Brevard County - Naples Fl Commercial Real Estate

1031 Tax Exchanges

 

From Wikipedia, the free encyclopedia

It has been suggested that this article or section be merged with 1031 exchange. (Discuss)
Under Section 1031 of the Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.
To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business or for investment. Stocks, bonds, and other properties are listed as expressly excluded by Section 1031 of the Internal Revenue Code. The properties exchanged must be "like-kind", i.e. of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. Personal property used predominantly in the United States and personal property used predominantly elsewhere are not like-kind properties.
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.
Taxpayers may wonder whether items such as equipment used on a property are included in the lump-sum sale of the property, and if they are able to be deferred. Under treasury regulation §1.1031(k)-1(c)(5)(i), property that is transferred together with the larger item of value will not exceed 15% of the fair market value of the larger property. So for equipment with a fair market value of $15,000, as long as the qualified like-kind property sells for >$100,000, the equipment can be included in the exchange of property and any gain realized can be deferred.
Cash to equalize a transaction cannot be deferred under Code Section 1031 because it is not like-kind. This cash is called "boot" and is taxed at a normal capital gains rate.
If liabilities assumed by the buyer exceed those of the seller (taxpayer), the realized gain of the seller will be not only realized, but recognized as well. If however, the seller assumes a greater liability than the buyer the realized loss cannot offset any realized and recognized gain of receiving boot such as cash or other personal property considered boot.
Originally, 1031 cases needed to be simultaneous transfers of ownership. But since Starker vs. U.S. (602 F.2d 1341), a contract to exchange properties in the future is practically the same as a simultaneous transfer. It is under this case that the rules for election of a delayed 1031 originated. To elect the 1031 recognition, a taxpayer must identify the property for exchange before closing, identify the replace property within 45 days of closing, and acquire the replacement property within 180 days of closing. A Qualified Intermediary must also be used to facilitate the transaction.

Section 1031 Like-Kind Exchanges

Section 1031(a) of the Internal Revenue Code (26 U.S.C. § 1031) states the recognition rules for realized gains (or losses) that arise as a result of an exchange of like-kind property held for productive use in trade or business or for investment. It states that none of the realized gain or loss will be recognized. It also states that losses cannot be deducted.
1031(b) states when like-kind property and boot can be received. The gain is recognized to the extent of boot received.
1031(c) covers cases similar to those in 1031(b) except when the transaction results in a loss. The loss is not recognized at the time of the transaction, but must be carried forward in the form of a higher basis on the property received.
1031(d) defines the basis calculation for property acquired during a like-kind exchange. It states that the basis of the new property is the same as the basis of the property given up, minus any money received by the taxpayer, plus any gain (or minus any loss) recognized on the transaction. If the transaction falls under 1031(b) or (c), the basis shall be allocated between the properties received (other than money) and for purposes of allocation, there shall be assigned to such other property an amount equivalent to its Fair Market Value at the date of the exchange.
1031(e) stipulates that livestock of different sexes do not qualify for like kind exchange.
1031(h)(1) stipulates that real property outside the United States and real property located in the United States are not of like kind.

 

 

Real Estate Investment Analysis Formulas

Income and Expense Statement

Income

Potential Gross Income (PG1) $__________

Less: Vacancy and Bad Debt Allowance __________

Equals: Effective Gross Income (EGI) $__________

Operating Expenses

Exclude: Depreciation

Mortgage Payments

Non-Operating Expenses. E.G Directors Salaries

Capital Expenditures $__________

Net Operating Income (NO1) __________

Less: Debt Service (P + I) __________

Cash Flow Before Tax (CFBT) __________

Less: Income Taxes __________

Equals Cash Flow After Tax (CFAT) $__________

Financial Measures:

Potential Gross Income Multiplier (PGIM)

Also called Potential Gross Rent Multiplier(PGRM)

PGIM = Market Value or Market Value = Potential Gross Income x PGIM

Potential Gross Income

MV = EGI x EGIM

= MV

PGI

Effective gross Income Multiplier (EGIM)

Also called Effective Gross Rent Multiplier(EGRM)

EGIM = Market Value or Market Value = Effective Gross Income x EGIM

Effective Gross Income

MV = EGI x EGIM

= MV

PGI

Net Income Multiplier (NIM)

NIM = Market Value or Market Value = Net Operating Income x Net Income Multiplier

Net Operating Income

MV = NOI x NIM

= MV

NOI

Capitalization Rate (Cap Rate)

Also called Broker’s Yield

Cap Rate(%) = Net Operating Income x 100 or Market Value = Operating Income x 100

Market Value Cap Rate(%)

= NOI x 100 MV = NOI x 100

MV Cap Rate(%)

Return on Equit y(ROE)

Also called: Equity Dividend Rate(EDR)

Cash on Cash Return

ROE(%) = (Net Operating Income – Debt Service) x 100

Equity

Where: Equity = Market Value – Mortgage

Debt Service = Principal & Interest Payment or MV = (NOI-DS) x 100 + Mortgage

ROE(%)

ROE(%) = Cash Flow Before Tax x 100

Equity

ROE(%) = (NOI–DS) x 100

(MV–Mtge.)

