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MulTifaMily inveSTor TM NEIL GRONOWETTER Chairman, Multifamily InvestorTM Commercial Real Estate Brokerage TM New York’s Premier Apartment Building Broker SM Newsletter | First Quarter 2010 www.multifamilyinvestor.com WHAT DO THESE THREE THINGS HAVE TO DO WITH YOUR APARTMENT BUILDING? PAGE 5 Featuring: Choose The Wrong Tenant? How To Protect Your Apartment LOSE YOUR LIFE. Buildings From Uncle Sam After You Die Firefighters run into burning buildings. Police officers apprehend violent crimi- You worked hard to run your apartment building holdings. You’re not planning nals. They knowingly face the risk of death. Apartment building owners provide on giving it away to the state, or the federal government. You want your children shelter to their tenants. At the risk of stating the obvious, there should be no dan- and grandchildren to have what you worked for. Without proper estate planning, ger in that. Unfortunately, unstable tenants have not only refused to pay their rent Uncle Sam and the State of New York may benefit upon your passing. What can without cause. They have also killed the apartment building owners themselves you do to protect your assets, multifamily and otherwise? I had the exclusive op- – right here in New York. portunity to speak in depth with Daniel Yarmish, a trusts and estates attorney at Loeb & Loeb LLP. Page 2 >> Page 3 >> The 7% Solution How To Keep Vultures Away From Your Distressed Assets You’re tired of managing your apartment building holdings. Rents are decreasing. You bought an apartment building or development project in the last few Maintenance is becoming more time-consuming. Tenants are demanding more years. How were you supposed to know the real estate market, stock market, for less. Even if you sold, what would you do with the money? and credit market would all collapse at the same time? The stress weighs on you night and day. What can you do? Here is the prescription for that very problem: Walgreens. It’s the nation’s largest drugstore chain with fiscal 2008 sales of $59 billion. Page 4 >> Page 7 >> This publication, and any information contained herein, may not be reproduced, in whole or in part, without Neil Gronowetter’s prior written permission. Choose The Wrong Tenant? LOSE YOUR LIFE. A merica ranks 24 in the world in murder, per capita. (Colombia is #1.) Perhaps, it’s no surprise then to find that tenants around the country have killed their owners. Recent examples around the country include: • Jonathan Vanhook, a tenant in a Las Vegas apartment complex, brutally beat his owner to death with a lead pipe. • Methamphetamine addicts, Richard Carelli and Michele Pinkerton, murdered their San Francisco-area owner after he commenced eviction proceedings against them. They justified their crime because an eviction would have hurt their chances of regaining custody of their daughter. • Raymond Douglas, the British man who tried to murder his owner by drilling through his skull with a power tool because he was asked to move out Here is a recent, but by no means exhaustive, sampling of New York-area multi- family owners who were killed in cold blood by their tenants: • Paul Siddo, a father of four, was fatally shot in the face while sitting in his van in him into his Midwood, Brooklyn home as a tenant, by beating him to death. Accord- front of his Brownsville, Brooklyn apartment building. Andre Walker murdered ing to the victim’s brother, the dispute was not over rent but transvestism: Sultan Siddo after a dispute involving trash placement. Walker was not even a tenant, tried to convince Goldstein not to cross-dress. When police apprehended Goldstein, but the boyfriend of one, who left garbage and bicycles in the hallway. he was wearing women’s clothing. If Sultan was persuasive, it was short-term at best. Goldstein pled guilty to first degree manslaughter. • Lakeisha (or Latisha) Mills, a mother of two, and her two daughters, aged 4 and 1, died in a fire apparently set by an angry tenant. Firefighters found evidence of • 45-year-old tenant, Walter Murphy, angry over water leaking into his apart- arson at the Richmond Hill, Queens multifamily property. Mills, the granddaugh- ment, fatally stabbed his owner, Stephen Stribula, after a dispute erupted in the ter of the owner, had a dispute with an unnamed tenant, a purported crack addict, owner’s Upper East Side office. over unpaid rent, shortly before the arson. New York’s three major papers seem to have made light of the fact that the fire was set for this very reason. They also • A 65-year-old Brooklyn man fatally shot his owner, Angelo Roumeliotis, 65, failed to name the suspect. and wounded the owner’s live-in companion, Anna Vareales, by shooting her once in the jaw and once in the