| As I write this newsletter, the media is hawking the | | | | proposition of carrying the property of its operating |
| slow down in the real estate market. Most of the | | | | expenses for 8 months. The 8.25% return |
| historically "hot" areas of the country are | | | | represented a 4.00% higher return than a bank |
| experiencing a 10% slow down in resales and new | | | | certificate of deposit would have given him. Was |
| construction permits, with the Midwest being the | | | | John's option to act as a lender worth the additional |
| positive exception. If new construction real estate | | | | risk? Well that is for each individual investor to |
| speculation, based on rapid appreciation, was your | | | | answer. Each investor must apply their own criteria |
| game plan, you may now be rethinking your strategy. | | | | to the evaluation of risk in each investment made. |
| Perhaps it's time for not just a new strategy but a | | | | Case Study 2 |
| new game plan. Here's a thought for you. Instead of | | | | Jackie O., a commercial real estate broker and CCIM |
| buying and selling real estate, what about being the | | | | with Equity Partners, has a client that owns 22 acres |
| Lender? A new light is being cast on the role of being | | | | along State Highway 47. The client inherited the land |
| the Lender instead of the owner of the property. | | | | several years earlier and wants to develop the land, |
| Let's take a look at some of the options being the | | | | with the necessary site improvements, to make the |
| Lender and holding notes in your IRA or self-directed | | | | parcel of land more marketable. |
| retirement plan. | | | | Jackie has $225,000 in her individual 401k. She and her |
| Case Study 1 | | | | client, Ari, decide to partner on this project. Jackie |
| John B., a top producing agent with Coldwell Banker, | | | | has two issues to consider when structuring the |
| has had a long relationship with a small custom builder | | | | transaction. First, her company has strict limitations |
| that constructs 3 homes a year. The builder has | | | | with regard to agents/brokers partnering with clients |
| already purchased the land and has his crew on | | | | in real estate transactions. Simply put, partnering with |
| payroll. While it is not an ideal time to be building | | | | clients is discouraged because of the implied liability to |
| another "spec" home, he will "trade dollars" if that's | | | | the company. Second, Jackie's prior experience with |
| what was required to keep his company viable. He is | | | | partners has not been pleasant. Her previous partners |
| looking for "cash partner" to complete a home on | | | | did not understand the risks inherent in real estate |
| one of the lots. | | | | investment and very often their expectations often |
| John has been offered an opportunity to buy the | | | | exceeded performance of the investment. |
| home, but doesn't want to purchase the "spec" | | | | Ari wants Jackie as his partner on this deal. Ari trusts |
| home directly because he believes the marketing | | | | Jackie and knows her reputation in the real estate |
| time for the custom home may exceed 6 months. | | | | community. He also knows that Jackie's contacts with |
| John agrees to partner with the builder but not own | | | | the municipality and local contractors are invaluable. |
| the property directly. He will act as the construction | | | | Here is the "deal" Ari and Jackie work out:oAri will |
| or "mezzanine financing" in the transaction. Current | | | | retain ownership and control of the land.oJackie's |
| construction financing rates are 9.75% from most | | | | 401k will lend Ari the amount needed for |
| traditional banks and lenders. | | | | development and the site improvement costs.oAn |
| John and the builder negotiate and agree to a rate of | | | | outside, unrelated party, will complete the site |
| 8.25. This is substantially more than he could receive | | | | improvements and handle the necessary municipality |
| from a money market or CD. They come to an | | | | permits. |
| agreement on the interest rate but now needed to | | | | Two separate companies, a REIT and big box retailer |
| iron out the terms of payment. | | | | - BlueMart, have approached Jackie about purchasing |
| John could be paid:omonthly,oquarterly oroin a lump | | | | the improved parcel of land. Since Ari has no capital |
| sum when the property sold. | | | | to repay the note, Jackie's 401k will write the note |
| Not surprisingly, the builder opts for the latter and | | | | as a "participation note". In other words, Jackie's 401k |
| John agrees to be paid at closing for all of the | | | | will lend the money in exchange for a percentage of |
| accumulated interest and repayment of the original | | | | the profit when the improved parcel is sold and |
| principle balance. John's attorney drew up the note | | | | Jackie's initial 401k loan is repaid. They agree to a |
| that indicated the note holder as your "Trust | | | | 15% participation fee. |
| Administrator", FBO John B. IRA. His attorney asks if | | | | Jackie's attorney prepares the 401k note in the name |
| he wants to collateralize his note by placing a lien on | | | | of your "Trust Administrator", FBO Jackie 401k. The |
| the land with a mortgage. Wanting to maintain | | | | note is secured with a lien/mortgage on the land. Ari's |
| compliance with IRS guidelines, John contacts our | | | | attorney reviews the documents along with the |
| office and asks what his options are. The answer is | | | | participation clause in the note and approves the |
| that either way, with or without a mortgage, he will | | | | transaction. |
| still be in compliance with the IRS. | | | | Eight months later, the site improvements are |
| Being a prudent investor, John opts to have a | | | | completed and BlueMart purchases the parcel from |
| mortgage prepared and recorded with the County. | | | | Ari for $2,500,000. Net profit after closing expenses, |
| One year later, the property sold after being on the | | | | commissions and repayment of Jackie's 401k note of |
| market for 8 months. John's attorney prepared the | | | | $225,000.00 is $2,000.000. Jackie's 401k also receives |
| payoff letter and proceeds were sent to the IRA | | | | $300,000.00 from the title company as repayment of |
| custodian directly from the title company at closing. | | | | the participation agreement in the note. Remember, |
| John was satisfied with receiving a short term return | | | | "taking notes" can be profitable. |
| of 8.25% on his IRA funds instead of the riskier | | | | |