Cherrytree Group LLC Blog

....by Warren Kirshenbaum

Acquiring capital for real estate investments is a difficult and daunting task in this weak economy.  The uncertainty of the real estate market has become a strong barrier between investors and real estate developers, leaving developers with very few options for obtaining capital.  The absence of eager/willing investors has prompted real estate developers to seek innovative means of financing.  One attractive source of financing is through foreign investment that is generated through the EB-5 Green Card program.  EB-5 is part of the Immigration Act of 1990 established for the purpose of attracting foreign capital to the United States.  Under this program, 10,000 green cards are set aside every year for qualifying candidates.  A qualified candidate must satisfy three basic requirements in order to be considered for approval.  These basic requirements include 1) establishing a U.S. business or investing in an existing business that was created or structured after November 19, 1990, 2) the foreign national must have invested $1 million in the business or $500,000 when investing in targeted employment areas and 3) the newly created business must create full time employment for 10 U.S. workers for a specified amount of time.  Once these requirements are met, the EB-5 investors must also demonstrate that they, their spouses and their children under the age of twenty-one have resided in the U.S. for two years by means of conditional visas.  

The EB-5 Program promotes the infusion of foreign capital into the American economy. This benefits real estate developers seeking additional investment capital for their projects.  The U.S. developer can obtain financing from the foreign investor in order to commence or complete local development projects.  This is a great opportunity for American developers to secure capital for their projects in an economy where banks are denying loans and U.S. investors are reluctant to invest in new endeavors.  The program not only benefits U.S. developers, but also offers incentives to foreign investors desiring to live out the American dream.  In exchange for the investor’s capital being put to work in the U.S., they receive green cards for themselves and their families as long as all of the program requirements are met.  This is a win-win situation for both the U.S. developer and the foreign investor in achieving their goals of real estate investment/development and expedited permanent residency status, respectively.  

EB-5 applicants invest foreign capital through Regional Centers that have varying investments programs.  The Regional Center may be a state government agency, a corporation or a private venture.  Companies or private entities that are approved EB-5 Regional Centers can directly contact foreign investors who are interested in participating in the immigration program. The Regional Center must verify that the investor’s capital was earned through lawful activity; otherwise it cannot be utilized for the program.  Once all of the required elements are met, the Regional Center can begin the application process for the foreign investor.  Don’t know where there is a regional Center? The Cherrytree Group can help you find one in your area.

At the Cherrytree Group we have extensive knowledge in structuring investments to achieve the optimal return on investment. The EB-5 provides valuable investment to new real estate development projects.

REITs - Real Estate Investing Minus the Headaches

By Warren Kirshenbaum

Real Estate Investment Trusts (REITS) have traditionally offered many advantages to investors looking to the real estate market for diversification and tax advantages.

They generally have higher yields and lower portfolio turnover than stocks or stock funds, plus they have the potential for capital gains.

As real estate bottomed, the rumor was that REITs had come and gone. But more likely, the weak housing market may have opened the door for smaller investors to participate in the short- and long-term gains offered by REITs -- which is especially appealing to the many investors who can't afford to buy a home or who aren't interested in owning physical property.

How REITs Work

REITs are created to hold a pool of managed real estate properties or mortgages. The REIT itself is not actively managed, relying instead on a set portfolio of preselected properties that is maintained for the duration of the trust. When the trust matures, the portfolio is reset according to the REIT's investment objectives. Each trust is considered to be a distinct security, with each unit in the REIT constituting a proportional share of ownership in each asset held within the trust.

REITs tend to focus more on value than growth. Historically, REITs have provided higher yields than other types of fixed-income securities, making them attractive holdings for moderate income investors. They tend to be more immune to market volatility than stocks or stock funds because of their correlation with the real estate sector.

Categories of REITs

There are three basic categories of REITs: equity, mortgage and hybrid.

Equity REITs receive rental income from the properties held within the trust as well as the capital gains from property sales. These three different streams of income make equity REITs the most desirable of the three.

Mortgage REITs are considered to be riskier than equity REITs because of their vulnerability to changes in interest rates. As with all other fixed-income securities, the value of mortgage REITs can drop substantially if interest rates rise.

Hybrid REITs are a combination of equity and mortgage REITs. There are several different varieties of hybrid REITs: some are open-ended securities, while others are closed-ended; some have a limited life span, while others are perpetual. They can also be invested in as little as one property, although they are usually invested in a group of properties.

Taxation of REITs at the Trust Level

The IRS requires REITs to follow specific rules of taxation. First, they are taxed as a trust, and unitholders pay tax on the income they receive. In most cases, little or no income is held at the trust level, and usually 100% of the income is passed on to investors.

The IRS requires that REITs distribute at least 90% of the income generated by the trust’s portfolio to unit holders. However, they must follow the same method of self-assessment that corporations are required to use. This means that REITs have to obey the same valuation and accounting rules as corporations, but pass cash flow (instead of profits) directly through the trust to unitholders.

