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Real Estate

Tuesday, November 12, 2019

What Determines Real Estate Yield?


In real estate, yield is calculated by dividing the annual cash flows received by the value of the asset:

 

 Yield:  Annual Cash Flow
  Current Value of Asset

 

For example, a property that is worth $500,000 and returns $50,000 per year in rental income has a yield of 10%. Note that yield does not account for net cash flow or profits – only the amount of cash that an asset generates over a period of time. Comparably, for stocks and bonds, yield is the dividend or coupon payment divided by the security’s value.

For real estate, there are two methods for which investors are compensated: rental cash flows and capital appreciation. Total return for an investor is a combination of rental cash flows received plus capital appreciation of the asset.
Read more . . .


Monday, October 21, 2019

What Are the Tax Benefits of Real Estate Investing?


Real estate is an extremely popular asset class among the wealthy. In addition to stocks and bonds, wealthy investors often have significant direct real estate investments within their portfolios, whether that be residential, commercial, or industrial. Likely the biggest reason for direct real estate investing is diversification.
Read more . . .


Tuesday, September 17, 2019

What Are Opportunity Zones?


The Tax Cuts and Jobs Act of 2017 significantly altered the U.S. Tax Code through changes to capital gains treatments, personal deductions, and a series of other revisions. For real estate investors and businesses, the creation of opportunity zones offers significant tax reductions. The purpose of the opportunity zone program is to incentivize investors to redeploy capital to lower-income areas.
Read more . . .


Wednesday, July 17, 2019

What Is the 1031 Exchange?


Perhaps you’ve heard of the 1031 Exchange. Perhaps you haven’t. Regardless, you are likely unfamiliar with what a 1031 Exchange actually does and how it works. The 1031 Exchange is a federal tax-deferral option popular among real estate investors. Section 1031 of the Tax Code allows investors to swap like-kind assets without incurring taxes, which makes it a powerful investment tool for building wealth.


Read more . . .


Friday, June 14, 2019

What are the Key Legal Differences in a Commercial Lease Versus a Residenial Lease?

There are a number of differences between commercial and residential leases. The most significant is the “use” provision. The premises leased under a commercial lease may be used for a business purpose described therein such as a retail store, office or manufacturing facility (provided it is zoned for such use).  It should be noted that a lease cannot grant a right to use space that is in violation of the applicable zoning laws.  

The premises leased under a residential lease may be used as a dwelling unit or residence but the lease may specifically prohibit commercial use in the space per the zoning laws. This prohibition may be especially relevant today with many workers working remotely or running business out of their home.  Some residential leases and zoning laws allow certain specific professions to conduct business in a residential dwelling.  Examples of such professions are lawyers, architects or therapists (which are appointment based professions rather than professions open to the public). The residential lease may list the tenant and the particular permitted occupants. 

In addition to the difference in “use”under a commercial vs. residential lease, the balance of power may change the dynamic of the lease agreement.  For instance, there is a presumption that the parties to a commercial lease may be more sophisticated and need less protection to contract in a manner that suits the parties economic/business needs.  The balance of power between the consumer/residential tenant and landlord may be less even, causing landlord/tenant laws to evolve to protect the tenant’s rights.  For example, there are more procedural steps involved in evicting a residential tenant vs. a commercial tenant for public policy reasons.  Society doesn’t want people thrown out of their homes out on the street but is possibly more accepting of a business tenant losing its lease. The business tenant can find another space with less emotional turmoil then a family losing its residential lease. 

With regard to the security deposit, a residential security deposit may be required to be placed in a separate, interest bearing account for the benefit of a residential tenant.  A residential landlord may have to carefully detail any deductions from the security deposit and may suffer penalties for wrongfully keeping the security deposit.  Whereas, a business landlord may be permitted to keep the interest on a commercial lease security deposit as a fee for administrating the funds and may comingle it with other tenant security deposits.

There may provisions in a residential lease that are not commonly found in a commercial setting, such as provision governing adding roommates, pets, rent stabilization provisions, use as an Air B&B, or use and maintenance of residential features (i.e.  backyard, pool or garage).  In the same way a commercial lease will have provisions not commonly found in a residential setting, such as a provision regarding signage and escalators/elevators.

A commercial lease and a residential lease may have many similar provisions but for the reasons described above, the form of lease used are not interchangeable. 


Wednesday, June 12, 2019

How to Finance my Investment Real Estate in Rhode Island?


“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” – Andrew Carnegie, billionaire industrialist

For millions of Americans, real estate provides the opportunity to build wealth and pursue financial freedom. If you’ve considered real estate as an investment opportunity, you’ve undoubtedly come across the issue of financing your acquisition.


Read more . . .


Friday, June 7, 2019

What are the Legal Differences Between a Co-op, Condo, Townhome and House?

When shopping for a residence, a buyer may be attracted to its architectural style,  the lifestyle it offers, privacy, control over of making alterations or maintenance concerns and fees. When considering a cooperative apartment (a “Co-op”), a condominium unit ( a “condo”), a town house or a detached house, it is crucial to understand the pros and cons of each type of legal ownership.  

