HOLC
...beginning in the 1930s, the federal government launched a series of programs designed to increase employment in the construction industry and make homeownership widely available to the American public. The Home Owners' Loan Corporation (HOLC) was the first of these programs, and it served as a model for later efforts.... Unfortunately for blacks, the HOLC also initiated and institutionalized the practice of "redlining." This discriminatory practice grew out of a rating system HOLC developed to evaluate the risks associated with loans made to specific urban neighborhoods. Four categories of neighborhoods were established, and lowest was coded with the color red; it and the next-lowest category virtually never received HOLC loans. Black areas were invariably rated as fourth grade and redlined. [These practices] lent the power, prestige, and support of the federal government to the systematic practice of racial discrimination.
In the 1930s and 1940s banks used the HOLC maps to make their own loan decisions. Thus HOLC not only channeled federal funds away from black neighborhoods but was also responsible for a much larger and more significant disinvestment in black areas by private institutions.
By far the greatest effect of the HOLC rating system, however, came from its influence on the underwriting practices of the Federal Housing Administration (FHA) and the Veterans Administration (VA) during the 1940s and 1950s. These loan programs together completely reshaped the residential housing market of the United States and pumped millions of dollars into the housing industry during the postwar era. Loans made by the FHA and the VA were a major impetus behind the rapid suburbanization of the United States after 1945... the marriage of FHA financing and new construction techniques made it cheaper to buy new suburban homes than to rent comparable older dwellings in the central city.
As a result, the FHA and VA contributed significantly to the decline of the inner city by encouraging the selective our-migration of middle-class whites to the suburbs. "In evaluating neighborhoods, the agency [FHA] followed the HOLC's earlier lead in racial matters; it too manifested an obsessive concern with the presence of what the 1939 FHA Underwriting Manual called “inharmonious racial or nationality groups." According to the manual, "if a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes."
__________________________________________________________________________
"It is my belief that black citizens of this era were stuck between Jim Crow(Genocide) and the HOLC, which funneled wealth away from many minority communities in the form of home ownership."
-Eugene O. Smith, Jr.
Showing posts with label private annuity trust. Show all posts
Showing posts with label private annuity trust. Show all posts
Friday, October 17, 2008
Tuesday, August 12, 2008
Prince William Co. Stiffens Illegal Immigration Crackdown
Posted to ABC News7 on:
6:23 pm Thu May 01, 2008 - MANASSAS, Va.
Prince William County (webnews) supervisors have made a key change to the county's illegal immigration policy, considered one of the most aggressive in the nation.
The board decided late Tuesday to direct police officers to question criminal suspects about their immigration status only after they have been arrested.
In October, the board directed police to check the residency status of anyone who is detained, no matter how minor the offense, if they believe the person might in the United States illegally.
Republican Supervisor Martin Nohe said Tuesday that the change in the illegal-immigration policy will limit the county's risk of a lawsuit.
Supervisors supported the change after cutting $3.1 million from the county's budget that would have funded video cameras in police cars to enforce the policy. Police had wanted the cameras to protect officers from allegations of racial profiling.
The change came before the board approved a fiscal 2009 budget of $893 million.
Prince William supervisors revisited the illegal immigration policy after Democratic Supervisor Frank Principi last week expressed concern about overly harsh enforcement.
Tuesday, he proposed a change that would have directed police to question a person's immigration status only after they have been arrested and taken to jail. He was the only supervisor to support it.
More than 100 people addressed the board for more than five hours Tuesday regarding both budget and immigration matters. Some asked the board to keep the illegal-immigration policy intact, while others urged supervisors to limit it.
"If [people] enter our country illegally, they should be deported, whether they are a criminal or not," said Walter Menz of Woodbridge.
Ruth Hellwig, a 45-year resident of Woodbridge, said, "it's dividing neighbor against neighbor ... even the children are discriminating against one another in the school system."
6:23 pm Thu May 01, 2008 - MANASSAS, Va.
Prince William County (webnews) supervisors have made a key change to the county's illegal immigration policy, considered one of the most aggressive in the nation.
The board decided late Tuesday to direct police officers to question criminal suspects about their immigration status only after they have been arrested.
In October, the board directed police to check the residency status of anyone who is detained, no matter how minor the offense, if they believe the person might in the United States illegally.
Republican Supervisor Martin Nohe said Tuesday that the change in the illegal-immigration policy will limit the county's risk of a lawsuit.
Supervisors supported the change after cutting $3.1 million from the county's budget that would have funded video cameras in police cars to enforce the policy. Police had wanted the cameras to protect officers from allegations of racial profiling.
The change came before the board approved a fiscal 2009 budget of $893 million.
Prince William supervisors revisited the illegal immigration policy after Democratic Supervisor Frank Principi last week expressed concern about overly harsh enforcement.
Tuesday, he proposed a change that would have directed police to question a person's immigration status only after they have been arrested and taken to jail. He was the only supervisor to support it.
More than 100 people addressed the board for more than five hours Tuesday regarding both budget and immigration matters. Some asked the board to keep the illegal-immigration policy intact, while others urged supervisors to limit it.
"If [people] enter our country illegally, they should be deported, whether they are a criminal or not," said Walter Menz of Woodbridge.
Ruth Hellwig, a 45-year resident of Woodbridge, said, "it's dividing neighbor against neighbor ... even the children are discriminating against one another in the school system."
Wednesday, July 30, 2008
HOPE FOR HOMEOWNER ACT OF 2008
Hello Everyone,If you have questions about the new bail out from the government, here are some questions and answers:
Questions and answers about the Hope for Homeowners Act of 2008, passed by Congress last weekend to try to steer as many as 400,000 struggling homeowners away from foreclosure:
Q: What exactly will the legislation do?
A: It will allow those who qualify to cancel their old mortgage loans and replace them with 30-year fixed-rate loans for up to 90 percent of the home's current value. The FHA will insure a total of $300 billion of the loans over a three-year period.But the decision on whether to write such a loan remains up to banks, which would have to be willing to take a loss on the existing loans in exchange for avoiding an often-costly foreclosure.
Q: Who is eligible?
A: Eligible borrowers must have spent more than 31 percent of their monthly incomes on their mortgages as of March 1, 2008. The troubled loan must have originated no later than Jan. 1, 2008, and be on the borrower's primary residence. And the borrower's income must be verified.
Q: When does the program start?
A: It takes effect Oct. 1 and runs through September 2011, although the FHA isn't likely to have it operating at full capacity until next year.
Q: Since lenders can pick and choose which loans to refinance, how can consumers determine if theirs will be selected?
A: Check with the bank or financial company servicing your mortgage, but it may be weeks before they make decisions concerning the new guidelines and assess individual loans.Even then, keep expectations limited."Servicers are going to be reluctant to take the government up on their offer," predicted Mark Zandi, chief economist at Moody's Economy.com. "The earliest they'll start taking them up on it is early next year. And even then it's likely to be modest."
Q: Is there anything a homeowner can do to improve chances of benefiting from the program, such as crunching numbers to make a case for the bank?
A: Not really. The best step is to keep up your payments as best you can.
Q: But doesn't this provide an incentive to NOT pay your mortgage, if you're barely keeping ahead of bills and are underwater on your house, so you can qualify?
