How Do I Prevent Losing My Parents Homestead Exemption When They Pass?

Question:
My parents owned their home for many years and had Homestead Exemption.  I’ve been living in my parent’s house and taking care of them in their last years.  But last year they passed and when I inherited the house, the Homestead Exemption was lost and now the real estate taxes have tripled.  What can I do?

Answer:
This is one question we get every year around this time and is one we unfortunately can’t be that helpful with other than informing the public ahead of time and referring our clients to a knowledgeable estate planner or lawyer.

Sadly if you find yourself in the above situation it may be too late.  But with the proper estate planning this situation can be avoided.  There is a little known provision in Florida Law that allows property to be transferred into a Trust and with the proper legal language allows the Homestead Exemption to be passed down to the children given that they have been living with their parents and have no other homestead.  For a more detailed explanation and to setup this up we recommend speaking with our friend and colleague Chris Vasallo at (305) 233-9066.


Christopher D. Vasallo, Esq.
J.D., LL.M. in Taxation

Vasallo-Sloane-Logo

Vasallo Sloane, P.L.
12394 S.W. 82 Avenue
Pinecrest, Florida 33156
Tel:  305.233.9066
Fax:  866.389.2760
Email:  chris@vasallosloane.com

The Hummer Dilemma

by Tom Dixon

Hopefully, now that we have passed through the dark time of not knowing what the financial future holds for us, it is time to consider how things can be better in the future. It seems to me that not too many years ago the belief was that if you have more, spend more and live in a bigger house you will be happier. Maybe it is now time to re-think what all this “more” has created.

My guess is that this came about because we were not content with what we had and thought more would be better. In terms of houses, this was financially possible but had a hidden trap. If you could buy a home for $100,000 with a down payment of $10,000 and a loan of $90,000 and the price of the home increased by only 10% then it would have a value of $110,000. With a $90,000 mortgage you had made $20,000, a 100% return on your $10,000 investment. If you can keep refinancing your home loan at 90% of its value will continue to double your money. Why not? The why not or risk is that if the value of your home declines then your equity is wiped out. Yes it was fun while it lasted but eventually more homes and condos were built than there were people able to afford to purchase without fraud or even to live in them. Prices declined and equity was wiped out.

The second problem became the cost for mortgage payments, upkeep, insurance, and real estate taxes. As long as values were going up it made sense. But when home prices stopped rising couples with no children began to question their need for 8,000 SF 6 bedroom 6 bath home with real estate tax bills of $4,000 to $6,000 per month. An excessive home is like a Hummer, yes to looks cool and seemed like a good idea, but do we really need to live in a monster home and drive around in such a massive vehicle.

How did all this happen? The combination of a belief that good times will continue, incomes will rise, home prices will never decline and more and more and bigger and bigger are better. This is not to say that there may be reasons for big homes and big cars, but just because we can borrow money to buy them is not a good reason.

So how do we overcome the “Hummer Dilemma”? A realization that perhaps the answer is in these quotes :

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” -Will Smith

“Wealth consists not in having great possessions but in having few wants.” -Epicurus

Or this great truism my wife Linda gave us when we moved to our new office. “The best things in life are not things”.

2010 Office Market Report

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On Thursday June 17,th we presented the 2010 South Florida Office Market Report.  If you missed the presentation or want a copy of the printed report you can find it and all the previous report under the CIASF tab of our website.

2010 Hospitality Report

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We just added a PDF version of the CIASF’s 2010 Hospitality Report compiled by Guy Trusty to our CIASF page.  Check it out.

Trying to Outrun Our Real Estate Tsunami

For those of us involved in real estate for over 20 years, we have experienced cycles which seldom took more than 3-4 years to work out. This one is much different with few experts able to forecast a time to return to normalcy.  It has been much more personal than the past because all of us have heard of the economic impacts on members of our families, neighbors and close friends.  Those involved in real estate seem to be particularly hard hit. Architects, title insurance firms, engineers and developers have suffered mortal blows. It is understandable why the government administration grasps at green shoots in order to show improvement with our dire economy.  Let’s dissect some of the most influential elements:

Here in Florida we have historically depended upon increasing population to feed our growth and real estate activity. That in turn fuels our construction employment. This growth has not occurred for the past two years and this year will show more outflow than inflow. This is causing havoc with local government budgets.

With our housing bubble resulting in serious overbuilding for single family and condos, we are still wallowing around trying to figure out when residential housing will return to normalcy. No question that bargain basement prices are assisting the sale of houses. But, this is with unusual amounts of government support such as the $8,000 credit for new home buyers and the fact that 90% of the residential financing has government backing. What will happen without this government support?

