EisnerAmper Blog

Building Success: An EisnerAmper Real Estate Blog

Financial Engineering and Real Estate Investing

 Permanent link

April 13, 2015

EisnerAmper’s Michael Benison recently caught up with Abraham Bergman, Managing Partner at Eastern Union Funding, to get his insight into financial engineering in the real estate market.

MB: How has real estate investing changed?

AB: Rates are starting to rise. Now, with the Fed still offering a decisive “maybe” on the question of a presumed rate hike, some feel the measures taken in response to more stringent lending policies could make the bottom that falls out much, much deeper.

Historically, people bought real estate based on brick and mortar. Decisions were made based on the price per unit or square foot, and raw value was key in the bidding process. That way of thinking is not terribly popular any more.
I recently met with a stock market investor who wants to start investing in real estate. The investor’s investment focus is based on the measurement of returns. The measuring stick for the real estate investments hinges on better internal rate of returns than the typical average annual return of stock portfolios.
I believe that other investors and other real estate industry players have similar investment strategies. As a mortgage broker, I have seen prices exceed value on a daily basis since the market kicked into high gear. Investors know that even though a building purchased for $11 million might only be worth $10 million from a brick and mortar perspective, at the higher price with the right financial engineering they can earn 9% (in this case) on their money. That level of return is even more than the typical returns originally needed.
MB: How does financial engineering affect investing?

AB: Financial engineering essentially means additional cash flow and the flexibility it creates. Thanks in part to low rates and interest-only options, buyers have enough cash flow to cushion the steeper prices with more debt through mezzanine financing and preferred equity. And while banks are towing the line and not lending more than 75% of the building’s brick and mortar value, at 3% interest you can afford to take on pricier layers of debt and bring the financing up to 85%.
Historically, when interest rates rise, cap rates rise with them and therefore value goes down. In a normal correction, this would translate into a 10% decline in property value. A building worth $10 million would go down to $9 million. However, as explained above, in a financially engineered market, that same building was sold for $11 million even though it was worth $10 million. When the market corrects itself, the value of the building stands to not just go down -- it stands to plummet, in this case by $2 million.
Moreover, void of engineered flexibility, the cauldron of competitive investors shrinks overnight, leaving only regular brick and mortar real estate buyers and shortening demand enough to raise the fear of even further price declines. The result: The question in real estate of “what is this product worth?” will revert back to the old-fashioned mindset of hard and soft costs.

The Property Tax Assessment Process in New York

 Permanent link

April 10, 2015

Lewis_KristenBy Kristen Lewis

Michael Benison’s recent interview with New York City Tax Commission President Glenn Newman has proved to be a popular subject. The information was recently published on the Real Estate Weekly blog under the title “Property tax assessment – straight from the horse’s mouth.”  The New York Society of CPAs also shared Michael’s interview under the title “Understanding New York City’s Property Tax Assessment Process.”

During the interview, Mr. Newman discussed the high volume of applications that the New York City Tax Commission office has been receiving in the wake of the recent real estate boom.  The application itself should be filled out in a complete and accurate way in order to start the process of reviewing a tax assessment on a solid footing. Details are critical to the assessment. As commercial property in the city has to be valued through the income and expense approach, an accurate statement of the income and expense of the property in question is necessary.  The growing use of outdoor spaces for technology such as cell towers and telecom equipment as well as other needs is another factor that assessments are taking into consideration. The interview also touches on not-for-profit exemptions. For more information, check out our original post, “What You Need to Know About the NYC Property Tax Assessment Process.”


The Origins of REITs and How They Benefit Investors

 Permanent link

April 1, 2015

Lewis KristenBy:  Kristen Lewis

The Origins of REITs and How They Benefit Investors

More investors have been using  the Real Estate Investment Trust (REIT) structure to facilitate investment in real estate. With origins dating back to the 1960s, REITS were created to allow average investors to invest in a managed portfolio of real estate assets. REITs have become more prominent since the early 1990s and have gained credibility as an investment vehicle due to the fact that they provide significant tax advantages. Under IRC Sec. 857(b), a REIT is allowed to take a deduction from its taxable income on any dividends paid to shareholders, creating essentially only one level of tax on the earnings. 

Due to the special tax treatment afforded them, REITs have specific and complicated compliance requirements. While compliance is the key to operating under a REIT structure, the recent popularity of the REITs has spread beyond the real estate industry and into other sectors such as cell towers, data centers, document storage, billboards, electrical transmission infrastructure, gas pipelines, telecommunications networks and gaming.

Mariana Moghadam and Michael Benison wrote an article titled Why REITs about how REITs work and why investors are turning to them, including many of the key issues anyone considering a REIT structure needs to consider.

EisnerAmper is an independent member of PKF North America.
PKF North America is an independent member of PKF International.