All Forum Posts by: Chris K.

@Mindy Jensen

In the "proper" construction world, everyone uses the AIA system for construction projects. There, a contractor would submit a schedule of value to the owner (or subcontractor to the GC). Most folks divide up the schedule into four categories. Something like this:  

• Admin/Mobilization/Shipping: This section accounts for paperwork and other administrative tasks. Also accounts for mobilization costs (e.g. lodging for field team) and shipping costs for materials. 

• Materials: This section accounts for all the material costs. Depending on the project, you could have many different sub-sections. 

• Labor: Accounts for the installation and labor costs per scope. You can create multiple subsections. 

• Punch List: Accounts for any punch list items involved. 

And then there is retention. In the commercial construction world, you have a 10% retention that gets paid at the end of the project once everything is done. The idea is to motivate the contractor/subcontractor to deal with any issues that may arise within a few months after the project is done. 

Can smaller projects adopt the above model? Maybe. I have to say that the AIA system --- despite its flaws --- makes it easy for parties to work together. Everyone understands how it works so folks do not need to invent a new system from scratch. 

In the AIA system, there are no real deposits or advances. Once in a while, you may have to do so if the material vendor requests it. But the contractor and subcontractor are expected to foot the bill for one to two months. 

In terms of the owner buying the materials, I personally wouldn't recommend it unless the owner really knows what he or she is doing. If someone made that offer to us, we would either reject it or expect the owner to get it completely right. If they are wrong, we would submit a change order for additional costs. In our trade, I would not expect any owner or GC to get this correct since our industry is extremely specialized. If you are in a commodity trade, maybe.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Kristin Caras

For lawyers, I would recommend using different ones depending on the state. Even as a PA lawyer, I still rely on other lawyers for out-of-state/out-of-country deals. 

For CPAs, I'm not sure if it would make sense to use multiple ones. The "main" job of a CPA is to deal with federal taxes. It sometimes makes sense to use different CPAs if they have different expertise (e.g. one CPA for real estate transactions, another CPA for manufacturing business, etc.). But if it is just for real estate purposes, I'm not sure if it will make a major difference.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Paul Nicklin

Here's the link to the tax bulletin: 

https://www.revenue.pa.gov/GeneralTaxInformation/TaxLawPoliciesBulletinsNotices/TaxBulletins/RTT/Documents/rtt_bulletin_2008-01.pdf

I would take a look at it if you are interested in the topic. I think Scenario 4 is most applicable to your situation. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Erin Bonsell

I see. Just so you know, this is probably what's happening:

• When a tenant appeals from the magistrate court, it's a de novo appeal. It basically means the magistrate hearing is moot. So you will need to do a new complaint, new hearing, etc.
• Likewise, the Court of Common Pleas will automatically grant a supersedeas as long as the tenant posts the rent. This means that no one can enforce the judgment at the magistrate level until you finish the proceeding at the Court of Common Pleas level.
• Just based on the procedural rules, the tenant has a month or two to file an answer. If they want to drag it out, they could reasonably stretch it out to three months or more (e.g. filing preliminary objections, etc.). Then you could have discoveries, judgment on the pleadings motions, summary judgment motions, etc. 

Based on the above, I'm not particularly surprised that you are now only getting to the hearing at the Court of Common Pleas level. Cases do not move fast once you get to the trial court level. There are things that you could do as a lawyer to get to the judgment faster for you but it will cost money. Going back and forth on a single motion is a few thousand dollars depending on the complexity. Given that this is an eviction matter, I assume your attorney thought it was not in your best interest to consider those options. It also sounds like you did not evict him for failing to pay rent. This could mean that the issue before the Court of Common Pleas involved more complicated legal or factual issues. That would further drag out the proceedings. 

Note that the tenant has the right to appeal one more time to the Superior Court if he has the money and wants to be spiteful. That could take another six months to over a year. Even if he loses there, he could file a petition with the Pennsylvania Supreme Court to hear the matter. They probably won't grant it but that buys him another few months. 

I guess what I'm trying to say is that lawsuits are lengthy and complicated. The remedy for most landlords in this situation is non-payment of rent. If he fails to pay rent, you can follow certain procedures to revert it back down to the magistrate level. But if the tenant can pay and afford a lawyer, theoretically they could drag on the matter for years. It's rare but it happens from time to time. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Colleen Brooks

I think @Marc Winter is organizing these? I haven't had a chance to attend it but I recall seeing something about it. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@David Lee Hall, III

You are probably right that the Department of Revenue cannot realistically audit every transaction. So I assume many wholesale transactions can get away with it. 

