The way you get your transactions done is very critical to your real estate business’ success. This entails having a good understanding of the technical and legal aspects involved. Who better to guide you about this than a good real estate attorney? If you are struggling to find who to work with, especially one who specializes in business and commercial law, then this episode’s guest might just be who you are looking for. Brett Swarts talks with Jeff Love, a real estate attorney who provides strategic guidance for clients in all facets of real estate transactions. Here, Jeff shares his wide knowledge and experience of helping clients with their transactions, offering tax deferral tips and differentiating capital gains tax and estate tax. He then talks about the importance of having a team with you and doing proper planning in order to not miss out on what’s important.
Listen to the podcast here:
Strategic Guidance On Real Estate Transactions With Jeff Love
I’m excited for our guest here. Most investors struggle with finding an attorney who specializes in business and commercial law. Our guest is an attorney who provides those types of services. In fact, he has provided strategic guidance for clients in all facets of real estate transactions, including drafting and negotiating purchase, sale, syndication and financing transactions in connection with commercial real estate, whether it be industrial or residential assets.
He also regularly drafts and negotiates office, retail and industrial leases for regional landlords and tenants throughout the West Coast. He’s located right in the heart of Los Angeles. He also has extensive experience negotiating or doing real estate loan documents including originations, modifications, note purchase agreements and other finance-related transactions from structuring of the transaction to the closing of the loan, through A to Z.
He represents a wide range of corporate transactions including private securities offerings of debt and equity, mergers and acquisitions, corporate governance matters, federal and state securities laws and asset-based lending and borrowing. These types of guests, for our audience, I call them the brain surgeons. They’re going to be doing the surgery for your very technical situation. We see our role as the nurse. Our guest here, please welcome with me, is a brain surgeon in his practice, Jeff B. Love. Jeff, welcome to the show.
Thank you so much for having me.
Jeff, our audience can find you at JLove@GibbsGiden.com. Jeff, would you give our audience a little bit about your background and your focus?
I always wanted to get into real estate. I enjoy getting transactions done. I always thought I was going to be more on the business side, be a real estate developer and build multifamily or retail buildings. In college, I met a few attorneys that focused on commercial real estate and caught the buck. After college, I went to law school and fell in love with transactions more. Having two parties while you’re adverse from each other, you’re both working towards a common goal. Whether that be corporate or real estate rather than the litigation side when you might be fighting over for one asset and you have a winner and a loser.
I fell in love with the commercial side of it. After law school, I knew I wanted to get into commercial real estate, but it was in the downturn of 2009. No one was hiring lawyers, much less transactional lawyers or real estate lawyers. Instead of jumping into the first jobs that came my way, which were litigation and workers’ compensation which wasn’t my bag of tea, I was able to find my first job out of law school as the first attorney for a scrap metal recycling company.
They brought me in because they were expanding. They had a lease they needed to be reviewed. They wanted me to look at their sales contracts with customers. I got some experience being with a company and seeing what they needed to grow and what their contracts look like, what their real estate needs were. I knew real estate was for me. After a few years and set in their shipwright, I went to work for a real estate developer who still owns roughly about eighteen million square feet of retail and industrial assets throughout the country.The hardest thing to realize is knowing what you don't know is often the best thing. Click To Tweet
I did everything real estate related, working on leasing for them and their tenants, helping acquire buildings, sell buildings, financing documents and I loved it. I was there for a couple of years and realized as much as I like working with one person, one developer, I love to do this for different size clients. Someone starting into real estate. Another client like my employer that has eighteen million square feet, that’s a huge landlord and be able to represent maybe both sides, maybe tenants, landlords, and developers. I came to Gibbs Giden, they were looking for a young attorney with real estate and corporate transactional experience.
It’s probably several years I’ve been here and represent clients of all sizes, mainly with their real estate needs, but also related and go by the acronym of a dirt lawyer. Since I can help clients do the whole process, developers from acquiring the dirt, building the building, raising capital to do so with construction contracts and eventually depending on the asset, lease it out through sales. The whole life cycle of the business, which I love because you get to see something tangible being created where it was dirt before.
Jeff, before your success as a real estate attorney, before getting your Doctorate and real estate from working from a huge developer and starting on in your own practice to help multiple levels of clients in different parts of their journey. Who is Jeff growing up? In particular, what gift were you given that has helped shape how you help others?
From a young age, I thought that work hard and have the right people around you. My mother was an elementary school teacher. My father started his own business. How he was able to do it is he had a great accountant that helped him set it up. He had a great attorney that was able to help him create the business. You don’t have to know everything yourself. The hardest thing to realize, and I still think that’s true as an attorney, is to realize not knowing everything and knowing what you don’t know is often the best thing. I advise a lot of my clients especially newer real estate syndicators or developers you could go out and raise money.