chest. The shooting followed an argument at their Bay Ridge, Brooklyn multifamily. Both victims were immigrants from Greece. The couple had lived on the quiet, tree-lined street for nearly 16 years. THESE MURDERS DID NOT JUST The New York Times article fails to mention the killer by name (again). OCCUR IN “BAD” NEIGHBORHOODS. These murders did not just occur in “bad” neighborhoods. Brooklyn’s Bay Ridge and Midwood, Ridgewood, Queens, and the Upper East Side of Manhattan, are not “bad” in any sense...Not to be confused with the recent New York tenants who tried but failed to murder their owners: • A tenant about to be evicted from his apartment in Middletown stabbed his owner, Darryl Smith, to death. Tenant Stephen J. Condit then plunged the knife • An angry tenant brutally decapitated his young pet boa then dumped the into his own neck in a suicide attempt. carcass at his owner’s bedroom door before setting the house on fire. Jose Rios torched the Central Islip multifamily property, then alerted the owner’s wife • Keshawn McNeill murdered his girlfriend’s owner in the driveway of his before fleeing the smoky house. Newark home, in a scheme to steal back her rent money. The shooting occurred shortly after McNeil’s girlfriend, Staci Marshall, alerted him that she had just • An unnamed tenant in a Canarsie, Brooklyn apartment building wielding a paid Borges $1,250 in rent. McNeill was sentenced to life in prison. 12-inch kitchen knife was shot to death by police inside her apartment after she slashed an officer’s hands. • 64 year-old Rosario Prestigiacomo was brutally stabbed to death in his Ridgewood, Queens home. Police are exploring a simmering owner-tenant This may be: (1) an argument for hiring a management company; (2) enough dispute. His murder remains unsolved. of a reason to sell your apartment building holdings, and buy a triple-net, management-free property; (3) a statistical fluke that should cause no lost sleep. * Michael Lorge, 42, a taxi dispatcher and Internet deejay, was shot twice in the Caveat erus. Let the owner beware. back of the head, as he sat in his car, parked in front of a Bronx apartment building he owned in the Norwood section. The NYPD still holds a briefcase containing documents for his then upcoming owner-tenant case. Lorge was not going to see his attorney that day, but always kept the documents by his side. Lorge died with the Did you know that “Multifamily Investor” is the briefcase by his side after the gunman fled. His murder also remains unsolved. widest-circulating free multifamily quarterly in the United States? • Panhandler Howard Goldstein repaid the kindness of Rahamim Sultan, who took www.multifamilyinvestor.com | 2 DY: This produces a tremendous savings on estate tax. First, Grandpa moves an asset worth almost $5 million—the 99% LLC interest— to his heirs and is required to take back a note in the amount of only $3 million. So he’s effectively moved $2 million out of his estate, thereby sheltering it from estate tax as well as from GST tax. Second, any future appreciation in the value of the property and any income earned from the property will inure to the benefit of the grandchildren. It’s a “home run” from a tax savings standpoint. There are a number of variations on this technique, which may or may not be ap- propriate depending on the circumstances. As an example, if Grandpa has a lower than average life expectancy, instead of selling the LLC interest for an ordinary promissory note, it may be wise to sell it in exchange for a “Self-Canceling Install- ment Note” or “SCIN.” With a SCIN, if Grandpa dies before the term of the note expires, the entire balance of the note is cancelled. A downside is that a premium will be payable on the note during Grandpa’s life. But depending on Grandpa’s life expectancy, a SCIN may be the way to go. I’ll also mention that this technique is not permitted if Grandpa is terminally ill. NG: Tell us a little more about the trust used in this technique. DY: The trust would be set up as a “grantor trust” which means that the trust does not pay income tax. Instead, Grandpa is required to pay the income tax attribut- able to the trust. This is actually an advantage because there will be no income tax consequence to the sale. In addition, when Grandpa pays the trust’s income tax, he is in effect making a tax-free gift to his grandchildren. There are some other details, including the fact that the trust would be partially How To Protect Your Apartment funded prior to the sale. It can be funded with, for example, a portion of Grandpa’s LLC interest. The gift would be well within his gift tax exemption amount and, Buildings From Uncle Sam assuming the gift is of an LLC interest, may be entitled to valuation discounts. After You Die NG: Assume the same owner