The real issue is the potential penalty. It's been a while since I looked at this side of the law, but there is basically no time limit on when the Department of Revenue can come after the parties for the unpaid realty transfer tax. And the penalties for failing to pay is pretty high (something like 10% to 20% upfront and 1% monthly compounding interest thereafter). So for every transaction where there are unpaid realty transfer taxes, there is a silent debt that is growing at a quick pace. And in theory, they can come after you long after you retired as a successful investor.

This is one reason why people voluntarily pay these taxes. Back when I practiced more, the issue that real estate lawyers had to do was acquisitions of "real estate companies." For a long time, major developers tried to avoid real estate transfer taxes by buying the holding entity (e.g. LLC that owns the building) instead of the building itself. Over the years, the PA Department of Revenue changed the law and its interpretation of the existing law to go after these transactions. In these transactions, the parties are expected to voluntarily report to the PA Department of Revenue.

Now like the wholesaling example, it is possible to get away by not reporting the taxable event to the PA Department of Revenue. The problem, however, is the penalty. For major deals, the penalties alone can be in the millions and can have major consequences for the non-reporting party (e.g. the lender or tenants declaring breach, etc.). It's just not worth the risk.

One last thought: your story is one reason why I generally prefer attorney-owned title companies. It's not so much that attorneys are inherently more honest (insert your own lawyer jokes here). It's just that they have more to lose if they do not handle a deal correctly. For example, failure to advise the transacting parties about paying realty transfer taxes can have serious consequences for lawyers. It could lead to malpractice claims and it could even lead to disbarment if they knowingly fail to advise them on it. Criminal penalties are not outside the realm of possibility depending on how egregious the conduct was. 

Now this is not to say that non-attorney-owned title companies won't face liability as well if they make a mistake or engaging in fraudulent conduct. But the stakes are different. Even a disciplinary record can have serious consequences for lawyers when it comes to making a living. It's like a scarlet letter that we must wear for the rest of our lives and it's in the public record forever.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Paul Nicklin

It's a bit more complicated than assuming that every wholesaling transactions are automatically double taxed. I don't have it in front of me, but the PA Department of Revenue published a special tax bulletin on this very exact question. You should be able to find it by Google. It lays out the different scenarios that can result. 

In terms of who pays, @Steve Babiak is correct the PA Department of Revenue does not care who pays it. But if you review that bulletin, you can see some examples of how the tax obligations are divided. Do note that the underlying contracts between you, seller, and the wholesaler may say otherwise. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Derrick U.

What @Brian Burke said about the growth projection is why investors make these seemingly low COC investments. Just to give you a perspective, our construction company works on big new construction and rehab projects all over the Northeast. When you look at the amount of money they spend on these projects, you often wonder how they make economic sense.

Now the actual answer is complicated and has to do with many factors (e.g. availability of grants, tax credits, local incentives, etc.). But a big reason why they do these projects is that they have faith that the market they invest in has the potential for growth. 

For example, many of the projects that we work on are in NYC or right nearby. I believe the average rent for a 1BR or 2BR apartment in this area increased by about $1500 a month in the past ten years. That kind of growth has an incredible impact on the ultimate returns --- especially as the project size grows bigger. By contrast, consider the area that I live in. When I first move to the area about eight years ago, I rent a very nice, large apartment for around $850 plus utilities. Eight years later, you can rent that same apartment for basically the same rent.

This is not to say that everyone should jump on the appreciation/primary market bandwagon. I'm also not discouraging investors from looking at cash flowing, 10 cap-ish markets. You can find success in both places. You just need to adjust the strategy depending on the market you are dealing with.  

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Erin Bonsell

It's very hard for folks to give any meaningful advice without knowing all the facts. What was the original basis for the eviction? What is the current issue on appeal? And what stage of the appeal is it in? Court of Common Pleas? Superior Court?

Based on what you wrote, it sounds like you either have a high-income tenant or a tenant that has a personal connection to a lawyer. Generally, tenants fail on appeal because they cannot keep up with rent and deal with the formalities involved when you go above the magistrate level. But if they can overcome that (and they feel spiteful), they could theoretically drag out the matter for years. It's rare but it happens from time to time.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Komi Agbodzie

What's the interest rate on your debt? If you have high-interest debt, it may make sense to pay that off first. If the interest rates are low/reasonable and you are confident that you can get a higher ROI, then perhaps it may make sense to invest rather than pay off the low-interest debt.

As for the SEP-IRA, I'm personally not a big fan of using IRA money for investing in real estate. But reasonable people can disagree on the topic.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.