All Forum Posts by: Oren K.

John,

Thanks for the detailed response. I was not aware that if there was no 'release' that a tank could be left in-place, washed and then abandoned with with fill / foam inside.

I get that regulatory agencies are unlikely to say there will never be any 'liability' but it sounds as if the closure report / 'no further action' letter stands as comfort to the (new) owner and any lender that the issue has been fully addressed.

Oren

Hi John,

I do have a question(s) that I've been curious about. I understand the Phase 1 & Phase 2 process. Assuming an issues is found like an old tank in the ground. What happens next?

• Is a clean-up forced? 
• Who does it? 
• I assume that the current owner is responsible / pays but should a buyer consider taking an abatement and controlling the process?
• Is there some kind of filing / certificate at the end that warrants that all is clean and no further liability exists?

You get the idea.

Thanks in advance,

Oren

Jesal, 

With the additional information regarding your personal preferences provided, some more focus can be provided;

"may demand a lot of time", "prefer to buy stable":  All investments take some time commitment. Even if it is just on the front end by getting advice and deciding what to invest in as you are doing here on BP. If that is the limit of your ability to spend time, a truly passive investment seem most appropriate. 

There are a couple of passive options that come to mind that offer different levels of risk / reward;

1) Participating in a syndicate - Spend your time vetting syndications / syndicators that fall within your investment envelope (e.g. 50K, 250K). Once you invest, they take care of everything and you are basically along for the ride. If you do a good job of vetting, this is probably the lowest risk and lowest (but not necessarily LOW) return approach.

2) Partner with someone - You provide some / most / all the $ and they do all the work (which they get paid for). Similar to syndication but with fewer people. beyond the paperwork, a lot of trust is involved. Generally a bit higher risk and higher return.

3) Turnkey - You buy via a turnkey provider who does all the work but you have all the $ risk. Typically better returns but higher risk.

With all of these approaches, there is always the risk that things go off the rails and you have to spend a lot of time and effort to get them back on or to recover what you can. There are lots of threads on BP regarding how screen / vet / select a syndication / partner / Turnkey and issues to watch out for.

Good luck,

Oren

Bobby,

The deposit funds are not the PM's or yours. 

The funds must be either refunded to the Tenant if the unit was left in good order / normal use or used to cover the cost of 'extra-ordinary' cleaning / repairs / delinquency. IF after repairs / cleaning / delinquency, there are still any funds remaining, they still belong to the Tenant.

Hopefully the funds are being tracked in the bookkeeping system. Once the repairs / cleaning is done, an allocation is made for the 'extra-ordinary' stuff due to the Tenant. Those funds are then transferred from the Security Deposit account into the Rent / Income account in the Bookkeeping system.

Not sure what the law in your state but in many places, the security deposit funds are supposed to be segregated (i.e. kept in a separate bank account) until the tenant moves out.

That you are even having an issue with your PM on this is not a good sign. The PM and you should be familiar with how SD funds need to be treated according to the law and simply do it.

Oren

Bobby,

Don't quite agree with JD. 

Firstly - this is likely governed by state, county and even municipal law / regulation so check in your jurisdiction.

One question - Does your lease state that the 'Deposit' is for 'Security' or 'Last Months Rent' (LMR). IF for security that generally covers excessive damage. IF for LMR, then that is what it has to be used for.

I think that in general, the hording is not normal use of the unit and as such, any costs associated with cleaning it out should be deductible from a security deposit but marketing, despite the eviction, for a new tenant is normally an owner expense and would not expect it to be deductible from the security deposit.

Oren

@Hai Loc

I agree with you that ultimately anyone investing in any market (Canadian or otherwise) needs appropriate subject matter experts (SME) to make sure they are doing things in the 'best' possible way ('best' in part depends on objectives). 

Having said that, the number of possible solutions is relatively small and unless you have some unique set of circumstances (hence the need for a SME). We here on BP can learn from each other to shorten the time to find the solution and hopefully save some $$ along the way.