A: No. If your situation deteriorates enough, the bank may reject any possible new loan."Turning yourself into a financial basket case is not going to work," said Dan Seiver, a finance professor at San Diego State University. "If you turn into a complete deadbeat, the servicer is going to just foreclose and dump it."
Q: So what should I be doing now besides trying to keep up with payments?
A: Talk to a local credit counselor and call the toll-free hot line of the Hope Now alliance — an industry group trying to coordinate a response to the mortgage crisis — at 1-888-995-HOPE. It is available 24 hours a day to provide mortgage counseling in multiple languages. Mary Thomason, director of resource development for The Impact Group of Atlanta, a housing counseling group, also suggests tracking expenses and income closely in order to be able to forecast your cash flow for the next six months and give yourself better control of your finances.
Q: If the banks and lenders refuse to write these loans, then what?
A: Public and political pressure may prompt them to participate. If not, and more people continue to lose their homes, Zandi says the next White House administration subject them to additional regulations or investigations if they remain unwilling to take on the risks.
Q: What happens if I'm able to sell my home after I refinance?
A: If you sell during the next five years, you must agree to share 50 percent of any profits from the resale with the government. What's more, homeowners can only retain equity gains based on a sliding scale. The homeowner would have zero equity from a sale in the first year, with the amount rising 10 percent in each succeeding year and capping at 50 percent from a sale in year five and thereafter. The equity must be repaid because the maximum amount on the new loans will be capped at 90 percent of the current market value, which automatically gives the previously troubled homeowner 10 percent equity in the home.
Q: Where can consumers find more detailed information about the plan?
A: There is a six-page summary of the housing act at http://banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf and the FHA's Web site at http://www.fha.gov is a place to watch for updated information. The entire 694-page bill is at http://www.house.gov/apps/list/press/financialsvcs_dem/hr3221_bill_text.pdf
Questions and answers about the Hope for Homeowners Act of 2008, passed by Congress last weekend to try to steer as many as 400,000 struggling homeowners away from foreclosure:
Q: What exactly will the legislation do?
A: It will allow those who qualify to cancel their old mortgage loans and replace them with 30-year fixed-rate loans for up to 90 percent of the home's current value. The FHA will insure a total of $300 billion of the loans over a three-year period.But the decision on whether to write such a loan remains up to banks, which would have to be willing to take a loss on the existing loans in exchange for avoiding an often-costly foreclosure.
Q: Who is eligible?
A: Eligible borrowers must have spent more than 31 percent of their monthly incomes on their mortgages as of March 1, 2008. The troubled loan must have originated no later than Jan. 1, 2008, and be on the borrower's primary residence. And the borrower's income must be verified.
Q: When does the program start?
A: It takes effect Oct. 1 and runs through September 2011, although the FHA isn't likely to have it operating at full capacity until next year.
Q: Since lenders can pick and choose which loans to refinance, how can consumers determine if theirs will be selected?
A: Check with the bank or financial company servicing your mortgage, but it may be weeks before they make decisions concerning the new guidelines and assess individual loans.Even then, keep expectations limited."Servicers are going to be reluctant to take the government up on their offer," predicted Mark Zandi, chief economist at Moody's Economy.com. "The earliest they'll start taking them up on it is early next year. And even then it's likely to be modest."
Q: Is there anything a homeowner can do to improve chances of benefiting from the program, such as crunching numbers to make a case for the bank?
A: Not really. The best step is to keep up your payments as best you can.
Q: But doesn't this provide an incentive to NOT pay your mortgage, if you're barely keeping ahead of bills and are underwater on your house, so you can qualify?
A: No. If your situation deteriorates enough, the bank may reject any possible new loan."Turning yourself into a financial basket case is not going to work," said Dan Seiver, a finance professor at San Diego State University. "If you turn into a complete deadbeat, the servicer is going to just foreclose and dump it."
Q: So what should I be doing now besides trying to keep up with payments?
A: Talk to a local credit counselor and call the toll-free hot line of the Hope Now alliance — an industry group trying to coordinate a response to the mortgage crisis — at 1-888-995-HOPE. It is available 24 hours a day to provide mortgage counseling in multiple languages. Mary Thomason, director of resource development for The Impact Group of Atlanta, a housing counseling group, also suggests tracking expenses and income closely in order to be able to forecast your cash flow for the next six months and give yourself better control of your finances.
Q: If the banks and lenders refuse to write these loans, then what?
A: Public and political pressure may prompt them to participate. If not, and more people continue to lose their homes, Zandi says the next White House administration subject them to additional regulations or investigations if they remain unwilling to take on the risks.
Q: What happens if I'm able to sell my home after I refinance?
A: If you sell during the next five years, you must agree to share 50 percent of any profits from the resale with the government. What's more, homeowners can only retain equity gains based on a sliding scale. The homeowner would have zero equity from a sale in the first year, with the amount rising 10 percent in each succeeding year and capping at 50 percent from a sale in year five and thereafter. The equity must be repaid because the maximum amount on the new loans will be capped at 90 percent of the current market value, which automatically gives the previously troubled homeowner 10 percent equity in the home.
Q: Where can consumers find more detailed information about the plan?
A: There is a six-page summary of the housing act at http://banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf and the FHA's Web site at http://www.fha.gov is a place to watch for updated information. The entire 694-page bill is at http://www.house.gov/apps/list/press/financialsvcs_dem/hr3221_bill_text.pdf
Thursday, July 10, 2008
PRO AND CONS OF THE 1031 EXCHANGE
October 1, 2007
Pros and Cons of the 1031 Exchange
By Neil A. OHara
How would you like to exchange one appreciated asset for another without having to pay capital gains tax? In the world of stocks and bonds, that only happens within qualified accounts like IRAs or 401(k)s. But it's a different story if your clients own business-related or investment real estate. Section 1031 of the Internal Revenue Code permits owners to exchange one piece of real property for another of "like kind"—a term broad enough to encompass anything from raw land to office buildings or mineral properties—without paying capital gains tax as long as they reinvest the entire sale proceeds in the new property.
A few restrictions apply, of course. The owner has 45 days from the closing of the sale to identify one or more replacement properties, and must close the new purchases within 180 days of the original sale. The owner can't touch the sale proceeds, either. The money has to go into escrow at a "qualified intermediary"—typically a bank or title insurer—pending reinvestment. A 1031 exchange works only if the real estate is held directly or as a tenancy-in-common (TIC), an undivided fractional interest in a property. Interests in a partnership or real estate investment trust (REIT) don't qualify. Nor does property used by the owner as a residence, which rules out vacation homes unless they are rented out.
In a hot real estate market, owners must take care not to flip properties in 1031 transactions. "If you trade too quickly the IRS may say you didn't buy the property for investment, but for the purpose of resale," says Steve Mastbaum, a tax expert and shareholder in law firm Greenberg Traurig's New York office. The consequences are ugly. The IRS not only disallows the tax deferral but also treats the profit as ordinary income rather than as a capital gain.
