All Forum Posts by: Tom C.

Does it create any complications having the general partner of an LP be a subsidiary of the LP?

I am sure you have considered this, but I would just slow your pace (if your prior pace hasn't elimnated that option). If you did seven deals this year, then if your funds work... do 4 next year, but be even MORE selective.

It seems that to stay "productive" people often take good projects, better projects and of course the best projects. You may even look at your seven rehabs and see that you know that several were better financially than the others--even before you swung a hammer. If your resources get strapped, be very selective and only swing at those "homerun pitches."

I like to just snap a quick photo from an iPhone and email the image of the reciept to a gmail account that I use soley for receipts. That way when I leave the store, I don't have to worry about where I put those darn receipts!

Happy Turkey Day!

If the contract stated July was the end date. And you BOTH agreed to that date to close by, then that seems pretty bi-lateral to me. I may be seeing why California is such a rough place to do business.

I am wondering what the group thinks of a two-entity stucture like this:

Limited Partnership - LP interests owned by individual [Self/Family], and potentially a small portion owned by the C-Corp, if it makes sense to do so. The GP (General Partner) for this partnership is the Management Company (a C-Corp discussed below). For the management of the investment, the LP contracts with the GP for a market-based management fee. All assets are owned at the LP level, allowing income to flow tax to the entities who own an LP interest and are taxed only once at the owner level. Any risk (beyond loss of investment) is soley born by the GP (the C-Corp) and not LP owners.

[I have purposefully limited the LPs in my example to one, but in practice, I see this being several based on the various partnership you may choose to form]

C-Corp - Management Company - Stock owned by individual [self/family/ira]. Revenue generated primarily by fee income from management agreements with LPs. Generally, this would be service based and would eat most of the business costs you generate. This company would receive the compensation for any work that may be done unrelated to the LPs or W2 earnings. It will have at least one employee and would seek to manage its affairs try to have taxable income of approximately $50K/yr to fill the lowest tax bracket for a C-Corp at 15%. Additional funds would be payrolled out, likely into deferred comp arrangements like a profit sharing plan.

C-Corp wouldn't dividend unless it had retained earnings >$250K (where it would get taxed to retain its earnings)... so at some point you may find yourself managing to break-even, or alas... paying some dividends. I beleive you could even structure the C-Corporation in a manner that it could be owned by your IRA making a dividend less troublesome.

Just wondering about your thoughts. Am I missing anything?

If you are emotionally prepared to evict if needed, then go for it. It seems the economics work and that you have thought this out adequately.

In my view this is not a good deal for you, but GREAT FOR "THE MAN" and I am not sure your math makes sense.

Here is my more pessimistic (or conservative summary) [Devil's advocate] I hope you take this as it is intended... as constructive feedback. So you buy an asset for $100K and effectively beleive you will sell it for a $50K loss ($100K - $20K - $30K). To offset this loss, you would have the generate $50K of pretax earnings to breakeven over the life of the agreement ($3.3K in earnings a year). [actually, more since you wouldn't get the $30K until the 15th year]

AND don't forget, you also agreed to operate that asset for 15 years and generate $80K of after tax cash flows (since repayment isn't an expense) to buy down the note (to the benefit of the option holder). That is an average of more than $5.3K/per year (after tax) you would need to generate each year. On a $100K property, I would be suprise if this scenarios would cash flow. Assuming your note was interest-free, you would need a cap rate of about 10% to make this work. And interest isn't free.

You will note that from your example, you actually wouldn't want to pay off the debt. (there is no incentive to you) You would want to just hold the asset and take the cash flows. The option holder unless they had some reason to trust you would see the incentive you have to just not pay the mortgage and collect rents until the bank foreclosed. Afterall, the MAN foreclosing (calling the property) and the bank foreclosing are pretty similar economically to you.

In short, what you get is the ability to operate unlimited properties for the MAN, where you strive to repay the 80% loan on each property, only to have the MAN call the property away from you in the end.

And don't get confused by the money you perceive getting. All of it in this deal is pumped into financing a property that ultimately goes to the MAN.

I would prefer a partnership where you had some upside. The structure may not be broken, but the economics you get in the example sure are!

FYI - You don't need to recapture depreciation when you sell an asset at a loss. In this case, you wouldn't have to recapture. Also, if I did a deal like this, I would have the option require a notice period and 1031 Exchange cooporation language, although this tax loss wouldn't need it.

Jeff S. Yeah, I suspect you are correct. My assumption was that you were nearing retirement rather than merely being unemployed with some rentals on the side planning to go start a new career starting businesses that only generate tax losses. Who knew... silly me, right? :-)

My point remains that you should consider both deferring your income in strictly enforced IRS restricted funds as well as consider the tax and save approach if you are approaching liquidation events in retirement accounts. If this is your situation... you can play it by ear or really sit down and evaluate your options. After all, we all know that real estate outside of retirement accounts can be managed in a manner to keep the earnings largely tax deferred for many years as it is sheiled by depreciation.

Check your property code and see if you agreed in your lease to provide the utilities to the tennant. In Texas (clearly not your State), Chapter 92 of the code, Subchapter G says that the landlord is not required to furnish utilities from a utility company if the utility lines are not reasonably available. Upon request, you are required to make repairs... you are not required (in Texas) to provide 3rd Party services to the location. I may be thought cruel, but are we also on the hook if a city bus stop gets moved and we are no longer providing that city service?