All Forum Posts by: Evan Hyde

Question for the RE CPA's: 

If I have a deal where I am the sponsor and invest no equity, while my investors invest 100% of the equity, and we agree to split cash flows (let's say 50/50). 

Our first cash distribution comes out and I receive 50% of the cash. How is this characterized on my K1? One scenario where I pay no tax because I get a share of the depreciation, in which case my basis in the deal goes from zero to negative. This seems like the aggressive approach. Is this a legitimate way to complete a K1 under this structure?

Another scenario is that I get a distribution in excess of basis (which stays at zero because 100% of depreciation loss flows to the equity), in which case I believe I would owe ordinary income rate on my cash distribution. 

Under the second scenario, is there an interpretation where the IRS could say I have now "earned" 50% of the initial equity basis (thus triggering a big tax bill)? I would not expect this to happen, because I would argue that the initial basis is still at risk, and if the deal sells for a loss, the first priority would be to pay back the investors actual cash investment.  

How to the CPA's out there like to characterize this cash flow? 

Thanks guys. I agree with the basis answer. I've heard conflicting answers on the refi scenario. A refi would not change the basis of the deal, so I would think there needs to be a specific OZ rule to prohibit this, which may be forthcoming. 

I have also heard that one could get around a prohibition by getting a loan against the entity instead of the specific real estate asset. Any thoughts on this approach? 

@Nick P. - Initial financing is permitted as far as I can tell. You don't have to do all OZ deals un-levered. The lender would not get any OZ tax treatment on their income, but the owner of the asset would. It's cash-out refi's that are in question. 

Great info here guys. I've got 2 questions I hope someone can help with:

1. Substantial improvement requirement: If I put 60% leverage on a property and 40% cash down, do I need to double my cash basis in rehab costs (another 40%), or do I need to double the entire basis (spend another 100% of the initial purchase price)? It seems to me that if we have to double the entire basis, very few old buildings in OZ's will ever get rehabbed. And since the program is about deferred gains, and lenders receive no OZ benefit, I'm led to believe "basis" might mean "cash basis." But this may be wishful thinking. 

2. Can I build something un-levered in an OZ, refinance some/all of my cash out upon stabilization, but hold the asset for the full 10 years to receive the OZ tax benefit? This would give me my cash back much sooner, which still reaping the tax benefit. Probably also wishful thinking, but I haven't read anything prohibiting this. I don't think that refinancing is prohibited after executing a 10-31 exchange, so hoping this is the same. 

thanks for any help! 

Billy - you're right, you can learn everything the MRED teaches you on your own. The trade off is time. It's going to take years to get exposure to the kinds of deals you learn about in MRED in 1 year. I like the approach of just jumping in and doing a deal, but I also don't see anything wrong with working for someone else, earning a salary, and starting your own deals at a higher level.

Here's another component that's unique and pretty cool: The Utah Real Estate Challenge. Team of students have the opportunity to put together a pitch for a development deal that is presented to a room full of establishes pros. The winning team gets a $20k cash prize and some of the deals from years past have actually been built. It's a cool way to get your name out there and has led to several jobs or connections that have proven invaluable.

Evan

Porter, I am in my first semester at the U in the MRED program. It's fantastic and I highly recommend it. Like you said, networking is a big part of it. I think networking is given as much or more weight as the class work. You get incredible access to the big time Utah players which is great, but the networking with other students is also invaluable. We also get RE industry job opportunities that would normally be hard to find. I would be happy to share more about my experience if you're interested. Evan

@Brandon Turner it's the Urban Land Institute fall meeting... check it out at ULI.org. Lots of great presentations, tours, and networking opportunities. 6,000 pro's from the RE world will be there!

Hey BP'ers!

Is anyone out there going to the ULI conference in Chicago? If so, let's do a BP meet-up!

Evan

Hi Rob,

I live in PC and have looked at some condos and spoken with some property manager friends about these kinds of deals. There are, apparently, some properties where you can make this work. I didn't find them. My problem was that in my price range the units were only grossing $6k/year and the HOA was something like $350 month.

Higher end properties command a boatload of rent during the winter and as long as you rent it during peak periods (don't bring your family during xmas), you could possibly make enough during the winter to make a return. But you won't find a month to month renter in the summer and it will sit empty. Property managers here take 40-50% of gross rent.

I'm curious to hear about anything you find that looks enticing. I'd be happy to ask some property managers about certain properties you may be interested in.

Evan

Thanks for the feedback everyone! I know I need to find out a lot more about who is paying utilities and what expenses are likely. Either way, it sounds like I would need a much lower payment in order to cash flow. Probably also need a lower purchase price to actually make some money down the road.

Hello! This is my first post and I've been loving the BP forum and podcast for a few months now. I came across this deal and it seems pretty good. I need to figure out what to ask this seller.

Here's what I know now:

1924 Triplex, total rents of $1935/month
Asking $199k, $40k down, $1335/month seller finance

This guy needs to sell it quick, should I be asking for a lower down payment, lower monthly payment, lower sales price? Seems to me the sale price doesn't matter all that much if I can get great terms.

Thanks for the insight!

Evan