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homeAuthor: Staff

The financial commitments required in real estate investing can vary in size and scope, from purchasing a handful of shares in a real estate investment trust (REIT) or real estate syndicate to purchasing a house or office building. The latter type of real estate investment generally requires a substantial outlay of cash. Very few individual investors have that kind of money on hand, but a prudent investor should always explore ways to avoid putting their own money at risk. Numerous resources exist for financing real estate investment purchases and projects. Real estate investors should carefully review their options. Identifying the best type of financing depends on the property or project, the resources available to the investor, and the investor’s goals.

Types of Real Estate Investments

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For rent signAuthor: Staff

Real estate investment can take many forms and offers many ways to obtain a return on one’s investment. Some investors purchase real property in order to make improvements and sell it, while others may purchase property with the goal of leasing it for rental income. Leases on real property can be broadly divided into two categories:  residential and commercial. While residential leases are subject to a wide range of legal restrictions aimed at protecting tenants, commercial leases allow far greater flexibility. Both types of leases involve their share of risks, from the hassle of collecting unpaid rent to the possibility of serious damage to the property. Commercial real estate investors in San Diego should be aware of the opportunities—and liabilities—that commercial leases have to offer.

How Are Commercial Leases Different from Residential Leases?

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ForeclosureAuthor: Staff

Real estate ownership, both residential and commercial, frequently involves financing some portion of the purchase price with a mortgage loan. Should an owner stop making payments to a lender, the lender can attempt to recover the balance of the loan through foreclosure:  the forced sale of the property at auction, often at a below-market price. This presents opportunities, but also risks, for real estate investors. Understanding the foreclosure process and the potential liabilities involved is essential for California real estate investors who are interested in “distressed” properties.

What Is a Foreclosure?

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house keysAuthor: Staff

Investing in real estate involves far more than just buying and selling land. A real estate investment can consist of a complicated web of assets, obligations, and contractual relationships. This latter category is crucially important for California real estate investors to understand, since the duties created by contracts can have far-reaching effects. Leases are a type of contract in which the owner of real estate (the “lessor”) allows someone (the “lessee”) to use that real estate as their home or for business purposes. A lessor has multiple duties under a typical lease agreement, and California law imposes numerous additional obligations on lessors in residential settings.

What Is a Lease?

A lease is a contract between a lessor and a lessee. According to the statute of frauds, a lease agreement must be in writing. It is possible—but generally not advisable—to have an enforceable oral agreement for a month-to-month lease.

The lessor provides the exclusive use of the leased property, and the lessee pays rent. If either party fails to fulfill their obligations, they may be liable to the other party for breach of the lease. California law makes a distinction between residential and commercial leases. It generally imposes more restrictions on lessors in residential lease agreements.
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La JollaAuthor: Staff

Real estate investments have generated income for investors for about as long as the concept of private ownership of real property has existed. The fundamental concepts of real estate investment have not changed much over the centuries, but relatively recent innovations allow investors to entrust their money to professionals, freeing them from direct responsibility for managing investment properties. Real estate syndication allows investors to contribute capital to a development project under the management of a syndicator. Real estate investment trusts (REITs) own and manage portfolios of real estate holdings. Syndicates and REITs differ from each other in several important ways. Potential investors should understand these differences before deciding where to put their money.

Syndicates versus REITs

The most fundamental difference between syndicates and REITs involves their relative size and scope. REITs are, essentially by definition, larger than syndicates. They have more investors, and they generally manage portfolios aimed at longer-term holdings. Guidelines for the structure and management of REITs are found in the federal Internal Revenue Code (IRC).

Syndicates tend to be less formal than REITS, with fewer specific legal guidelines or restrictions. They are usually limited to a small number of development projects and therefore tend to focus on holdings and revenues on a shorter time scale than REITs. You can read our many articles about real estate syndication here.

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CrowdfundingAuthor: Staff

The internet and social media have changed the way people communicate in a vast number of ways. They also offer numerous opportunities—and hazards—for investors. Securities laws and regulations have struggled to keep up with new technologies. A process known as “crowdfunding,” by which individuals and businesses solicit small donations from the general public for specific projects or causes, has become increasingly popular in the past few years. A bill enacted by the U.S. Congress in 2012 allows crowdfunding for investment purposes, subject to various rules. Real estate investors may also now invest in ventures, including real estate syndicates, through crowdfunding platforms.

