1. October, 2009 VOL 1 ISSUE 2
Financial Round-Table
Real Estate, Accounting, Legal, Investing
This week’s contributors: Mission:
In the spirit of the legendary King Arthur, we formed
Tax:
Jim Javorcic, CPA a “Round Table” of highly ethical people who are
Mayer Hoffman McCann involved in different aspects of finance – real estate,
jjavorcic@cbiz.com
312-602-6817 stock market, legal, accounting, etc. Our goal is to
share ideas with and gain knowledge from each other
Financial Investments:
Stuart Kruse, CFA to become better informed in areas outside our
Kruse Asset Management particular expertise so that we will be able to service
Stuart@KruseAssetManagement.com
312-775-6000 our clients better.
Commercial Real Estate:
Bill Main, SIOR
C-BIZ Gibraltar Real Estate Services
wmain@cbiz.com
312-602-6902
Estate Planning:
Melissa Selinger
Burke, Warren, MacKay & Serritella
mselinger@burkelaw.com
312-840-7097
Real Estate Law:
Rachel D. Wanroy
Burke, Warren, MacKay & Serritella
rwanroy@burkelaw.com
312-840-7079
“Working together to service you better”
2. October, 2009 VOL 1 ISSUE 2
Tax Planning
Jim Javorcic, CPA
Main Idea: Additional Illinois Tax Bite for Partnerships
Although partnerships and LLCs are not subject to any
federal entity-level tax, the state of Illinois imposes a 1.5%
“replacement tax” on partnership income.
. Professional service firms such as law firms, investment
advisors, architects, etc. were able to reduce the amount of
Estate Planning income subject to Illinois replacement tax by taking a
Melissa Selinger deduction for “personal service income or reasonable
allowance for compensation of partners.” The idea behind
Main Idea: Teamwork and Coordination in Estate the deduction was that many of these firms had
Administration Maximizes Tax Benefits owner/employees who were compensated by distributions,
which do not reduce taxable income, rather than salary
When a loved one dies, there is a period of time during payments, which do.
which the individual's estate or trust is administered. During
this period, many important decisions are made that could Beginning with 2009 returns, the state of Illinois is
greatly impact the tax consequences for the beneficiaries of eliminating this deduction due to perceived abuses. A
the estate or trust. For example, if an estate or trust professional service firm with $10 million in income, which,
experiences a loss during administration, the loss can in the past, may have been able to reduce or eliminate this
typically be carried forward and passed through to the income for Illinois replacement tax purposes, will now be
beneficiaries in the year of termination of the estate or trust. subject to a $150,000 tax.
This allows the beneficiaries a corresponding deduction on
their income tax returns. However, in the case of excess What can be done? One strategy would be to convert
deductions, meaning expenses such as attorneys fees which partner distributions to guaranteed payments. In the
exceed the estate or trust's income, the tax laws (see example above, a firm distributing the $10 million to
footnote) allow such deductions to be passed through to the partners could, instead, make guaranteed payments of $10
estate or trust beneficiaries only in the year of termination of million. This would reduce taxable income to zero and
the estate or trust - which is the year in which the final eliminate the replacement tax. A partner who received 10%
distributions of assets are made, the estate or trust closed, of the distributions would then have to pick up a $1 million
and for which the final income tax return is filed. In a year guaranteed payment as self-employment income, but his/her
other than the year of termination, these deductions are flow through income from the partnership (most likely, also
"trapped" in the estate or trust, cannot be passed through to self-employment income) would be reduced from $1 million
the beneficiaries, and are lost as a tax benefit. to zero. The partnership agreement would need to be
amended to provide for guaranteed payments, rather than
In order to prevent the wasting of such valuable tax savings, normal distributions.
it is strongly advised that the attorney, accountant and
executor (or trustee) communicate and work together with
respect to charging expenses, selling assets, making
distributions to beneficiaries, and closing the entity in a
timely manner. All too often, inattention to these rules
results in the loss of real tax savings for the entities or
beneficiaries. By coordinating their efforts, these individuals
may help provide significant tax benefits to estate or trust
beneficiaries.
FN: Section 642(h) of the Internal Revenue Code and the corresponding Treasury Regulations.
3. October, 2009 VOL 1 ISSUE 2
Investments
J. Stuart Kruse, CFA
Structured Products (Principle protection)
For investors who want or should have exposure to some
less mainstream markets (commodities, currencies,
emerging markets), but who do not wish to take on any
additional risk, perhaps structured products are your
solution.
Often investors do not have enough exposure into low- and
non-correlated asset classes that provide diversification
benefits versus their core holdings. Adding additional
asset classes can often reduce the risk and improve the
potential for returns of a portfolio – it is said of
diversification: it is the only “free lunch” in investing.
