All Forum Posts by: Daniel Chang

I do plan to talk to my tax advisor about this.  But this is crunch time tax season, and it's hard to get ahold of him.  Just wanted to see if anyone here as an idea so I can at least start brainstorming a little.

If I'm in escrow selling a property, and the close date is in November.  That is <2 months from a new fiscal year.  Does anyone know if it is allowed to do an installment sale (or seller's financing...both are the same thing essentially), where buyer pays half on closing and half 1/2/2023 (<2 months later)?  My thought was to split the tax hit over 2 years instead of one.  My reading of IRS regulations seem to allow it, but nothing is specifically mentioned about <2 months between payments as long as it crosses a new fiscal year.

(Yes I'm aware of other options such as 1031, DST's, etc etc. I'm exploring the "just take the tax hit" option.)

You ask a question of ethics. This isn't about ethics. If I was the seller under contract, I would absolutely instruct my broker to continue to take offers. The potential buyer (you) under contract has the right to exercise your contingencies and drop the contract, at which point if I have other offers, it would reduce time on market. Furthermore, having secured other offers puts pressure on the contracted buyer to perform. It also improves my negotiation position. For instance, if a second buyer submits a LOI for higher than the current contracted price, I'm going to say "no" to everything, since if you walk away, I can sell it for more.

You still control the asset.  They can't sign another contract.  However having other buyers makes it less advantageous for you no doubt and hence you don't like it.  But it's a legitimate business practice.

Has anyone experienced an issue with tenants or tenants' employee/vendors smoking marijuana in states that have made it legal?  I have one tenant complaining about occasional smell of marijuana.  I think it's coming from the employee of another tenant.  Of course, this being California, not sure I can even restrict the use, due to the "medical marijuana" excuse.  

This hasn't reached a problem status yet, but just thinking ahead as it may get there.

If you DIDN'T sign the lease around, I'd advise you to just pay the water bill and raise the rent a bit to compensate.  

It sounds like you signed the lease already, so you're in a bit of a more sticky situation.  You didn't mention what kind of tenant.  For instance, if it's an office tenant, they likely use very little water, compared to residential.  The problem is you randomly assigning a percentage may cause your tenant to balk...and rightfully so, since that's not the water she used.  

It also depends on how much the water bill is. 

What I would do is approach the tenant and offer a full refund of all the water she has paid for (because it was your mistake), but in exchange agreeing to addendum the lease where she reimburses you a $xx/month for water or % of water bill.   

I'm not a lawyer.  Nor do I have any idea what's in your contract.  

In generality, if the seller is bound to a contract, the repercussions is if you decide to sue him.  You can sue for damages or specific performance or both.  

I can hear your attorney groaning already.  You want $85K, more than what you have under contract, to walk away.  Keeping in mind you haven't paid anything yet, so it's a pure $85K profit.  The courts are meant to make you whole, not give you a windfall.  

Relax, you actually have the upper hand here.  What you need to decide is how much is worth your time, money and aggravation to pursue this in court.  If you have the property under contract at $62K, but it's truly worth $90K, I'd probably ask for $28K but would probably walk away with half that amount.   

In general, the answer to your question is none-nada-nothing.  A lease is generally considered a liability.  So from the tenant's perspective that lease isn't worth anything.  

However, let's take the following situation, generally all would need to fall in line:  Long term lease in a highly desirable area, market rate in the area outpaces the lease growth, the lease itself is freely assignable or can freely have a sublease, ok then yes the lease is worth something.  For instance, if market rate is $40 PSF, but the lease is paying $25 PSF with 10 years left, then there is value owning the leasehold.  You can then sell/assign the lease, or sublease it and keep the difference.  

In the above case, the landlord made a mistake.  So unless you find a landlord who made a mistake, again in general, the lease isn't worth anything.  

Thanks for sharing this.

1) When you say the cap rate is 2x the norm of other commercial RE, do you mean car washes?  Or all commercial real estate?  Buying a car wash is more like buying a business with a real estate component attached.  You need to compare apples to apples, meaning what is the cap rate of other car washes that have sold.  

2) Everyone wants to reduce tax.  Your mistake was that commercial owners are a bit more sophisticated than residential owners.  Honestly, your fuzzy math of how you almost arrived at their asking price made me cringe a bit.  If I was a seller, I'd be a bit insulted as well.  As in, "is he trying to pull one over on me?"  By doing what you did, you did not take into various factors including opportunity cost and time value of money that works against the seller, but somehow lumped all future interest and tax savings into the present value. 

3) I thought your request of training for "next 2 years" was a bit much.  

@Michael Gayer Jr

I'm not sure if you are asking about residential or commercial.  And I'm unsure if you are buying it for yourself as a owner-user or you're buying it with a tenant in place.

There's a whole bunch of legal mumbo jumbo that I'm not addressing, like what you can use the property for, who you can lease to.  So make sure it works for you.  

From a financial perspective:

If you're looking at an owner-user, then you would calculate the difference between a standard lease for a comparable property compared to the maintenance cost of the leasehold over the term of the leasehold, and discount it back to present value.  

For instance, say this is regarding an office space.  This leasehold interest will have ongoing maintenance of $300/mo.  But if you were to lease a similar office space, it would be $1000/mo.  The term is for 10 years, after which you own nothing.  Essentially, you would have a "gain" of  $700/mo over 10 years.  You then apply a discount factor, factoring things into it like illiquidity and apply it to the expected future cash flow savings and arrive at the present value.  That's what you should pay for it today. 

You can only lower the tax bills by other means (IRAs, HSAs, deductions).  If you have other stock that have taken a loss, you can sell those to offset the gains.  As for the stock that you sold, you realized your gains and so yes there's an automatic tax liability.  

A cash offer is stronger than a loan contingency offer.  Some real estate can only be bought with cash.  Most people don't have the ability to do an all cash offer.  What you can try and do next time if you have the cash, is to make a loan offer with no contingency, showing that you have the cash to close if needed.  That should be as strong as a cash offer.  Ultimately, sellers want to know you can close and not unnecessarily tying up their property.  

My thought was also, just get a real estate license and get into commercial brokerage if you're interested in commercial.

Very few buyers have the ability nor desire even if they have the ability to purchase in cash.   You would be essentially have a clientele of ultra high net worth, family offices, and institutional buyers.  So on the buyer side, you are dealing with sophisticated people.

As mentioned by others, on the seller side, you're dealing with sophisticated people.  They aren't going let you tie up property so that you can show it to national tenants, nor are they going to let you have it for a discount of 20-50%

The properties that attract credit worth national tenants are not the type that will require a wholesaler.  The dilapidated and distressed properties may hear offers from a wholesaler, but those are the class C and D properties that do not attract cash buyers and investors.  

I could go on.  It's great to think about this and think about possibilities.  But essentially everything you just listed you can do as a commercial real estate broker, and do so more "legitimately".