You can buy the building, but without a great team, you’re going to miss something. Having that accountant to be able to help you. Having an attorney that can help you structure it, having a great real estate broker to go out and help you find deals. Having that team in place from the get-go helps you succeed. That’s something that I learned early on. It still is true. I’m not a tax attorney, but if I go next door to one of my partners that specialize in tax, I can get answers to that question and that helps me advise my clients and get the answers to when I need to by having other attorneys, which is my team in place.
Taken that team approach and that humble approach that you might miss something or might not know something and hiring that out, be willing to pay for that or have strategic alliances in place so that you’re servicing the client in the best way possible. Jeff, this show is focused on capital gains tax deferral. We’re talking about maybe a deal story that either didn’t go so well that it was a challenging because of it, maybe having a plan in place. Walk us through maybe that deal or anything else that comes to mind for making sure that you’re properly prepared legally, but also knowing the financial implications if you don’t.
I’ve got a perfect one that happened. A long-term client, we’ve helped her with corporate needs in her own business but comes from a wealthy family. She inherited probably $100 million worth of real estate from her parents, who had passed away. It was a tremendous amount. She is not in the real estate business. She doesn’t know much about it and decided it’s been too much work. A lot of the assets that she inherited were big multifamily buildings or a couple of trailer parks, so management-intensive. She came from the family where you do it yourself and you put in the hard work.
There hasn’t had a property management team come and help her. With that said, it’s a lot of work. She wanted to get out of it and the broker she’s been using steering her into triple net properties was much less management intensive. Get your check every month, you don’t have to worry about it. She got a great deal on a multifamily property. It was an escrow and sold it. She calls me probably 30 days before her 1031 exchange deadline, which she had set up to do and ready to go. She said, “I can’t find a property.” I said, “Have you been looking at the deadlines?” She said, “No, I thought as long as the accommodator held it, I thought I could spend as much time as I wanted looking for another one.”
She got bad advice from the accommodator and the brokers that were helping her. By the time, I got involved, there wasn’t a property out there. The things that she was looking for and wanted to stay in Southern California where we’re both located. It didn’t make sense. They were overpriced or there was no cash or it was too maintenance-intensive. She ended up cashing out of the deal and was hit with a pretty large chunk of capital gains given her parents bought it decades ago that she had to pay. I wish she’d come to me earlier. I could have helped her find a replacement property or explore other avenues that you specialize in to help her shield some of that gain. It was too little, too late.
Running out of time, that’s the biggest thing. We sell high, buy higher 180 days later and that 45-day identification period. These are strict guidelines and you’ve got to follow them. Otherwise, you get yourself in a whole lot of trouble. Unfortunately, that is a tough call. The deferred sales trust, a little plug here, we can save a failed 1031 exchange. Although there’s some stuff that’s going on with the Franchise Tax Board and such with that particular part of it. We’ve saved multiple failed 1031 exchanges and that would’ve been a good option for that.
The key here is not having proper planning. Figuring out what your vision is and not getting caught in a deal emotionally to sell high. Before you know what the next cliff that’s coming, you need to build that bridge. That’s by having proper planning and be with the right consultant. You’re not forced into deals where brokers are oftentimes, let’s face it, I’m a broker myself and started Marcus & Millichap. You’re trying to sell. You’re going to get paid when you sell and when the client buys.
Those are the only two times that you’ve got to have a plan in place for the in-between times to make sure that you don’t get caught with the taxes. At the end of the day, you’re paying the tax, no one else is. Having a proper plan is the most important thing to have in place before you sell. Thanks for sharing that, Jeff. Any other tips on that for tax deferral or other ways to properly plan with the clients who use your services best? What do they do?
To piggyback off of what you said is planning early. If I could take a step back in this transaction, as soon as she decided that she wanted to sell, that’s the time I would have advised her. What’s the plan? Do you want to cash out some of this money for living expenses or diversify? Do you want to put it into another property and let it grow? What’s your plan with this money? Where do you see yourself in 5 to 10 years and have that plan in place before you decide to sell? You can take advantage of different ways to save on capital gains to defer into another property before you get up against a hard deadline.
That planning ahead is not for tax deferral and savings, but everything in real estate with some of my syndicators and buying deals is planning a couple of steps ahead. While I’ve signed my purchase agreement, my deposit goes hard and nonrefundable in two weeks. I haven’t even started raising money from my investors. I’m going to run up against a hard deadline. Planning ahead and making sure you know what you have to do by what dates so that you don’t get caught between that rock and a hard place.
That being said, shifting from capital gains tax to estate tax, especially if for some of your ultra-high net worth clients. What strategies are you helping to implement for them so that when their estate passes, they’re perhaps either moving stuff outside of their taxable state to avoid the $22 million or more if you’re married being taxed or $11 million if you’re single? Walk us through some of those strategies you helped with your clients.