Default Ratio (Break-even) (%)

Using Potential Gross Income Using Effective Gross Income

= (Operating Expenses + Debt Service) x 100 = (Operating Expenses + Debt Service) x 100

Potential Gross Income Effective Gross Income

Financing Measures.

Debt Service Ratio (DSR) Loan to Value Ratio (%)

= Net Operating Income = Loan Amount x 100

Debt Service Market Value

Rental Apartment Building Measures.

1. Price Per Suite

2. Price Per Sq. Foot (Using Suite Areas)

3. Rents Per Sq. Foot per month

4. Operating Costs

a. Operating Costs Per Suite Per Year

b. Operating Cost per Sq. Foot per Year

5. Operating Expense Ratio (OER) = Operating Expense x 100

Effective Gross Income

Home Financing:

Gross Debt Service Ratio = (Principal + Interest + Taxes)

Gross Family Income

Lenders often modify the basic Gross Debt Service Ratio Formula.

Modified Gross Debt Service Ratio = (Principal + Interest + Taxes + Heat + % of Maintenance

Gross Family Income

Total Gross Debt Service Ratio = (Principal + Interest + Taxes + Other Debt Payments)

Gross Family Income

Commercial Real Estate Sample Calculations

The following examples illustrate how to use the real estate formulas. In Example No.1 the information is obtained for the property and

the financial measures calculated. In Example No. 2 the financial measures such as the Cap Rate are obtained for comparable sales and

are used to calculate the Market Value for the subject property.

Example No 1.

Sale Price (Market Value) $3,165,000

Potential Gross Income: $306,000

Vacancy & Bad Debt Allowance: 4.5%

Operating Expenses $58,000

Mortgage $2,056,000

Mortgage Payment (P+i) $180,538

Number of Suites 30

Total Rentable Area 24,000 Square feet

Note: All figures are annual

Calculate: Potential Gross Income Mulitplier (PGIM)

Effective Gross Income Multiplier (EGIM)

Net Income Multiplier (NIM)

Capitalization Rate (Cap Rate)

Return on Equity (ROE)

Default Ratio (Break even) based on:

Potential Gross Income

Effective Gross Income

Debt Service Ratio (DSR)

Loan to Value Ratio

Price per Suite

Price per Square Foot

Rent per Square Foot per Month

Operating Cost per Suite per Year

Operating Cost per Square Foot per Year

Operating Expense Ratio (OER) based on:

Potential Gross Income

Effective Gross Income

1. Construct an Annual Income and Expense Statement

Potential Gross Income $306,000

Less Vacancy & Bad Debt Allowance (4.5%) 13,770

Effective Gross Income $292,230

Operating Expenses 58,000

Net Operating Income $234,230

Less; Debt Service (P+i) 180,538

Cash Flow Before Tax $ 53,692

2. Calculate the Financial Measures

Potential Gross Income Multiplier (PGIM):

PGIM = MV = 3,165,000

PGI 306,000

= 10.34

Effective Gross Income Multiplier (EGIM):

EGIM = MV = 3,165,000

EGI 292,230

= 10.83

Net Income Multiplier (NIM):

NIM = MV = 3,165,000

NOI 234,230

= 13.51

Capitalization Rate (Cap Rate):

Cap Rate = NOI = 234,230 x 100

MV 3,165,000

= 7.40%

Return on Equity (ROE):

ROE = (NOI – DS) x100 = Cash Flow Before Tax x 100

EGI Equity

= 53,692 x 100

(3,165,000 - 2,056,000)

= 4.84%

Default Ratio (Breakeven):

Based on Potential Gross Income:

Default Ratio = (Operating Expenses + Debt Service) x 100

Potential Gross Income

= (58,000 + 180,538) x 100

306,000

= 77.95%

Default Ratio (Breakeven) cont.

