Adjudicated properties are coming to market over the next few weeks, so now is a good time to review how to purchase real estate at rock bottom prices when a property owner has defaulted on the mortgage.
Often commercial real estate properties that are in trouble have defaults by the property owner on mortgages, contractor work, and taxes, in addition to deficiencies by city code and fire code violations. The property owner may not wish to sell because the property's decline in value no longer brings enough cash to cover all the debts. The result is a stalemate where the property is never put to the highest and best use; therefore, debtors no longer receive a return on their investment and the property declines in condition and becomes less valuable.
One solution is to acquire the property by purchasing the mortgage note. The benefit is that once you own the first mortgage note, which gives you the senior lien position, you can foreclose on the property which eliminates all liens on the property, except for tax liens and SBA loans. If you own the mortgage note and the property goes to auction at a Sheriff's sale, the proceeds are paid to you up to the face amount of your note plus interest and fees. If you buy the property at auction, you will pay the Sheriff a 3% fee in Orleans Parish, but you only have to pay the Sheriff the difference between your bid and your note. You may have to bid against other bidders, but if you bid the face value of the note and are outbid, the high bidder makes payment and you receive your note's face amount. If you are the high bidder then you receive the deed from the Sheriff within 30 days.
Here is a diagram of the process:
With 30 year Treasury Bonds yielding 3.79 percent, many investors as well as institutions are considering investing in commercial real estate. How do you know whether the market is right to invest or not? This article presents a strategy for analyzing whether or not it is feasible to develop commercial office property.
The first question you'll need to answer is whether rents are high enough to justify new construction. This concept helps the analyst determine timing, as well as the difference between required rent and market rent based on known costs and expected returns to the investor. The capitalized difference between feasibility rent and market rent represents total depreciation if market rent is less than feasibility rent.
Given the information below, is this project currently feasible?
The quick answer is that the project is feasible. Here is how we get to the answer:
The conclusion is that as long as market rents are above $13.38/square foot, that the project is feasible.
The appraisal industry in Louisiana is undergoing a significant decline in the number of general licenses issued to Louisiana appraisers while at the same time appraisers in Texas are being hired to perform appraisals in Louisiana. The result is a dying Louisiana industry.
There are 191 Appraiser Trainees who earned a license upon passing a test and completing 75 hours of classroom training. The license permits trainees to write appraisals under direct supervision of a licensed residential or general appraiser who agrees to be responsible for the trainee's conduct and supervise under active, personal and diligent direction. The supervisor agrees to sign all appraisal reports and make sure reports are subject to the Uniform Standards of Professional Appraisal Practice.
There are 752 Residential Appraisers who earned a license upon completion of the Uniform State Certified Residential Real Property Appraiser Examination and 200 classroom hours and 3500 hours of real property appraisal experience in no less than 2 years.
There are 494 General Appraisers who earned a license upon completion of the Uniform State Certified General Real Property Appraiser Examination, 300 classroom hours and 5000 hours of real property appraisal experience in no less than 3 years.
There are 59 licenses issued so far in 2013, as shown in the table below.
|Row Labels||Count of First Issuance Date|
New appraisers coming into the industry bottomed at 16 in 1998, and experienced growth after Hurricane Katrina in 2007-2008 to 77 and 78 respectively, then leveled off.
The number of Louisiana licensed appraisers actually living in Louisiana has dropped dramatically since 2007, as shown in the chart below, with a count in 2012 of 20 licenses issued to Louisiana appraisers, the third lowest level since 1990.
In 2013, most of the Louisiana Appraisal licenses were issued to people in Texas. Only 27% lived in Louisiana, resulting in appraisal licenses issued to non-Louisiana appraisers totaling 73%.
The free market has spoken. The trend toward bank mergers has shifted the demand curve toward appraisers who can serve many markets. Banks now order appraisals from Texas because they can get several property locations appraised from one appraiser. The price is usually the same from a Texas appraiser as from a Louisiana appraiser at approximately $2,500 for a commercial summary appraisal by a general licensed appraiser.
The loser in this trend is the Appraiser Trainee. Since the license requirement for an Appraisal Trainee is that they obtain experience hours ranging from 2 years for a residential license to 3 years for a general license, and must internship with another licensed appraiser who acts as supervisor, reviewing and agreeing to be responsible for the Trainee's work. Only those appraisers living in Louisiana would agree to supervise a Trainee, and most of the time Trainee must be living in the same town as the supervisor. This result is a reduction of supervisors. This explains why, of the 191 Licensed Appraiser Trainees in Louisiana, approximately 9% are unable to get licensed because they cannot find a supervisor. Over half of the Trainees have not earned either their residential license in the two year minimum time frame or general license in the three year minimum time frame, with 40% licensed as trainees longer than 5 years, 22% longer than 7 years and 15% longer than 8 years.
The purpose of commercial real estate tax credits is to encourage the preservation of historic buildings through incentives to support rehabilitation of historic and older buildings. Since the inception of the Federal Rehabilitation Tax Credit, Louisiana has been a leader in certified tax credit projects, generating over $2 billion in private reinvestment in Louisiana communities. The State Commercial Tax Credit has leveraged more than $350 million in private reinvestment in Louisiana Downtown Development Districts and Cultural Districts. A tax credit is a direct, dollar for dollar, reduction in the amount of money a taxpayer must pay in taxes for a given year. For example, if a taxpayer owes $5,000 in taxes to the Internal Revenue Service, but has a $3,000 credit, he only pays $2,000. Thus he pockets the $3,000 he would otherwise have to pay in taxes. A credit is much better than a deduction which merely reduces a taxpayer’s income and puts him in a lower tax bracket.
The Federal Rehabilitation Tax Credit is for 20% of the costs of rehabilitation expenses for an income producing building. The credit is available for income-producing properties that are contributing elements to a National Register Historic District, or individually listed on the National Historic Register. All properties must be certified by the National Park Service. To qualify, the rehabilitation work must exceed the adjusted basis for the building (either the purchase price minus the value of the land, or the current depreciated value).
The building must be a contributing element to a Downtown Development District (DDD) or a Cultural District. The building must be used for an income-producing purpose. Eligible expenses must exceed $10,000. This credit may be used in addition to the Federal Historic Rehabilitation tax credits, provided that the most stringent program requirements are met. It may also be combined with the State Residential Tax Credit Program if the building is mixed-use.
Homeowners may qualify for a 25% tax credit (50% for vacant and blighted properties) against their individual state income taxes when they rehabilitate their historic home. The property must be the owner's primary residence. There is a $25,000 credit cap per building, with one credit allowed per building. Rehabilitation costs must exceed $10,000.
The credit is not automatically available to any owner of an historic building. An application must be filed with DHP. Although not recommended, applications can be accepted after commencement of rehabilitation work. However, the Part 1 or Part A application must be submitted prior to the building’s placement in service.
It is best for an owner not to start construction until after the Part 2 application has been approved. If work is begun without an approved application, the owner proceeds at his own risk. Approval of a rehabilitation project by any other group, organization, or governmental entity does not insure approval by DHP or NPS. All applicants are advised to consult with their tax attorneys and/or certified public accountants in developing projects to determine if the credit will work for you.