Mark Roderick appeared on School for Startups Radio with Jim Beach to discuss the current state of crowdfunding and how the industry is progressing. He discusses the booming real estate crowdfunding industry and how the rest of the crowdfunding space measures up.
Tag Archives: crowdfunding for real estate
The IRS just issued more proposed regulations under §1400Z-2 of the Internal Revenue Code, dealing with investments in qualified opportunity zones and qualified opportunity funds. Some highlights:
- In general, a QOF must spend at least as much to rehabilitate a building as it paid for the building itself. But this rule doesn’t apply to a building that’s been vacant for five years. This presents an enormous incentive to acquire and rehabilitate vacant properties (that are located in QOZs).
- The tax benefits associated with QOFs are available only to an “active trade or business.” The new regulations provide that (1) the ownership and operation (including leasing) of real estate can qualify as an “active trade or business,” for these purposes, but (2) a triple-net lease of real estate is not an “active trade or business.”
- To qualify for tax benefits, a corporation or partnership must derive at least 50% of its gross income from the active conduct of a business within a QOZ. The new regulations provide three safe harbors and a facts-and-circumstances test to make this 50% calculation.
- In general, at least 90% of the assets of a QOF must be in the form of “qualified opportunity zone property.” The new regulations allow the QOF to ignore investments made by investors in the QOF during the preceding six months in making this calculation, as long as the new investments are held in cash, cash equivalents, or certain short-term debt instruments This rule will make it far easier for QOFs to satisfy the 90% test while continuing to raise capital.
- Similarly, if a QOZ sells assets and reinvests the proceeds in other assets, then the proceeds of the sale will be treated as “qualified opportunity zone property” for purposes of the 90% test, as long as they are held in cash, cash equivalents, or certain short-term debt instruments and reinvested within 12 months. Of course, any gain recognized by the QOZ from the sale will be taxed to investors.
- The new regulations provide that an investment in a QOF may be made with cash or other property, but not by performing services for the QOF.
- The new regulations provide alternative approaches to valuing the assets of a QOF, both for making the 90% calculation and for determining whether substantially all of the QOFs assets are in a QOZ.
- A “qualified opportunity zone business” must own “qualified opportunity zone property,” and “qualified opportunity zone property” does not include property purchased from a related party. But under the new regulations, it can include property leased from a related party, under certain circumstances.
- By investing in a QOF, a taxpayer can defer recognizing capital gains for tax purposes until 12/31/2026. But if an “inclusion event” occurs before 12/31/2026, the taxpayer must recognize the capital gain at that time. Selling the interest in the QOF is an obvious example of an “inclusion event.” The new regulations provide many more, less obvious examples, like giving the interest in the QOF to a charity, or receiving a distribution from the QOF that exceeds the taxpayer’s basis.
- After holding a QOF for 10 years, a taxpayer may exclude all capital gains from the appreciation of the interest in the QOF. The new regulations provide that the taxpayer doesn’t have to sell her interest in the QOF to benefit from the exclusion; the exclusion also applies if the QOF sells its assets and distributes the gains.
- A ”qualified opportunity zone business” means a trade or business in which substantially all of the tangible property is “qualified opportunity zone business property.” The new regulations clarify that in this instance, “substantially all” means 70%.
- “Qualified opportunity zone business property” means tangible property used in the trade or business of the QOF if, during substantially all of the QOF’s holding period for such property, substantially all of the use of the property was in a QOZ. Believe it or not, the new regulations provide that the first instance of “substantially all” in that sentence means 90% and the second instance means 70%.
The new regulations illustrate why tax lawyers so look forward to new tax legislation, and are so popular at cocktail parties.
Questions? Let me know.
In this episode of The Real Estate Way to Wealth and Freedom, you will learn:
- Crowdfunding – what it is and how it relates to real estate
- Comparing and contrasting crowdfunding and syndication
- How much money you can raise and who you can raise money from
- Title 2, Title 3, & Title 4 crowdfunding – what to know
- Predictions of how technology will impact real estate investing in the future
Questions? Let me know.
On this episode of A Millennial’s Guide to Real Estate Investing, host Antoine Martel sits down with Mark Roderick, a leading crowdfunding, investing and fintech lawyer. They talk about blockchain, crowdfunding, the JOBS act, and how all of these things are going to be changing the real estate industry. Also discussed are the different types of crowdfunding flavors and how each of them work.
Questions? Let me know.
