August 1979
Vol 2 No 11
THE ECONOMY IS OUT OF CONTROL AND NO ONE HAS THE MEANS TO DO MUCH ABOUT IT! The Carter Administration is in disarray! Gold is on a rampage! The citizenry and their elected representatives, faced with recession, inflation, shortages, unemployment and labor unrest, seem capable of only lamenting the situation. AS A NATION, WE DON’T SEEM READY TO MAKE THE SACRIFICES AND HARD CHOICES NECESSARY TO GET THINGS BACK ON THE TRACK AGAIN. Now that Washington has proven its inability to cope, ONLY A SMALL MINORITY OF OUR POPULATION HAS ACQUIRED THE SKILLS AND DARING TO SEIZE THE INITIATIVE IN MEETING TODAY’S CHALLENGES. What does the future hold for us as small investors?
MIDDLE INCOME FAMILIES WILL BE HARDEST HIT! Some 25 million dual income families earning $15,000 to $30,000, in the automobile, furniture, construction, and manufacturing industries are vulnerable along with sales people, middle managers and recreational developers. Caught in a tax squeeze THEY WILL EXPERIENCE HIGH RATES OF UNEMPLOYMENT, CREDIT DEFAULTS, AND LOSS OF REAL PURCHASING POWER. Middle incomers will be passed by, by the do-gooders, concerned with the poor, who will keep pressure on social and welfare programs. Working wives with low seniority will be the first to lose jobs. SUBURBAN FAMILIES LIVING ANY DISTANCE AT ALL FROM JOBS WILL SEE THEIR NET INCOMES DROP OFF AS GASOLINE PRICES AND CONTROLS INCREASE.
The best laid plans of mice and men oft go astray. OPEC’s splurge of price rises can easily upset predictions of a shallow recession. As Gold passed through $307.00 per ounce, Saudi finance ministers held emergency meetings which COULD LEAD TO FURTHER INCREASES IN OIL PRICES AND/OR WITHDRAWAL OF DEPOSITS CURRENTLY IN DOLLARS. President Carter’s energy speech and cabinet shake-up will do little to help the situation in the near term. Even Mexico is raising oil prices.
OIL SHORTAGES ARE NOT GOING TO GO AWAY! It seems clear that the Administration is going to go for INFLATION to buy votes for the coming elections! The new Energy Mobilization Board is budgeted at $140,000,000,000.00! This will be largely MANUFACTURED MONEY, driving prices even higher. Everyone is marshaling forces for their drive to get energy priorities. IN THE TURMOIL, THE PROMISE OF A BALANCED BUDGET, FULL EMPLOYMENT, LEVELING OFF OF INFLATION, AND REAL GROWTH OF THE GNP HAS BECOME THE IMPOSSIBLE DREAM. Look for real costs of living to increase about 20% in 1979!
Our crystal ball shows prices of everything continuing to rise. Unemployment will center in the industrial North East and Mid West. THE SUN BELT, WEST, AND MOUNTAIN STATES SHOULD FARE BETTER. Money will tighten up as wage earners withdraw funds for living expenses. A higher proportion of income will be allocated to HOUSING, TRANSPORTATION, MEDICAL CARE, FOOD, TAXES. The personal car will stay in style for daily commuting, but not for long trips. Facilities and communities near jet air ports will prosper more than others. RE-APPORTIONMENT OF CONGRESS WILL SHIFT POWER TO AREAS GAINING POPULATION. They will get the pork-barrel benefits over the long term.
How can we investors in SFH continue to prosper in these perilous times? First, NEITHER A SPENDER NOR A LENDER BE! Aside from emergency reserves, put your money to work, GET FUNDS OUT OF BANKS, INSURANCE POLICIES, BONDS, NOTES, MORTGAGES, TRUST DEEDS, TAX CERTIFICATES unless they are yielding in excess of 20%. Eliminate unnecessary frills at home and office. Budget ruthlessly to increase cash flows. RE-EVALUATE ALL NEGATIVE CASH-FLOW INVESTMENTS AND SPECULATIVE VENTURES in the right of local area economic forecasts in which they are located.