For people willing to accept the constraints, 1031 exchanges can lay the foundation for significant wealth. Stephen Wayner, first vice president at Bayview Financial Exchange Services in Coral Gables, Fla., has a client who put down $300 on each of two $3,000 lots he bought 33 years ago. Four exchanges later his net worth is $4.3 million—and he never put in another penny. Wayner says clients often use the tax-free proceeds of one sale for the down payment on a replacement, which allows them to buy more property and leverage the return.
IRS figures show a dramatic increase in 1031 exchanges in recent years. In 2004, the most recent year for which data is available, 219,675 individuals reported transactions, more than double the number in 2000. For partnerships, the transaction volume almost quadrupled to 47,928. Wayner says a whole new industry has sprouted since a 2002 IRS ruling permitted up to 35 people to join together as TICs to buy a piece of property and still qualify for 1031.
Patricia DelRosso, president of Inland Real Estate Exchange Corp. in Chicago, expects the growth to continue, as baby boomers who have spent their lives managing small real estate portfolios approach retirement. "They no longer want to deal with the three T's: tenants, toilets and trash," she says. "We can meet that need by offering a 1031 TIC exchange." While the owner still participates in decisions to sell, rehab or refinance the property, a management company handles collections and regular maintenance. DelRosso says a TIC exchange provides an opportunity to diversify, too. The owner can trade a portfolio of single-family rental homes for fractional interests in up to three replacement properties—a shopping center, an office building and a multifamily apartment complex, for example. Although advisors don't get paid directly from 1031 exchanges, suggesting a way for a client to defer tax builds credibility. And as William Fleming of PricewaterhouseCoopers' private company services practice notes: "People with these kinds of properties often have big securities portfolios."
(c) 2007 On Wall Street and SourceMedia, Inc. All Rights Reserved.
http://www.onwallstreet.com/
http://www.sourcemedia.com
Pros and Cons of the 1031 Exchange
By Neil A. OHara
How would you like to exchange one appreciated asset for another without having to pay capital gains tax? In the world of stocks and bonds, that only happens within qualified accounts like IRAs or 401(k)s. But it's a different story if your clients own business-related or investment real estate. Section 1031 of the Internal Revenue Code permits owners to exchange one piece of real property for another of "like kind"—a term broad enough to encompass anything from raw land to office buildings or mineral properties—without paying capital gains tax as long as they reinvest the entire sale proceeds in the new property.
A few restrictions apply, of course. The owner has 45 days from the closing of the sale to identify one or more replacement properties, and must close the new purchases within 180 days of the original sale. The owner can't touch the sale proceeds, either. The money has to go into escrow at a "qualified intermediary"—typically a bank or title insurer—pending reinvestment. A 1031 exchange works only if the real estate is held directly or as a tenancy-in-common (TIC), an undivided fractional interest in a property. Interests in a partnership or real estate investment trust (REIT) don't qualify. Nor does property used by the owner as a residence, which rules out vacation homes unless they are rented out.
In a hot real estate market, owners must take care not to flip properties in 1031 transactions. "If you trade too quickly the IRS may say you didn't buy the property for investment, but for the purpose of resale," says Steve Mastbaum, a tax expert and shareholder in law firm Greenberg Traurig's New York office. The consequences are ugly. The IRS not only disallows the tax deferral but also treats the profit as ordinary income rather than as a capital gain.
For people willing to accept the constraints, 1031 exchanges can lay the foundation for significant wealth. Stephen Wayner, first vice president at Bayview Financial Exchange Services in Coral Gables, Fla., has a client who put down $300 on each of two $3,000 lots he bought 33 years ago. Four exchanges later his net worth is $4.3 million—and he never put in another penny. Wayner says clients often use the tax-free proceeds of one sale for the down payment on a replacement, which allows them to buy more property and leverage the return.
IRS figures show a dramatic increase in 1031 exchanges in recent years. In 2004, the most recent year for which data is available, 219,675 individuals reported transactions, more than double the number in 2000. For partnerships, the transaction volume almost quadrupled to 47,928. Wayner says a whole new industry has sprouted since a 2002 IRS ruling permitted up to 35 people to join together as TICs to buy a piece of property and still qualify for 1031.
Patricia DelRosso, president of Inland Real Estate Exchange Corp. in Chicago, expects the growth to continue, as baby boomers who have spent their lives managing small real estate portfolios approach retirement. "They no longer want to deal with the three T's: tenants, toilets and trash," she says. "We can meet that need by offering a 1031 TIC exchange." While the owner still participates in decisions to sell, rehab or refinance the property, a management company handles collections and regular maintenance. DelRosso says a TIC exchange provides an opportunity to diversify, too. The owner can trade a portfolio of single-family rental homes for fractional interests in up to three replacement properties—a shopping center, an office building and a multifamily apartment complex, for example. Although advisors don't get paid directly from 1031 exchanges, suggesting a way for a client to defer tax builds credibility. And as William Fleming of PricewaterhouseCoopers' private company services practice notes: "People with these kinds of properties often have big securities portfolios."
(c) 2007 On Wall Street and SourceMedia, Inc. All Rights Reserved.
http://www.onwallstreet.com/
http://www.sourcemedia.com
Wednesday, June 25, 2008
Editor's Letter: Too Far, Too Fast
January 1, 2008
Editor's Letter: Too Far, Too Fast
David Bodamer Editor-in-Chief Retail Traffic Magazine
The meteoric ascent of Centro Properties Group from a company few were familiar with a decade ago to a firm that controls one of the 10 largest portfolios in the United States always seemed too good to be true. It turns out, it was.
While Australian capital has long had a prominent presence in the U.S. (names like Westfield, Macquarie and Galileo come to mind), Centro's rise was somehow different. It collected properties as if they were stamps, amassing more than 700 in a matter of years through portfolio deals and outright acquisitions of companies. In the process it leapfrogged past firms with decades of experience owning and operating properties in the U.S. market. And 2007 provided the firm's master stroke: the acquisition of New York City-based New Plan, one of the oldest and largest retail REITs in the country.
A few months ago I had the chance to sit down with Centro CEO Andrew Scott when he was in New York attending an investors conference. One of the things I asked is how the company was able to move so far so fast. He pointed to the superannuation funds in Australia whereby every worker puts 9 percent of their money into retirement accounts. And a preference there has always been to invest in commercial real estate.
In Australia, however, the vast majority of investible real estate is already owned by funds like Centro. As a result, Australian firms have to be aggressive abroad in order to invest their funds.
Scott said that Centro constantly had money streaming in and was able to move from acquisition to acquisition without seemingly ever taking a breather to absorb the new properties. He even hinted that there might be more deals for the firm in the offing this year. As it turns out Centro's growth wasn't just the result of those funds. In reality, it was carrying an extremely heavy debt load, with much of that short-term financing stemming from its aggressive acquisitions strategy.
Now it's looking at billions of dollars worth of maturing debt that all needs to be paid back (or refinanced) by February 15. The initial reports coming out of Australia are that no bank is willing to do that unless Centro dramatically decreases its leverage levels. The only way it can do that is to sell assets quickly. And that creates a whole other problem.
Centro's fall is proving doubly painful because investors in U.S. retail REITs have gotten spooked by Centro's rapid fall. They are worried that U.S. REITs have followed suit and dumped REIT shares in the days after Centro's announcement sending many companies to new 52-week lows. That may hamper some REITs' ability (or willingness) to jump in and buy Centro's portfolio, especially if it would require them to take on more debt — something that's extremely tricky in the current environment.