Technology has made it easier to raise capital for real estate deals. Since Crowdfunding has grown exponentially, John Casmon, host of the popular Target Market Insights podcast, invited me on his show to learn more about crowdfunding and fintech (financial technology). On this episode, I talk about different ways to use the internet to raise money and the impact new technologies will have on the way we buy real estate.
Key Market Insights
Crowdfunding is raising money on the internet
Two versions – donation based (think Kickstarter) and equity based
Crowdfunding is online syndication with 3 flavors: title 2, title 3 and title 4
All crowdfunding falls under the JobsAct
Title 2 is very similar to 506c for accredited investors
Title 3 is very different, can only raise $1MM annually
Title 4 can raise $50 million
FinTech – any technology disrupting the financial services industry
Many believe banks should be a disintermediary
Roboadvisor apps are apart of FinTech
Online syndication is not more risky than traditional syndication
Anytime you take money, you can be sued
When done properly, you should not be exposed to any actual liability – even if they lose money
Blockchain technology could disrupt the real estate industry
Blockchain is a database or ledger that cannot be changed and has no central authority – everyone must consent
Title companies and other “middle men” could be pushed away through blockchain
Questions? Let me know.
Podcast: The Business Credit & Financing Show Focusing on How to Avoid Crowdfunding Legal Pitfalls with Mark Roderick
CLICK HERE TO LISTEN | Also available on iTunes & Spotify
During This Show We Discuss…
- Your potential legal liability using crowdfunding platforms
- When a potential investor can sue the project creator
- The “3 flavors” of crowdfunding you should know about
- Legal issues with flex versus fixed funding
- How the new tax law affects crowdfunding
- 20% tax deduction in crowdfunding transactions
- Getting crowd funding for real estate investing
- What you should know about peer-to-peer lending
- Issues with bonuses you may offer to donors
- What to know about the SEC’s role in crowdfunding
- What an opportunity zone fund is and how they work
- Why trusts invest in crowdfunding projects
- Other big investors who are investing in crowdfunding campaigns
- Potential legal pitfalls in peer-to-peer lending?
- And much more
Mark Roderick is one of the leading Crowdfunding and Fintech lawyers in the United States. Expanding on his in-depth knowledge of capital-raising and securities law, Mark represents many portals and other players in the Crowdfunding field. He writes a widely read blog, crowdfundattny.com, which provides readers with a wealth of legal and practical information for portals, issuers and investors. He also speaks at Crowdfunding events across the country and represents industry participants across the country and around the world.
The new tax law added section 199A to the Internal Revenue Code, providing for a 20% deduction against some kinds of business income. Section 199A immediately assumes a place among the most complicated provisions in the Code, which is saying something.
I’m going to summarize just one piece of section 199A: how the deduction works for income recognized through a limited liability company or other pass-through entity. That means I’m not going to talk about lots of important things, including:
- Dividends from REITS
- Income from service businesses
- Dividends from certain publicly-traded partnerships
- Dividends from certain cooperatives
- Non-U.S. income
- Short taxable years
- Limitations based on net capital gains
Where the Deduction Does and Doesn’t Help
Section 199A allows a deduction against an individual investor’s share of the taxable income generated by the entity. The calculation is done on an entity-by-entity basis.
That means you can’t use a deduction from one entity against income from a different entity. It also means that the deduction is valuable only if the entity itself is generating taxable income.
That’s important because most Crowdfunding investments and ICOs, whether for real estate projects or startups, don’t generate taxable income. Most real estate projects produce losses in the early years because of depreciation deductions, while most startups generate losses in the early years because, well, because they’re startups.
The section 199A deduction also doesn’t apply to income from capital gains, interest income, or dividends income. It applies only to ordinary business income, including rental income*. Thus, when the real estate project is sold or the startup achieves its exit, section 199A doesn’t provide any relief.
Finally, the deduction is available only to individuals and other pass-through entities, not to C corporations.
*Earlier drafts of section 199A didn’t include rental income. At the last minute rental income was included and Senator Bob Corker, who happens to own a lot of rental property, switched his vote from No to Yes. Go figure.
The general rule is that the investor is entitled to deduct 20% of his income from the pass-through entity. Simple.
Alas, the 20% deduction is subject to limitations, which I refer to as the Deduction Limits. Specifically, the investor’s nominal 20% deduction cannot exceed the greater of:
- The investor’s share of 50% of the wages paid by the entity; or
- The sum of:
- The investor’s share of 25% of the wages paid by the entity; plus
- The investor’s share of 2.5% of the cost of the entity’s depreciable property.