It goes to planning, especially if it’s someone buying the real estate for a long-term hold. We’ve got different investors and they all have different minds, whether they’re fixing and flipping real estate or they have a value add and it’s five years. I’m going to buy this property for the appreciation and I’m buying it for my kids, so I’m going to hold it for 30 years. Depending on what situation you fall into, when I buy my property, I’m going to gift a small portion of it with to my children. I have a value of the property. I’ve purchased it. I don’t necessarily need to pay for an appraisal. I’m going to give my children each $14,000, $15,000 worth of this property to get it into their name. Depending on the value of the property, that could be a significant chunk.Without a great team, you're going to miss something. Click To Tweet
Obviously, Southern California was very expensive and smaller, but I had a client do that exact thing. He bought a $2 million duplex, and off the bat, him and his wife both gifted their two children, that $15,000 exemption. Their kids are already in this LLC for about 9% or 10% each. That’s already out of their estate. The benefit of the LLC is they’re the manager. They don’t necessarily have to make certain distributions to their kids. They can have a better control of where this money and distributions are going, but at the same time, they have it out of their estate. When this property grows, it’s one less thing to do. Each year, especially if they refinance or there was an event where they had to get a value for this property, they could make subsequent gifts and get a little bit out of their estate each year. That’s one of the ones that I’ve used depending on what the client is looking for.
I’ve found that sometimes the two get a little bit confused, the capital gains tax and the estate tax and especially the stepped-up basis that you get on the capital gains tax. Clarify for us or help us, these are completely separate estate taxes, your overall taxable state. That’s everything. It doesn’t matter about the stepped-up basis or capital gains tax. Walk us through making sure people are aware of those differences.
One more to consider, especially in California, we have Proposition 13, which limits the amount that our annual property taxes can increase every year. We also have reassessment to consider. Capital gains simplified example, I buy a property for $100,000 and twenty years down the road, it’s worth $1 million. I’ve got capital gains of that difference. Taking into account money I’ve put into the property, but generally, that increases my capital gains that I’m being taxed on. My estate taxes, myself and my wife, we own a business. We own real properties. We have a general estate of $20 million when we pass away, that goes to our children, subject-to the estate tax.
If the debt was above that $22 million limit, that would be taxed. It’s about 40%. You want to plan for that. It wasn’t always $22 million and there’s a sunset on that. Some of the clients I have and we don’t focus on tax, they’re concerned about that with their real estate holdings. They want to figure out what they can do while the exception is so high because it can go back down. The third component to complicate it more is the reassessment. You’ve bought a property at $100,000 in our example, it’s being taxed at $100,000 with 2% annual increases.
If I were to buy that property or I were to change ownership of my entity that holds it, I’m being taxed at $1 million. When you’ve owned property, especially in using Southern California and New York, states with high property values over a 10, 20, 30-year period. It can be an enormous increase in property taxes. You want to be careful how you structure it. You don’t inadvertently sell 51% of it or bring on new investors. You accidentally trigger a reassessment and your property taxes have dramatically increased.
If it’s in the estate, I imagine it was a $2 million estate that’s worth $30 million over a 40-year period of time. They’ve done all the depreciation. Maybe they have a zero basis, but also it passes the estate. Is that going to trigger a reassessment on the estate passing?
In California, depending on the type of property. For your residence, it’s exempt. If you’re talking about commercial property, we have a $1 million exemption. If it’s up to $1 million in property, not even with your state, but you can transfer that at any time and have that be exempt from reassessment. When your estate passes or you’re beyond that limit, that portion will be reassessed. You can get a step-up in basis for your capital gains.
If your total net worth was $30 million and you’re saying $1 million of would be exempt. The other $29 million is still subject to property tax reassessment.
In California, it’s for your commercial real estate.
The importance of planning, not only for capital gains tax but for FLP, LLC gifting for kids, for property tax reassessment, the tax code is complicated. You want to get professionals who are focused in this and can map this out for you before the event happens, before the health challenge comes on, before you go to sell anything. Any other tips on that, Jeff, or things to touch on for capital gains tax reassessment or estate tax?
It’s what we’ve been talking about planning and not maybe your accountant, but with estate planning attorney. There are trusts that you can utilize to help with your planning and making sure that you’re not forgetting one of these components. The Tax Code is complicated. It’s not the estate tax, income tax or capital gains tax, but you also have reassessment in your property level tax.
Focusing back on your services and what you’re doing to help people create and preserve more wealth, what would be some of the standard questions if someone’s interested, “I need to hire Jeff,” what are some of the key things you’re going to be asking? What would be an ideal fit for exactly what you specialize in?