Don’t panic! There’s time to systematically trim your sails for the coming stormy weather. Take a hard look at both your property and your tenants. SELL OFF MARGINAL HOUSES AND PUT THE PROCEEDS INTO TREASURY BILLS OR MONEY MARKET FUNDS, or try to get deep discounts in buying back debts that will come due in the next couple of years. DE-FUSE POTENTIALLY HAZARDOUS BALLOON NOTE SITUATIONS. Bring in an Investor for an interest in the property in exchange for paying off discounted debt. Offer lenders higher interest, more cash-flow, longer/shorter terms, advances of principal, etc. in exchange for deflated balloon payments, favorable acceleration clauses, reduced payments, performance mortgage terms. At the same time OFFER INDUCEMENTS TO THOSE WHO OWE YOU TO GET THEM TO PAY MORE, SOONER. Help them to sell or refinance property, offer them options, discounts, etc. DOLLARS YOU COLLECT NOW WILL EARN FANTASTIC YIELDS WHEN YOU BUY OTHER DISTRESSED PROPERTIES OR GOLD AND GEMS IN THE EVENT THERE IS A BLOW-OFF IN PRICES.
BEGIN NOW TO RESTRUCTURE YOUR LEASES WITH LARGER DISCOUNT CLAUSES IN ANTICIPATION OF RENT CONTROLS IF YOUR AREA SEEMS VULNERABLE. Tighten down on your Tenant selection criteria. Look for stability of employment, seniority, marketable skills, government checks, maintenance capabilities. Try to get larger deposits. IMPROVISE INCENTIVES TO ATTRACT AND TO KEEP HIGH QUALITY TENANTS. In our apartments we are awarding a “BONUS” OF $25.00 to each tenant who has been with us for 6 months and who has paid regularly. This will be awarded as each reaches that point, and again every 6 months. We will continue to increase rents to keep up with inflation. Take affirmative action to ELIMINATE SLOW PAYERS AND CHARITY CASES WHILE THEY STILL HAVE A PLACE TO GO IF THINGS GET WORSE.
NOW IS THE TIME TO GET FIRM COMMITMENTS FOR EMERGENCY FUNDS FROM NON-INSTITUTIONAL SOURCES! You might offer an Option on an interest in your properties in exchange for an Option on a specified sum, with your Option to be controlling. ARRANGE FOR LOANS AT SPECIFIED RATES AND UNDER TERMS WHICH EXTEND FOR AT LEAST 18 MONTHS following the date of the loan. You’ll have to offer inducements commensurate with the times. These might be in the form of future participation with you in investments, present interests in property, discount-buy-back sales, etc.
In buying additional property, BE SENSITIVE TO ENERGY-VULNERABLE LOCATIONS. Avoid areas which you feel are susceptible to economic fluctuations. Those properties will be available later at lower prices. Buy them on the up-swing. Keep an eye out for strong Union influences, permissive courts, and social organizations. They can all make life miserable in hard times, holding down rents and increasing taxes without regard to the economic consequences over the long term. MAKE YOUR ADJUSTMENTS NOW BEFORE THE STAMPEDE STARTS.
LOOK FOR HIGH YIELD CASH-FLOW INVESTMENTS IN NON-REGULATED SECTORS. Many States have relaxed usury limits. In Florida, the Legislature has passed a law raising the limits to 18%. While this has brought a flood of easy money into the area, it will be a two edged sword. Home owners seeking relief from consumer debt will consolidate with a high interest rate 2nd mortgage. WE CAN SEE A RUNAWAY FORECLOSURE SITUATION FOR THOSE FOOLISH ENOUGH TO BORROW AT THESE RATES. A friend of ours recently borrowed $10,000 for 5 years. This increased her payments from $300.00 per month to $550.00 on a house which commands a rental $375.00. Let’s see how this might benefit us.
Denis Rauzin of Miami has requested more specific information on Leasehold Interests. First, we need to give credit where it is due. Richard Robbins, producer of the ROBBINS REPORT, P.O. BOX 5426, SAN ANTONIO, TEXAS 78201 first introduced me to creative leasehold strategies in a marathon session in Las Vegas several years ago. For those of you who are really interested in pursuing this, I’d recommend you contact him or go to one of his seminars on the subject.
