All Forum Posts by: Wells Mangrum

I have $600,000 of capital gains from the sale of stock. This spring, I plan on purchasing land in a Qualified Opportunity Zone and building a multifamily apartment complex. Construction costs are planned to be $600,000. So my capital gains perfectly matches acquisition and construction costs.

Once the complex is fully built and operating, can I use the property as collateral for a loan to purchase a property not in a Qualified Opportunity Zone? Or is that a violation of the 90% rule?

For example, after construction I want to increase my use of OPM. So I go to the bank asking for a loan of $400,000 using the completely paid off QOZ property as collateral. I then use the $400,000 in a separate LLC as down payment on a $2,000,000 McDonalds in a non-QOZ area. Does that violate the 90% rule?

My gut feeling is yes but I would like to be certain.

Thanks!

I purchased a gas station in 2018.  Gas stations normally depreciate over 15 years. But I’m using special bonus depreciation to take immediate 100% depreciation for the full cost of the acquisition minus the land cost (tax cuts and jobs act). I now want to donate the fully depreciated asset to charity while keeping the passive loss from the depreciation. 

Can I do that immediately?  Do I have to wait a certain time period before donating?  Do I have to first cancel all of the passive loss with passive income before donating?  

Thank you for your time!

I have an accepted purchase agreement on a 85,000 square feet industrial building. This is a sale-lease-back meaning that the current owner is selling the property and agreeing to lease it back to me at a 7.75% capitalization rate. They are signing a 12 year NNN lease with 8% rent escalations at year 7. And this is a true NNN, they are even going to be responsible for foundation and roof. I will have literally zero maintenance responsibilities.

So everything sounds great right?  The one catch is that the business owner does not want to sign a personal guarantee.  So if his business goes under, I will have a large building with no tenant.  The business has been around for 20+ years. It has manufacturing facilities in two different states and it has contracts with big companies such as Menards, Lowes and Home Depot.  So it has some stability and they are profitable.

But I'm a little gun shy without the personal guarantee.  Also, I worry that macroeconomic conditions are going to cause capitalization rates to start creeping upward and real estate prices to start falling.  So I think that I may be timing this wrong.  I am considering use a contingency to cancel the purchase agreement.  

My broker likes the deal. My banker thinks it is ok.  What do others think about this deal?  I know that it is impossible for you to give a full analysis with these sparse details.  But I'm truly on the fence and I'd appreciate additional opinions.

Good for you for finding a creative solution to your problem! I too have been reading about swaps. I buy NNN lease properties with long term leases. I try to match the lease term, frequently 10-30 years, with the loan term. Such a match reduces interest rate risk. However banks often do not want to give long term fixed rate loans. A solution is to bring in an intermediary market such as the swap market and make everyone happy: I get a long term loan at a fixed rate, the bank gets a long term loan at a variable rate and the swap counterparts gets long term income at a fixed rate. One problem that banks have with swaps with small time investors is counter-party risk. If interest rates turn against the individual investor and the individual goes bankrupt then the bank now has to finance the loss from the swap. This too can be overcome with swaps that weekly “mark to market”. But I have not yet seen these “mark to market swaps” in the market for individual investors. I currently have five different large commercial loans each with different interest rates and loan termination dates. Most of the loans are for a shorter term than I desire. I’m considering purchasing a swap from Wells Fargo to hedge against rising interest rates.

What if I take out a HELOC on my personal residence to finance the acquisition of a commercial real estate investment? In that scenario, would the interest on the HELOC be deductible as a business expense?

I am close to making an offer on a strip mall. This strip mall is adjacent to a Home Depot and is covered by a CC&R written by Home Depot. This CC&R has ridiculous restrictions severely limiting who can be a tenant in the strip mall. Ironically, many of the current tenants are in direct violation of the CC&R including a dental office, insurance office and a Head Shop. In other words, the CC&R specifically restricts these type of shops. And yet these tenants have been in place for years with no complaints from Home Depot. If I buy the center, then I will be entering this strange don’t-ask-don’t-tell situation where half of my tenants are violating the terms of the CC&R but Home Depot seems to not care or not know. Why write such a ridiculous CC&R and then not enforce it? Why would Home Depot make all of these restrictions such as the restrictions against dental and insurance offices? Are these documents frequently not enforced?

A high interest savings account with Ally bank (or some equivalent) is the answer for no risk and liquid savings. A CD does not make sense to me as they are not liquid (generally have fees if withdrawn early) and you need your down payment money to be liquid because you never know when the next deal is going to come along. For those with a high risk tolerance who can tolerate a potential loss of money, then I wonder about temporarily parking assets in a bond, REIT or stock market index tracked ETF. The downside is that these assets are volatile, especially in the short term. Furthermore, if you invest for a few months, get lucky and yield a positive return and then cash out to buy real estate, you have to pay short term capital gains tax- which negatively incentivizes your risk taking. I have considered using the free cash to pay down loans on other indebted real estate and then refinancing everything each time there is a new deal. But loan fees make this less desirable. And I think that this will annoy your banker. A banking professional might be able to design an Investment-line-of-credit (a term I made up that is analogous to a HELOC). In times of savings then you pay down the debt in the line of credit. But in times of acquisition you take out money from the line of credit to finance the acquisition. Any banking geniuses out there know of such a product?

I am a physician with an interest in this niche. I think it is useful to understand the market pressures that currently exist in health care. Government regulations such as “MACRA” and “Meaningful Use” have put heavy pressure on small physician groups. These groups are folding and/or merging with larger groups. Also reimbursement is changing from a fee-for-service model to global cost saving measures through “Affordable Care Organizations” (ACO). This too will lead to merging of health care organizations. It will also lead to increasing power held by primary care physicians, declining physician reimbursement and increased rationing of health care. These changes will have effects on medical offices. Physicians in small groups are now more risky tenants as their groups are more likely to fold or be bought out. Especially at risk are the independent groups. Also at risk are independent rural medical offices. These will be replaced by simplified rural medical offices owned by an ACO. These simplified primary care centers will be run by non-MDs and will have little ancillary services. They will serve primarily as referral centers for the big ACO in the cities where patients will receive their advanced care (if their perceived needs overcome the ever-increasing rationing hurdles). In the long term, the ACO model will also likely fail and be replaced by a single payer system (see the Democrat party platform). This will further act to centralize health care into large corporations, further decrease physician reimbursement, and significantly increase the rationing of health care. There will be huge losers in his situation as large ACOs will fold and go bankrupt.

I think that I will rephrase my question using the language of math. Let's assume that I purchase a property with a 10 year NNN lease.

10 year IRR = NPV of cash flows over the 10 years + NPV of Resale value

The net present value of cash flow is easily calculated from the terms of the lease. The net present value of the resale value is highly dependent on the value of the location of the property. A building in a growth region will appreciate more than a building in a non-growth area. But how does the investor determine the location value when the investor is from out-of-town and not familiar with the location?

How does one get a good assessment of the location?  Two buildings could have the same lease structure with the same tenant but have different value depending on the location.  For example, a Burger King in the growing part of town is worth more than the Burger King in the crime-ridden part of town even if those two Burger Kings have identical lease structures.  
As an out-of-town investor, it is difficult to assess the value of a location.  I could rely on the local commercial broker's opinion, but that means that I have to trust someone that I don't really know.