In the end, there's a strong argument that Centro's problems are the result of bad timing and a too-aggressive strategy. It seems highly unlikely that other firms will face similar issues since no major retail REITs have similar leverage levels or are looking at the amount of debt maturing in 2008 that Centro faced.
But it also shows that getting a handle on the credit crisis may not be as easy as we thought a couple of months ago either.
© 2008 Penton Media. Displayed by permission. All rights reserved.
You may forward this article or get additional permissions by typing http://license.icopyright.net/3.5516?icx_id=retailtrafficmag.com/management/edletter/centro_properties_group_fall/index.html into any web browser. Penton Media, Inc and Retail Traffic logos are registered trademarks of Penton Media, Inc. The iCopyright logo is a registered trademark of iCopyright, Inc.
Editor's Letter: Too Far, Too Fast
David Bodamer Editor-in-Chief Retail Traffic Magazine
The meteoric ascent of Centro Properties Group from a company few were familiar with a decade ago to a firm that controls one of the 10 largest portfolios in the United States always seemed too good to be true. It turns out, it was.
While Australian capital has long had a prominent presence in the U.S. (names like Westfield, Macquarie and Galileo come to mind), Centro's rise was somehow different. It collected properties as if they were stamps, amassing more than 700 in a matter of years through portfolio deals and outright acquisitions of companies. In the process it leapfrogged past firms with decades of experience owning and operating properties in the U.S. market. And 2007 provided the firm's master stroke: the acquisition of New York City-based New Plan, one of the oldest and largest retail REITs in the country.
A few months ago I had the chance to sit down with Centro CEO Andrew Scott when he was in New York attending an investors conference. One of the things I asked is how the company was able to move so far so fast. He pointed to the superannuation funds in Australia whereby every worker puts 9 percent of their money into retirement accounts. And a preference there has always been to invest in commercial real estate.
In Australia, however, the vast majority of investible real estate is already owned by funds like Centro. As a result, Australian firms have to be aggressive abroad in order to invest their funds.
Scott said that Centro constantly had money streaming in and was able to move from acquisition to acquisition without seemingly ever taking a breather to absorb the new properties. He even hinted that there might be more deals for the firm in the offing this year. As it turns out Centro's growth wasn't just the result of those funds. In reality, it was carrying an extremely heavy debt load, with much of that short-term financing stemming from its aggressive acquisitions strategy.
Now it's looking at billions of dollars worth of maturing debt that all needs to be paid back (or refinanced) by February 15. The initial reports coming out of Australia are that no bank is willing to do that unless Centro dramatically decreases its leverage levels. The only way it can do that is to sell assets quickly. And that creates a whole other problem.
Centro's fall is proving doubly painful because investors in U.S. retail REITs have gotten spooked by Centro's rapid fall. They are worried that U.S. REITs have followed suit and dumped REIT shares in the days after Centro's announcement sending many companies to new 52-week lows. That may hamper some REITs' ability (or willingness) to jump in and buy Centro's portfolio, especially if it would require them to take on more debt — something that's extremely tricky in the current environment.
In the end, there's a strong argument that Centro's problems are the result of bad timing and a too-aggressive strategy. It seems highly unlikely that other firms will face similar issues since no major retail REITs have similar leverage levels or are looking at the amount of debt maturing in 2008 that Centro faced.
But it also shows that getting a handle on the credit crisis may not be as easy as we thought a couple of months ago either.
© 2008 Penton Media. Displayed by permission. All rights reserved.
You may forward this article or get additional permissions by typing http://license.icopyright.net/3.5516?icx_id=retailtrafficmag.com/management/edletter/centro_properties_group_fall/index.html into any web browser. Penton Media, Inc and Retail Traffic logos are registered trademarks of Penton Media, Inc. The iCopyright logo is a registered trademark of iCopyright, Inc.
Wednesday, June 11, 2008
Lehman raising $6B in capital, expects $2.8B loss
June 9, 2008
By JOE BEL BRUNO
AP Business Writer
Lehman Brothers Holdings Inc. on Monday confirmed fears on Wall Street that the credit crisis isn't quite over, and it left investors to wonder if other major investment banks face the same set of risks.
The nation's fourth-largest investment bank said wrong-way trading moves and risky mortgage-backed securities plunged it into a nearly $3 billion second-quarter loss. It marks the first time Lehman was unable to post a profit since going public in 1994.
Its stock fell nearly 9 percent and helped drive a broad sell-off in bank and brokerage shares.
Lehman's top executives, who have repeatedly assured investors that their books were safe, will fund the firm's survival by raising $6 billion of fresh capital. It is a move many of Lehman's competitors have already been forced to make.
The announcements, made before the official June 16 release date of Lehman's results, were an attempt to calm a market still badly shaken by the near collapse of Bear Stearns in March. Analysts were disappointed that Lehman's loss was much deeper than they expected, and felt it could have an impact on rivals.
"There is a broader element to all this," said David Trone of Fox-Pitt Cochran. "Management considered this to be an aberration, but I think you'll see similar results in form and structure, just the magnitude will be smaller."
Sanford C. Bernstein analyst Brad Hintz, a former chief financial officer of Lehman, said one concern is the $130 billion of mostly residential and commercial real estate assets the firm sold during the quarter. Those sales triggered billions of dollars of gross mark-to-market adjustments — or accounting changes to the value of assets — since the beginning of last year.
He believes that if those prices are deeply discounted, it would set a precedent that could hurt rivals like Merrill Lynch & Co., Morgan Stanley, and Goldman Sachs Group Inc. "There could be a modest domino effect," Hintz said. Those companies have also had write-downs of mortgage-backed assets, with Merrill taking a heavy enough hit that it lost its CEO. Goldman is believed the be the strongest of the Wall Street companies.
Further, Lehman's investments to hedge against troubled assets on its books backfired, and CFO Erin Callan said they "were significantly impacted" during the past few months. She said the highest point of the market's disruption this year was in March, but conditions have eased since then.
Lehman said it expects to lose $2.87 billion, or $5.14 per share, for the period ended May 31, compared with the $1.3 billion, or $2.21 per share, it made in the year-ago period. Analysts had expected the company to report a loss of just 22 cents per share for the period, according to Thomson Financial.
CEO Richard Fuld said he was "very disappointed" in the quarterly results. However, he believes the additional capital — raised through an offering to yet unnamed investors — will help keep the company whole amid continued market turmoil.
There had been market speculation that Lehman was seeking outside investors to offset losses during the quarter and fortify its balance sheet. Some analysts felt the firm's balance sheet was the closest of all the Wall Street firms to Bear Stearns, which narrowly avoided bankruptcy in March through its government-sponsored sale to JPMorgan Chase & Co.
But so far, Lehman appears in better shape — and possibly has generated more confidence among investors — than Bear, which was badly undermined when panicky customers withdrew their money from the investment bank. Moreover, after the Federal Reserve helped engineer JP Morgan's buyout of Bear, investors have felt more secure that the government is unlikely to let a big investment bank fail.
