Garage Town

Sorry it's been a while without any posts.. I was in San Francisco on business.

The other day, one of my co-workers was in my office talking about a new property development in Mesa, Arizona that she came across - Garage Town. It's a development consisting entirely of garages. Unlike a rental storage space, at Garage Town, you actually buy and own the garage, just like you would buy a home. The community is gated, you have 24/7 access. The garages can include cable, A/C, internet and just about everything a home has. They have a community clubhouse that has showers, bathrooms, and a mini-kitchen. (So while legally, you probably couldn't live there, in reality, you could stay for a couple days without being too inconvenienced.) My co-worker also said the garages vary in size from a standard one car unit, to huge two story spaces capable of sheltering an RV. Their website claims it is "the perfect starter real estate investment!" You get all the benefits of REI, including tax deductions,depreciation, and the ability to do a 1031 exchange.

The drawback? Here in Arizona, the smallest unit starts at $80,000. Prices vary across the country, but this seems pretty expensive for a garage - my Rental #1 in Tulsa cost as much. As for a real estate investment, I have my doubts. For a true investment, you'd need to rent this out. I'm not sure there are that many people who need to rent a garage. Further, I would think this would be pretty susceptible to economic downturns. Everyone needs a place to live, but when money gets tight, I think the extra garage payment would be one of the first things to go. Still, it's an interesting concept and I would like to know if any investor actually makes money renting one of these out. I have a feeling the investors who will make the most money are the builders who sell the units for the first time.

Bankrupt AMH's Property Tax Checks Bounce

I heard about this from Savvy Saver - American Home Mortgage, the subprime lender who is in serious financial difficulty, has apparently been bouncing checks that it sent out to pay mortgage holder's property taxes in Maryland. Curiously, I can't find this story on CNN or MSNBC, but there is an article here. I did find a story from three days earlier about Freddie Mac trying and failing to take over loan servicing from AMH. However, AMH filed for bankruptcy protection before Freddie Mac could get the servicing rights.

There are a couple scary things about this. First, the escrow accounts of mortgage holders are supposed to be get separate from the other funds of the business. These accounts are protected by state law from bankruptcy proceedings, but there is a possibility the accounts were incorrectly frozen when AMH filed for bankruptcy. Being of a more cynical nature, I tend to think the company "borrowed" money from these accounts as their financial crisis escalated. We'll have to wait to see how this thing plays out to find out for sure. However, the big losers in this mess are the people whose property taxes were not paid. They are still responsible for the taxes and will need to find some way to pay the bill.

The second scary thing about this is this quote:

Anthony McCarthy, a spokesman for Mayor Sheila Dixon, said the city does not plan to notify the affected homeowners. They will get a notice in November along with all other delinquent taxpayers if the problem isn't resolved by then.

So your government officials aren't going to notify you until your taxes are past due and the penalties and fees have started accruing. That's nice. Instead of giving people an extra two months notice and more time to find a way to come up with the tax payment, they'll just hope the problem goes away by then. Yup, the mayor sure does care about her constituents.

Commentary On The Subprime Meltdown

...from the comics pages:

Louisiana Update

This investment is a textbook case of why you should always know who you invest with and make sure your objectives and styles are compatible. (Although in our defense, I will say that when we went into this deal, the problem person was not the majority partner. He only became that after buying out someone else.)

The last time I wrote about this, it appeared things were looking up - our investment was brought current, a new team had bought out the slumlord majority holder "Joe", and we were looking at a possible 100% upside potential. Not any more.

I just got off a conference call and have the latest info. Apparently, the purchase never went through. During the due diligence phase, the team went to check out some of the properties that were in Houston that were part of the sale and found out they were in bad shape. Like, ready-to-be-demolished shape. So three of the nine properties in the deal were rejected. The deal was moving forward, but Joe then contested the sale, saying we were getting the Louisiana properties too cheap. Legal counsel for the new team advised them to cancel the purchase, so the deal fell thorough and Joe is still the owner.

The good news is the investors have been brought current, at least through August. The September payment is due by the 15th, but it's looking like that won't be made. Also, the property tax still has not been paid since the beginning of the year and there are several other outstanding payments owed, including one to the property manager (someone you definitely want to keep happy).

At this point, we are moving forward as fast as possible with foreclosure. If you recall, we have both a first and second on the properties. The second has the stronger language, so that is the one that will be foreclosing. We have a couple of options here. If we don't get the September payment, we can foreclose for that. Because the tax bill is a senior lien to any mortgage, we can pay the delinquent tax bill to protect our interests in the property and foreclose for that reason. (The second actually still has a couple hundred thousand available, so we wouldn't have to come up with any more money to pay the taxes.) Speed is of the essence here because, as mentioned earlier, Joe is a slumlord and we want to take control of the property before he runs it into the ground and destroys the property's value.

In the past, Joe has threatened to file bankruptcy if we start foreclosure. At this point, we're ok with that. If he files bankruptcy, the buildings go into a trust and the court assigns a third party to administer the trust. This accomplishes our goal of getting control out of Joe's hands. Additionally, our second mortgage contains an assignment of rent clause, which means we can collect rent directly from the tenants, again, keeping the money, and therefore control, out of Joe's hands.

Once foreclosure has been filed, even if Joe brings the payments current, it still won't be enough to stop the foreclosure. Joe will need to show he has a plan and the resources to continue to make payments and effectively manage the property.

Joe has asked some investors what they want for their interests. In other words, he wants to know if he can buy them out. We've told him we will sell our interest at cost, cash only. He doesn't have the money to do that, but he may be able to talk some other investor or investors into partnering with him.

So if anyone reading this gets an offer to go in on some office buildings in Louisiana, contact me before you say yes :-)

Nevada Extends Charging Order Protection To S-Corps

This one was brought to my attention by Diane Kennedy's tax Loopholes Updates newsletter. LLCs and Limited Partnerships have enjoyed protection from charging orders in many states for some time. A charging order is a legal instrument that says if a creditor obtains a judgment against you personally, the creditor can attach a claim to your interest in an LLC or LP that you are part of. The protection comes from that fact that the creditor does not get any money until you make distributions from the LLC or LP - which you never have to do. However, they are responsible for any taxes on profits the LLC or LP makes, even if those profits are only on paper and never distributed to shareholders. Thus, if a creditor gets a charging order against your LLC, he is liable to pay the taxes, but may never get any income from it.

Nevada is one of the few states, along with Delaware and Wyoming, that is aggressively trying to attract business interests by passing laws that are very business-friendly. In continuing that trend, Nevada has no extended the same charging order protection enjoyed by LLCs and LPs to S corporations. As Diane points out in her newsletter, this is a new law and we should wait until there are several court decisions supporting it to get all excited, but it is worth keeping an eye on. And, of course, you shouldn't be holding your investment real estate in an S-corp anyway, but one could be the manager of your LLC...