|
A Monthly Newsletter Source of Financial Sources • Private vs. Public Investment in Real Estate • Sales Imperatives of “Financial-Industrial Complex” Often Not in Best Interests of Investor • Options Exist for Saving Estate Taxes on Large Real Estate Holdings When it is Too Late to Implement Traditional Estate Planning • Mortgage Relief for the Middle Class • Does it Make Sense to Reduce Monthly Expenditures by Using Savings to Pay off Your Mortgage? • The Worker, Retiree, and Employer Recovery Act of 2008 • Investors Eager to Discuss Pros and Cons of Certificates of Deposits (CDs) • It’s Emotionally Difficult to Retire This Year ---------------------------------------------------------------------------------------------------------------------------- Private vs. Public Investment in Real Estate Many of the same forces in the financial markets that have just so horribly racked the residential mortgage market, our banks, and ultimately the stock markets have also drastically roiled through the once safe and sleepy market for equity REITs. Changes on the investment demand side of the REIT market seem irreversible. Investors seeking the low volatility accompanied by relative safety and sturdy dividends which commercial and multi-family real estate has traditionally offered, may need to reconsider whether REITs are still the right way to play those markets. Private real estate funds offer an option for those investors who can live with the lack of liquidity inherent in private investments. Back in 1990, the market cap of the entire publicly traded REIT group was only $5.5 Billion.[1] It was actually smaller than the market cap of Motorola, far too small to support many stock analysts, much less attract attention from hedge fund operators and other gun-slinging financial engineers. That began to change by the early 1990s. Many investors, advisors and portfolio managers battered by the stock market crash on Black Monday, 1997, gradually began seeking low risk, higher yield investments. Some looked hard at developed, leased commercial and multi-family real estate. Big pension funds and very large private investors already had access to direct real estate investment. Individual investors and smaller institutions wanting the same chance slanted the real estate portion of their portfolios increasingly toward the growing publicly traded REIT sector. After the S&L and bank collapses of the late 1980s there was a huge amount of property available that REITs could buy cheaply. Many of the best private real estate operating companies took advantage of the growing public REIT window to get equity to shore up their own balance sheets and then to acquire the bargains they saw from the Resolution Trust Company (RTC), the FDIC and the private markets. The REIT value proposition worked. By the year 2000 the market cap of the publicly traded equity REIT market was $134 billion. By its peak in 2006 it exceeded $400 billion. Today, REITs own about $600 billion in property, about 10% to 15% of all institutionally-owned commercial real estate. The investors who initially triggered this growth were primarily looking for high dividends, safe, slow moving investment fundamentals, and reasonably simple balance sheets, all in all a prescription for a security with transparent financials, easily understood markets, and low volatility. Several studies from 1978 through the late 1990s indicated that REIT volatility tended to be 30 to 40% below the broad equity indices such as the S&P 500, the DJI, and the Russell. Most of them also indicated REITs would turn in higher IRRs than the S&P (or at least equal) and REITs had a relatively low co-variance with those indices. All in all an allocation to REITs tended to improve returns and reduce portfolio risk. It was too good to last. The huge growth in REIT markets made it a big enough target for the hedge funds and gunslingers. Then the advent of ETFs and other derivatives made it possible for aggressive financial engineer investors to make very large bets on changes in REIT prices without the necessity of owning many actual shares. In effect, as in the residential mortgage markets, when “real” shareholders had a $400 billion bet on US real estate, the fund managers could bet a substantial amount more, hoping they could see changes in share prices driven by facts or emotions that lesser investors could not get as right or as often. These investors had quite different motivations than the traditional REIT shareholders who liked growth in stock prices but focused more on dividends. REITs typically distribute about three times the dividend of the S&P. When the S&P threw off a 2% dividend, REITs might have thrown off 6 or 7%. That 4% to 5% advantage is not enough to help hedge fund managers hit their targets or make their bonuses so they focus much more on expectations of future earnings, threat of bankruptcy in troubled REITs, but not on safe dividends. They also trade rapidly, and in large volumes of shares. As a result the future expectations tail is now wagging the safe and stable real estate earnings