Lehman is expected to raise capital by selling to mostly American investors $4 billion of new common shares and $2 billion of three-year mandatory convertible preferred stock. The convertible stock is required to be turned into common shares by the end of the three-year period.
The firm was under pressure after David Einhorn, who runs the hedge fund firm Greenlight Capital, vocally and publicly raised questions about Lehman's earnings during the first quarter. He said the company has not disclosed all of its losses, and felt Monday's announcement was only the start.
"Lehman is raising $6 billion that they said they didn't need to replace losses that they said they didn't have," he said in an interview. "Since the credit markets actually improved this quarter, such losses primarily reflect losses that might have been taken in prior quarters. A preliminary analysis of the pre-release and conference call suggests that there are still unrecognized losses on the balance sheet."
In addition, Lehman's stock sale will significantly dilute outstanding shares. As of March 31, Lehman had about 553.6 million shares outstanding. The common stock offering would add about 142.9 million shares, while the conversion on the preferred stock would eventually add as many as 71.4 million more shares.
Lehman shares fell $2.81, or 8.7 percent, to $29.48. Moody's Investors Service and Fitch Ratings both cut their ratings on Lehman, exacerbating the decline.
In this Jan. 24, 2008 file photo Chairman and CEO of Lehman Brothers, USA, Richard Fuld speaks during a working session at the World Economic Forum in Davos, Switzerland. Lehman Brothers Holdings Inc. on Monday said it will raise $6 billion in new capital to shore up its balance sheet after saying it expects to post an unexpectedly large second-quarter loss of nearly $3 billion. (AP Photo/Virginia Mayo, file)
By JOE BEL BRUNO
AP Business Writer
Lehman Brothers Holdings Inc. on Monday confirmed fears on Wall Street that the credit crisis isn't quite over, and it left investors to wonder if other major investment banks face the same set of risks.
The nation's fourth-largest investment bank said wrong-way trading moves and risky mortgage-backed securities plunged it into a nearly $3 billion second-quarter loss. It marks the first time Lehman was unable to post a profit since going public in 1994.
Its stock fell nearly 9 percent and helped drive a broad sell-off in bank and brokerage shares.
Lehman's top executives, who have repeatedly assured investors that their books were safe, will fund the firm's survival by raising $6 billion of fresh capital. It is a move many of Lehman's competitors have already been forced to make.
The announcements, made before the official June 16 release date of Lehman's results, were an attempt to calm a market still badly shaken by the near collapse of Bear Stearns in March. Analysts were disappointed that Lehman's loss was much deeper than they expected, and felt it could have an impact on rivals.
"There is a broader element to all this," said David Trone of Fox-Pitt Cochran. "Management considered this to be an aberration, but I think you'll see similar results in form and structure, just the magnitude will be smaller."
Sanford C. Bernstein analyst Brad Hintz, a former chief financial officer of Lehman, said one concern is the $130 billion of mostly residential and commercial real estate assets the firm sold during the quarter. Those sales triggered billions of dollars of gross mark-to-market adjustments — or accounting changes to the value of assets — since the beginning of last year.
He believes that if those prices are deeply discounted, it would set a precedent that could hurt rivals like Merrill Lynch & Co., Morgan Stanley, and Goldman Sachs Group Inc. "There could be a modest domino effect," Hintz said. Those companies have also had write-downs of mortgage-backed assets, with Merrill taking a heavy enough hit that it lost its CEO. Goldman is believed the be the strongest of the Wall Street companies.
Further, Lehman's investments to hedge against troubled assets on its books backfired, and CFO Erin Callan said they "were significantly impacted" during the past few months. She said the highest point of the market's disruption this year was in March, but conditions have eased since then.
Lehman said it expects to lose $2.87 billion, or $5.14 per share, for the period ended May 31, compared with the $1.3 billion, or $2.21 per share, it made in the year-ago period. Analysts had expected the company to report a loss of just 22 cents per share for the period, according to Thomson Financial.
CEO Richard Fuld said he was "very disappointed" in the quarterly results. However, he believes the additional capital — raised through an offering to yet unnamed investors — will help keep the company whole amid continued market turmoil.
There had been market speculation that Lehman was seeking outside investors to offset losses during the quarter and fortify its balance sheet. Some analysts felt the firm's balance sheet was the closest of all the Wall Street firms to Bear Stearns, which narrowly avoided bankruptcy in March through its government-sponsored sale to JPMorgan Chase & Co.
But so far, Lehman appears in better shape — and possibly has generated more confidence among investors — than Bear, which was badly undermined when panicky customers withdrew their money from the investment bank. Moreover, after the Federal Reserve helped engineer JP Morgan's buyout of Bear, investors have felt more secure that the government is unlikely to let a big investment bank fail.
Lehman is expected to raise capital by selling to mostly American investors $4 billion of new common shares and $2 billion of three-year mandatory convertible preferred stock. The convertible stock is required to be turned into common shares by the end of the three-year period.
The firm was under pressure after David Einhorn, who runs the hedge fund firm Greenlight Capital, vocally and publicly raised questions about Lehman's earnings during the first quarter. He said the company has not disclosed all of its losses, and felt Monday's announcement was only the start.
"Lehman is raising $6 billion that they said they didn't need to replace losses that they said they didn't have," he said in an interview. "Since the credit markets actually improved this quarter, such losses primarily reflect losses that might have been taken in prior quarters. A preliminary analysis of the pre-release and conference call suggests that there are still unrecognized losses on the balance sheet."
In addition, Lehman's stock sale will significantly dilute outstanding shares. As of March 31, Lehman had about 553.6 million shares outstanding. The common stock offering would add about 142.9 million shares, while the conversion on the preferred stock would eventually add as many as 71.4 million more shares.
Lehman shares fell $2.81, or 8.7 percent, to $29.48. Moody's Investors Service and Fitch Ratings both cut their ratings on Lehman, exacerbating the decline.
In this Jan. 24, 2008 file photo Chairman and CEO of Lehman Brothers, USA, Richard Fuld speaks during a working session at the World Economic Forum in Davos, Switzerland. Lehman Brothers Holdings Inc. on Monday said it will raise $6 billion in new capital to shore up its balance sheet after saying it expects to post an unexpectedly large second-quarter loss of nearly $3 billion. (AP Photo/Virginia Mayo, file)
Thursday, May 29, 2008
Banks Facing Up to Reality of Diminished Values
By Jim Freer
This year, reality is sinking in at many community banks that have high ratios of noncurrent land development and other real estate loans.
"They realize," said Kingsley Greenland, chief executive officer of the Boston loan-sale adviser DebtX, "that the values, not just of the loans but of the collateral, are not going to come back any time soon."
Thus, many such banks are looking to sell some of these loans — a change from their previous strategy of continuing to restructure weak credits while trying to delay writedowns.
Some are turning to advisers like DebtX that market bank loans to institutional investors.
Others are speeding up their real-estate-owned sales, provided the discounts are not too steep on undeveloped land and stalled housing tracts. Their goal is to sell properties this year rather than incur tax liabilities and other costs as they wait for a housing market rebound.
The $7 billion-asset United Community Banks Inc. in Blairsville, Ga., began that strategy last year because "we cannot predict when prices will start reversing," said David Shearrow, executive vice president and chief risk officer.