Based on Effective Gross Income:

Default Ratio = (Operating Expenses + Debt Service) x 100

Effective Gross Income

= (58,000 + 180,538) x 100

292,230

= 81.63%

Debt Service Ratio (DSR) = Net Operating Income

Debt Service

= 234,230

180,538

= 1.30

Loan to Value Ratio % = Loan Amount x 100

Market Value

= 2,056,000 x 100

3,165,000

= 64.96%

Price Per Suite = 3,165,000

30

= $105,500

Price per Square foot = 3,165,000

24,000

= $131.88

Rent Per Sq. Foot per Mo. = 306,000

24,000 x 12

= $1.06

Operating Costs Per Suite Per Year

= 58,000

30

= $1,933

Operating Cost per Square foot per year

= 58,000

24,000

= $2.42

Operating Expense Ratio (OER)

Based on Potential Gross Income:

= Operating Expenses x 100

Potential Gross Income

= 58,000 x 100

306,000

= 18.95%

Based on Effective Gross Income:

= Operating Expenses x 100

Effective Gross Income

= 58,000 x 100

292,230

= 19.85%

Summary.

Potential Gross Income Multiplier (EGIM): 10.83

Potential Gross Income Multiplier (EGIM): 10.83

Net Income Multiplier (NIM): 13.51

Capitalization Rate (Cap Rate) 7.40%

Return on Equity (ROE) 4.84%

Default Ratio (Break even) based on:

Potential Gross Income 77.95%

Effective Gross Income 81.63%

Debt Service Ratio (DSR) 1.30

Loan to Value Ratio 64.96%

Price per Suite $105,000

Price per Square Foot $131.88

Rent per Square foot per month $1.06

Operating Cost per Suite per Year $1,933

Operating Cost per Square Foot per Year $2.42

Operating Expense Ratio (OER) based on:

Potential Gross Income 18.96%

Effective Gross Income 19.85%

Example No 2.

Potential Gross Income: $244,800

Vacancy & Bad Debt Allowance: 5.0%

Operating Expenses $49,300

Mortgage $1,685,000

Mortgage Payment (P+i) $147,500

Number of Suites 24

Total Rentable Area 18,720 Square feet

Note: All figures are annual

Calculate the Market Value using the following financial measures

Effective Gross Income Multiplier (EGIM): 9.30

Net Income Multiplier (NIM): 12.50

Capitalization Rate (Cap Rate): 8.00%

Return on Equity (ROE): 5.57%

1. Start by constructing the Annual Income and Expense Statement

Potential Gross Income $244,800

Less Vacancy & Bad Debt Allowance (5.0%) 12,240

Effective Gross Income $232,560

Operating Expenses 49,300

Net Operating Income $183,260

Less; Debt Service (P+i) 147,500

Cash Flow Before Tax $ 35,760

2. Calculate the Market Value based on the:

Effective Gross Income Multiplier (EGIM):

MV = Effective Gross Income x EGIM

= 232,560 x 9.30

= $2,162,808

Net Income Multiplier (NIM):

MV = Net Operating x NIM

= 183,260 x 12.50

= $2,290,750

Capitalization Rate (Cap Rate):

MV = Net Operating Income x 100

Cap Rate

= 183,260 x 100

8.0

= $2,290,750

Return on Equity (ROE):

MV = (NOI - DS) x 100 + Mortgage

ROE

= (183,260 - 147,500) + 1,685,000

5.57

= $2,327,011

 

 

Short Sales

Overview on Short Sales and Foreclosures
The Basics of “Short Sales”
by William Bronchick

You will likely come across dozens of properties in foreclosure with little or no equity, that is, the seller owes at close to or more than the property is worth. In these situations, lenders are sometimes willing to accept less than the full amount due, commonly referred to a "short pay" or "short sale."

Negotiating a short sale with the lender is a difficult process, generally because it is a daunting task finding a bank officer who has the authority to accept a discount. You will have to call around to locate the lender’s “Loss Mitigation Department.” More than likely, each lender you deal with will have a separate name for this department, so be patient when calling. Much like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and being bounced around an intricate maze of automated voice mail systems. Once you get in touch with the right person, then the negotiating begins.

From the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process - attorney fee's, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. Your job as the investor is to convince the lender that it will fare better by accepting less money now.

The lender will want some information about the property, the borrower and the deal he has made with you. Specifically, the lender wants to know what the property is worth. The lender will generally hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”). You can also submit your own appraisal or comparable sales information. In addition you will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood and the local economy if things are bad (copies of newspaper articles with “bad news” may help). A contract’s bid for repair estimates should also be submitted, which, of course, should be the highest bid you can obtain!

