All Forum Posts by: Michael Plaks

Can someone guess as to why the OP's account is closed?

It usually happens to either promoters or tire-kickers. But the OP seems to have a real business, almost 700 posts and even was a podcast guest. Then, a week after posting a legit question - account closed?

@Shodhan Patel

This article is a good start:

http://www.nolo.com/legal-encyclopedia/why-its-tax-smart-hire-your-children.html 

@Geoff Kraemer

What will be your arrangement with the clinic in A - W2 or 1099?

@Jared Comeau

It's like saying "typical rehab is $40k" without seeing the size and condition of the property and adding in factors like the geographical location and the contractor's operation.

@Anthony R.

Don't stop at that. You should also sue yourself for shoddy workmanship and collect compensation from your liability insurance. Then fire yourself for poor performance and collect unemployment. Meanwhile, sue yourself for wrongful termination. I have a few more ideas, but they are not free. ;)

On a serious note, you can sell services between your own companies, but it is counter-productive in most cases.

@Karan Jhavar

No, you will not get $500k tax free after two years. You will only get 40% of your capital gain tax-free.

There is a little-known tricky rule about "non-qualified use" that requires you to take ratio: 6 out of 10 years were rental, so 60% is non-qualified and only 40% is qualified.

Sorry.

I'm very familiar with how the two programs work.

What my post is about is the legal uncertainty on whether REI businesses can apply AT ALL.

Besides, any EIDL grant received reduces forgiveness of PPP loan, so you  will have to pay it back

Below is my unsuccessful attempt to understand SBA rules - an area new to me, so I have an excuse.

PART 1 - FLIPPING and SBA

I was prompted to look into this after one of our clients, a flipper, showed us an interesting affidavit that his bank made him sign while applying for PPP. The affidavit said: 

“Building or constructing homes for future sale (50% or more of business revenue derives from building a home under contract with an identified Purchaser is eligible)” I certify that the above requirement applies to the applicant business.

My research led me to this SBA document from 2011 that describes SBA lending rules
https://www.sba.gov/sites/default/files/files/SOP%2050%2010%205%28D%29%20%289-15-11%29%20clean_0_5.pdf

The current SBA guidance linked to these old rules for PPP eligibility. Buried in the document is the mention that so-called "speculative" businesses are ineligible:

"Speculative businesses include: ...(e) Building homes for future sale (except under the Builders CAPLine program). Note: Construction of homes for future sale with no sales contract in place (spec homes) is eligible under the Builder’s CAPLine program. (13 CFR120.391)"

I decided to look into the law cited above, and it says:

"Under section 7(a)(9) of the Act, SBA may make or guarantee loans to finance small general contractors to construct or rehabilitate residential or commercial property for resale. This program provides an exception under specified conditions to the general rule against financing investment property. “Construct” and “rehabilitate” mean only work done on-site to the structure, utility connections and landscaping."

This left me scratching my head, with no answers:

1. The law seems to say yes to flipping
2. The guide seems to say yes, but only if there is no sales contract in place (which suits flippers)
3. The bank affidavit seems to say yes, but only with sales contract in place (huh?)

If someone can make sense of all this, please enlighten this confused accountant. I blame it on my ESL classes.

By the way, I seem to not be the only one confused, judging from this article:
https://www.bisnow.com/national/news/economy/construction-companies-eligible-for-cash-under-cares-act-but-homebuilders-still-in-limbo-103805


PART 2 - INVESTING and SBA

That old SBA guide (and it is specifically referred to in the SBA guidance on PPP) has another troubling section, listing businesses that are ineligible:

"Passive Businesses (13 CFR 120.110 (c))
(1) Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under 120.111) are not eligible.
(2) Businesses primarily engaged in subdividing real property into lots and developing it for resale on its own account are not eligible.
(3) Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible. For example, shopping centers are not eligible...
(4) Apartment buildings and mobile home parks are not eligible. But, hotels, motels, recreational vehicle parks, marinas, campgrounds, or similar types of businesses are eligible if more than 50% of the business’s revenue for the prior year is derived from transients who stay for 30 days or less at a time..."

The law itself is not nearly this specific:

"...Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds..."

And again I'm left with unanswered questions:

1. These rules were put in place to prevent SBA lending for acquisition and improvement of real estate. OK, fine. But PPP program is lending money for payroll, not for acquisitions or improvements. Are investors excluded anyway?
2. What about EIDL loans?
3. What happens if a real estate investor already received PPP money, as some have? No forgiveness? Immediate return of funds?

At least I have company as far as being confused, so I don't feel hopelessly dumb:
https://www.forbes.com/sites/brendarichardson/2020/04/11/apartment-industry-urges-sba-treasury-to-close-paycheck-protection-loophole/

I suggest you ask in the local REI clubs, local Facebook groups or, better yet, in your local forum here on BiggerPockets. The attorney needs to be licensed in the state(s) where you do business.