First, what is a leasehold? Technically, any interest in property less than a FEE SIMPLE interest can be called a leasehold interest. IT CAN INCLUDE MOST OF THE BUNDLE OF RIGHTS ASSOCIATED WITH OWNERSHIP OF A PROPERTY WHEN THEY COMPRISE LESS THAN A FEE SIMPLE TITLE. Suppose I rent you my house. In effect I have conveyed some of my rights to you for the rent you paid me, thus you would have acquired an estate of sorts in my property. Your tenancy could be “at sufferance,” “month-to-month,” or you might have a Lease under which I have granted you the specific rights for a year or so. AS THE TIME DURING WHICH YOU POSSESS AN ESTATE IN MY PROPERTY LENGTHENS, SO YOUR RIGHTS ALSO BECOME MORE TANGIBLE.
For example, if I were to sign a 20 year lease for a fixed sum without any escalators in an inflationary period such as we are experiencing today, THE PASSAGE OF TIME WOULD SEE MY EQUITABLE INTEREST GRADUALLY CONVEYED TO YOU, providing I was the Lessor and you the Lessee. As a point of law, when one voluntarily rents property for less than economic rents, one confers an equitable interest. WITHOUT AGREEMENT TO THE CONTRARY, A CONDEMNATION ACTION MIGHT AWARD YOU AN INTEREST IN ANY FINANCIAL SETTLEMENT BECAUSE OF THIS TRANSFER. This can get to be pretty interesting when a person controls lots of leases in an area undergoing urban renewal as a case in point.
UNDER SECTION 1031 OF THE IRS CODE, A LEASE IN EXCESS OF 30 YEARS CAN BE EXCHANGED TAX FREE just as property is exchanged. You can see how leaseholds begin to resemble more and more the fee they pertain to as they are written over longer and longer periods. THEY CAN BE MORTGAGED, OPTIONED, SOLD, EXCHANGED, ETC. They can confer various estates in property. An example would be a “life estate” wherein the Grantor might reserve unto him/herself an interest in the title for the balance of his/her life, with the residual interest being conveyed automatically by Deed to the Remainderman. In another instance an “Estate for Term” might be created by a person who might Deed an interest in property to another for a stated period of years, or until some event had transpired, after which the property would revert back to the Grantor. This might be done to tailor taxes.
Now the fun begins! Instead of renting you a property on a Lease, suppose I sold it to you on a Deed for the next 5 years, reserving unto myself a “Remainder Interest.” You pay a small down payment and the balance over the entire period. BECAUSE I AM SELLING AN INTEREST VERSUS RENTING YOU THE PROPERTY, THESE PAYMENTS COULD BE LONG TERM CAPITAL GAINS. You might eventually SELL your interest to yet another for a lump sum, subject to my Remainder Interest and your purchase contract, taking cash out taxed as long term capital gains also, (providing sufficient time had elapsed). In the meantime, I might mortgage, or sell an option on, or sell a subsequent leasehold interest in, or sell an option on a subsequent leasehold interest in my property subject to your prior claim. I can also discount your income stream or pledge the payments for a loan. As a matter of fact, I CAN DO JUST ABOUT ANYTHING THAT I CAN IMAGINE! One might ask how farfetched this can get to be in the real world.
Richard Robbins told us about the Beneficiary of a Trust who was not allowed to either mortgage or sell trust assets. Instead HE SOLD AN OPTION ON A 199 YEAR LEASEHOLD INTEREST IN THE AIR RIGHTS OVER A SITE FOR $5,000,000. CASH FOR CONSTRUCTION OF A HIGH RISE. The Trust would have a Remainder Interest and retain all improvements at the end of the 199 years. Ponder this: CREATIVITY IS COMPRISED OF EQUAL PARTS OF NEED AND OF KNOWLEDGE OF THE ALTERNATIVES. The need is all around us –all we have to do is acquire the knowledge!
RON COLE OF INDIANAPOLIS SENT US A TERRIFIC BOOK DEALING WITH DUE-ON-SALE DECISIONS OF THE VARIOUS COURTS. Available from A.B.A., 1155 East 60th Street, Chicago, Ill. 60637 for $4.00. Ask for Real Property Probate and Trust Journal, Winter 1978, Volume 13, No. 4. Great for scaring bankers!
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