Question For Boardmembers!

[Parsad]

Got a question for boardmembers and I thought I would tap the brains of the best, since most of the senior partners, CPA's, CA's and lawyers we've questioned haven't got a real clue:

 

And no, this is not for us...we have no interest in doing this! 

 

If you were setting up an investment structure for Canadian residents to invest in U.S. distressed real estate, what is the best structure when considering compliance, taxes and reporting?

 

1)  A Canadian corporation holding the property directly...seems to be very inefficient taxwise.

 

2)  A Canadian GP that sets up a U.S. LP with Canadian investors investing directly into the U.S. LP...more tax efficient, but could have considerable compliance issues.

 

3)  A Canadian corporation with a wholly-owned U.S. corporation that invests directly into the U.S. real estate...probably the least efficient of all structures due to double taxation

 

4)  A Canadian GP that sets up a CDN LP with Canadian investors and then the CDN LP invests directly in the U.S. real estate...seems as efficient as #2, but has more compliance issues and tax filings issues for partners...since both a K-1 and US 1065 would have to be issued.

 

Would be interested in hearing from you guys on these or any other alternatives!  Cheers and thanks!

[netnet]

I'm U.S. based, so I have not thought about the Canadian implications, but here goes:

 

1) Why do you need the Canadian structure?

2) Is this to be widely cast to a variety of investors or are they all ready to go now?

3) How many investors are there?

4) Are they deemed sophisticated?

 

(If you can legally set up a CDN corporation, with all the investors--option 1--, I'm surprised that there are no CDN compliance issues.)

Off hand, I would tend to #2, with or without the Canadian entity.  If there are compliance issues, then set up a US LLC, which allows you to upstream the profits tax free to the members, but you still have the foreign entity tax treatment issues, which is way beyond me.

[Parsad]

Thanks for trying Netnet.  Some answers to your question:

 

I'm U.S. based, so I have not thought about the Canadian implications, but here goes:

 

1) Why do you need the Canadian structure?

 

Actually it's a client who wants to set it up.  They don't care except they want the cheapest, most efficient structure...unfortunately cheap and efficient don't necessarily go hand in hand.

 

2) Is this to be widely cast to a variety of investors or are they all ready to go now?

 

Most are ready to go, and they are primarily friends and family.  They aren't raising capital from outside investors at this stage.

 

3) How many investors are there?

 

About 10-12

 

4) Are they deemed sophisticated?

 

About half would be, but the other half would have to qualify under a friends and family exemption.

 

(If you can legally set up a CDN corporation, with all the investors--option 1--, I'm surprised that there are no CDN compliance issues.)

 

In BC, it's pretty easy to set up a corporation operating under certain regulatory exemptions that allow capital to be raised freely from friends, family, associates and accredited investors.

 

Off hand, I would tend to #2, with or without the Canadian entity.  If there are compliance issues, then set up a US LLC, which allows you to upstream the profits tax free to the members, but you still have the foreign entity tax treatment issues, which is way beyond me.

 

Unfortunately, the LLC structure isn't recognized by Canada, thus there are certain timing issues in relation to how operating losses can be passed up to the investors...in essence, the LLC structure is viewed as a corporation in Canada, thus operating losses cannot flow through directly to the investors.  Cheers!

[value-is-what-you-get]

The cheapest and most efficient structure must also contemplate the human/relatives factors involved in what you describe.  I would recommend the Canadian Corporation with shares issued to each member with restrictions (if any) clearly spelled out in bold including the mechanism for redeeming those shares if need be.  All kinds of things can come out of the woodwork when in business with friends and family!

[SharperDingaan]

 

Because there are so many friends/family the core legal entity should be a Cdn Trust, where everyone owns 'units' that they can buy/sell. The Cdn Trust contracting for services (Admin/Acctg, Ppty Mgmt, etc.) & your admin/acctg involvement is via a seperate LLC of your own..... But frankly, the better option is simply a direct investment in the various public REITs (liquidity, diversification, admin, etc).

 

Next best is a small group buying an entire apartment block/commercial warehouse for retirement income, in some urban centre. A common practice amongst the major ethnic communities, & most will welcome new people who want to learn the nuts & bolts.

 

Best of luck to you

 

SD 

 

 

[hyten1]

this is very interesting and definitely worth watching

 

but i do have to point out that both Ford and GM also said their says has increase considerable in China, now its possible that GM  and Ford increase and other automaker decrease.

 

http://www.egmcartech.com/2009/11/11/china-auto-sales-up-75-8-in-october-gm-china-doubles-sales/

 

just to illustrate the fact its not ALL smoke and mirrors I guess its possible to get ALL sales data from each of the major automakers independently to cross check the data.