Some bankers and advisers expect a new round of banks' and their holding companies' setting up "bad bank" subsidiaries to hold noncurrent loans and REOs.
One example is BankAtlantic in Fort Lauderdale, Fla., which in March transferred $101.5 million of noncurrent loans to a newly formed asset workout subsidiary of the $6 billion-asset parent, BankAtlantic Bancorp.
Almost all the loans were so-called land bank loans to Florida residential developers whose builder clients did not carry out deals to buy lots after the housing market began to soften in late 2006.
Alan Levan, the chairman of BankAtlantic and its holding company, said using an entity that is not part of the bank adds flexibility for timing loan sales. The subsidiary could become a joint venture partner in some developments after the housing market begins to rebound, he said.
Meanwhile, some banks are turning to traditional-style auctions, complete with bidding and the hammer falling, to unload housing construction loans and undeveloped properties.
J. Durham & Associates in Albany, Ga., is to hold the first in a series of Atlanta-area auctions of bank-owned commercial real estate properties and undeveloped land in late June.
Many publicly traded banks are among those that have decided to sell loans and REOs quickly — rather than face the prospect that prices may still be falling late this year and into 2009.
Analysts and investors "are comparing these banks to their peer groups and asking, 'How are you managing your nonperforming assets and REOs?'," Mr. Greenland said. "A way to stay ahead is to not wait to foreclose but to sell the loan before it gets to foreclosure and mitigate your losses."
A growing number of banks are taking a "pay now rather than pay later" approach to selling loans and accepting discounts, said Christopher Marinac, the director of research at the Atlanta investment bank FIG Partners.
DebtX, which also sells nonproblem loans to institutional investors, sold loans for about 100 banks last year.
That total could double this year, Mr. Greenland said.
Cowlitz Bancorp. in Long-view, Wash., with about $500 million of assets, has been selling real estate and commercial loans through DebtX since 2003.
Its latest DebtX sale was an acquisition and development loan to a developer near Portland, Ore., for which it received "just under 50 cents on the dollar," said Cowlitz president and CEO Richard Fitzpatrick.
The single-family home project stalled because several builders had backed out of contracts to buy lots.
Cowlitz might have spent three to five years trying to sell the project if it had taken it through foreclosure, Mr. Fitzpatrick said.
"We sold, received some cash, and moved on," he said.
Still, in sales before this year, including some of nondistressed loans, Cowlitz had gotten "north of 85 cents on the dollar" on some DebtX sales.
This year, Cowlitz took possession of another home building project near Portland that it is marketing itself — again willing to accept a discount rather than absorb several years' holding costs.
Some banks with problem loans and their borrowers are turning to private lenders, such as Forman Capital in Delray Beach, Fla.
Forman Capital's lending in Florida and other states has been on nondistressed commercial properties.
Now, with the number of noncurrent bank loans growing, CEO Brett Forman said his company will consider buying distressed housing development loans. Mr. Forman and other private lenders have more flexibility than banks in structuring loans, including those for distressed debt.
Data from the Federal Deposit Insurance Corp. show the market for distressed bank real estate debt has grown.
From Dec. 31, 2006, and Dec. 31, 2007, the industry's noncurrent ratio for all real estate loans grew from 0.80% to 1.71%. The noncurrent rate on construction and development loans soared from 0.71% to 3.15% during those 12 months.
Among banks with assets of $1 billion to $10 billion, the noncurrent ratio for all real estate loans rose from 0.67% to 1.53%, and from 0.76% to 3.05% on construction and development loans.
The FDIC had not released its first-quarter industry data by press time, but if earnings reports of publicly traded banks are an indication, the numbers are likely to get worse. Many community banks' quarterly earnings included significant increases in noncurrent loans to home builders.
United Community Banks reported that its ratio of nonperforming assets to total assets rose from 0.56% at the end of last year to 1.07% at March 31. Its noncurrent loans and REOs are primarily for housing construction in the Atlanta market.
United has been able to sell REOs aggressively because it exceeds all measures required for being considered well-capitalized, Mr. Shearrow said.
Writedowns have ranged from "0 to 20%" on sales of completed projects and "anywhere from 15 and 20 to 50%" on lots and undeveloped land, he said. Buyers usually are local developers and individuals, he added.
United uses its own staff to find buyers and tries to get properties off its books within 90 days of foreclosure. It prefers to foreclose and sell properties rather than try to sell problem loans before they reach foreclosure. In addition to being behind on loan payments, housing developers often are owed money by subcontractors and have liens, Mr. Shearrow said.
Setting up a subsidiary for problem loans is another strategy that requires a bank to exceed well-capitalized levels, said BankAtlantic's Mr. Levan.
The bank and its holding company satisfy the requirement. The holding company added to its capital in March by selling 2.1 million shares of Stifel Financial Corp. for $82.2 million and used much of the proceeds to buy loans from the bank.
"As opposed to being concerned about capital at the bank level, we can be more creative in working with borrowers and in completing foreclosures as the case may be," Mr. Levan said.
Steven Fritts, the FDIC's associate director for risk management policy, said the agency is not hearing much about banks setting up "bad bank" affiliates. Still, he said, "It can make sense to isolate those assets. It allows loan officers to focus on developing new business."
State laws on corporations and Federal Reserve and Office of Thrift Supervision rules on holding companies are what Mr. Fritts calls the "dominant legal drivers" for setting up such subsidiaries.
Taking foreclosed properties to auction is an alternative to managing them in a bad bank setup.
The Martin Realty Advisors in Alpharetta, Ga., and joint venture partner J. Durham & Associates have recently been advising several banks in southeastern states about auctions. "This is at an early stage," said Joe Durham, the president of J. Durham Associates. "We will start seeing more banks realize that they need to sell now because the markets are not getting better."
Mr. Durham said the first auction featuring bank assets will include undeveloped land, stalled condominium projects along the Florida Panhandle coastline, and stalled single-family projects around the Southeast.
Those kinds of properties are prominent as collateral for loans that DebtX sells in an online bidding process to more than 3,500 institutional investors. Mr. Greenland said he anticipates vacancies rising at numerous "marginal shopping centers," and that loans on retail properties could be the next to falter.
DebtX's business includes a five-year agreement with the FDIC, signed last year, to sell real estate assets that are in receiverships.
This year, reality is sinking in at many community banks that have high ratios of noncurrent land development and other real estate loans.
"They realize," said Kingsley Greenland, chief executive officer of the Boston loan-sale adviser DebtX, "that the values, not just of the loans but of the collateral, are not going to come back any time soon."
Thus, many such banks are looking to sell some of these loans — a change from their previous strategy of continuing to restructure weak credits while trying to delay writedowns.
Some are turning to advisers like DebtX that market bank loans to institutional investors.
Others are speeding up their real-estate-owned sales, provided the discounts are not too steep on undeveloped land and stalled housing tracts. Their goal is to sell properties this year rather than incur tax liabilities and other costs as they wait for a housing market rebound.
The $7 billion-asset United Community Banks Inc. in Blairsville, Ga., began that strategy last year because "we cannot predict when prices will start reversing," said David Shearrow, executive vice president and chief risk officer.