Each of those clauses is subject to special rules and defined terms. For purposes of this summary, I’ll point out three things:
- The term “wages” means W-2 wages, to employees. It doesn’t include amounts paid to independent contractors and reported on a Form 1099.
- The cost of the entity’s depreciable property means just that: the cost of the property, not its tax basis, which is reduced by depreciation deductions.
- Land is not depreciable property.
- Once an asset reaches the end of its depreciable useful life or 10 years, whichever is later, you stop counting it. That means the “regular” useful life, not the accelerated life used to actually depreciate it.
Exception Based on Income
The nominal deduction and the Deduction Limits are not the end of the story.
If the investor’s personal taxable income is less than $157,500 ($315,000 for a married couple filing a joint return), then the Deduction Limits don’t apply and he can just deduct the flat 20%. And if his personal taxable income is less than $207,500 ($415,000 on a joint return) then the Deduction Limits are, in effect, phased out, depending on where in the spectrum his taxable income falls.
Those dollar limits are indexed for inflation.
ABC, LLC and XYZ, LLC
Bill Smith owns equity interests in two limited liability companies: a 3% interest in ABC, LLC; and a 2% interest in XYZ, LLC. Both generate taxable income. Bill’s share of the taxable income of ABC is $100 and his share of the taxable income of XYZ is $150.
ABC owns an older apartment building, while XYZ owns a string of restaurants.
Like most real estate companies, ABC doesn’t pay any wages as such. Instead, it pays a related management company, Manager, LLC, $500 per year as an independent contractor. All of its personal property has been fully depreciated. Its depreciable real estate, including all the additions and renovations over the years, cost $20,000.
Restaurants pay lots of wages but don’t have much in the way of depreciable assets (I’m assuming XYZ leases its premises). XYZ paid $3,000 of wages and has $1,000 of depreciable assets, but half those assets are older than 10 years and beyond their depreciable useful life, leaving only $500.
Bill and his wife file a joint return and have taxable income of $365,000.
Calculation With Deduction Limits
Bill’s income from ABC was $100, so his maximum possible deduction is $20. The Deduction Limit is the greater of:
- 3% of 50% of $0 = $0
- The sum of:
- 3% of 25% of $0 = 0; plus
- 3% of 2.5% of $20,000 = $15 = $15
Thus, ignoring his personal taxable income for the moment, Bill may deduct $15, not $20, against his $100 of income from ABC.
NOTE: If ABC ditches the management agreement and pays its own employees directly, it increases Bill’s deduction by 3% of 25% of $500, or $3.75.
Bill’s income from XYZ was $150, so his maximum possible deduction is $30. The Deduction Limit is the greater of:
- 2% of 50% of $3,000 = $30
- The sum of:
- 2% of 25% of $3,000 = 15; plus
- 2% of 2.5% of $500 = $0.25 = $15.25
Thus, even ignoring his personal taxable income, Bill may deduct the whole $30 against his $150 of income from XYZ.
Calculation Based on Personal Taxable Income
Bill’s personal taxable income doesn’t affect the calculation for XYZ, because he was allowed the full 20% deduction even taking the Deduction Limits into account.
For ABC, Bill’s nominal 20% deduction was $20, but under the Deduction Limits it was reduced by $5, to $15.
If Bill and his wife had taxable income of $315,000 or less, they could ignore the Deduction Limits entirely and deduct the full $20. If they had taxable income of $415,000 or more, they would be limited to the $15. Because their taxable income is $365,000, halfway between $315,000 and $415,000, they are subject, in effect, to half the Deduction Limits, and can deduct $17.50 (and if their income were a quarter of the way they would be subject to a quarter of the Deduction Limits, etc.).
Because most real estate projects and startups generate losses in the early years, the effect of section 199A on the Crowdfunding and ICO markets might be muted. Nevertheless, I expect some changes:
- Many real estate sponsors will at least explore doing away with management agreements in favor of employing staff on a project-by-project basis.
- Every company anticipating taxable income should analyze whether investors will be entitled to a deduction.
- Because lower-income investors aren’t subject to the Deduction Limits, maybe Title III offerings and Regulation A offerings to non-accredited investors become more attractive, relatively speaking.
- I expect platforms and issuers to advertise “Eligible for 20% Deduction!” Maybe even with numbers.
- The allocation of total cost between building and land, already important for depreciation, is now even more important, increasing employment for appraisers.
- Now every business needs to keep track of wages and the cost of property, and report each investor’s share on Form K-1. So the cost of accounting will go up.
