consigliere

Who is your tenant? S&P Tenant Credit Ratings

When purchasing a single tenant net leased investment, tenant quality and the financial ability of the tenant to perform is of utmost importance.  In essence you are buying the income stream and the bundle of rights subject to the leasehold, so how do you know you will get you monthly rent check for 10, 12, 15 or 20 years?  One way is to have the "market" rate the risk for you.  Here is the  S & P breakdown of credit ratings, to help you assess your risk:

Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following considerations:

Likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
Nature of and provisions of the obligation;
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
 

AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
 

AA
An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
 

A
An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
 

BBB
An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
 

BB, B, CCC, CC, and C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
 

BB
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
 

B
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
 

CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
 

CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
 

C
A subordinated debt or preferred stock obligation rated 'C' is currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
 

D
An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
 

Plus (+) or minus (-)
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
 

NR
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
 

ouch.... do you know your 1031 exchange intermediary?

Your money is safe with your 1031 Exchange Intermediary right?

A recent article in Forbes dropped my jaw.  Who holds my 1031 exchange client's money?  Are they legit?  Did my client or myself read the 1031 Intermediary fine print of the Exchange Agreement?  Are my clients funds insured...protected...the funds will be there at closing on the exchange right?  Cross my fingers and hope so is not good enough.

1031 Exchange Intermediaries are un-regulated in most states. However their use is required to successfully complete an IRS Section 1031 Exchange.  Because use of an Intermediary is mandatory by the IRS, you would think placement of exchange proceeds with them would be safe or even insured like a bank. This is not the case with the now defunct Southwest Exchange.

Recently, a greedy businessman bought Southwest as an "investment" then proceeded to divert exchange funds on deposit with Southwest to his failed venture, of all places, a breast implant company.  Deposits slowed with Southwest, the diverted money was spent on breast implants and other things and all of a sudden there were more Southwest 1031 closings than cash available to close them.  Approximately 130 Southwest clients lost between $25k and $22,000,000 each and are unlikely to see any of there funds again. This does not even count escrow deposits and damages on the failed 1031 deals or the deferred taxes that the clients were trying to mitigate in the first place.

I am normally not an advocate of more regulation but in this case I am.  If the IRS requires an Intermediary to be used to complete a 1031 then the government should also regulate and protect the exchange funds placed on deposit with the Intermediary. Maybe this will lead in the right direction.

In the meantime, regardless of the size of your 1031 deposit and if you want the money to be there at closing, read the fine print of the Exchange Agreement and check references of the Intermediary.

Luckily none of my clients were on deposit with Southwest.  To little, to late for the others.