dog. REIT volatility has exploded. [2] The last week in February REITs were almost twice as volatile as the Dow Jones and even more substantially more volatile than all the other broad equity indices. We may like the new money moving the market or we may not, but it is a factor investors need to deal with. One major hedge fund has acquired a major stake in General Growth Properties, a huge shopping center REIT that among other things acquired much of Hughes Tool Companies’ Nevada properties. GGP has had some trouble rolling over its debt on the Nevada properties and the hedge fund operator has asked for a seat on the board with the announced intention of contemplating its bankruptcy. That may or may not be a great idea, but an activist outside shareholder is an example of how different the ownership of REITs has become. Shareholders looking for slow moving stocks and unexciting dividends may find their REIT shares increasingly behave like their general equity portfolio and in fact they have. Depending on the period chosen in the 80s and through the mid-90s, REIT covariance with the Dow Jones ran in the .40 to .60 range. In the last week of February it was .822 and climbing. Meanwhile, particularly during the time since 2000, specialized investment vehicles have been created that enable less than enormous investors to take private market positions in real estate. These vehicles have included private single property LLCs, private real estate funds, and private REITs. They can usually offer the reasonable leverage ratios and stable earning streams that the huge pension funds seek but typically these vehicles focus on smaller properties. The good ones deliver strong yields and, as they are privately traded, are not much subject to the winds of takeovers, hedge fund managers and the like. As a result they tend to have pretty low volatility but it comes at the price of substantially decreased liquidity. In some cases the investor has to stay in the investment until the Manager liquidates the properties, though typically these investments have expected 5 to 7 year holding periods. As with REITs, investors considering the private vehicles should consider the stronger property sectors. At the moment senior housing, student housing and some office markets look good, but there are worries about retail real estate. Investors may want to look for direct real estate investments with proven sponsors, (as one also should with REIT stocks). It seems reasonable that if due diligence and care are exercised, those dividends, and some similar preferred stocks will perform well. I know of no ETF that tracks a specific set of such private real estate investments. The liquidity risk is real, during 4/Q/2008, MIT’s Center for Real Estate reported that there were too few transactions in their index that tracks major pension fund investments to compute volatility — primarily because the private owners don’t want to sell, but historically liquidity returns to real estate after investors get over the shock of a big downturn. So today, if an investor needed his investment back in a hurry, he would probably have to take a significant haircut if he could get out at all but at the moment the private real estate funds owning the 6,287,properties valued at $305,096.000 tracked by the National Council of Real Estate Investment Fiduciaries is distributing a sturdy 5.5% cash flow based on its year end 2008 valuations. The NCREIF index was down only 3.1% during the 4th quarter of 2008. REITs in the same period dropped 12.7%. At the turn of the last Century a young man was supposed to have approached London’s Baron Rothschild “My father left me some money. He admired you greatly. Might I ask you where I should invest my inheritance?” The Baron said he’d be delighted to help the young fellow but first he had to ask a question: “Do you want to eat well or sleep well?” For at least the immediate future, REITs may not any longer be appropriate for restless sleepers. Private real estate equities are worth a good look. [1] REITWatch, National Association of Real Estate Investment Trusts March 2009. Michael Dowd has been a real estate investment professional and writer for 30 years. The views expressed here are his own and not necessarily those of his employer, The United Group of Companies UGOC, Troy, New York. A portfolio of the three private real estate offerings of UGOC in the last three years would have yielded an investor an IRR of 8.1% over the period since October 2006. By contrast an investment in the FTSE NAREIT US Real Estate Index would be down a blistering 65%. Mr. Dowd can be reached at DowdBoston@aol.com, or 718-893-4119. Sales Imperatives of “Financial-Industrial Complex” Often Not in Best Interests of Investor Investing the bulk of one’s portfolio in stocks and mutual funds is a relatively recent phenomenon, a significant departure from the more prudent and normative behavior for most of the 20th century. In the “old” days, savings accounts and bonds were the primary options for people hard working enough to accumulate more dollars than they