88
expertise to entrepreneurs, start-up businesses and small firms. He is a CFA Level I Candidate and is working towards a CPA designation.
Michael Kinsman, CPA, PhD, is the Luckman Distinguished Professor of Finance and Accounting at Pepperdine University’s Graziadio School of Business and Management. A former systems analyst for General Electric Corporation, financial analyst for Pacific Telephone, and consultant for a variety of large and small firms, he currently operates a CPA and consult- ing firm in Laguna Beach. He has written and lectured on a variety of subjects and has been published in the Journal of Finance, the Journal of Accountancy and other periodicals.
Tell us what you think. Send email to
trends@aahanet.org or go to
Trends Today > Search: Real estate. Read the full article and post your own comments.
Footnotes
To be a real-estate professional, the individual must spend the majority of his or her time in the real- property business.
1. A single-owner LLC is not required to file an LLC return for federal purposes. Instead, all the income or loss is reported directly on his income tax return, as it would be in sole ownership of the property.
2. California Revenue and Tax Code Sections 17941 and 17942.
3. Business Law and the Regulation of Business, 5th ed., by Richard A. Mann and Barry S. Roberts (Thomson/South- Western, 2005).
4. The nine states allowing community property are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico is a community property jurisdiction.
5. The title is held in the name John and Martha Mays, husband and wife, as community property, tenants in common with Jack and Jill Gomez, husband and wife, as community property. In that way, should a spouse die, his or her surviving spouse would continue to own the property and would, under current law, get a step-up in basis on the property, leading to a lower capital gain at sale. (The estate-planning aspects of this transaction are beyond the scope of this article.)
6. The amount of leverage real property can sustain is directly related to the quality of the net operating income stream generated by the property as well as the variability in the historical occupancy rate. If the property can consistently attract high occupancy while charging market-average rental rates, the demand for the property reduces the risk of owning the property. Lower risk levels contribute to the ability of the asset to sustain higher leverage. In owner-occupied scenarios, entrepreneurs need to be confident they can favorably forecast their company’s operating future, based on historic profitability and projected growth in demand.
In depressed economic environments, such as today’s commercial real estate market, an 80% loan-to-value ratio will not be advanced by a bank. Declines in commercial real estate assets happen rapidly, and the result is a “disconnect” between sellers and buyers. Sellers have acquired the properties at over-market values and have the potential of being “under water.” Buyers anticipate a continuing decline in the price of commercial real estate. As a consequence, sales do not take place in the market.
In addition, appraisers rely on current sales market activity to determine the capitalization rates that are used to value the cash flows from the commercial properties. If there is a lack of current sales activity, an appraiser has to use dated capitalization rates to value a property. The end result is a value that is not representative of the current market. Because of an appraiser’s inability to identify the true current market value of a commercial asset in a recessionary economy, along with the prospect of the declining performance of tenants, banks will advance less than a 60% loan-to- value ratio on performing commercial assets that have quality credit tenants.
7. Of course, if real estate values decline, higher leverage means that a larger negative return will accrue to the owners of the real estate.
8. Real Estate Finance and Investments, 13th ed., by William B. Brueggeman and Jeffrey Risher (McGraw-Hill/Irwin, 2008).
9. Prologies, a real estate investment trust based in Denver that focuses on commercial warehouse real estate, recently signed an 8-year lease with Southern California Edison to lease the roof on one of its buildings, for example.
10. The present value of any such payments received by the owner of the property will reduce the amount of his charitable contribution.
11. U.S. Internal Revenue Code (Tax Information for Businesses).
12. Modified Adjusted Gross Income is Adjusted Gross Income (the bottom number on the first page of the Form 1040 tax return) minus taxable social security or railroad retirement benefits, deductions for IRA and pension contributions, the deduction for half of the self-employment tax, and certain other items of income and deduction that are more unusual. For details, please consult an accountant. CCH U.S. Master Tax Guide Paragraph 2063 has a good summary of this information.
13. Broadly defined, a real property trade or business is a business with respect to which real property is developed or redeveloped, constructed or reconstructed, acquired, converted, rented or leased, operated or managed or brokered [Internal Revenue Code Section 469(c)(7)(C)].
14. U.S. Internal Revenue Code (Tax Information for Businesses).
Trends magazine, November/December 2010
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103