People may lack exposure for a variety of reasons:
• Fear of the unknown, Often these CD are principle-protected, which means if it is
• Perceived Risk, held to maturity (usually 3-5 years), the worse an investor can
• Poor advice or do is have all of his capital returned should the linked portion
• Unaware of available investment vehicles. not appreciate. The investor may have lost opportunity on his
investment, but he lives to invest another day. On the other
Structures products might provide an excellent solution for hand, if the linked portion of the CD moves up, the CD’s
potential investors who have failed to diversify into value can grow as much and more than the associated basket
beneficial areas since they can be “structured” to provide of investments.
significant downside protection and in many case,
eliminate downside-risk completely. The negative of this structure is that any profit from the CD is
paid as interest and is taxable at ordinary income levels.
Large banks often create products in the form of CDs However, this issue can be negated if they are purchased in
(certificate of deposit, just like one might find at their local tax-exempt accounts. Additionally, the investor takes on the
bank). Because these products are CDs, they are FDIC credit risk of the issuing bank just as if they were purchasing a
insured up to $250,000 per individual per account. CD from the bank.
However, instead of paying the traditional interest, these
CDs are linked to a particular investment, which could be Using structure products to diversify (especially principle-
an index, a basket of commodities or currencies or any protected CDs), can greatly reduce or eliminate risk in areas
combination of investments. Additionally, these CDs can where you might not feel completely comfortable, while
be structured to reduce part of all of the downside. improving the overall performance of your portfolio.
4. October, 2009 VOL 1 ISSUE 2
Commercial Real Estate
Bill Main
Landlords continue to feel the pressure of the declining
marketplace. How does this affect the Chicago office
market? It continues to be a very challenging time for
landlords, yet a potentially advantageous time for financially
stable tenants.
Rising vacancy rates, which we believe will increase to 16%
to 17% downtown, should spell opportunity. Leverage for
many tenants ranging from early renewals, relocations and,
in some cases, contraction is picking up steam. Although we
are not seeing the deep discounting of the early 90’s, rental
rates have continued to become more tenant favorable.
A major concern continues to be the health of some The suburban marketplace has fared even worse
landlords. While tenants always want the upper hand in compared to downtown, with vacancy rates over
negotiations, a landlord’s ability to withstand the difficult 20% in most submarkets. The O’Hare and
times and be positioned to provide the services and capital Northwest submarkets continue to have the highest
necessary to operate a building is vital. The capital markets vacancy rates of all the suburbs at around 23%, with
are weak, so the liquidity needed to fund building the East-West corridor struggling around 22%. We
improvements may become limited. Further, if faced with a are continuing to see fewer completed sales
need to refinance, obtaining the dollars at a cost that makes transactions in suburban Chicago also due to the
sense may be the most significant challenge. frozen credit markets. Investment sales continue to
be limited and will continue to be so for some time.
In summary, we can expect to continue to see
greater negotiability among landlords, with lower
“effective” transaction economics. Tenants need to
realize, however, that it is not a “bottomless pit” in
negotiating with landlords. Transactions not
meeting certain economic metrics may not be
approved by lenders. That said, for the next few
years, landlords may not be so quick to walk away
from a deal, anticipating that another tenant would
be standing by willing to pay more.
It is not how much you make, but how much you keep.
5. Commercial Real Estate
Rachel D. Wanroy
While the commercial real estate market has yet to bounce back from the downturn, leases are still being
executed. Many landlords are working with tenants and more customized, creative leases are being
signed. Extensions of existing leases are often being signed well in advance of the scheduled expiration
dates for lower rental rates. A few trends that are being seen repeatedly are:
• Multiple month rent abatements/free rent periods
• Caps on a tenant's annual operating expense and real estate tax obligations
• Extension options with fixed rent amounts, rather than "fair market" rent rates or rates subject to
CPI increases
• Expansion/reduction options
• Early termination options, often tied to gross sales (often seen in retail leases)
For many tenants who are trying to cut costs and may be uncertain of the future success of their
businesses, the ability to expand or reduce space can be very valuable. In addition, securing a cap on
operating expenses and real estate taxes for each year of a lease term can provide more stability for a
tenant, as these expenses combined are often higher than the actual base rent payable. Now is a good time
to negotiate a long-term lease (or renegotiate a current lease) at very favorable rates, while perhaps getting
several months or even a year of free rent upfront. In light of the large number of leases scheduled to
expire in the next three years, it is likely that we will see the continuation of many of these trends.
Disclaimers
The information contain herein is obtained from sources believed to be reliable, but its accuracy or completeness
in not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation
that any particular investor should purchase or sell any particular security. All expressions of opinions are
subject to change without notice.
This report is not intended to provide tax advice. Accordingly, any discussion of the U.S. tax matters contained
herein is not intended or written to be used for the purpose of illegally avoiding US-taxes and/or tax-related
penalties. None of the topics contained herein are approved for further disbursement by future parties that may
acquire these notes.
Investment suitability must be determined individually for each investor, and the financial instruments described
herein may not be suitable for all investors. This information is not intended to provide and should not be relied
upon as providing accounting, legal, regulatory or tax advice. Investors should consult with their own advisors
as to these matters before taking any action as these topics herein are, by nature, incomplete in coverage and
analysis.