As for filing your tax return on a postcard? It better be a really big postcard.
Last Thursday I joined Jack Miller, the host of “Down to Business” on 880 AM The Biz in Miami, for a discussion about Crowdfunding and what it means for entrepreneurs and investors. Jack is a terrific interviewer and an entrepreneur himself, and brings a great perspective to the subject.
We had a lot of fun and might have even shed some light on this brave new world for Jack’s listeners.
Caution: material not appropriate for all ages.
Questions? Let me know.
September 24th – Chicago, IL
RealCap Chicago will provide real estate entrepreneurs the opportunity to hear from the country’s leading real estate crowdfunding platforms. Attendees will learn how to raise debt and equity online for projects including “fix and flip” single family homes, multifamily complexes, commercial buildings, and ground up development projects.
Meet The Future of Real Estate Capital
“The rapid growth of real estate crowdfunding platforms can be attributed to both the low minimum investments of $100 – $10,000 as well as the transparency which both developers and investors now benefit from as they compare terms and opportunities on platforms, and even across platforms, ” Jorge Newbery said. “The ease and speed of investing on the platforms is seductive. Online capital raising is the future of real estate finance.” There are over 75 real estate crowdfunding platforms active in the United States, which several additional platforms planning to launch soon.
Click here for the full conference agenda.
MY SESSION: The Evolution of Online Capital Raising
Moderator: Mark Roderick, Flaster Greenebrg PC @CrowdfundAttny
- AdaPia d’Errico, Patch of Land @Adapia
- Jordan Fishfeld, Peer Realty @PeerRealty
- Eve Picker, Small Change
- Scott Jordan,HealthiosXchange @HealthiosX
- Bhavik Dani, EquityRoots @EquityRoots
Click here for more information or to register. Stay connected #RealCapChi
October 13th – October 15th – Fairmont Royal York Hotel – Toronto, ON Canada
Toronto is home to NAIOP’s second largest chapter and is excited to host commercial real estate professionals from across North America at this leading industry event.
- DEALS: Nearly 1,000 industry and association leaders who’ve come together to share strategies, make contacts and learn new ideas.
- CONNECTIONS: Broaden your network in unlimited networking and business-building opportunities, including special events and receptions. Meet partners showcasing the latest innovative tools that can advance your business.
- TRENDS: 15+ education sessions, featuring nationally recognized speakers, trainers, and industry experts, who discuss timely topics and critical issues to your business.
Click here for the full conference agenda.
MY SESSION: Crowdfunding and New Ways of Raising Capital (October 14th)
Moderator: Mark Roderick, Flaster Greenberg PC @CrowdfundAttny
- Larry Botel, Managing Partner JOSS Realty Partners @JOSSRealtyLLC
- Jason Fritton, CEO, Patch of Land Inc @JasonFritton
- Ben Miller, Co-Founder and CEO, Fundrise @BenMillerRise
Click here for more information or to register. Stay connected #Crecon15
October 22nd – Builders League of South Jersey – Cherry Hill, NJ
8:30 – 10:30 A.M.
The internet has arrived in the capital formation business! In case you haven’t heard, Crowdfunding is a way to fund a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. Explore its growth from small investments to large, how the process is managed, the risk and reward factors, and what the future holds. Learn about the potential for builders/developers and how New Jersey compares to other states.
*Free to all BLSJ Members/$25 Non-Members
To register, email Marlene Spencer at email@example.com
October 26th – Trump International Hotel Las Vegas – Las Vegas, NV
This very special event will sell out quickly and space is limited. Join us for the country’s first REG A PLUS Master Class training for professionals under the JOBS Act. We will kick off this event on Sunday night with a special Dinner for our sponsors and VIP attendees.
This is your opportunity to learn from the best and the brightest experts in the industry how you can integrate this new securities offerings directly into the professional services that you offer your clients . And this will help you stand out as one of the first experts in Title IV of the JOBS Act, REG A PLUS in your city or state.
This is a first mover advantage you don’t want to miss.
- Brian Balbirnie @brbalbirnie
- Michael Colon @IssuerDirect
- Jonathan Frutkin @CrowdfundCPA
- Samuel Guzik @SamuelGuzik1
- Brian Korn @CapMarketsAtty
- Ron Miller @RonStartEngine
- Mark Roderick @CrowdfundAttny
- Stevens Sadler @AllegiancyUS
- Joy Schoffler @joyschoffler
- Dr. Richard Swart @richardswart
Click here for more information or to register. Stay connected #GCCB2015