sells his apartment building, and buys a triple-net leased property under a 1031 exchange. What are the tax benefits of doing such an exchange before his death, and what specifically can he do to minimize the tax G exposure for his heirs? What disadvantages might there be in such action? randpa wants to leave his $5 million apartment building, 123 Main Street, to his grandchildren. He wants as little tax exposure as possible. Assume DY: In your example, say Grandpa had a basis in the property of $50,000 and he Grandpa has owned 123 Main Street for more than 20 years. He has paid sells the property for its fair market value of $5 million. Assuming a 25% com- next to nothing for it. He already has title in the form of an LLC. bined Federal and state tax rate imposed on the gain from the sale, there will be about $1.2 million in income tax payable. What are the tax consequences of transferring title or control to his grandchildren? In contrast, if Grandpa holds the property until his death and the property is DANIEL YARMISH: The federal government imposes an estate tax on each dece- included in his estate, the basis of the property is “stepped-up” to the value of the dent’s estate at a maximum rate of 45%. Under current law, individuals dying in property at the time of his death. This means that the capital gain that is “built in” 2009 have a $3.5 million exemption with respect to this tax. The government ac- up to the date of death is avoided. tually imposes the tax at each generation so that when you leave property to grand- children you are subject to “generation-skipping transfer tax” or “GST tax” on the A 1031 exchange can enable Grandpa to dispose of the property while deferring property left to them, in addition to the estate tax. Also, each state has its own rules with respect to estate tax. In New York, estate tax is imposed at a maximum rate of capital gains tax or possibly avoiding it altogether. In a 1031 exchange, speaking 16%, with a $1 million exemption amount. very generally, the capital gains tax on the disposition is not paid at the time of the exchange. Instead, the basis of the relinquished property is carried over to the Clearly, the estate tax can have a devastating impact on what a person’s heirs replacement property. The tax on the “built-in” gain will be payable if and when ultimately receive. To avoid these taxes, assets need to be removed from the estate. the property is later sold. And, if the replacement property is held until death, The problem is that a direct transfer to heirs is subject to gift tax and, in the case of Grandpa may be able to avoid capital gains tax entirely because his basis in the gifts to grandchildren, to GST taxes as well. The federal gift and GST tax rates are property will be stepped up to its value on the date of his death. It’s important the same as the federal estate tax rates. So that is probably not a very good solution. to remember that in order to get the step-up in basis, the property needs to be Instead, we have to be a bit creative. included in Grandpa’s estate, which means that it’s subject to estate tax. NG: What specifically can Grandpa do to minimize such tax exposure? It’s often better to get the property out of the estate by using estate planning strate- DY: There’s a great technique that is particularly well-suited for the current gies such as the one discussed previously rather than holding it until death. This is depressed real estate market and low-interest rate environment. Let’s take your because the estate tax rates are much higher than the capital gains tax rates. example. Grandpa sells a 99% interest in the LLC that owns 123 Main Street to a trust for the benefit his grandchildren. Assuming the LLC Agreement is properly However, even if the property is gotten out of the estate and into, say, a grantor drafted, the 99% LLC interest is a non-controlling interest in a closely-held entity. trust as in the technique mentioned before, the trust itself should still be able to do This means that it may benefit from valuation discounts from 30% to 40% or even the 1031 exchange. In that case, the capital gains tax will be deferred, but there will higher. I should mention that Congress is now considering legislation that would be no basis step-up. reduce or eliminate the ability to take discounts in the intra-family estate planning context. NG: Final thoughts/advice? If it’s determined that discounts of 40% apply, the value of the LLC interest sold DY: Sometimes people who have been financially successful throughout their lives would be approximately $3 million. Since the LLC interest is technically worth neglect proper planning for distribution of their property to their heirs, unfortu- only $3 million, the trust will pay for it with a $3 million promissory