All Forum Posts by: Jack Martin

@Candace Price it is important to understand which type of property will garner the highest amount of bonus depreciation.  Bonus depreciation is derived from the portion of the property's value with a 15 year depreciation schedule or less. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements".  Those property types are things like mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from the building(s) but rather from the improvements to the land.  In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building. In a similar fashion, if you can imagine how much landscaping is in a golf course as compared to the clubhouse, that will give you an idea why an extremely high percentage is allocated to land improvements. 

When a property is purchased, a cost segregation study is performed, wherein the value of the property is segregated into land (which is not depreciated), buildings (which are depreciated on a 39 or 27.5 year schedule), land improvements (15 year schedule), and other smaller items like personal property. At the election of the property owner bonus depreciation can be taken, which means 100% of that portion of the property's value allocated to those 15 year or less items can be taken as a passive loss in the year the property was purchased. Properly executed, an investment in these kinds of property can garner passive losses equal to or greater than the amount of capital invested. 

Because of this, we tend to see investors that are seeking passive losses look to our MHP strategy as a solution. This can be particularly valuable if they have experienced gains in the same calendar year, expect to experience gains, or expect to sell an investment property and want an alternative to a 1031 exchange. On that note, if you invest passively in a syndication (direct investment or a fund) alongside other investors, you will still receive your pro rata allocation of bonus depreciation on your K1 along with the other investors.

Keep in mind, each of these types of real estate have different intrinsic performance characteristics, so make sure you understand the property type's risks and potential as an investment on it's own.  Be careful not to invest in a poorly performing property simply for the depreciation. In that same vein, if you are investing passively in a syndication for bonus depreciation benefits make sure you vet the sponsor and understand the investment vehicle before you invest.  Bonus depreciation is great, but when you combine that with great investment properties that produce cash flow and appreciation, you have the best of both worlds. 

All the best,

Jack

@Caleb VanTimmeren if you are planning to scale, look into rent manager.  It will work well with both apartments and mobile home parks and is one of the better reasonably priced options out there. You can use quickbooks alongside rent manager, or you can migrate to rent manager's internal solution that would replace quickbooks.  

@Jim Vinh outside of the obvious 1031 strategy, cost segretation/bonus depreciation is another investment strategy that can shelter those gains and defer the tax that will be due. If you are seeking to invest the gains from the sale of your property and do not want to use the 1031 strategy, look for a passive investment with a sponsor who is utilizing the cost segretation/bonus depreciation strategy. 

Here is generally how the strategy plays out: when a sponsor acquires a property, performs a cost segregation study, and takes the bonus election, the portion of the property's value that is allocated to land improvements gets depreciated 100% in the same calendar year the property was purchased. Therefore, the investors receive those passive losses as long as they invested in that same calendar year. 

If you are seeking the highest % of passive losses, look for mobile home park investments as they will have a greater degree of land improvements than other asset types. An investment in a mobile home park fund can garner significant passive losses equal to your entire investment amount. In that case, this strategy would allow you to sell your property, invest the gains, and defer all of the taxes due. 

Keep in mind, this is a tax deferral strategy, so when the property(s) are sold there will be a recapture. However, with depreciation, the recapture is at a flat rate and is not based on your income tax bracket.  Currently, that recapture rate is 25%. Because of this, many investors see this strategy as a win in 2 ways:  first, they are able to invest 100% of their gains into another investment vehicle without paying tax and therefore gain the benefit of 100% of their capital's exposure to the new investment; and second, they are essentially creating tax arbitrage between their tax bracket rate and the flat recapture rate. 

All the best,

Jack

@Sagar Vijapura there is a difference between a direct investment and an investment in a fund. Direct investments can be set up in a variety of ways so be sure to understand how the investment entity is structured. 

In a fund, investors are typically investing in a Limited Partnership where the real estate assets themselves are owned in separate LLCs. In this structure, the Limited Partnership owns each of the LLCs and therefore owns the properties, but there are several layers of protection for investors. That is important for everyone, since nobody wants a lawsuit at one property to create exposure for the other properties, OR for the Limited Partnership. This structure is also important so each property has its' own books and records, bank accounts, insurance policy, etc.  That way there is no co-mingling of funds, books, or cross-exposure. For most people, creating an entity to invest in that kind of vehicle would be overkill if you are planning to invest as an individual.  

All the best,

Jack

@Chad R. although a 1031 is the most well-known strategy to defer gains, there are other strategies that can be as good or even a better solution, depending on what you are attempting to accomplish. For someone seeking to retire, exchanging into more properties may not be congruent with the lifestyle you are seeking. 

