group.  It reminded me of a Rodney Dangerfield routine or Jay Leno initating him in a monologue.  This is for all you members who don't think attorneys have a sense of humor!

So here goes..... drum roll and rim shots will ring in your ears if you catch the drift.

The economy is so bad...that I got a pre-declined credit card in the mail. 
  
The economy is so bad... I ordered a burger at McDonalds and the kid behind the counter asked, "Can you afford fries with that?" 
  
The economy is so bad...that CEO's are now playing miniature golf. 
  
The economy is so bad...if the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.
  
The economy is so bad...Hot Wheels and Matchbox stocks are trading higher than GM. 
  
The economy is so bad...McDonalds is selling the 1/4 ouncer. 
  
The economy is so bad...parents in Beverly Hills fired their nannies and learned the names of their children. 
  
The economy is so bad...a truckload of Americans was caught sneaking into Mexico . 
  
The economy is so bad...Dick Cheney took his stockbroker hunting. 
  
The economy is so bad...Motel Six won't leave the light on anymore. 

Ed Young
His Real Estate Network

No Escape From TARP for U.S. Banks Choking on Real Estate Loans

By Elizabeth Hester and Linda Shen

Dec. 7 (Bloomberg) -- As the U.S. economy pulls out of a recession and the biggest banks return to profitability, mounting defaults on commercial property may keep regional lenders from repaying bailout funds until at least 2011.

Unpaid loans on malls, hotels, apartments and home developments stood at a 16-year high of 3.4 percent in the third quarter and may reach 5.3 percent in two years, according to Real Estate Econometrics LLC, a property research firm in New York. That’s a bigger threat to regional banks, which are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients.

The concentration makes regulators less likely to let regional lenders like Synovus Financial Corp. and Zions Bancorporation leave the Troubled Asset Relief Program, analysts said. Smaller banks would remain stuck in TARP, while bigger lenders, including Bank of America Corp., repay the government and free themselves to set their own policies on executive pay.

“Community and regional banks basically became real estate banks in the past 25 years, and now real estate is on its back,” said Jeff Davis, an analyst at FTN Equity Capital Markets Corp. in Nashville, Tennessee. “The largest banks have other areas where they can make money, be it consumer lending, capital markets and asset management.”

Bank Failures

The stakes for taxpayers include whether they’ll get back $36.6 billion held by 35 of the largest regional lenders that received TARP money. Souring commercial real estate loans pose the biggest threat to the U.S. banking industry, according to October testimony to Congress by Sheila Bair, chairman of the Federal Deposit Insurance Corp., and Comptroller of the Currency John Dugan.

Regulators have shut 130 banks this year, all regional or community lenders, costing the FDIC more than $33 billion. Non- performing commercial property loans caused a majority of the failures, said Chip MacDonald, a partner specializing in financial services at law firm Jones Day.

“Somebody that has a lot of CRE exposure is going to be held to a higher standard” to redeem TARP preferred shares, said Paul Miller, a former bank examiner and now an analyst with FBR Capital Markets in Arlington, Virginia. “You’ve got to be careful they don’t allow these guys to pay back TARP, and then a year goes by and have to give it back to them.”

Commercial real estate loans “absolutely could be a factor” in whether regional banks can repay TARP funds, Bair said in an interview on Dec. 4.

Regional Lenders

Among 35 of the biggest regional lenders that retain TARP funds, commercial real estate and construction loans average 37 percent of total loans, compared with 9.5 percent at Citigroup Inc. and Wells Fargo & Co., the two biggest U.S. banks that haven’t announced plans to repay the government, according to data compiled by Bloomberg. The figures were derived from holdings at regional lenders that still have bailout money whose stocks are listed in either the 24-company KBW Bank Index or the 50-company KBW Regional Bank Index.

Of the 35 firms, 25 hold commercial real estate and construction loans equal to 30 percent or more of their total loans, according to FDIC data; seven have more than half of their loans in commercial property.

Nine of the banks with more than 30 percent of their loans in commercial real estate won’t show a profit for 2010, including Birmingham, Alabama-based Regions Financial Corp., Columbus, Georgia-based Synovus and Zions in Salt Lake City, according to Bloomberg’s survey of analysts.

Paying Back TARP

“To pay back TARP, they need to return to profitability, and for them to return to profitability, credit problems have to start to decline,” said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine.