needed to live on. Stocks were seen—correctly—as speculative vehicles that were only appropriate for those dollars that you could afford to lose and not for middle class investors. The idea that a middle manager in a large corporation should have most of his savings in stocks would have been ridiculous. What did your father’s portfolio look like? The birth and development of the financial planning ‘profession’ in the 1970s fed the enormous growth in products manufactured by Wall Street. The ensuing symbiotic relationship between Wall Street product manufacturers and Main Street financial providers created “The Financial-Industrial Complex.” New ‘needs’ are created in the name of diversification: large cap, small cap; U.S., foreign; developed market, emerging market; technology, health care, etc. But are these sales imperatives in the best interests of most investors? It is not an insult, merely recognition of reality that long-time employees in any industry will slowly grow to believe that the country’s interests are the same as their industry’s interests. There is no doubt that your advisor and the people quoted in the media sincerely believe that you, too, can be like Warren Buffet by buying and holding stock in good companies forever. But even Warren Buffet is having trouble being Warren Buffet these days. Nevertheless, Buffet is unlikely to sweat market declines. In fact, his stock investments could plummet 90% and he’d still be a billionaire. Having seventy to eighty percent or more of one’s retirement assets regularly exposed to the market is—no matter how diversified--needlessly speculative. Current carnage aside, the Rambo-in-pinstripes nature of today’s ‘conventional’ advice would be just as unhealthy even in a bull market. It may seem late to ask this question, but do you really need to take that risk to get where you wanted to go? It all comes down to the wisdom inherent in the ultimate risk question: what if you’re wrong? If you’re cautious and you’re wrong, it means you’ve missed out on some attractive gains in the market. Not forever, but just until you decide to get back in. On the other hand, if you stay the course in the market and you’re wrong, it could mean additional losses of 20-30% or even more. Which way would you rather be wrong? Which ‘mistake’ would be life altering? It is safe to say that the world economy has entered uncharted waters. We will eventually see our way out of this mess, but it is of little practical use to be told that ten years from now we will be happy again as investors. Your financial life is not a movie where blood is fake and damage is artificial. It is not a game where macho posturing like Rambo may help you gain a competitive advantage. Leave Rambo to Hollywood. He always was out of place on Main Street. Excerpted from an Op Ed piece that appeared recently in the Minneapolis Star Tribune. Robert Markman, Managing Director, Markman Capital Management, Edina, MN, is the portfolio manager of the Markman Core Growth Fund (MTRPX) and the Markman Global Build Out Fund (MGBOX) bob@markman.com, 952-920-4848. Options Exist for Saving Taxes on Large Real Estate Holdings When Traditional Estate Planning Is Not In Place Recently, Jeff, the son of a wealthy woman now in a serious health decline, discovered that the three most traditional estate planning techniques were not available to him as tax saving strategies; gifting, leveraging, and discounting. His mother’s estate was close to $8 million. He was the Power of Attorney, but his mother had not given him the ability to gift from her estate. He could not use leverage on his mother’s life because she was uninsurable and they could not get an insurance policy to help pay estate taxes that would be due nine months after she died. Further, the son could not use discounting techniques to move her assets into an irrevocable trust, which could be offset by using the $1 million lifetime gifting exemption. The estate stood to lose as much as $2.5 million in settlement costs consisting primarily of estate taxes. In addition, because the estate consisted almost entirely of commercial real estate, a fire sale would most likely take place, forcing a distressed sale of the estate and leaving less to beneficiaries. Most advanced estate planning attorneys would say “game over.” There are a few strategies, however, that bear examination. Jeff’s advisor came up with a much less well-known strategy for this family who wanted desperately to save estate taxes. The advisor suggested a 1031 tenants in common strategy for the $8 million in property. “TIC” is a form of real estate asset ownership in which two or more persons have an undivided, fractional interest in the asset, where ownership shares are not required to be equal, and where ownership interests can be inherited. Jeff and his siblings, as a group would own the real estate. At the time of his mother’s death, the value of the real estate will be discounted because multiple-owner property that contains the requirements needed in a qualified TIC is harder to market and sell than an asset that