Oren

@Dan Rogers @Antoinette Ollivierre@Antoinette Ollivierre

OK.. So you are interested in a property, a Phase 1 & 2 gets done and some issue is found. I would think there would be 2 approaches with pros and cons. 

First would be to let the Seller deal with the cleanup; their costs and they control process. Assuming they are using a reputable firm, the property gets cleaned up and the sale closes.

The second would be to discount price based on expected cost; you control / oversee process but have risk of unexpected costs.

Which way (if there is one) is common / recommended?

Also, what is the end goal from a liability perspective. Is there some kind of certification / letter / insurance which will fully protect the new owner from future liability?

Also, what exactly does 'CERCLA' stand for and what is it?

Thanks,

Oren

Suzanne,

One more point for clarification; the LLC / C-Corp / Canadian Corp structure is more about protecting you then the underlying asset.

If there is a lawsuit at an asset (e.g. slip and fall), they sue the LLC as the legal entity that owns the asset and can only claim against the assets in the LLC. To claim against all the assets in the C-Corp, they would have to 'pierce' the LLC which I have been told is legally difficult and sue the C-corp. To get at the assets of the Canadian Corp, they would have to 'pierce' the C-Corp which is even more difficult.

This is why some people have only one asset in an LLC with many LLC's in the C-Corp.

You get the picture; to get to you personally, a law suit would have to get through 3 layers of protection.

@Hai Loc - Can you elaborate on why an Limited Partnership (LP) is now the recommended structure. Is it from a tax, liability, or operational perspective? Have some rules changed or case law been decided? What makes an LP better?

Oren

Garmeon,

I think you are on the right track. The 'rule' is as everyone else has stated just a guideline / quick screening method so that you do not waste your time. For example, I have seen all to many offerings where the expenses are closer to 30% (or even less!) of income (with obvious underwriting holes). While it may be possible that this is true, it is extremely unlikely. Using 50% on the property shows it to be a money pit and you move on.

So you use the 'rule' to see if it might meet your investment objectives (however you want to measure them). If it is does not by only a 'little' bit, you can decide to get more information and run more detailed projections. 

What does a 'little' bit mean - what every you want it to. For example, in a rising market, you can choose to accept lower returns due to expected higher / faster appreciation or whatever other reason makes sense to you. Alternatively, the rule can be your absolute, minimum, never to be violated threshold.

Screens are not perfect and you will miss out on that unique property that really really only has 30% expenses (believe it when I see it :) but then that's just life.

Oren

Suzanne,

I went through this and the double taxation problem arises when you, as a Canadian, hold an LLC in your own name. It's all about when funds are repatriated back to Canada and how they are treated.

For the IRS, a LLC is a pass-through entity. The LLC provide a decent amount of liability protection (you should still have liability insurance) and any net income is passed to you personally so you pay personal tax rates in the US.

CRA (Canada's IRS for our US readers) does not look at things the same way. The LLC is first treated as a corporation and you first pay corporate tax rates. The after tax income then becomes part of your personal income in Canada and is taxed again as ordinary income (hence the double taxation issue). I am fairly certain that you get a credit for the taxes paid in the US but not certain so check with your accountant (Note - make sure he knows this stuff as most accountants do NOT know US / Canada Tax interaction).

If you create a C-Corp (as a Non-Resident Alien you can not create a S-Corp) in the US, it can have LLC's as subsidiaries. The LLC acts the same as above (pass-through & liability protection) and now the income is in the C-Corp which pays corporate tax rates in the US. As long as you leave it there (no salary, no dividends, etc), you don't pay any additional taxes since no funds have been repatriated to Canada.

When you do finally want / need to bring funds back, they will be taxed at personal rates in the US first and then personal rates in Canada but with a credit for any taxes paid in the US.

You can also have a Canadian corporation holding the C-Corp. Same issue of when funds  are repatriated back to Canada applies and it adds another layer of liability protection. Having said that, there is the added overhead of annual tax returns (even if they are essentially Null returns), etc.

I have heard of using a Limited Partnership as the holding entity but don't understand it well enough to comment further.

Oren