Some bankers and advisers expect a new round of banks' and their holding companies' setting up "bad bank" subsidiaries to hold noncurrent loans and REOs.
One example is BankAtlantic in Fort Lauderdale, Fla., which in March transferred $101.5 million of noncurrent loans to a newly formed asset workout subsidiary of the $6 billion-asset parent, BankAtlantic Bancorp.
Almost all the loans were so-called land bank loans to Florida residential developers whose builder clients did not carry out deals to buy lots after the housing market began to soften in late 2006.
Alan Levan, the chairman of BankAtlantic and its holding company, said using an entity that is not part of the bank adds flexibility for timing loan sales. The subsidiary could become a joint venture partner in some developments after the housing market begins to rebound, he said.
Meanwhile, some banks are turning to traditional-style auctions, complete with bidding and the hammer falling, to unload housing construction loans and undeveloped properties.
J. Durham & Associates in Albany, Ga., is to hold the first in a series of Atlanta-area auctions of bank-owned commercial real estate properties and undeveloped land in late June.
Many publicly traded banks are among those that have decided to sell loans and REOs quickly — rather than face the prospect that prices may still be falling late this year and into 2009.
Analysts and investors "are comparing these banks to their peer groups and asking, 'How are you managing your nonperforming assets and REOs?'," Mr. Greenland said. "A way to stay ahead is to not wait to foreclose but to sell the loan before it gets to foreclosure and mitigate your losses."
A growing number of banks are taking a "pay now rather than pay later" approach to selling loans and accepting discounts, said Christopher Marinac, the director of research at the Atlanta investment bank FIG Partners.
DebtX, which also sells nonproblem loans to institutional investors, sold loans for about 100 banks last year.
That total could double this year, Mr. Greenland said.
Cowlitz Bancorp. in Long-view, Wash., with about $500 million of assets, has been selling real estate and commercial loans through DebtX since 2003.
Its latest DebtX sale was an acquisition and development loan to a developer near Portland, Ore., for which it received "just under 50 cents on the dollar," said Cowlitz president and CEO Richard Fitzpatrick.
The single-family home project stalled because several builders had backed out of contracts to buy lots.
Cowlitz might have spent three to five years trying to sell the project if it had taken it through foreclosure, Mr. Fitzpatrick said.
"We sold, received some cash, and moved on," he said.
Still, in sales before this year, including some of nondistressed loans, Cowlitz had gotten "north of 85 cents on the dollar" on some DebtX sales.
This year, Cowlitz took possession of another home building project near Portland that it is marketing itself — again willing to accept a discount rather than absorb several years' holding costs.
Some banks with problem loans and their borrowers are turning to private lenders, such as Forman Capital in Delray Beach, Fla.
Forman Capital's lending in Florida and other states has been on nondistressed commercial properties.
Now, with the number of noncurrent bank loans growing, CEO Brett Forman said his company will consider buying distressed housing development loans. Mr. Forman and other private lenders have more flexibility than banks in structuring loans, including those for distressed debt.
Data from the Federal Deposit Insurance Corp. show the market for distressed bank real estate debt has grown.
From Dec. 31, 2006, and Dec. 31, 2007, the industry's noncurrent ratio for all real estate loans grew from 0.80% to 1.71%. The noncurrent rate on construction and development loans soared from 0.71% to 3.15% during those 12 months.
Among banks with assets of $1 billion to $10 billion, the noncurrent ratio for all real estate loans rose from 0.67% to 1.53%, and from 0.76% to 3.05% on construction and development loans.
The FDIC had not released its first-quarter industry data by press time, but if earnings reports of publicly traded banks are an indication, the numbers are likely to get worse. Many community banks' quarterly earnings included significant increases in noncurrent loans to home builders.
United Community Banks reported that its ratio of nonperforming assets to total assets rose from 0.56% at the end of last year to 1.07% at March 31. Its noncurrent loans and REOs are primarily for housing construction in the Atlanta market.
United has been able to sell REOs aggressively because it exceeds all measures required for being considered well-capitalized, Mr. Shearrow said.
Writedowns have ranged from "0 to 20%" on sales of completed projects and "anywhere from 15 and 20 to 50%" on lots and undeveloped land, he said. Buyers usually are local developers and individuals, he added.
United uses its own staff to find buyers and tries to get properties off its books within 90 days of foreclosure. It prefers to foreclose and sell properties rather than try to sell problem loans before they reach foreclosure. In addition to being behind on loan payments, housing developers often are owed money by subcontractors and have liens, Mr. Shearrow said.
Setting up a subsidiary for problem loans is another strategy that requires a bank to exceed well-capitalized levels, said BankAtlantic's Mr. Levan.
The bank and its holding company satisfy the requirement. The holding company added to its capital in March by selling 2.1 million shares of Stifel Financial Corp. for $82.2 million and used much of the proceeds to buy loans from the bank.
"As opposed to being concerned about capital at the bank level, we can be more creative in working with borrowers and in completing foreclosures as the case may be," Mr. Levan said.
Steven Fritts, the FDIC's associate director for risk management policy, said the agency is not hearing much about banks setting up "bad bank" affiliates. Still, he said, "It can make sense to isolate those assets. It allows loan officers to focus on developing new business."
State laws on corporations and Federal Reserve and Office of Thrift Supervision rules on holding companies are what Mr. Fritts calls the "dominant legal drivers" for setting up such subsidiaries.
Taking foreclosed properties to auction is an alternative to managing them in a bad bank setup.
The Martin Realty Advisors in Alpharetta, Ga., and joint venture partner J. Durham & Associates have recently been advising several banks in southeastern states about auctions. "This is at an early stage," said Joe Durham, the president of J. Durham Associates. "We will start seeing more banks realize that they need to sell now because the markets are not getting better."
Mr. Durham said the first auction featuring bank assets will include undeveloped land, stalled condominium projects along the Florida Panhandle coastline, and stalled single-family projects around the Southeast.
Those kinds of properties are prominent as collateral for loans that DebtX sells in an online bidding process to more than 3,500 institutional investors. Mr. Greenland said he anticipates vacancies rising at numerous "marginal shopping centers," and that loans on retail properties could be the next to falter.
DebtX's business includes a five-year agreement with the FDIC, signed last year, to sell real estate assets that are in receiverships.
Friday, May 16, 2008
ON THE PATH TO BECOME A PRIVATE ANNUITY TRUST
COUNSELING CLIENTS
What strategies can planners suggest for clients who already own multiple homes in overvalued markets? If the bubble has not deflated in your area, you might counsel clients to sell their second homes if they want to get top dollar.
"We have a client who just sold a vacation home and an adjoining lot in Tahoe," says Stone, referring to the area around the lake that spans the California-Nevada border. "He wasn't using it enough to keep it, and he got a good price: $1.2 million." The price was so good, in fact, that the client would have had an $800,000 gain and a steep tax bill. "To defer the tax, we suggested this client sell the property to a private annuity trust," Stone says.