is directly and solely owned. Because of the challenge of marketability, the TIC asset can be generally discounted by 15-25%. Eligibility and the discount amount is subject to the circumstances of each estate. Assuming Jeff’s mother’s current estate tax exemption amount of $3.5 million and assuming a 20% discount on an $8 million estate consisting of TIC assets, the amount of the estate subject to the “death tax” drops from $4.5 million to $2.9 million, preserving approximately $700,000 for the beneficiaries. A second strategy is available from an IRS approved tax program in domestic oil and gas investments. Using qualified investment funds for this strategy, Jeff can generally expect to write off 85% of the money invested in gas and oil, and generate 10 to 15% tax-advantaged income for some time. In addition, although over time these wells will get depleted, income from these investments can last for twenty to thirty years. There are, of course, investment risks in the oil and gas industry, but some investments are extremely well tested, generally drill over 200 wells per fund, and have a 95% chance of finding oil per drill. It is not marketed as a speculative investment. If all the family’s assets, all $8 million are invested, there are benefits:
These plans are not suited for every circumstance and every estate. But clearly it is not always ”game over” when traditional and advanced estate tax reduction strategies are not available. So all is not lost if a parent does not do estate planning in a timely fashion. Financial advisors with a specialty in working with real estate portfolios are important to recruit to advise families who find themselves with highly appreciated property and no estate plan in place. Rich Arzaga is Founder and President, Cornerstone Wealth Management, San Ramon, California, a life planning company specializing in providing options and solutions for residential and commercial real estate investors. He is also an instructor in the nationally-recognized financial planning certification program at U.C. Berkeley, and teaches the highly-acclaimed Real Estate Investments course at U.C. Santa Cruz and U.C. Berkeley. Rich can be reached at rich@consultrich.com or toll free (888) 290-9900. Securities and Investment advice through Associated Securities Corp. (ASC), Member FINRA/SIPC and a registered investment advisor. Additional Advisory and Investment Services offered through Cornerstone Wealth Management Inc., a registered investment advisor not affiliated with ASC. CA Insurance License No. 0D92796 Trends from Ink&Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com, 508-479-1033 Mortgage Relief for the Middle Class The Federal Home loan refinancing and mortgage reworking programs announced on March 4, 2009, are dense, hard to understand, and works in progress. They are, however, expected to make it possible for 4-5 million homeowners to refinance or remediate their home loan obligations. The goal of the program is to lower monthly mortgage payments on home loans and convert adjustable-rate loans to fixed rate loans. Q - What programs are available? Q -What are the rules? Q -Are you qualified? Q -Can a homeowner get monthly mortgage payments reduced to avoid foreclosure? Q -What are the known rules for the Modification Program Q -What steps will the Modification Program take? The Modification program may reduce your mortgage payments by as much as 50% in certain cases. Talk with your bank and then talk with your financial advisor. Participating in these programs may save you from losing your home or depleting your retirement savings earlier than you had expected. For additional information contact William Campbell at wgc@theRPCgroup.com or visit their website at www.therpcgroup.com. (Phone) The RPC Group provides advisory and consulting services for financing or refinancing mortgage debt for individuals and homeowners. The RPC Group also provides advisory services and strategic plans for commercial debt and equity financing for or troubled commercial real estate properties. Does it Make Sense to Pay off Your Mortgage with Savings to Reduce Monthly Expenditures? History is history and knowing that what has happened to the stock markets in the past may be an indicator of the future. But that information may not be enough reassurance, particularly since we have no control over it. Under the circumstances, our anxiety over the market declines and our desire to control our expenditures brings up the common question of whether a mortgage should be paid off. Surprisingly, even younger home owners are asking the same questions. Certainly the volatility and decline in the stock market makes paying off the mortgage seem more attractive. Typically the cost of a mortgage is less than what you can earn by investing in the stock market over long periods of time. Obviously, as the stock market and housing values have declined individuals are tempted to take the short-view. However, there are several, longer-term factors to consider. The primary consideration has generally been based on the terms of the loan.