In most cases, REITs are generally exempt from taxation at the trust level provided they distribute at least 90% of their income to their unit holders. Even some REITs that adhere to this rule will still face corporate taxation on any retained income, depending upon the provisions spelled out in the initial trust indenture.

The taxation of REITs differs from that of other unit investment trusts. Because the government considers them to be the business of managing properties, rental income is treated as business income to REITs. Therefore, all expenses related to rental activities managed by the trust are deductible, just as business expenses can be written off by a corporation.

How Will You be Taxed on Income From a REIT?

Because they are rarely taxed at the trust level, REITs usually pay larger dividends than stocks, which can only pay dividends after being taxed at the corporate level.

For the most part, REIT dividends are taxed to the unitholder as ordinary income just like stock mutual fund dividends. This means that you will pay tax on these dividends at your marginal tax rate.

However, some REIT dividends are classified as “qualified” dividends, which are a special type of dividend taxed at the more favorable capital gain rates. Some of the dividends you receive from your REIT may also be considered a non-taxable return of capital. When this happens, your taxable income from the REIT is reduced accordingly for the year. Return of capital distributions reduce your cost basis and you will not pay tax on return of capital distributions until the REIT matures or you sell it.

by Warren Kirshenbaum

The Community Development Financial Institutions Fund (“CDFI Fund”), a program of the U.S. Department of Treasury released its 2010 Performance and Accountability Report on January 18, 2011, providing key insight into economic revitalization in 2010. The CDFI Fund promotes economic revitalization and community development through investment in, and assistance to community development financial institutions.

The Performance and Accountability Report demonstrated a continued level of interest in investment into low-income communities and showed a substantial increase in rewarded tax credits over 2009. In 2010, the CDFI Fund, which administers the New Markets Tax Credit Program (“NMTC”) distributed all $26 billion in its authority in 495 separate awards.

The NMTC was created as part of the Community Renewal Tax Relief Act of 2000 to provide a tax credit to taxpayers who provide investments to businesses in low-income communities.

Specifically, the NMTC stimulates capital investment in low-income communities by providing tax credits against federal income taxes to taxpayers who make equity investments (referred to as “QEI’s” or “qualified equity investments”) into a designated community development entity (“CDE”). Substantially all of the investments made by the taxpayer must be used to benefit low income communities in order to receive the tax credit, and that determination is made by reference to census tracts. The Performance and Accountability Report of 2010 announced that the demand for the NMTC is increasing. In 2010 over two thousand applications were submitted, containing requests totaling $202.6 billion in tax credit allocation. Accordingly, only 27% of applicants were selected to receive the awards with the average tax credit allocation award being $52.5 million. The tax credit allocations are limited, so they are approved by a competitive application process. This process of approving tax credit allocation is set up so that the most qualified organizations receive first consideration.

This past year also saw another record for investments raised – in the first three quarters of 2010, $3.1 billion in qualified equity investments were raised, surpassing the $2.8 billion raised for all of 2009. Furthermore, tax credit recipients reported making $3.5 billion of loans and investments in Qualified Active Low Income Community Businesseses – 64% of which went into real estate businesses. Lastly, in 2010, recipients also reported making over $168 million in direct investments into other CDE’s, and providing $12 million in financial counseling and other services to 7,139 businesses in low-income communities.

The 2010 report announced by the CDFI Fund shows the growing demand for investment capital in low-income communities. In sum, since the program’s inception, there has been a total of $15.8 billion of cumulative investments made via the New Market Tax Credit Program. If you are interested in how to qualify for these or any other potential tax credits, please call Warren today or fill out a Contact Us form.

If you are thinking about a strategy to make money in real estate, skip residential properties and focus on commercial real estate. This does not necessarily mean that you need to focus on commercial buildings, start with a small residential multi unit building. Buildings with five units or more are considered commercial.

Where the money happens is here; residential properties are not appraised in the same way by lenders as commercial real estate. This makes all the difference for someone looking to invest in commercial real estate.

Small residential rental properties are appraised by comparing the building to recently sold similar buildings within a mile radius. Therefore, to increase the appraisal value and recoup your down payment you have to either hold the property long enough for the value to be driven up by the market, or you need to improve the property itself. Neither of these options are very cost effective for making money quickly.

A commercial building is appraised by comparing the income and expenses to other comparable commercial properties in the area. So essentially, the lender subtracts the expenses from the rent roll and multiplies that by the capitalization rate for the vicinity of the property. The challenge is to look for properties with artificially low rent rolls. This can be found in a landlord who has owned a property for a long time or in buildings where the owner resides within and is looking to sell.

Therefore, in order to increase the value of the property and recoup your deposit, you can increase the rent roll and or decrease expenses. Not a costly endeavor in relation to the residential option, and if managed correctly, will not take an exorbitant amount of time.

You, as the investor, can recoup your deposit money in less than a year, giving you the funds to purchase a new property and repeat the strategy. With rates as they are now, still low despite the rise of the last couple months, this can make you, the investor, quite a bit of money in a few short years.