Losses may hamper efforts of regional lenders to compete with bigger banks, such as Bank of America, ranked first by assets and deposits. The Charlotte, North Carolina-based lender, aided by profits from brokerage services and underwriting securities at its Merrill Lynch unit, announced last week that it would pay back the $45 billion it took from the government.

If Bank of America and Wells Fargo join JPMorgan Chase & Co. in redeeming TARP preferred shares, they’ll be free to press their advantage in markets they already dominate and to declare dividends and stock repurchases without seeking government approval. Bank of America and Wells Fargo finance about half of all U.S. home loans, and the four biggest banks -- Bank of America, JPMorgan, Citigroup and Wells Fargo -- account for more than a third of all U.S. deposits.

Diversified banks are also better able to capitalize on close-to-zero borrowing costs to make money by trading currencies, commodities and other assets.

Bank Stocks

Stocks of regional banks have taken a bigger hit than their larger peers. The KBW Regional Bank Index is down 28 percent this year. Bank of America and JPMorgan have posted gains this year, while Wells Fargo has dropped 9 percent.

There are more than 8,000 banks in the U.S., most of them community and regional lenders. Regional banks typically operate in several communities or states while lacking national or international operations.

Property owners and their bankers are facing losses because the recession cut into employment and consumer spending, pushing up vacancies at office buildings, shopping centers and hotels and bringing down asset values. Commercial real estate prices may drop as much as 55 percent from their October 2007 peak, Moody’s Investors Service said last month. Office vacancy rates may approach 20 percent in 2010, according to brokers at Jones Lang LaSalle Inc. and Grubb & Ellis Co.

‘Out of Whack’

Synovus, with $968 million in TARP money and two-thirds of its loans in commercial property and construction loans -- the highest of any TARP-holding bank in the KBW Bank Index -- posted five straight quarterly losses and is projected to lose money for all of 2010.

The bank’s failures include a $220 million loan to Sea Island Co., a Georgia real estate development firm, which it renegotiated and declared non-performing in April. Last month, co-lender Wells Fargo took over the deed to Sea Island’s 3,000- acre Frederica community on St. Simons Island that features a course favored by professional golfer Davis Love III.

“We got out of whack in the last four, five years, where we were pushing for growth, trying to keep up with the herd,” said Kevin Howard, Synovus’s chief credit officer. “Real estate, in the Southeast, is where you can get the growth. We let our percentages get higher than we normally have. We are fine, really, with moving it back.”

Zions Losses

Zions, Utah’s biggest lender and recipient of $1.4 billion from TARP, has posted four straight quarterly losses, and analysts are predicting the bank won’t return to profitability next year, according to Bloomberg data. Commercial property loans make up 57 percent of Zions’ portfolio, second-highest among banks in the KBW Index that haven’t repaid the government.

Collateral values are “stabilizing,” and while losses are expected to “increase somewhat,” they will be “extremely manageable” when compared with earnings, bank spokesman James Abbott said in an e-mail.

Other regional banks have seen defaults on projects ranging from a condominium-conversion project in Racine, Wisconsin, that was foreclosed on by Milwaukee-based Marshall & Ilsley Corp., the state’s biggest bank, to a subdivision in Oregon inspired by J.R.R. Tolkien’s “The Lord of the Rings.”

The Shire

Umpqua Holdings Corp., the Portland, Oregon-based bank that has 66 percent of its loans tied up in commercial property, sank $3.4 million into the Shire, a development in Bend, Oregon, with homes that have artificial thatched roofs modeled on the hobbit community in Tolkien’s trilogy. The developer defaulted in July, according to Oregon’s Bend Bulletin newspaper.

Umpqua CEO Raymond Davis said that while the bank did not experience a “significant loss” on the Shire, its real estate portfolio was “showing signs of weakness.” The bank has the highest commercial-property loan ratio of any lender in the regional bank index still holding TARP funds.

Davis said that Umpqua has set aside cash to repay the $214 million in TARP funds that it took from the government last year and is waiting for the economy to show further signs of stabilization before returning the money.

The worst may still be ahead for regional banks, according to Moody’s, which calculated that the non-performing loan ratio for commercial mortgages is higher than for residential ones.

“The commercial real estate problem is looming, and a bit like the rat going through the snake,” said William Bartmann, CEO of Bartmann Enterprises in Tulsa, Oklahoma, and former chairman of Commercial Financial Services, which was among the first companies to purchase assets from regulators during the savings and loan crisis. “We can see that it’s coming, it just hasn’t shown up yet.”

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net.

 Luis - I would love to hear your analysis and comments on this article for our network.