Even if your rate is high, it doesn’t mean you shouldn’t have a mortgage. Mortgage interest deductions on your tax return (particularly if you earn less than $250,000) is often a useful tax deduction. It's important to shop around and see whether the current rates, probably lower than your current mortgage interest rate, justify that you consider refinancing. Despite the rate you pay, the greatest risk for those who choose to pay off a mortgage is access to cash in the future. What if you pay off your mortgage, but end up needing those funds you used to pay off the loan in the future? You need to balance the cost of the loan against your need for future liquidity. Under the circumstances, it seems important to focus on what we can control. Obviously the options vary from individual to individual. Barry Taylor is a portfolio manager at Bingham, Osborn & Scarborough, San Francisco, a comprehensive wealth management firm. He can be reached at 800-767-8535 or barry.taylor@bosinvest.com. The Worker, Retiree, and Employer Recovery Act of 2008 On December 23, 2008, President Bush signed into law H.R. 7327, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA). WRERA includes one provision. of many, which may alleviate some of the stress caused by the downturn in the financial markets in that it addresses aid for non-spouse beneficiaries of rollover IRA accounts. Non-spousal Rollovers When a Federally recognized spouse inherits a 401(k), 403(b) or other employer-sponsored retirement plan, the surviving spouse can roll the money into his/her Individual Retirement Account (IRA) and defer paying taxes until the money is withdrawn, generally at age 70 ½. When a non-spouse inherits assets from an employer-sponsored plan, the rules change and generally result in the surviving partner having to take a taxable distribution of the plan assets either immediately or over five years. The Pension Protection Act of 2006 extended the ability to rollover an inherited qualified employer plan to a non- spouse beneficiary. Then, the IRS thwarted Congress by ruling that qualified plans are not mandated to allow non-spousal rollovers. If they wanted to they could, but were not required to do so. Starting on January 1, 2010, WRERA provides that all employer plans must permit rollovers for non-spouse beneficiaries and provide notice of the distribution. Now, any non-spouse beneficiary will be able to roll the inherited assets over (into a new) to his/her new “Inherited IRA” and will be able to take mandatory distributions over his/her life expectancy, thereby extending the tax deferral over his/her life expectancy. Debra A. Neiman, CFP®, Principal of Arlington, MA-based Neiman & Associates Financial Services, LLC (www.NeimanOnline.com), provides fee-only financial planning and investment advisory services for GLBT individuals and couples. She is author of the bookMoney Without Matrimony: The Unmarried Couples’ Guide to Financial Security. Neiman can be reached at info@neimanonline.com or 781-641-5700. Neiman is a member of the steering committee for the 2009 PridePlanners Fifth Bi-Annual Conference to be held in Fort Lauderdale, FL, June 11 to June 13. This is the only financial services conference that focuses on the financial needs and issues of the GLBT community. Investors Eager to Discuss Pros and Cons of Certificates of Deposits (CDs) Investors, in panic mode because of the their portfolio and global meltdown, jokingly talk about burying cash in their backyard, but they are only half-joking. Justifiably concerned that banks, insurance companies and other financial institutions will survive the current environment, they are very interested in finding out more about CDs. Normally, a person can put up to $100,000 in a bank's CD and be covered by the Federal Deposit Insurance Corporation (FDIC). During the market upheaval last year, the government increased the FDIC coverage to $250,000. Currently this increase is set to expire at the end of 2009. This FDIC coverage guarantees that, in the event of a bank failure, depositors will have their deposits returned up to the limit of the coverage. This insurance is designed to give people greater faith in banks so they don't pull their money out of the banks in bad economic times. The major benefit of a bank CD is this FDIC guarantee. Even if the bank goes belly up, the depositor will get the money back. The