What Is Crowdfunding?

A typical “crowdfunding” campaign seeks to raise money for a specific project through small contributions. Platforms offered by companies like Kickstarter and GoFundMe allow individuals to contribute via a website or a mobile app. Kickstarter is generally known for creative projects like films, while GoFundMe is known for more charitable causes, like raising money to help pay medical bills.

Contributions to crowdfunding campaigns on this type of platform are not “investments,” since the contributor does not receive equity in the project. Contributors to a Kickstarter project may receive a reward defined in the campaign. For example, people who contribute $20 might get a t-shirt, and people who contribute $50 might get a t-shirt and a poster. Investing through a crowdfunding platform requires compliance with securities laws.

One prominent example of a real estate crowdfunding company is RealtyShares.

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1031-Exchange-and-Vacant-Land-300x138

Author: Matthew Riley

 How do you characterize vacant and unproductive land that is not used for personal enjoyment nor in furtherance of any trade or business purpose?

As we described in a prior article, for property to qualify for a Like-Kind Exchange the real estate investor must hold it for productive use in a trade or business, or for investment purposes.  But what about property that is unproductive, meaning that it does not provide any profitable income to the owner, or that perhaps even creates losses for them?  What about acquired property that an owner has left untouched or unimproved?

You can read our summary of 1031 Exchanges here. You can read our articles about the tax advantages of real estate here.

Treasury Regulation 1.1031(a)-1(b) explains that “Like-Kind” refers to the “nature of character of the property and not to its grade or quality.”  The regulation further states that “[o]ne kind or class or property may not, under [Section 1031], be exchanged for property of a different kind or class.”

IRS Publication 544 outlines different kinds or classes of property eligible for like-kind exchanges.  Real estate is one kind or class of property, but other property classes exist. The IRS, for example, has created general asset classes for personal property– some of these include the following:

  1. Asset Class 00.12 – Information systems, such as computers and peripheral equipment.
  2. Asset Class 00.21 – Airplanes (airframes and engines), except planes used in commercial or contract carrying of passengers or friend, and all helicopters (airframes and engines).
  3. Asset Class 00.23 – Buses

What Treasury Regulation 1.1031(a)-1(b) does is restrict property exchanges between any two different and distinct classes– an office building considered to be in the real estate class cannot be exchange for a Learjet 85, considered to be in the airplane class or asset class 00.21; The IBM Sequoia supercomputer in the asset class 00.12 cannot be exchanged for a Justin Bieber Tour Bus in the asset class 00.23.

In other words, the IRS is talking about apples and oranges.  Apples can be exchanged for any other apple because they are the same kind of fruit.  But you cannot exchange an apple for an orange, because these are two different types or classes of fruit.  But again, any apple can be exchanged for any other apple.  A Red Delicious apple can be exchanged for a Granny Smith or Fiji; a rotten apple on the ground can be exchanged for one picked from the apple tree.  The reason this analogy works is because the exchange is occurring within the general class of apples, and the differences that exist are due to the variety of types and qualities existing between any two apples within that class.

Under the general and broad property class, “real estate”, there are countless types and qualities of real estate. The IRS is not concerned with the peculiar qualities of the properties being exchanged, whether the property is a warehouse or pasture, profitable or not to the owner, they are only looking to see whether the properties are both classified as real estate.  Whether the land is vacant or unproductive, therefore, is not material to whether the property is eligible for an exchange.

There are, however, two important caveats to this general rule:

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stock marketAuthor: Staff

California real estate investors have many options when deciding where to put their money. This includes a real estate syndicate, in which investors contribute money to a real estate project under the management of a syndicator or sponsor. Since a real estate syndicate investment often involves buying ownership equity in a business entity, such as a limited partnership or limited liability company, state and federal securities laws may be a factor. In order to avoid inadvertent securities law violations, syndicators and investors alike should be aware of the general requirements and exemptions in laws like the federal Securities Act of 1933.

