They say you should invest in areas you know. After a few years trying to figure out the stock market, I have come to realize how true that is.
But since my daily profession digs deep into the details of planning and forecasting risk/rewards and tax implications of real estate development, it makes perfect sense that here is where my own investments should be. Yes, in this regulatory world any real estate project quickly gets complicated. But if you have a working knowledge about real estate — and access to smart help in the more arcane elements of municipal/state/Federal regulation and tax planning — then perhaps this is the better field for you to play in, too.
So how to go about it? Where are the best opportunities?
Most people, when they think of real estate investment, think of only two avenues: real estate acquisition, and real estate development. In both scenarios, you are the one on the spot. Whether as a sole developer or as a partner, whether large-scale or small, whether commercial or residential, we all are familiar with the stories (and perhaps our own experiences) of fantastic successes and —also — of spectacular failures. It’s a tough playing field, with ruthless competitors and referees who are not always on your side —if present at all.
Still, some people love the game. And some believe they will more often than not end up on the plus side. But since so many factors are out of any developer’s control — such as fluctuations in the general economy or competition for the targeted market segment — it can be a risky business even for the well funded and well connected.
There is an alternative that is more in line with the objectives of investors who wish to take advantage of (or diversify into) real estate — but follow a more traditional, low-risk, solid investment strategy. It’s one of my favorites, and it’s the focus of much of the work we do at the Cherrytree Group.
My firm works with individuals, groups and managers of investment portfolios to match them up with high-quality developers who are spearheading projects which qualify for lucrative investment tax credits. These range from historic tax credits (offsetting as much as 40% of a project’s cost) to renewable energy credits (up to 30%) to Brownfields remediation credits (up to 50%).
These are dollar-for-dollar credits against taxes the participants owe at the end of the year. A tax credit is used to offset your federal taxes. It’s as if you have already written a check to the government. Some programs have a carry-forward provision: meaning that any tax credits not used in one year may be used over the following 20 years.
No matter what the future profitability of the project may be, the investor quickly achieves his or her primary goal: a substantial reduction in Federal and/or state taxes. A successful project in the end is a terrific bonus.
In order to meet IRS and state regulations, investing in these tax credits means placing a financial stake into the property, capturing all of the available federal tax credits, and remaining in the investment for a period of time. This is where an investor wants to have a skilled team managing the investment: to assist in project and developer evaluation, maximizing tax advantages, guiding the process and keeping you informed. Some investors have turned to their own accountants, lawyers and real estate advisors to handle this — but most likely those consultants are generalists without specific knowledge in this complex field. At Cherrytree, all of these services are under one roof, handled by professionals who work in this area every day.
Your partner, the developer, is doing most of the heavy lifting. You are largely passive. At Cherrytree, we are protecting your interests. As any real estate project cannot generate sufficient profits in the early years to use these tax credits, you as an investor can use them to offset your other income. Longer-term, you could take advantage of future earnings from the project, or exit at a mutually agreed point. We can help you plan this.
So, when one evaluates the investment strategy of partnering with a developer to take advantage of generous income tax credits, I see a high early return, an additional later return, a manageable risk ratio, and a low upfront investment — sometimes as little as 35% of the tax credit’s value. What’s not to like?