You may want to consider a more passive investment with a proven sponsor that uses a cost segregation study and elects bonus depreciation, which create significant passive losses for investors.  Those passive losses can offset the gains you made, as long as you sell your real estate and invest the gains in the same calendar year. With that background, keep in mind that some real estate (like mobile home parks) can offer significantly greater benefit with this strategy.

All the best, 

Jack

@Gina Tavizon yes, generally you should receive the same benefits when you invest as an LP (limited partner) that you would if you acquired real estate directly. I say generally tho, because not all sponsors will take the same approach, and different types of real estate will garner less or more tax benefits. 

As @Taylor L. mentioned above, cost segregation and bonus depreciation can deliver significant benefit to LPs, but not all sponsors will perform those studies.  Also, some real estate will deliver greater benefit to LPs than others, like mobile home parks. 

With that said, make sure not to let the "tax tail wag the dog". It is critical to invest with a good sponsor in good deals. It does no good to invest just to gain the tax benefits if the investment itself does not make money. Take your time to vet the sponsor and their track record, reporting processes, transparency, history of distributions, and develop a strong sense of trust and confidence. 

Also, make sure you understand the tax benefits and whether or not you will be able to use them.  In a mobile home park fund like ours, all investors will receive their portion of bonus depreciation, but not all investors can use it or even have a need for it. Generally, those tax benefits are considered passive losses and can only be used against passive investment gains. (so as an example you couldn't use those losses against your regular income) Make sure your CPA is knowledgeable in this area so you are getting good advice. All CPAs have different areas of expertise, so it is important you have the correct guidance. 

All the best,

Jack

@Colin Valenta as mentioned above, the value of a park is driven largely by the income the park creates. However, the cap rate that is used to determine the price will be impacted by several factors, one of which is the age and condition of the homes in the park.  

As an example, if you have 2 parks in the same neighborhood that were build around the same time with the same infrastructure, general condition and amenities as each other, the park that has all older homes would have a higher cap rate than it's neighbor with all newer homes. The lot rent at both parks may be the same, but the park with all newer homes would be more attractive to a buyer so a higher price would be warranted.  

@Ali Kassam one important item to consider when negotiating terms of a loan is the balloon payment. You don't want to put yourself in a position where the balloon comes due and the capital markets have dried up (i.e; 2009-2011) 

With most commercial loans, there are 4 items that are commonly negotiated or massaged: the % loan to cost, the interest rate, the amortization rate, and the length of the balloon payment. There are other items as well, but those 4 are the most commonly negotiated and they tend to work in concert with each other. For example, if you put more $$ down, you can achieve a better interest rate. If you want longer amortization or a longer balloon payment, the interest rate will likely go up. 

The risk to pay attention to with commercial debt is the balloon. Imagine if you acquired a property in 2005 with loan that included a 5 year balloon. In 2010, you would either have to pay off the balance of the loan, refinance with the existing lender, or refinance with a new lender. In those market conditions, DCR and LTV requirements became very strict, appraisers were extremely conservative with valuations, and the capital markets had dried up significantly, so even if you had an amazing property and managed to keep your occupancy high, it was still difficult to refinance. In those conditions, you would look back and wish you had procured a 10 year balloon instead of 5. Just keep that in mind when you are negotiating the terms of your loan.

All the best, 

Jack

@Tanya M. Tucker if you are seeking to acquire a smaller park, the best option will be seller financing. However, if the seller is not open to that, the best lenders to approach for smaller deals will be local or regional banks, or credit unions.

Keep in mind that a $200k loan takes the same amount of work as a $2MM loan, so you may come across some lenders who like MHP's yet they may not show serious interest in smaller deals. You can find out which banks have an appetite for mobile home parks by asking the MH/RV brokers in your area, networking through other owners of parks in your area, or simply obtain list of the smaller banks and CUs in your area/region and call them to see if they have lent on parks in the past. Ask that question up front and don't waste your time talking to lenders who don't already lend on MHPs. When you find a local lender who already loves them, they will be your best resource. 

@Charles LeMaire you raise a great point in your PS (PS. I don't expect sympathy! Yes, no matter what, this was a great investment) As Brian Eastman mentioned above, focus on the best investment and navigate tax the best you can given the situation.  Tax strategy is an important component of an investment, but it's a good reminder not to lose sight of the investment itself and allow the tax "tail to wag the dog". 

The alternative would be to lose money on an investment and therefore have no tax burden at all. I would prefer to share your experience and have the tax bill:)

Happy Holidays!

All the best,

Jack