downside is that it is not easy to access your money once you get the CD. If a cash crunch comes up and you need the cash, you normally have to sacrifice the unpaid interest earned by the CD. As one would expect, the longer you are willing to tie up your cash, the higher the interest rate the bank will give you. One downside to long-term CDs during periods of low interest rates is that you are locking in a low yield when rates are likely to go up dramatically before the term of the CD ends. To avoid this problem, you can buy shorter term CDs while rates are low and extend the length when rates get higher or ladder your money in a multiple smaller CDs for varying periods of time. The second option has the added benefit of making cash available as the series of CDs mature. Another issue to consider is whether the CD is actually backed by the FDIC. As an example, an advisor checked a bank offering a five year CD with an astounding 9% annual interest rate for a client. Research showed that the bank was chartered in the British Virgin Islands and did not have any FDIC protection. If the bank went under during that five year period, depositors risked losing everything. The client decided not to take that risk. If it seems too good to be true, it almost always is. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. 952-835-9000 - pfshim@usinternet.com. It’s Emotionally Difficult to Retire This Year A year ago, for many pre-retirees, 2009 looked like a good year to retire. In fact, their advisors may have agreed with that assessment. Now, things may look very different. However, it is very important that you not play head in the sand. Instead, look at your status and discuss it with your advisor. Joan and Dana had a discussion with their advisor a year ago. They have taken a new look in March of 2009 and the retirement they thought they could count on needs to be delayed. They have the money to retire, but not if they live beyond ages 85 or 90. They have real estate assets they could sell as well. Joan and Dana are not unable to retire, but the red flag warning is up that they may want to cut expenses and delay retirement a bit longer so they don’t need to withdraw savings from a portfolio that is down 25% or sell property in a down real estate market. Amy is 72 years old, has equity in her home and $300,000 in savings. But she has lost her part time job and boarder for the room she rents in her home. Both made the difference in how she managed on social security. Her advisor suggested that she work diligently to find a boarder, while working Craig’s List for a part time job. Sitting around won’t help Amy. She has two action steps to take to supplement her social security benefits. No one is able to escape this recession economy. Accurate retirement planning is not possible in an unstable economy. Wait, hold on , and take a regular assessment of your status. This period of time points out clearly that retirement planning is not something that you do once, but something that requires you taking a regular look. Sharon Rich is a fee-only financial planner and principal of Womoney, Belmont, Mass. She can be reached at SLR76@aol.com or 617-489-3601. PridePlanners June 2009 Conference is Only Financial Conference to Focus on Financial Issues of LGBT Clients, Non-traditional Families and Unmarried Couples Financial advisors working with the gay, lesbian, bisexual, transgender (LGBT) and unmarried clients will have the opportunity to learn vital information and understand the changing law for serving the complex needs of this market segment at the Fifth Bi-Annual National Financial Planning Conference of PridePlanners Association (www.prideplanners.org), at Hyatt Regency Pier Sixty-Six, Ft. Lauderdale, Florida from June 11 to June 13, 2009. The event features keynote addresses by:
Additional topics will include:
The PridePlanners Association (www.prideplanners.org), is the only national organization of financial, tax, insurance, investment and estate planning professionals, represents financial advisors and money managers who specialize in meeting the unique needs of the LGBT community, non-traditional families, and unmarried couples. Further information about the Conference can be obtained from: Nicole Rosandich, Comer Consulting, Plymouth, Minnesota, Nicole@jcomerconsulting.com 877-540-0711 Or register at www.prideplanners.org |
| BACK TO TOP |