Condominium

This is a unit/apartment in a multi-unit building.  The owner owns a particular unit in fee simple and has use of the common areas with other unit owners but only owns a percentage of the common areas in proportion to its ownership interest.  A condo board will govern the business of the condo and approvals may be required to purchase the condo or lease it to a tenant.  Maintenance charges will be shared in proportion to the ownership interest. The Board will set rules and regulations  (“House Rules”) regarding use, alterations and shared areas to maintain community relations. A condo is also governed by sponsor rules when it is newly constructed by the developer and offered for sale through the offering plan.  

Co-op

A Co-op is  a unit/apartment in a multi-dwelling in which the owner does not own the apartment but has an interest in the entire co-op and holds stock in the corporation and a proprietary lease to the apartment. A purchaser of a co-op will have to interview before the Board and be approved. An owner of a co-op also may have restrictions on leasing the space to a tenant. There may be approval rights on the tenant and the term of the tenant’s lease. Common area maintenance charges will be shared in proportion to the ownership interest.  

Townhouse

This is a unit connected to a similar structure by a shared wall, often called the party wall. Unlike a condo, the townhome owner owns the exterior façade and roof of the structure and must maintain it.  

Each of the above legal structures offers community style living with common amenities such as a pool, gym or clubhouse.

House

A house is real property that is a dwelling residence (for living purposes not for commercial purposes)  and may be a single family home, a two-family or a multi-family home (3 or more units). It is a freestanding structure and the homeowner owns the structure and the land upon which it sits.  A house offers the most control over its use and privacy then the other legal ownership types described above.  

Other factors to consider when selecting a home with a certain legal structure, are the mortgage type and rates on that particular type of residence, the form of contract of sale and transfer documents will vary, as will the type of title insurance and the home owner’s insurance required.  Ultimately, a purchaser should carefully review the pros and cons of a the legal structure before purchasing a  particular type of home.


Friday, May 24, 2019

What are the Ways to Get Out of a Commercial Lease?

You found the perfect location for your business, retail store or office, and you are ready to sign the lease!  Unlike residential leases, which usually have a 1-year term, a commercial lease can be much longer, typically 5-10 years. Before signing a commercial lease, a business tenant should consider all the ways to get out of the lease should something go wrong with the business or the location.   

Commercial Tenant Exit Strategies

The first way to get out of a commercial lease is to simply walk away.  Close your doors and deal with the landlord. The landlord will keep your security deposit and, if you provided a personal guaranty, the landlord may go after the business and personal assets to recover the unpaid rent or damages.  

A business tenant should carefully review the lease to find out if the tenant is liable for the entire term of the lease (called a “rent acceleration” provision) or if the tenant is responsible for the balance of the lease until re-rented to a different tenant at the same or higher rent.  

It is also necessary to review the lease and the state specific law on the landlord’s duty to mitigate damages.  This duty requires a landlord to actively try to find a replacement tenant to “mitigate” the landlord’s damages. In states that do not impose such a duty (e.g. New York), the landlord can simply sit on the empty property and make the old tenant pay.  

Another exit strategy in a commercial lease can be found in the assignment and sublease provision. If the business tenant wants out of its commercial lease, it may assign the entire space for the entire term of the lease to an assignee via an assignment agreement.  Alternatively, a business tenant could sublease a portion of the space (or the entire space) for a portion of the term (which could be the term less one day via the sublease provision).  

Both an assignment and a sublease will likely require landlord’s review of the proposed assignment or sublease agreement, a review of the assignee’s or sublesee’s financials and landlord’s reasonable consent to the transfer.  The exit strategy of an assignment may provide for a full release of the business tenant’s obligations as well as release the original guarantor.  With a sublease, however, the business tenant remains on the hook for the lease if the subtenant doesn’t pay rent or breaches the lease in some way.  For these reasons, an assignment is a more effective exit then a sublease.  

Finally, another exit strategy is to negotiate a buy out. If real estate market rents are on the upswing, the landlord may be willing to let a tenant pay a lump sum payment to be released from the lease. This leaves the landlord with vacant space to rent to a new business tenant at a higher rent.  A win-win for both parties. 

In the end, a business tenant should carefully review the exit strategies with an attorney before signing a commercial lease agreement.


Thursday, May 23, 2019

Federal Tax Reform Bill May Greatly Impact Commercial Real Estate


After a recent federal tax reform bill was approved, many are concerned with the law’s disproportionately negative impact on tax-heavy states, and the incentive for residents of such states to relocate to tax-free states such as Florida. 

However, there are very real and potentially significant impacts on commercial real estate in the South Florida area, as well as the industry at large. Although accountants, financial advisors, and tax attorneys are still working to explore all of the ways in which the tax reform bill will affect commercial real estate clients, there are certain impacts that are already clear:

Pass-through deductions

The tax reform bill now includes a pass-through deduction provision for Limited Liability Companies (LLC), partnerships, and S Corporations (S Corps). These corporate entities are common for businesses, as they help to protect individuals from personal liability. They have also provided the option for a pass-through taxation option, to avoid being taxed twice (once personally, and once through the company).
Read more . . .