The unemployment numbers are downright scary. The present average unemployment level and length of time unemployed is the greatest since 1948. Paul Krugman, economist and writer for New York Times, says US household’s net worth has declined by $14 trillion. A large segment of our population, fearful of our burgeoning debt and feeling the need to increase reserves, is saving more and curtailing their consumer spending. Of course, this adversely impacts real estate investments.

We have yet to feel the full sledge hammer impact of commercial foreclosures, the result of commercial real estate having a 35-40 % reduction in market value. Locally and in the rest of Florida, we have a large amount of our commercial loans coming due in 5-10 years posing a tremendous challenge to both borrowers and lenders.

No rational answers have been forthcoming for these challenging elements. Against the backdrop of these daunting challenges giving advice to active investors is difficult. There will be a large group of investors who have been active in the area for years, throwing up their hands and electing not to play the game. Offsetting this will be some new players, bringing to the market large chunks of cash, attracted to buying well below replacement costs.

The great investor, Warren Buffett has several observations to remember:

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”

And “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

By: Gary Sisler

2010 Industrial Market Report

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Last week Andrew and I presented the 2010 Miami-Dade County Industrial Market Study to over 240 members of the Commercial Industrial Association of South Florida. This is 15th year we have reported on the industrial market conditions in South Florida.

The Market Trends Section reported a growth in industrial space for the year of 2008 of just over 267,000 SF a decline of about 87% from the prior year. This downward trend was also evident in the industrial employment sector showing an employment decline of 7,600 to a total employment of just over 175,000. For the year of 2009 projected total freight at the Port of Miami declined by 8% while freight through Miami International Airport declined by 20%.

The Market Activity Section shows volume of warehouse sales remained the same at 74 buildings but a decline in the average sale price from $71/SF to $69/SF. The dollar amount of the sales decreased by 55% to $108,328,400. The industrial condominium market also slowed with a 25% decline in sales volume in 2009 and an average price decline from $144/SF to $122/SF.

Because of the variety of warehouse/industrial properties in various locations Miami-Dade County is divided into seven regions based on similar types of properties in each region. All regions are reporting an increase in the amount of rental space available, vacancy rates are as high as 18%-20% and rental rates have declined to as low as $3.50/SF in some areas.

Summary:

First year rental rates have declined from the mid $7.00/SF to as low as $3.50/SF. Some industrial property owners in larger buildings are renting for $1.00/SF plus all expenses (NNN) for the first year of a three year lease. Existing tenants are requesting rent rate reductions, abatement of rent or other concessions in exchange for longer term leases. Property managers are reviewing these requests on a case by case basis.

Vacancy rates should continue to increase from 13% and could rise to as high as 18% as a result of no new companies moving into this market. Existing companies are relocating from older less efficient buildings to newer buildings taking advantage of the lower rental rates in newer building with better access, parking and loading areas. This is forcing properties with functional problems to become even more rate competitive.

The major issues facing commercial property owners are the burden of additional governmental regulation and enforcement. Property owners are being forced to install expensive wired fire alarm systems, re-inspection for code compliance whenever a tenant applies for an occupational license.

The encouraging news in cargo compared to other US Customs districts is that Miami’s decline of 15% in trade from June 2008 to June 2009 was the smallest of all districts except Norfork/Mobile/Charleston. With the construction of two cargo facilities, the Miami International Airport will have an additional 800,000 SF of cargo space plus a new fumigation facility. At the Port of Miami the dredging of the channel to 50’ depth will make Miami only one of three ports on the Eastern Seaboard with this depth which can take advantage of the widening of the Panama Canal. These factors will improve Miami’s international trade as the economy recovers and secure Miami’s future as a major air and sea port.

If you’d like more information about the “Commercial Industrial Association of South Florida” send an e-mail to info@ciasf.com or you can view and download the entire Market Report.

By Tom Dixon

Bend, Blend & Extend

As the Great Recession of 2008-2009 continues, its effects are felt in the commercial real estate market and submarkets of South Florida in the form of increased vacancies, lower rents, reduced income and cash flow to landlords and owners of investment properties.  If landlords, owners and their leasing agents are not agile enough or willing to bend, blend and extend existing lease agreements, then we will see this segment of the market go through what has happened in the housing markets.  However, no matter what action ownership takes the combination of short term loans coming due, the new rules of higher equity requirements, increased capitalization rates and appraisal values might still tilt the balance downward.  But no matter, the mortgage debt side of the equation is a subject of a later newsletter.  We will discuss here the ownership side.

What is a landlord and it’s representative to do when approached by a large major tenant with several years remaining on their lease term, to reduce rent and/or give up space back to the landlord?  There are various concessions and amendments that can be offered and considered.  The main element has to be to save the tenant and keep them from vacating the space and moving to another location.  Other questions are:  How much space do they occupy? How long have they been a tenant?  What is their track record in rent payments?  Also are they willing to give the landlord financial records of the past 12 to 18 months and a projection of their income for the next 12 to 18 months?  Will their request to give back seriously affect the cash flow of the property?  And lastly, what is the future of their business?  And most important are they going to survive?