Securities Law Enforcement

Both federal and state laws define “securities” very broadly. In addition to stocks and bonds, the term also includes a variety of “investment contracts.” An investor in a real estate syndicate often entrusts their money to a syndicator, who will handle the actual operations of the syndicate. This type of investment is likely, in many cases, to be an “investment contract” within the meaning of state and federal laws.

At the state level, the California Department of Corporations (DOC) is responsible for enforcing securities laws. The Securities and Exchange Commission (SEC) handles federal securities enforcement. Anyone seeking to sell a security, possibly including an interest in a real estate syndicate, to the public must register with securities regulators. This can be a time-consuming and expensive process, as demonstrated by the overall rarity of companies “going public” by making an initial public offering (IPO) of stock to the public. State and federal laws provide exemptions to these rules, however.

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Stock ExchangeAuthor: Staff

Real estate syndicates in California offer investors a way to invest in real estate projects under the management of a syndicator, also known as a sponsor. The syndicate itself may use one of several different business forms under California law, such as a corporation or a limited partnership.

The individual investors own a portion of the syndicate. This raises an important question about state and federal securities laws:  do investments in a real estate syndicate constitute “securities,” which might place them under the jurisdiction of state and federal securities regulators?

The rather complicated answer is that it depends on various factors, including how the syndicate was formed and the role of the investors in its ongoing operations. Determining the answer requires a careful and thorough review.

What is a “security?”

At the federal level, the Securities Act of 1933 regulates the offer, issuance, and sale of securities to the public. It defines “security” to include not only stocks, bonds, futures, and options, but also a wide range of “investment contracts” and other financial transactions.

California’s Corporate Securities Law of 1968 defines “security” in much the same way. It also adds provisions that exempt certain membership interests in limited liability companies (LLC) when the investors are “are actively engaged in the management of the limited liability company.”
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Minnesota-Amicus-Brief

Author: Luke Wake

Luke Wake is an attorney for the National Federation of Independent Business Small Business Legal Center—a Bona Law client. Luke and Jarod Bona have also published two law review articles together, on both takings and antitrust law. Luke is one of this nation’s leading experts on takings law. You can read some of his academic articles here.

Last week Bona PC filed an amicus brief, on behalf of the National Federation of Independent Business Small Business Legal Center, challenging the Minnesota Uniform Disposition of Unclaimed Property Act (“MUPA”).

In this case, a Minnesota resident discovered that she had lost a substantial inheritance because she had invested it in a savings account and left the money untouched—without any interaction with her bank—for a three-year period. At that time, Minnesota deemed her account presumptively “abandoned” under MUPA and the Act required the bank to transfer her money to the State’s general fund.

Under Minnesota law this could happen to anyone holding assets in a Minnesota bank account. This is, of course, highly concerning, especially since the State offers no actual notice to affected owners. For that matter, the only way that a Minnesota resident may learn that he or she has lost assets under MUPA is by searching a website.

Minnesota is willing to return the amount it seized when an owner discovers that the State has taken possession, but MUPA assigns the interest on the money to the State rather than the owner during the time the State holds his or her assets. So whereas one fully expects to earn interest on money deposited in a savings account, MUPA purports to extinguish that right at the time the State forcibly transfers the money to the State’s control.

But can a state law simply abrogate private property rights in this manner?

This is the essential question that the Minnesota Supreme Court will soon decide in Hall v. State. Affected owners argue that MUPA effects an unconstitutional taking of their property in withholding accrued interest, while the State defends its regime on the view that nothing is taken because MUPA defines the scope of one’s continued rights in property deemed presumptively abandoned. That is, the state tries to define away your property rights to the money in your savings account.

In the proceedings below, the Court of Appeals sided with the State—holding that there could be no valid takings claim where an owner has lost rights as a result of his or her own “neglect” under the statute.

We argue in our amicus brief that the State cannot simply avoid a takings claim by virtue of the fact that an enacted statute purports to impose restrictions on one’s common law property rights. If that were the case then regulatory authorities could enact legislation to take private property without paying just compensation by putting an expiration date on one’s right to retain title, or by simply declaring that once protected private property rights are no longer recognized under state law. But, of course, the U.S. Supreme Court had already made clear—in numerous cases—that the government cannot abrogate private property rights in this manner.

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