note. In light nately resulting in massive estate taxes being paid to the government. There are a of current low interest rates, there will be relatively little interest payable. number of ways to minimize estate tax that have been developed over the years. With proper planning, you can maximize the amount that your heirs receive and NG: What kind of savings would there be on the estate tax, in your illustration? minimize the amount left to the tax man. Over $1 billion in sales | 3 purchased. In fact, Walgreens has a very young base of stores, unlike its competitors. Seventeen percent of its stores are under 2 years old; 25% of the stores are under three years old. Currently, Walgreens has fewer than ten stores it needs to close right now for performance reasons. Walgreens typically needs to close less than ten locations per year, out of a chain of 7,000. They are usually a pharmacy on the site of a corporate headquarters or hospital, that has since closed down. These locations are not drugstores, let alone corner drugstores. Some of you may still be concerned: you sell your apartment building, only to buy a store that closes down in the middle of the night – leaving you with what you fear might be an empty building and no rent. When Walgreens has a 25-year lease, it still honors the entire term of the lease, regardless of whether it is occupying it or not, some companies use a shell company to sign their leases. If their store closes, the shell company has very little in the way of assets to go after, and the owner is stuck with an empty store. That’s not the case with Walgreens. It signs its leases with its corporate signature, the same one with the A+ bond rating. The 7% Solution In a typical Walgreens lease, the owner’s rent stream stays constant. Typical rent term is 25 years, with options to renew for another period of time, ultimately making it a 75-year lease. Other tenants may offer more in rent, but with more rent, comes greater risk. That’s why other retail tenants may W algreens operates 7,449 locations in all 50 states, the District of pay more – to allay an owner’s concern that it might pick up in the middle Columbia, Puerto Rico and Guam. That includes 6,943 drug- of the night and close. You can go to sleep knowing that Walgreens will stores, 587 more than a year ago, including 70 stores acquired pay the rent, maintenance, and repairs, in accordance with the lease terms, this year. Walgreens is the only drug store chain in the U.S. that is “A+” month in, month out. rated “Investment Grade” by Standard & Poor. It is publicly traded on the New York Stock Exchange. Any investor should seriously consider having Walgreens as a tenant. Walgreens is a good, solid credit risk. You’re buying a stable A+ rated bond. Walgreens drug store branches are available for sale as triple-net proper- You also don’t have to be a large corporation to buy a typical triple-net ties. The rent you would receive would be net of insurance, taxes, and leased Walgreens. Even if you own multiple apartment buildings, adding a maintenance - hence the term “triple-net.” As the owner, you would have Walgreens to the mix is a great way to diversify. zero management responsibility, and keep all the rent. Nothing is taken “off the top.” Annual rates of return (or cap rates) for Walgreens can be found for 7 to 7.5%. Is Walgreens a good fit for your family’s portfolio? First, you should know Anyone considering selling an apartment building, and buying a triple- how much your apartment building will sell for in this market. The first 50 net leased property, wants to ensure that his new tenant is dependable. apartment building owners who reach out to us will get a free customized Walgreens has had 34 years of consecutive sales and earnings growth. chart that shows them: (1) what they can expect their apartment building Our long term debt ratings are A2 by Moody’s, and A+ by Standard and to sell for; (2) a side-by-side comparison of their current net income with Poor. Walgreens is the only drug store chain in the U.S. that is “A+” rated what they can expect to earn if they own a Walgreens instead. “Investment Grade” by Standard & Poor. Walgreens is ranked No. 6 among food and drugstores by Fortune magazine, and has been listed for the past This way you can make an informed decision, and compare apples to 16 consecutive years. Of America’s top 500 companies, Fortune ranked apples. Call Neil direct (212) 584-8030, or email@example.com Walgreens 36th overall in revenue, and 3rd among food and drugstores. by email. They’ve been around for 107 years. They utilize a very defensive business model. People need drugs in good times and bad. Even in rough economic Special thanks to Lisa Meers, Manager of Investor Relations for Walgreens. WALGREENS IS THE ONLY