More New York City developers are taking advantage of a program that offers green cards to foreign investors of development projects, according to the Wall Street Journal, as stateside financing remains constricted in the rocky economic climate. The federal program, known as EB-5, grants two-year green cards in exchange for a $500,000 or more investment in a real estate development. The strategy has gained traction among developers like Forest City Ratner, which has received $249 million from 498 investors taking advantage of the program at his Atlantic Yards development. Experts like Evan Zeppos, a spokesperson for developer Jackson Street Management, said that EB-5 is increasingly useful in the down market. “It’s an attractive alternative,” Zeppos said. “Any developer knows now that for financing, the faucet is still very tight.”

Congress has proposed legislation touted as taxing partnership capital gain allocated to investment managers at ordinary income rates. The “carried interest” legislation as drafted is vastly broader, affecting interest holders in many existing partnerships, not just managers of private equity and other investment funds. The legislation would affect small businesses, family partnerships, corporate joint ventures and other partnerships that are not commonly thought to be the subject of the legislation.

No “carried interest” need be involved. No conversion of capital gain into ordinary income is required. It applies to corporations, who pay the same tax rate on both types of income. Taxpayers caught up in the legislation would be taxed at higher rates on their shares of partnership capital gains, be unable to deduct all or a portion of their share of partnership losses, be denied the use of common nonrecognition provisions (no tax free property distributions), and may find that they are subject to the 2.9% hospital insurance (“HI”) tax on a portion of their partnership income (if they are actively involved in the partnership’s business).

The legislation applies to any partner who renders substantial services to a partnership that owns “specified assets.” Specified assets include rental real estate, stock and securities, and partnership interests. Most tiered partnership arrangements are thus covered. Extremely broad related party rules greatly extend the proposal’s reach.

The proposal legislation contains two exceptions, both of which are difficult to satisfy. One is for partnership structures whose allocations are “straight up”, including allocations in all lower tier partnerships. A second is for allocations with respect to “qualified capital” of the service provider for partnerships which have unrelated partners who get the same allocations. This exception is unavailable for family partnerships (no unrelated partners) and many real estate partnerships (qualified capital is reduced by losses; partners with negative tax capital accounts have no qualified capital).

The following link contains a summary of the proposed legislation and several examples illustrating its unexpected consequences. Particular attention should be given to Examples 1 (family real estate partnership, all equal partners: losses denied, capital gains benefits curtailed), 2 (same, transfer of interest in divorce taxed), 3 (straight-up family operating business partnership, tiered structure: operating losses not deductible and converted to capital losses on disposition of business) and 5 (publicly-traded corporation, internal partnership: losses not deductible, gain triggered by “tax free” merger).

The legislation has not been enacted, and may be modified prior to passage. Moreover, the Treasury Department may ameliorate the impact of the rules through regulations. As currently drafted, however, the potential adverse impact of this proposal cannot be overstated. For more information click here.

Commercial property transactions can be complex and require detailed analysis and care right from the due diligence stage to the deal structuring and closing phase.

The first step in the process is assessing a deals attractiveness. While less experienced investors would be strongly advised to consult with professional advisors before investing, there are certainly early indicators that can be sought to assess if this particular deal warrants further inspection.

Tenant:

When purchasing a building with a tenant in place, the identity of that tenant is of serious importance. The tenant isn’t simply living in your building, but doing business within your property. Their ability to pay your rent is predicated upon the health of their business and not just on their ability to draw a paycheck.
In order to lower your Tenant Risk you must understand the nature, and more importantly strength of the businesses of each of your Tenants.

Whereas in Multifamily you might stop at reviewing the Tenant’s background check and payment history … in Retail, Office and Industrial you have to go further and really research the viability of each Tenant’s business. This has never been more important than in today’s economy.

Losing a tenant and suddenly finding yourself with a vacancy to deal with can lead to serious ramifications for your investment.

Lease:

If your tenant, or more specifically anchor tenant, should fail or move out at the end of its lease, the building as a whole may require restructuring and retrofitting or, at a minimum, some downtime until a new anchor tenant can be found.
With this in mind, you, as the potential owner, are looking to see as long a period of time as possible remaining on the lease. Ideally, you want to have initiated your exit strategy before any new lease is required as this will mitigate any risk of being left with a large vacancy.

Market:

The investment documentation will most likely include a market analysis detailing the current environment and how the investment sits, or will sit, within the market. This is vital and warrants a thorough investigation by the potential investor. Are the figures taken from a reliable source? Are the figures relevant? Is the report based on assumptions, or true analytical data? Is the data current? Does it relate to the correct market?

Sponsor

Like all property investment opportunities, ultimate success truly rests with the sponsor’s ability to perform as planned. Their experience, and preferable success, in the market place is obviously the best indicator of the likelihood and one should be on the look out for a strong bio. In addition, one would like to see the sponsor contributing a percentage of the required equity themselves. This is a statement of their confidence in the deal, as they are not only risking your money, but their own.

Should you pay upfront fees to secure financing for you real estate project? It is the 64 million dollar question. For developers it is hard to pay upfront not knowing if the broker will succeed in securing the financing. For the brokers it is often the only way that they can cover their overhead expenses.  With ten deals a day to review but only 1 out of 100 getting all the way to financing it is important to have a regular income stream to cover the cost of deal analysis. So when should a developer agree to pay up-front application fees?

Here are 7 things to watch out for with up front fees:

1. Is the fee a reasonable amount to allow the source to compete their due diligence or is it large enough that the broker can walk away satisfied even if the deal does not get funded?
2. Can the fees be staged over a series of milestones – upon application, following site inspection, upon delivery of the lender term sheet?
3. Following the signing of a NDA, will the broker disclose the name of the lender to allow the sponsor to do their own due-diligence before accepting the fee structure and loan proposal?
4. Will the lenders accept the current appraisals or are they requesting that everything be redone?
5. Has the broker got a solid track record that can be verified through references?
6. Has the broker successfully funded deals over the prior 6 months to your request?
7. Is there a clause that says that some of the fees are refundable if the term sheet is substantially different from the LOI?

If the answer to the above questions is yes then you may want to consider paying the fee if the lender has offered you a LOI that makes sense to your business model.

Good luck and good investing – The Equity Finder

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Every once in a while mega deals come along that need financing. $250m+ deals can be bears to deal with but there are supposed financing sources out there that seem to gobble up these types of transactions.

We were working on two such financing’s…one dropped out of the running this morning. The other mega deal that remains in our marketplace is looking for $500 million to build out a theme park and resort.  We have sourced a number of lenders who expressed interest and the development team selected one that is offering 100% financing at 6-7% interest. It is early days – due diligence is still being carried out – but we will wait and see the outcome and will keep you posted on this blog.

Good investing – The Equity Finder

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com