Friday, May 17, 2019

What is a "Good Guy" Guaranty?

A commercial landlord will want protections in the event that the tenant fails to pay the rent or otherwise breaches the lease. A landlord can obtain such protection by reviewing a tenant’s financials and requiring a security deposit in an amount that provides adequate assurances.

Another way a landlord can get protection is to request a guaranty from another individual or entity that is not the tenant under the lease.  Generally, there are three types of guaranties available under a commercial lease:

  1. Full payment and performance
  2. Full payment only (monetary only and no lease performance obligations)
  3. “Good Guy” Guaranty, commonly used in the New York market (sometimes also referred to as a “Good Gal” Guaranty)

The person who signs a guaranty is called the Guarantor.  A guarantor will generally not want to take on such risk unless it has a substantial ownership or beneficial interest in the tenant. An example would be a parent company providing a guaranty for its subsidiary company or a barber signing a barbershop lease in his/her tenant legal entity but the hairdresser provides a personal guaranty by Mr. Steve Barber.  

A lease guaranty is not an agreement that should be entered into without careful review.  The landlord will state that the guaranty is a condition to the lease and an inducement to the landlord.  

 A “Good Guy” Guaranty limits the guarantor’s obligations under the lease and draws a line in the sand on the Surrender Date.  Returning the keys to landlord is often used as short hand for the surrender date, however, it may include other conditions. 

In sum, the surrender date can be defined as the date the tenant hands over the keys and possession to the landlord, vacant, broom-clean, with all occupants (i.e. tenants and subtenants), vacated with the premises in the condition required under the lease and all sums paid through the surrender date. 

A “Good Guy” Guaranty will be signed simultaneously with the lease and is often attached to the lease as an exhibit.  It will reference the parties to the lease and the date of the lease. The guarantor will guarantee to the landlord the full and prompt performance of all the terms agreed to by the tenant under the lease (as may be amended) and the full and prompt payment of all rent and other charges payable by the tenant under the lease until the Surrender Date. 

The guarantor agrees to make right all the tenant’s liabilities is he or she fails to do so.  Some examples of liabilities are unpaid rent, tenant bankruptcy or damages caused to the landlord by a tenant “hold-over.”  A tenant hold over is when a tenant stays in possession of the space after the expiration date of the lease and causes the landlord to lose the next tenant is had signed up and the legal fees associated with such hold over.  

In sum, a “Good Guy” Guaranty is a compromise to requiring a full guranty in that the Good Guy Gurantee reduces the guarantor’s exposure to payment and performance duties that arise on or before the Surrender Date. 


Friday, May 3, 2019

What is a Mechanic's Lean on my Real Property?

The law recognizes many types of liens on Real Property.  A lien is a claim or a means for enforcing the obligations of the owner of real property to pay for it.  Examples of liens placed on property include:

  • A judgment lien placed on real property because a judgment issued by a court was not paid
  • A tax lien on real property for the failure to pay to real estate taxes
  • A brokerage lien placed on the real property for failure to pay a broker a commission 
  • A mechanic’s lien which is a claim placed on real property by a party who provided labor or materials to improve the property and was not paid.   

“Mechanic’s” lien is merely a name and is not limited to mechanical work or work performed by a mechanic at a property (and not paid for by the owner.)  Mechanics’ liens cover any person or entity that provides labor or materials intended to improve real estate such as a painter, plumber, electrician, contractor, subcontractor, material-man or other tradesmen.  

In a commercial lease, a landlord will often require a “lien waiver” which is a document signed by the tenant that any work performed in the retail or office space was paid for and free and clear of mechanic’s liens placed on the owner’s building.  On the other hand, the lease may contain a provision protecting the landlord from having mechanics’ liens placed on its property for work or materials furnished by a worker hired by the tenant to make an alteration or improvement to the space.  If a mechanic’s lien is placed on the property, the tenant will need to provide a bond to cover the cost to have the lien removed.  Failure to “discharge” (i.e. remove) a mechanic’s lien will be a breach under the lease.

An owner cannot sell a property to avoid clearing up a mechanic’s lien.  A mechanic’s lien can will remain on the property even if the property is sold or otherwise transferred to a new owner.  A title report will show a list of liens and should be addressed by the seller and purchaser before closing the sale.

The Takeaway  

A mechanic’s lien is a valuable tool, which offers protection for workers who perform services and provide materials to real property.  The laws related to placing and removing (and bonding over) a mechanic’s liens are state and locale specific. In the end, consult an experienced real estate attorney for proper advice on mechanic’s lien laws in your state.


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The Law Offices of Richard Palumbo, LLC assists clients with Real Estate Law, Business Law, Probate, Evictions for Landlords and Property Damage matters in Rhode Island including Cranston, Warwick, Coventry, Johnston, Providence, Pawtucket, Central Falls and all areas throughout RI.



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