DRUG STORE CHAIN IN THE U.S. RATED A+ How To Keep The “INVESTMENT GRADE” BY STANDARD & POOR. Vultures Away From Your Distressed Assets times, someone won’t get off their statin, or other life-saving drugs. They sell products that people need. S ome professionals who hold themselves out as loan negotiators are for- One barometer of reliability is how much cash the tenant has on hand. The mer loan originators. They usually are self-appointed specialists who more cash they have, the less likely they are to default on the lease. As of either don’t understand risk management, credit origination, or both. 5/31/09, Walgreens has $2.3 billion in cash. Originators may have brought leads to banks. That does not mean they un- derstand all the steps involved in underwriting, and approving a loan. They Walgreens’ finances are very different from those of its competitors. Rite don’t understand how to unwind the problem at the debt or property level. Aid has $7 billion in debt. CVS is also very strong, but Walgreens has a higher credit rating than CVS. CVS’ rating from Moody’s is Baa2, while The Rapid Response Team not only originated billions of dollars in loan Walgreens is A2. Walgreens’ presence in the healthcare market is similar production. They also formalized bond structures and sold them to Wall to other companies that are leaders in their fields, like WalMart, McDon- Street from their respective institutions. In addition, they also utilized their ald’s, and Best Buy. All of these companies are nationally known, and they own balance sheets to create loans. are also in the real estate business. Some owners may be concerned that a company like Walgreens might still close a store they happen to have Continued Page 7>> www.multifamilyinvestor.com | 4 R S T each p ecialization ools WHAT DO THESE THREE THINGS HAVE TO DO WITH YOUR APARTMENT BUILDING? Introducing TM COMMERCIAL REAL ESTATE BROKERAGE We are a team of commercial real estate brokers with over $1 billion in website, www.multifamilyinvestor.com, is ranked by Alexa.com as the most apartment building sales under our belts. Our competitors do not offer any of the visited multifamily blog in the United States. following three benefits. And no other broker adds value in all three unique ways: T ools: Fortune 500 companies that offer their products and services to R each: Our mailings reach every owner of every apartment the public use the latest marketing and technological tools to increase building throughout New York City. No other broker has as thorough market share. Commercial real estate brokers rarely use any of those or extensive a list. We spent extensive time and money to create it tools. Until now. We’re putting the entire arsenal of tools to work. from scratch, and update it daily. In order to secure the highest price for your apartment building, you need to reach the widest pool of qualified buyers. You need to cast the widest possible net. If you focus on a neighborhood, you keep thousands of would-be investors outside that neighbor- Skeptical? Good. hood in the dark. On top of that, we have verifiable relationships with investors in all 50 states and 90 countries on six continents. These include private equity funds, high net-worth families around the globe, with whom we have After R, S, and T, comes YOU. long-standing, deep-seeded relationships. Don’t take our word for it: go to our website at www.multifamilyinvestor.com for real-time updates of our visitors and their locations. And we’re not content to rest on our laurels: Our week- Get not only a FREE comprehensive evaluation of YOUR property ly multifamily email newsletter has over 5,850 subscribers. And counting. but also an in-depth explanation of how we’ll put our unique tools to work for you. Earn every last dollar you and your family deserve. In S pecialization: We don’t sell office buildings or commercial leasing on ways no one else can provide. the side. We focus on apartment buildings, and multifamily develop- ment projects in all stages of development. We do one thing very well, Call Multifamily Investor Chairman Neil Gronowetter now (212) 584-8030. instead of several things not so well. This allows us to remain experts in the marketing and sale of apartment buildings in the New York City area. Our Find out how we will add value to your bottom line: (212) 584-8030. www.multifamilyinvestor.com Over $1 billion in sales | 5 2010 Multifamily Buyer Checklist Get EXACTLY what you want in 2010. Avoid the junk emails or faxes. Don’t find out about a hot deal after it’s too late! PLEASE COMPLETE THE FOLLOWING AND FAX TO (888) 623-6345 I am interested in purchasing apartment buildings in the following areas/ neighborhoods (fill in all that applies): MANHATTAN: OTHER MAJOR CITIES: ___________________________________________ _________________________________________________________________ _________________________________________________________________ QUEENS: _________________________________________________________________ Please fill in where appropriate: MY PREFERRED CAP RATE RANGE: BRONX: MY PREFERRED GRM RATE RANGE: MINIMUM # UNITS: MAX # UNITS: BROOKLYN DEAL BREAKERS / SPECIAL CONCERNS: NAME: FAX: PROPERTY ADDRESS: MAILING ADDRESS: CITY / STATE: EMAIL: YES. I’D LIKE TO KNOW WHAT MY BUILDING IS WORTH TODAY YES, I PREFER TO RECEIVE THE WEEKLY MULTIFAMILY NEWSLETTER AND DEAL SHEET BY FAX TO THE FOLLOWING NUMBER: #__( ________)________________________________________________________ www.multifamilyinvestor.com | 6 Community Housing Improvement Program Multifamily Investor’s “Owners Helping Owners” Rapid Response ADVOCACY FOR BUILDING OWNERS Team Assists Distressed Borrowers CHIP is a trade association representing & Guarantors more than 2,500 apartment-building owners in New York City. O ur Rapid Response Team provides free consultations. No strings attached. After a 1966, hour has been a the player Founded in free halfCHIP conversation, ifkey borrower decides to move forward, and state Rapid Response tax returns, profit/loss statements, and an evaluation housing policy defending property owners’ in city lender. This package includesTeam prepares a comprehensive package for the our interests on borrower. These typically cost borrowers $5,000-$10,000. of property and such diverse issues as lead paint, property taxes, water rates and rent regulations. Before you spend that kind of money, or put down a deposit, call Neil (212) 584 8030: How To Keep Vultures Away To join, call the CHIP office or visit our website & Free consultation with Neil the Managing Director of our Rapid Response Team. From Your Distressed Assets (212) 838-7442 www.chipnyc.org Continued from Page 4 here’S your anSwer: Multifamily Investor has assembled a Rapid Response Team of former (212) 838-7442 bank executives to assist you. Unlike other brokerages: 1) Our immediate goal is the fire sale of your loan or property. We’re happy to get your loan modified. 2) Our Rapid Response Team is made up solely of former bank executives. www.chipnyc.org Our Rapid Response Team has direct relationships with more banks and Yawitz-Gronowetter Team – Over $1 bil ion in sales | 7 private lending institutions than anyone else. Our skill sets run the spectrum: • Loan modifications • Litigation support and referrals • Debt and equity placement solutions If you’re in trouble, our Rapid Response Team will steer you in the right direction, and get you to where you need to be. The worst thing a distressed borrower can do is…nothing. The second worst thing a distressed borrower can do is try to work things out direct with the bank. Most lenders do not want to deal with the borrower who “made the mess.” Most borrowers also lack the understanding of how the banking world works. If a borrower attempts to resolve matters on his own, he risks accidentally waiving certain rights, and failing to advocate best for himself. Even attorneys who are used to dealing with banks and their different departments (underwriting, risk management, asset liability) may not be a borrower’s best line of defense. Our Rapid Response Team offers borrowers, owners, sponsors, and guarantors an experienced, patient, helpful interface that adds value. We understand risk- rating schemes and terminology that bank officers use. As a result, our Rapid Response Team has a higher likelihood of negotiating and convincing banks to restructure the loan in order to mitigate your losses and preserve your asset. We sat in the corporate suites of financial institutions and approved loans. Our Rapid Response Team will have a greater likelihood of knowing how to get their former colleagues to approve new loans, or modify old ones. Our Rapid Response Team has mastered the areas of loss reserves, allowances, and risk ratings. We understand what it means when a risk rating goes from a 6 to an 8, and how a financial institution copes with that problem. Over $1 billion Over $1 | 7 Yawitz-Gronowetter Team –in salesbillion in sales | 7 NEIL GRONOWETTER Chairman, Multifamily Investor TM Commercial Real Estate Brokerage New York’s Premier Apartment Building Broker SM www.multifamilyinvestor.com • Ranked by Alexa.com the most visited multifamily website in the United States • Verified investors from 50 states and 90 countries Don’t use email? Want the weekly e-newsletter by fax? Page 6>> Fax your request form direct to (888) 623-6345 Sign up for your FREE weekly multifamily e-newsletter now! www.multifamilyinvestor.com Information delivered right to your computer or handheld device.
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