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Round Table Vol 1 21

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Our Round Table is a periodic meeting of a CPA, CFA, Estate Lawyer, commerical and residential real estate agents as well as a mortgage broker

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Round Table Vol 1 21

  1. 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. 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. 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. 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. 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.

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