Answers to these questions and the willingness to disclose their present and future financial condition will greatly affect the landlord’s ability to bend, blend and extend.   Help can take various forms:  rent abatement (free rent) for short periods to give them breathing room, rent deferrals with accrued deferrals repaid at a future date with interest, reduced or eliminated rent escalations to provide “breathing room” for a period, give back of space with or without a future take back, updating of base year for operating expense pass-thru to a current year or eliminate it entirely.  More help can take the form of paint and new carpet to “refresh” their space in return for extended lease term, say two or three years remaining extended to five to ten years.

Finally, a rent per square foot reduction and some parking rate concession for a short term (12 to 18 months) can go a long way to help a tenant survive these rough economic times.  The key is, will you as the landlord or his representative be able to make the value judgment: “Will the tenant survive?”  If you have strong doubts, do not play the bend, blend and extend game.  Let the space go vacant and find a tenant to occupy the space at a rate where you as the landlord can survive!

CALL US, WE KNOW HOW TO BEND, BLEND AND EXTEND.  WE ALSO KNOW HOW TO SURVIVE!

by Steve Magenheimer

Your Fair Share of Real Estate Taxes

If you live in Florida and own property, you will receive a TRIM (Truth in Millage) notice in the next 4 to 6 weeks. This notice will give you an estimate of the real estate taxes that the property must pay, based on the assessment and millage rate. The assessment is established each year by the County Property Appraiser using mass appraisal techniques. The millage rate is based on funds the city and county government need to operate. The real estate taxes for a property is then calculated by multiplying the assessment – say $100,000 times the millage rate of say 19 mills, which is really 1.9% or .019. This equals a tax of $1,900. I sometimes think that the use of the term millage rate is to confuse the taxpayer. It would be much clearer if it was expressed as a percentage of value.

As a taxpayer, you are only obligated to pay your fair share and the only part of the real estate tax equation which can be appealed is the assessment. With the decline in the market values of both residential and commercial properties from January 2008 to January 2009 the new assessment should be lower of the year of 2009 compared to the year of 2008.

However, because of the continuing need of the government for revenues it is possible that the millage rate will increase for the tax year of 2009. If the assessment for property declines by say 10% and the millage rate increases by 10% the final tax bill and revenues collected by government will be the same.

If you have property which has been enjoying the benefits of homestead exemption, your taxable or homestead exempt value may remain the same but with an increase in the millage rate you will have an increase in your taxes.

The TRIM notice you will receive at the end of August is an estimate of the taxes you will pay based on the government receiving the same amount of revenues in 2009 as in 2008. After you receive the TRIM notice, there is usually a period of 25 days to file an appeal petition if you wish to protest the assessment. Then, sometime in the next 12 months there will be a hearing before a Special Magistrate to protest the assessment.

If you object to the real estate taxes there are two proactive things you can do. One, attend the budget hearing at the City and County Commission meetings and tell government to stop spending so much money. Two, appeal your assessment.

As a property owner, you can file the appeal and present your arguments before the Special Magistrate. However, many property owners have found that using a professional is much more effective. With our 30 plus years of combined knowledge of South Florida real estate valuations as real estate brokers, professional appraiser, teacher and economic analysts, we are well equipped to represent property owners in the successful appeal of real estate tax assessments.

CALL US WE KNOW THE APPEAL PROCESS

Tom Dixon 305-443-4966

After you receive your 2009 assessment visit our Tax Appeal Page and fill out the form at the bottom if you want us to review your assessment.

Where are the tenants?

Last Friday, I attended with 130 other professionals the presentation of the Official 2009 Annual Miami Office Market Report by the Commercial Industrial Association of South Florida, (CIASF).  Data for the report was based on information from Black’s Office Guide.  The report was prepared and presented by my two able office mates, Tom and Andrew Dixon.  There was also a panel of office leasing professionals sharing their views of the office market and presenting estimates for the remainder of 2009 and 2010.

As an office leasing professional in South Florida for over 30 years acting as both a tenant and landlord professional broker representative, to me the glass is always half full.  This market for the foreseeable future will be soft and stagnant, with higher vacancies, lower rents and greater concessions by landlords to keep existing tenants and attract new ones, particularly in the Downtown and Brickell Districts.

When the new office buildings hit the market in 2010, the Miami-Dade office market will have a total close to sixty million square feet of rentable space.  Where are these tenants going to come from?  The CIASF report shows that the number of businesses with more than 100 employees have shrunk to less than 300.  Landlord/Developers building high-rise structures with large floor plates will find that users are few and far between for their space.  Only larger tenants can efficiently use large floor plans.

