Be Informed!

In this situation our investor, consulting with his CCIM, was advised that the apartment building he owned was never going to satisfy his investment goals, and that he should sell the property. The timing was such that the Tax Reform Act of 1986 was four months from it's effective date. The game plan was to hope to expose the property to an investor, or ill-advised syndicator, that would analyze and evaluate the investment based on the existing tax law...with no consideration for the new tax law that was to take effect in a few short months.

An analysis of the property using pre-1986 tax law indicated an investment value in the area of $1,100,000 to $1,200,000 dollars, while an analysis using the new tax law (to take effect in a few months) indicated an investment value in the area of $800,000. It became evident through in-depth expert analysis, that our investor had a short window of opportunity. In order to salvage 25% of the property's value, he had to dispose of the property before the impact of the Tax Reform Act of 1986 set in. Our investors story ended well, as outlined below. Continued below

Our investors story ended well...he was able to sell the property through the ill-advised syndicator he had hoped to find for $1,100,000. In fact he settled (closed) on the property one month prior to the new tax law taking effect.

For the buyer of the property (the syndication), the story did not end well. In just over a year the property went to foreclosure. Why. . .?

The buyer paid far too high a price for the property, reasoning that the price they paid was comparable to the price the seller had paid, and the price the buyer paid was in line with what similar properties had sold for in recent years, all confirmed by a formal appraisal. No consideration was given to an Investment Value analysis, which would have taken into consideration the upcoming tax law changes.

Let's take a bird's eye view of that scenario. As a result of an expert "Investment Value" alternative strategy analysis, our investor was able to salvage most of his invested capital. He was able to market the property within a limited window of opportunity. . . because he was informed.

The poorly informed buyer of his property purchased it based on an after tax cash flow projection based on the existing (pre-1986) tax law. None of the advice the buyer had access to considered the fact that the new tax law (to become effective in a few months) would wipe out much of the tax benefits, thereby much of the "Investment Value" of the property. Keep your finger on the pulse of your real estate investments!!!

Any change, or proposed change in tax legislation should be the real estate investor's cue to evaluate alternative planning strategies that will impact yield positions positively rather that negatively. Especially if the rumbling's of a "Flat Tax" or ‘Fair Tax" should become a reality. Real estate stands alone as an investment vehicle that provides the opportunity for financial structuring as well as tax planning strategies over the life of the investment. . . in the acquisition, the holding, as well as disposition phases of the investment.

About the author: Stewart L. Mac Donald, CCIM, is President of Real Estate Assets, Inc., a consulting services company focused on maximizing wealth through Asset Management in the real estate portfolio. Mr. Mac Donald has counseled on and has been an active participant in a wide range of investment real estate projects. He has written and presented seminars on "Strategic Planning in the Investment Real Estate Portfolio" before bar associations, financial planning and investment groups.
http://www.real-assets.com
http://www.real-estate-assets.com

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