 

unless everyone thinks the automakers are also cooking the numbers

[hyten1]

sorry i posted in the wrong thread disregard my post above

[nodnub]

Next best is a small group buying an entire apartment block/commercial warehouse for retirement income, in some urban centre. A common practice amongst the major ethnic communities, & most will welcome new people who want to learn the nuts & bolts.

 

Sharper,

 

Can you offer any tips on how an interested individual could find such a group of investors (that would welcome a new partner)? 

 

Thanks,

 

 

[Parsad]

The cheapest and most efficient structure must also contemplate the human/relatives factors involved in what you describe.  I would recommend the Canadian Corporation with shares issued to each member with restrictions (if any) clearly spelled out in bold including the mechanism for redeeming those shares if need be.  All kinds of things can come out of the woodwork when in business with friends and family!

 

Unfortunately the Canadian corporation structure is the least tax efficient.  For every dollar in income, only 25 cents will make it to the pockets of investors after taxes, due to double taxation of dividends and personal income taxes.

 

Because there are so many friends/family the core legal entity should be a Cdn Trust, where everyone owns 'units' that they can buy/sell. The Cdn Trust contracting for services (Admin/Acctg, Ppty Mgmt, etc.) & your admin/acctg involvement is via a seperate LLC of your own..... But frankly, the better option is simply a direct investment in the various public REITs (liquidity, diversification, admin, etc).

 

Yes, the trust structure is the best structure and what we originally told them, but the problem is that they are raising only a small amount of capital...$300K-500K.  The administrative, custodial and compliance costs are going to eat into their capital.  If they were going to use the capital as the 25-30% down payment and then leverage up through mortgages, then you could justify the costs of the trust, but they are buying the homes for cash:

 

Cash:  $300K in properties...double in price over five years (only a best case assumption)...$600K - $30K in admin/compliance costs + $20K in operating expenses...$550K/300K = 83% return or about 12.5% annualized.

 

Leverage:  $300K in down payment and $600K in mortgages...double in price over five years (again only a best case assumption)...$1.8M-$600K in mortgages...$70K in interest costs + $30K in admin/compliance costs + $20K in operating expenses...$1.08M/$300K = 260% return or about 21.5% annualized.

 

I think you could justify the trust structure cost based on the potential return in the leveraged scenario, but not the way they want to do it with cash purchases.  Cheers!

[Vinayd]

Hi Sanj,

 

There was a presentation I attended awhile back from a company called CBI Group from Alberta. 

 

They seem to have setup a structure similar to what your group is looking to setup.

 

I am definately NOT recommending this company, but it may be worthwhile connecting with them to get information on the most tax efficient way to set this up.  Heck, they may even have a template on how to do it.

 

Again, I have not dealt with CBI, or have knowledge/interest in their investments/philosophy. I just went to a presentation and what they've already done seems to be similar to what your group is trying to achieve -- so they may have useful information.

 

the website is: http://www.cbigroupinvestments.com

 

cheers,

Vinayd

[SharperDingaan]

 

Nodnub

 

Go to a couple of Italian, Greek, & S.American community functions. Give the folks an opportunity to know you, & discreetly let your interest out. It will not be long before you're introduced to the local folks in that community who actually do what you're thinking of.

 

Ethnic communities are notable in that you, vs your money, counts for far more; so a down-to-earth approach will go a long way. The cuisine & entertainment along the way is usually pretty good as well.

 

SD

 

     

 

[arbitragr]

I thought you were bearish on CRE Sanjeev?  ;)

I think alot of the opportunities have reached fair value almost.

 

Anyways, I agree with the trust structure or the REIT structure.

This is the best way from a tax perspective. Anything else will put you at a disadvantage since all other key real estate investment companies usually use the REIT structure where the operating cash flows are distributed out to unit holders (AFFO, FFO) and taxes are applied at the individual level.

For some types of real estate taxes are only applied on capital gains and not income (e.g. Timber/Forestry).

 

So this is your best bet.

 

However I'm not from Canada so the legal specifics I'm not too sure about. Nonetheless, many jurisdictions around the world operate similar structures for real estate.

[Parsad]

Hi Arbitragr,

 

I'm still very, very bearish on commercial real estate.  This isn't for us.  A client of Quantum's is interested in setting up such a structure to purchase residential real estate in Las Vegas. 

 

I'm not against that idea per se, as I think residential real estate has come down alot and will take time to recover, but the simplicity of the structure they are seeking becomes complicated, as it's deficient in many areas such as liability and tax efficiency.  Cheers!