The economy of South Florida is based on three structures holding up our communities; tourism, finance/trade and construction.  Construction will not be a factor in the near term and tourism does not create a significant office demand.  A majority of the office space I have leased is in Coral Gables, home to multi-national tenants based here to service their Latin American businesses.  They are not large users of office space.  Typically, they will occupy 1,500 to 2,500 SF.  Some landlords are aware of this requirement and have tailored their marketing programs in this direction.  Other landlords, many on Brickell Avenue and Downtown are still looking for full floor tenants.  Most of these will be large regional law firms that continue to see opportunities to locate to Miami/Coral Gables to service their international clients in Latin America.

So, where are we and where are we going, and better yet, how do we get there?  First, with few exceptions, new tenants to the market are going to be few and far between.  Landlords will have to offer huge concessions to attract them.  These will take the form of free rent, moving allowances and generous tenant improvement budgets.  A bit of history here, as the landlord’s representative in the Texaco Latin America-West Africa division lease for 72,000 SF in Coral Gables twenty five years ago, the lease provided an 18 month rental abatement on a ten year lease.  Plus, turnkey tenant improvements and free parking!  The effective rate was in the mid $20’s/SF and the face rate was in the low $30/SF.

Other that new tenants, landlords have to react to existing tenant needs to retain them.  Reduced rents, moving base year operating expenses pass-thrus and rent abatement will be the order of the day.  Otherwise we will see a massive game of “musical chairs” throughout the market.  With tenants moving from one building to the next for lower rents.

We will get “there” by having leasing professionals, landlord and tenant representatives educate and inform landlords on the market conditions that will require them to be receptive, creative and realistic to the current market circumstances.  Those that do, will enjoy reasonably full buildings, others will suffer vacancies of up to 50%! Remember, those in the business of office leasing have to believe the glass is half full and will stay that way.

CALL US: WE KNOW HOW TO KEEP THE GLASS HALF FULL

To view the 2009 Office Market Report go to www.dixoncommercialre.com click on 2009 Office Report

By: Steve Magenheimer

The Underwear Factor

THE UNDERWEAR FACTOR

Now that the summer rains have started in South Florida it reminds me that there are cycles to the weather, life, financial markets and it seems everything around us.   Three months ago we were commenting about the cool weather and when would it be warm enough to go swimming.  Now the water is warm and we wonder will the weather ever become cool again.

As hard as it is to believe the financial struggles we are going through will pass and the clock of financial markets will turn and the economic cycle will go from bad to worse and then start to get better.  My explanation for this is the “Underwear Factor.”  It could be called the bed-sheet factor, towel -factor or automobile tire factor.  Things will need to be replaced and no matter how long we wait to replace them they will eventually wear out.

The wear-out cycle for cars used to be three years, for copiers five years, for computers four years.  A good copier salesman would contact an office and ask “how old is the office copier.”  If the answer was two years he would set a reminder to contact the office in three years.  If the copier was more than five years old he had a good prospect for a new copier.

The result of this natural cycle is that some things are replaced because the technology has changed, other are replaced because they have worn-out and others because fashion and styles have changed.  Think about the things you use every day.  Eventually, they will need to be replaced.  As much as we hold off on buying new things eventually we must.  The “we must” starts the cycle over again and goods are produced to meet this demand.

For an example consider the automobile industry.  They produced cars with a life cycle of three to five years.  At the end of this period the paint failed, the body rusted out and mechanical parts need replacing. Of course, also the styles changed and we all wanted to stay in fashion.  The result was a continuing demand for new cars.  Then there was a change, car manufacturers started producing better cars than last six-seven or even ten years before they need to be replaced.  This reduced the demand for cars by 50% but I guess the manufacturers never figured this out.

Now let’s look at the current economic cycle.  Beginning in the summer of 2007 the overbuilt and over financed real estate market began to collapse.  This meant that homeowners had less equity to obtain loans, employment declined, consumer spending declined and the “Economic Clock” started to wind down.  Hopefully, the “Clock” will start to rewind when the “Underwear Factor” comes into play and consumers will need to buy more goods.  The decline in home prices will end and with lower prices more buyers will move into the market.  It will be a slow process because of the excesses of the past several years, but it will happen.

How long will it take to rewind the “Clock”?  I’m reminded of the statement of my real estate professor in college, “housing is the hand maiden of the GNP.”  The real estate and housing market has brought the economy down and it needs to recover before it can bring the economy up.

WE WILL LET YOU KNOW WHAT TIME IT IS ON THE ECONOMIC CLOCK

By Tom Dixon