The lender will also ask for financial information about the borrower. Sort of a backwards loan application, the borrower must prove that he is broke and unable to afford the payments. The borrower must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more paperwork than an original mortgage application! The borrower should submit a “hardship letter”, which is basically a sob story about how much financial trouble the borrower is in. This may require a little literary creativity, and some help on your part. Don’t lie, just paint a picture that doesn’t look good.

Finally, the lender generally wants to see a written contract between you and the seller. The lender wants to make sure the seller isn’t walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the seller is the exact amount of the short pay to the lender. A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies simple won’t prepare one in advance of closing. You can prepare your own HUD-1, and simply write “preliminary” on the top.

Don’t be surprised if your short sale bid is rejected. Lenders aren’t emotionally attached to their properties, so they aren’t as likely to give you “steal.” Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes - if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value.

If you are interested in these properties please contact me and I can furnish you a list of properties

 

Buying Fixer uppers

Fixer uppers
Ask many a home buyer about the type of house they are looking for and many will reply "We are looking for something we can fix up and live in (or resell). We like the idea of gaining some quick sweat equity." The classic "fixer-upper" home. Unfortunately, there is a bit of fantasy in the notion, though. First of all, there are many more fixer-upper buyers than there are fixer-upper properties. Second, the current thinking in many minds is that anyone can make a killing in the Real Estate market, which is not always the case. Third,
many buyers totally mis-estimate both the cost and the time involved in fixer-uppers, severely impacting (and in some cases destroying) the profit potential. Unless you are fully prepared to deal with the realities of fixer-uppers rather than the fantasies, it probably is a good idea to look elsewhere for a home.

This does not mean that there isn't equity to be gained (or profit to be made) by purchasing the RIGHT property at the RIGHT price. The important notion is to understand that there are several factors that will make the difference between winning and losing in such a transaction.

The Mindset

The first factor that must be understood is that it isn't going to be easy. The only people who think that finding, buying, fixing and selling a home is an easy task are those who have never done it. Those with any experience (even if only once) will tell you that it rarely is as simple as it appears. In general, it is best to assume that repairs will cost twice what you estimated, take double the amount of time and,when finished, the house will be worth less than expected. If you keep that in the forefront of your thinking, the chances of being burned are much less.

Foreclosure sales are often good sources for fixer-upper properties. A couple of resources that specialize in listings of those types of homes are and . All three of the resources above offer free trial periods to evaluate their services and search for foreclosure listings in the area in which you are interested.

Start Out Small

Some of the worst examples of mistakes made by buyers of fixer-uppers are first-time buyers who bite off way more than they can chew. Examples of this are houses that have structural problems or will take an exceptionally long time to repair, or are located somewhere other than a desirable neighborhood. These can be a horrible drain on finances, time and peace of mind.

A much better strategy for the inexperienced is to purchase a home in a desirable neighborhood that is in need of cosmetic attention--new paint, carpeting, appliances, landscaping and the like. These repairs can either be handled by the homeowner or are easily contracted out, saving time, effort and money. Yes, money can be made on homes needing major renovations, even if they
are in less popular neighborhoods, but these are jobs for professionals, not homeowners (and definitely not for first-time homeowners!)

Avoid Surprises

The most expensive situations are often those that are the least expected--those nasty little (and often big) surprises that jump out at you. You can avoid many of these surprises, though, with a couple of easy steps taken BEFORE final commitment to a property.

1) Have the property thoroughly inspected. Have the inspector detail all obvious (as well as potential) defects in the property. NOTE: The seller may say "we are selling the house as-is, so NO inspections." Avoid this property like the plague.

2) Run the numbers. You must know the market values for houses in the neighborhood in which you are interested that need no repairs. Running the numbers means working them backwards to see how much equity or profit may be available (or even IF there will be any) in the deal. You will need to begin by computing the realistic value of the home when all repairs are made. From that point, you will need to subtract any selling expenses you will incur (commissions and the like) as well as the full cost of repairs and, most importantly, the amount of desired profit or equity.
Example:

$600,000: Expected Sale Price, Repaired
-40,000: Selling Expenses
-25,500: Repair Expenses
-50,000: Desired Profit/Equity
$485,000: Maximum Property Purchase Price

Don't be deluded into thinking that you'll be able to sell for more than the market value or do the repairs for less than the estimates. If the numbers don't fit--with a good amount of "wiggle room" for more expense or handling costs or if the property does not sell quickly--don't waste your time or your money!

