Fall 2008

Cash Flow Mortgages
As the economy continues to weaken, many commercial properties may become distressed as tenants fail to renew leases or default on rent payments. In turn, landlords may be unable to make monthly or quarterly mortgage payments. In this situation, the lender may be willing to convert the loan to a cash flow mortgage rather than foreclosing the loan. Under such a mortgage, debt service payments by the borrower are based on the availability of cash flow, while deferring the portion of debt service that is unpaid until sufficient cash flow is available or until maturity (with or without compounding, depending upon the terms of the loan). Read more...

Shifting Trends
A report by the Brookings Institution, based on new U.S. Census Bureau data, shows that the nation's fastest growing cities continue to be located in the South and interior West. But the estimates also show a retrenchment of the "snowball to sunbelt" population surge that is bringing modest gains to many older cities that lost population earlier in the decade. Three of the nation's nine largest cities--Chicago, Los Angeles and San Diego--saw gains in the past year after previous declines, while their Sunbelt counterparts--Phoenix, Houston, San Antonio and Dallas--showed slower levels of growth. Chicago's modest gain was the first since 2001. Boston also saw a gain, becoming the fastest growing city in the Northeast, after losing population the year before. Read more...

Short Sale Is Taxable Income
The U.S. Tax Court affirmed the decision of the IRS that a "short sale" of real estate generated taxable income to the extent of the excused unpaid mortgage (Stevens vs. Commissioner of Internal Revenue, TC Summary Opinion 2008-61). Background: Eugene Stevens and his wife bought a two-story home in need of rehabilitation. Their intent was to rehabilitate the dwelling and then either rent the property or sell it. The purchase price was $256,000 and was financed with a bank mortgage. Subsequently, the couple was unable to make the mortgage payments, and in order to avoid a foreclosure that would have affected their credit rating, they sold the property in a short sale with the approval of the lender. Read more...

Credit Default Swaps: Role in Subprime Mortgage Collapse
A relationship not generally understood by many investors is that between credit default swaps and the subprime mortgage crisis. A credit default swap (CDS) is a form of credit derivative, i.e., a method whereby a lender can shift part of the risk of owning mortgages to another party. Specifically, the owner of the mortgages makes a payment (or a series of payments) to another party in exchange for the promise of the other party to pay a specified sum in the event of a default by the mortgagors. The party receiving the credit protection is the "buyer," while the party providing credit protection is the "seller." In short, a CDS is a form of insurance whereby the seller either takes delivery of the defaulted mortgages or pays the buyer the difference between the face value and the recovery amount of the mortgages. The credit risk thus is transferred from the buyer to the seller. (Credit default swaps also can be used as a form of speculation by hedge funds and other market operators.) Read more...

Auditing Revisited
The emergence of outsourcing by major corporations of most or even all of their real estate functions has been a significant development within the real estate industry. This continuing trend shows no signs of letting up and has witnessed many positive results, also with some negative realities. Many corporations now benefit by having large national real estate firms provide a wide array of services and functions that were not previously performed or were performed internally at a substandard level. Having a national real estate firm provide a cadre of services allows highly qualified experts to handle a host of concerns that many corporations could not monitor effectively. However, hidden costs and a downside do exist. One major downside is the possibility that the overall picture might be ignored by having each task handled by a specialist with only one objective--the completion of a particular assignment. Read more...

Home Sale Exclusion: New Provision
An individual homeowner can exclude up to $250,000 ($500,000 if married) on gain realized on the sale of a principal residence. To be eligible for the exclusion, the home must have been used as a residence for at least two of the five years ending on the date of sale. An individual or couple owning more than one home could double the value of the tax deductions by careful timing, i.e., living in one home for two years, selling it and excluding up to $500,000 of any gain, then moving into the second home and treating it as a new primary residence and selling it after two years and once again taking the exclusion. The new housing law, in order to prevent such a double exemption, provides that a homeowner cannot exclude the gain from a sale that includes periods of "non- qualified use." This includes any period (beginning in 2009) when the home is not used by the homeowner as a principal residence. Use of the home as a vacation home, or as a rental property, would be considered to be nonqualified use. Read more...

Somerset Real Estate Team News
On Friday, November 14, our Real Estate Team will be hosting an exhibit booth at the Indiana Commercial Board of Real Estate Conference at the Indianapolis Marriott Downtown. We hope to see you there.

In Other News...
Somerset publishes a variety of newsletters in addition to Real Estate Focus--such as Wherewithal, Work-In-Process, Tax Times and several others. Please visit the Newsletters page of our web site to read the archives and sign up to have new issues delivered to your email inbox.

Real Estate Focus is provided by Somerset’s Real Estate Team for our clients and other interested persons upon request. For additional information on the issues discussed, please contact Michael Fritton, CPA. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. 

These articles were written by and published herein with the permission from professionals of BDO Seidman, LLP.  Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.