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REAL ESTATE preconstruction in the Go Zone

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andviv

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I've been invited to a "presentation" by an "investment group" that is promoting a preconstruction deal in New Orleans. This supposedly is the best available deal for the area (of course) and it includes the benefit of the 50% extra depreciation in the first year. This is the second round of the offering (already sold like 200 condo units and now they are going to sell the second 150 or so) and they are targeting closing dates of second half 2009.

I got two questions:

1. If you are familiar with the Go Zone, is it true the tax incentves are still valid for 2009 or 2010? My understanding was that the incentives were only valid until the end of this year.

2. What should I expect, other than the typical sales pitch, during this "presentation"? I've never been to one of those for preconstruction investment so I don't know what to expect, other than they trying to pressure the audience to sign right away (the cost to get the "letter of intent" is $5K, or so I've been told).

Thanks for any input.
 

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Jason_MI

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Jul 25, 2007
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I'm not aware of this (the incentives and depreciation you describe), or of the deal you're describing, but I'd approach it with the same kind of ideas:

Have they done this before? What is their success? Are they open to outside review of their numbers? Preconstruction involves an idea of rapid appreciation and growth for an area; is it there? Are the numbers valid and believable that are being presented?

I'm not bright; so when I look at these sorts of things, I want to know that what is being presented, factually, I can verify independently of the sales pitch; what is your expected return over what amount of time and with how much risk. To me it's that simple.
 

andviv

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so, I finally went to the presentation last night.

One of the developers representative talked about the opportunity (I do have a ppt and a .doc files that they provided, but they are bigger than 1MB so I can't attach them here, email me and I will send them to you if you want to see them). The property is called Algiers Crossing. If you google it you will find that some realtors are already offering them to the public. Prices go from the upper 300s up to $600K. I asked for two units that seems interesting to me, a 2/2 for $504K and a 2/2.5 for $504K.

Basically they are saying the New Orleans area is recovering and they have secured a great piece of land with a great view. They showed comps and were telling us the prices they have are very competitive. Of course they told us that the Donald is building over there, as well as many other important developers.

The great deal, based on what they were saying, is that because the property is in the Go Zone act that got extended until Dec 31 2010, you will be able to claim extra 50% bonus depreciation.

The example they provided was like this:

Unit price: $425,000 (25K for land, 400K for unit, which would be depreciable)

Depreciation:
50% bonus depreciation
plus 3.5% regular depreciation,
total depreciation 53.5%: $214,000
@ 35% tax bracket (tax savings): $74,900

Additional tax saving side effect:
since your income is lower:
a) Your tax rate is much lower
b) the AMT may go away
c) your deductions will be higher
d) All the closing costs are deductible if under LLC

Estimated Potential Tax Savings: $85,000

Down payment for the property is 20% ($80K) so basically IRS is paying for that 20% for you,

Also, the developer will pay condo fee, taxes and management fees for the first two years.

The payment structure was:
$5K right now for a letter of intent
5% of purchase price when signing contract
5% of purchase price when breaking ground (expected: Jan 08)
5% of purchase price when under roof (Sept 09)
5% of purchase price when closing (Sept 09)

Based on that, you can get your money back from IRS with the tax incentives when filing for taxes for 2009.

This was, in a nutshell, the presentation from last night. There are more details that they mentioned but I am not sure if they are that interesting to post in here for now.

I am passing on this opportunity, for several reasons, but I may discuss that in here later. I am posting it here just in case somebody else is interested, so I am just passing along the information. All in all was a good experience.
 

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