Summing Up

When considering a fixer-upper, whether for resale or to live in with increased equity, go into the process fully prepared so you will avoid many surprises. For your first project, only consider structurally sound homes in good neighborhoods requiring cosmetic repairs only. Have any property you are considering fully inspected and then get firm estimates for all needed repairs. Most importantly, "run the numbers" to be certain that the potential for gain is truly there. If you are satisfied on all counts, you may very well be able to be successful with your fixer-upper project “Remember not making a decision is still a decision!

 

Building in Brevard County

 

Buying a lot and building your dream home may be the way to go. The cost of building will vary widely from $50.00 per square to $300.00 and up.
Basically lots in Florida as far as price goes will run as follows.
Most expensive

Open-water—Atlantic or Gulf
Open-water Inter-Coastal or other Rivers-Lakes
Canal Homes with Open water views (Bay or Atlantic-Gulf)
Canal homes-Boat able and quick access to open-water
Dry Lots—price widely varies based on the community and area.
As of September 2005, per an MLS search, the prices for vacant lots started at.
Melbourne, $45,000
Melbourne Beach, $375,000
Palm Bay, $40,000
Cocoa, $28,900
Cocoa Beach-there were none available
Titusville, $275,000
There is one problem in finding a custom builder right now and that is that most of the builders are really jammed since the last hurricane and also in trying to keep up with the explosive growth this year (2005) in building new homes, apartments.

Permit prices and restrictions will vary in each community. Generally the more environmentally sensitive the area is, the more restrictions there are in getting a permit. (Since the water is one of the main reason people want to be here, the state and the communities want to keep it that way.

Important:
Regarding pricing. The closer to the water and the deeper the boating,(boat draft-a 50 foot requires deeper water and wider canals than a flats boat) the higher the prices.
Another thing to do is find out what flood zone the property is in per FEMA maps and then talk to a local insurer on how that will affect your rates. Do this ahead of time.
#In all cases if you find a lot that you like, my suggestion is that you ask for a letter of build ability from the local zoning commission as a clause in your sales contract. Always-always, talk with the county yourself to get the update on the laws.

So, yes, you can build here and it’s done all the time, but make sure you ask all the necessary questions and if you can, get it in writing.

See the Biz directory for builders if that’s the way you want to go. If you want a new home contact a residential agent.

REGARDING BUILDING
Ask the REALTOR that you pick to help find you a good builder that can respond. Another consideration is to buy a lot and build later (be careful here as building codes and laws can change due to density controls) I would first see how long it takes to get a building permit and then if you get one how long you can wait. In the Keys when you get a permit there is a limit of a couple years during which time you have to at least start the process (bring electric to the site-do a septic check etc)
Since all this varies widely make sure you get all the answers, Probably best to go the the permit department and have a discussion.
Due to Florida’s stricter building codes, please check out http://www.brevardcounty.us/buildingcode/home/
Link to the Florida 2004 building code draft
http://www2.iccsafe.org/florida_building_code/

Zoning ordinances For Zoning Information, Contact the Broward County Community Code Compliance Division at 954-468-3434
The purpose of the Building Code is to protect the safety, health, and general welfare of the citizens through structural strength, stability, sanitation, adequate light and ventilation, and safety to life from hazards attributed to the built environment. This is accomplished through the implementation of building, plumbing, mechanical and electrical codes along with various state and local codes and standards

Information on Complaints Against Contractors:
Don't get nailed! Many citizens in Florida have fallen victim to dishonest, unlicensed or improperly licensed contractors. Florida Statute 489 requires all construction contractors to hold a valid contractor's license prior to engaging in contracting. Always require that a contractor show you a valid contracting license before you sign a contract. Some indications that a contractor may be unlicensed are: the contractor requests a large deposit or all of the money up front before any work has commenced, the contractor asks you to pull a "homeowner permit", the contractor pressures you to sign a contract "today or I can't give you this special price." To verify licensure of a contractor, you may call the State of Florida Dep't of Professional Regulation at 941 338-2373 or search their contractor licensing database. The City requires proof of licensure from contractors who pull permits for properties located in the City, so be sure to require that the contractor pull the permit in his name, not your name

So always play it safe and do it right. This will certainly help you in the Insurance area also---The extra structural costs for doing it better really pay off if a Storm hits and or you decide to sell

With regard to making any decisions, be sure to check with local and state permit and zoning authorities and a REALTOR and/or a Real Estate attorney

To find contractors, builders and other business vendors see the business directory for the area (Under real Estate section) or contact a local REALTOR for help.

*Regarding, building and building permits, be sure to check with the County and city building departments as the laws change.