In this arrangement, the real estate is sold to a trust, which in turn makes a sale to a third party. The trust then reinvests the proceeds and pays lifetime income to the original owners as well as any balance to designated heirs. This way the client can defer income tax on the sale, effectively provide the heirs with a basis step-up and remove any funds left in the trust from the seller's taxable estate. But there are potential gift tax consequences, depending on the seller's age and the cash flow paid by the trust (see "Going Private," below).
Another tax-effective move is for clients to sell their primary residence and move into what had been a second home. The $250,000 home-sale exclusion ($500,000 for married couples) would shelter gains from the sale as long as the seller had lived in the house for at least two of the previous five years. If the clients decide to sell the former vacation home after living in it for two years, they would qualify for another $250,000 or $500,000 tax break.
"A married couple I represent did this recently, moving from the San Francisco Bay area to Tahoe," says Jane Williams, chief executive officer of Sand Hill Advisors, a wealth management firm in Palo Alto, Calif. "They sold their primary residence and moved into their vacation home." Williams works with many people who are experiencing a major life transition, such as a divorce or the death of a spouse. "The family home, which is often a major asset, can be an expense rather than an income-generator," she says. "For people with more real estate than they can maintain, we encourage downsizing."
What strategies can planners suggest for clients who already own multiple homes in overvalued markets? If the bubble has not deflated in your area, you might counsel clients to sell their second homes if they want to get top dollar.
"We have a client who just sold a vacation home and an adjoining lot in Tahoe," says Stone, referring to the area around the lake that spans the California-Nevada border. "He wasn't using it enough to keep it, and he got a good price: $1.2 million." The price was so good, in fact, that the client would have had an $800,000 gain and a steep tax bill. "To defer the tax, we suggested this client sell the property to a private annuity trust," Stone says.
In this arrangement, the real estate is sold to a trust, which in turn makes a sale to a third party. The trust then reinvests the proceeds and pays lifetime income to the original owners as well as any balance to designated heirs. This way the client can defer income tax on the sale, effectively provide the heirs with a basis step-up and remove any funds left in the trust from the seller's taxable estate. But there are potential gift tax consequences, depending on the seller's age and the cash flow paid by the trust (see "Going Private," below).
Another tax-effective move is for clients to sell their primary residence and move into what had been a second home. The $250,000 home-sale exclusion ($500,000 for married couples) would shelter gains from the sale as long as the seller had lived in the house for at least two of the previous five years. If the clients decide to sell the former vacation home after living in it for two years, they would qualify for another $250,000 or $500,000 tax break.
"A married couple I represent did this recently, moving from the San Francisco Bay area to Tahoe," says Jane Williams, chief executive officer of Sand Hill Advisors, a wealth management firm in Palo Alto, Calif. "They sold their primary residence and moved into their vacation home." Williams works with many people who are experiencing a major life transition, such as a divorce or the death of a spouse. "The family home, which is often a major asset, can be an expense rather than an income-generator," she says. "For people with more real estate than they can maintain, we encourage downsizing."
Monday, March 10, 2008
MAKE THE MOST OF EVERY DOLLAR
By: Eugene O. Smith, Jr. March 10, 2008
CEO Mestizo Media Group, Inc.
The principles of real estate investing are a bit more forgiving than investing in the stock market. Considering our curent economic situation, and the future of our property values our country has been put in an extremely vulnerable position. From within it looks as if the value of our land and homes has crashed, and that the we were all mistaken. Well I don't agree I think that the value of our land and homes has increased. I think that the systems we have in place to secure them has failed us.
Let me explain. I owned four properties less than a year ago. One being primary residence, two being investments, and the other raw land. The value of these properties at that time were low. This was proven to me by the ease of purchase. I had no serious difficulty finding the money to secure these investments. Now all of my properties were in the Washington D.C. metro area. The D.C. metro area is an absolutely fabulous place to live or visit. I love the culture, the sites and seafood, the history, and not to mention it's the capitol!
Well now that same real estate portfolio that I had created would be worth less than half of what it would have appraised for just 3 years ago. Lucky for me I sold it. Most people did not, And now with real estate agents reporting day on market times going in to the five and six hunreds ... it's not pretty.
So I guess my question is, what happened to the value? I still truly feel that there aren't many places on the planet to live that are much nicer that the D.C. Metro area. You see I have live in quite a few places, so I can say that. I've lived in; MD,WV,SC,OK,VA,FL,GA,NY,DC, and Germany. I've visited quite a few coutries and states as well. With all I've seen, I can say with confidence that the Washington DC area holds it's own. It really is breath-taking.
My value is not gone. People all over the planet would love to purchase those same properties that I once owned. They would love to have a vacation home in the same zip code as the U.S. Commander and Cheif. So what's all of the fuss about? Well for the first time in history, America is so broke that we can't even afford our own land. I'm afraid that there are plenty of foreign investors waiting in the wings for this very moment. If foreign investors really knew first-hand what has hapened here, they would be buying up high-value propery by the billions.
Wait a minute.......THEY ARE!!
The current mortgage failure is not only a threat to our economy, it's a HUGE threat to our national security. My mission over the next twelve months will be to educate myself and others to the advantages of using our TSP, TSA or 401-k accounts to purchase leveraged properties as a tax-deferred investment instrument.
CEO Mestizo Media Group, Inc.
The principles of real estate investing are a bit more forgiving than investing in the stock market. Considering our curent economic situation, and the future of our property values our country has been put in an extremely vulnerable position. From within it looks as if the value of our land and homes has crashed, and that the we were all mistaken. Well I don't agree I think that the value of our land and homes has increased. I think that the systems we have in place to secure them has failed us.
Let me explain. I owned four properties less than a year ago. One being primary residence, two being investments, and the other raw land. The value of these properties at that time were low. This was proven to me by the ease of purchase. I had no serious difficulty finding the money to secure these investments. Now all of my properties were in the Washington D.C. metro area. The D.C. metro area is an absolutely fabulous place to live or visit. I love the culture, the sites and seafood, the history, and not to mention it's the capitol!
Well now that same real estate portfolio that I had created would be worth less than half of what it would have appraised for just 3 years ago. Lucky for me I sold it. Most people did not, And now with real estate agents reporting day on market times going in to the five and six hunreds ... it's not pretty.
So I guess my question is, what happened to the value? I still truly feel that there aren't many places on the planet to live that are much nicer that the D.C. Metro area. You see I have live in quite a few places, so I can say that. I've lived in; MD,WV,SC,OK,VA,FL,GA,NY,DC, and Germany. I've visited quite a few coutries and states as well. With all I've seen, I can say with confidence that the Washington DC area holds it's own. It really is breath-taking.
My value is not gone. People all over the planet would love to purchase those same properties that I once owned. They would love to have a vacation home in the same zip code as the U.S. Commander and Cheif. So what's all of the fuss about? Well for the first time in history, America is so broke that we can't even afford our own land. I'm afraid that there are plenty of foreign investors waiting in the wings for this very moment. If foreign investors really knew first-hand what has hapened here, they would be buying up high-value propery by the billions.
Wait a minute.......THEY ARE!!
The current mortgage failure is not only a threat to our economy, it's a HUGE threat to our national security. My mission over the next twelve months will be to educate myself and others to the advantages of using our TSP, TSA or 401-k accounts to purchase leveraged properties as a tax-deferred investment instrument.
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