Depending on what the client does. We practice commercial and real estate transactional law. What we’re trying to do is help not only from a liability and structuring standpoint for the client, but also be able to bring in a tax accountant or attorney when needed to be able to help structure them that. For example, a client may come and say, “I like real estate. I want to come in this new business. I’m going to start syndicating deals. I’m going to buy this duplex. What is the best way for me to structure this? Not only to protect myself from maybe a tenant has a party and someone comes from slips and falls. I don’t want to get sued and have the liability and financial loss that comes with that.
I also want to plan for the future and I want to make sure that I’m limiting my taxes to the extent possible.” In that situation, you don’t necessarily want to own it as an individual. If you own an LLC or a different type of entity, you get that liability protection. You have the ability to deduct expenses and lower your overall estate. It’s past their taxation on like C chapter corporation so you’re not paying double tax. It’s depending on the client’s business. One of the questions we get from the get-go is how to structure my business for that business.
Each industry is different. You may be actively working in the business and maybe a subchapter S Corporation makes sense because you can save some money on taxes rather than passively investing in real estate. I’m collecting my rent every month where the simplicity of maybe in a limited liability company makes sense. We help them structure the business, guide them through the best choice, and engage as outside general counsel helping them with contracts if it’s business real estate with purchases and sales through the life of the business, whether that’s a real estate company or potentially a startup and another industry.
Real estate investment, real estate in particular and it could be a wide range of focuses within structuring litigation or setup and making sure that you’re calling Jeff and you’re saying, “This is what I’m trying to do,” what approach would you take if you have investment real estate, especially as it pertains to buying or setting up any partnerships or even your own single deals and how the best way to do that with an LLC. As a reminder, you can reach Jeff at JLove@GibbsGiden.com. Jeff, what’s the most rewarding part of what you do?
It’s got to be helping people from creating the entity and the business to the lifespan. It’s probably a few years ago, we created a visual effects company. It was a couple of guys that had worked for other companies and they said, “We can do better ourselves.” They brought in their latest round of investment and put that company at $100 million valuations. Creating it when there was nothing before. Seeing it grow, helping them with all the bumps along the road is rewarding. Seeing the success that we can have a little part of our client’s business that we’re able to contribute and help them achieve their goals.
Serving others with your gifts, talents to help other people achieve their vision and their goals and being a part of that big story. Will you share with us a little bit about those that you work with? Shifting out of the client itself, but more so the business professional. You are a real estate attorney expert. I consider you a brain surgeon because you’re also a wealth advisor along the way. How do other business professionals best work with you to essentially either partner or send you referrals to help others spread the message of these important topics?
We work every day with other types of professionals, whether accountants, commercial real estate brokers and financial advisors. I have been corresponding as a referral from a client, but a financial advisement firm in Brazil, which is we have a number of clients from there. They have a client that’s looking to form an LLC in California to hold real estate. We’re going to work with them and help to structure it from a legal standpoint while they’re advising him as to the tax standpoints and his financial growth. We’re working together to protect the client.
Another example, I’ve got an accountant we work with a lot. He’s a great guy. He had a client that was selling his pizza business. He was advising him from an accounting standpoint as to the best way to structure it. He brought us in to help prepare the purchase agreement, to document the sale and to make sure that we were able to limit the client’s risk as much as possible in terms of making certain representations as to his business and limiting any ongoing liability once the sale closed.
Connect with Jeff if you are any of those fields and are looking for an expert in this area. Are you ready for the lightning round, Jeff?
I am ready.
What’s your favorite book maybe you read a read that you would recommend?
I have two little kids, so my favorite book is probably going to be Llama Llama, that series. It is not business-related, but my kids love it. He’s starting to read it himself.
Spending time with your kids and reading and seeing them read is rewarding in itself. How about favorite podcasts maybe you listen to?
I’ve done a lot of podcasts. I don’t think I have a favorite. The real estate podcasts, there’s a lot of good guys out there. Sean Penn, I’ve done. I’ve done one with Ellie, Charles Dobson. Check out some of the real estate podcasts on iTunes. There’s a bunch of great ones out there.
Maybe what’s your favorite athlete or sports team?
I’ve got to bring up Kobe Bryant with his tragic passing and living in LA. It shows me how great of an athlete he was and the impact he’s had in our community.
Maybe share insight for the audience who are not from LA, a story that is not on the news. I don’t know if you know someone personally or connected with Kobe, but being there all those years, anything that comes to mind that would give some more insight on the legacy that he’s been able to leave there.
He was an asset to the community. Seeing some of my contacts on a personal level, whether it be LinkedIn or even Instagram. I have a friend that’s a real estate broker and who sold houses with Kobe, helped them buy and sell houses. Kobe, hearing his story was he opened up the Staple Center for this gentleman’s son’s birthday so they could run around and play on the court before a basketball game. Although I didn’t personally see that, I’m sure this is one of many stories out there where he did things that you may not have heard about. It shows what kind of person he was maybe off the court.
That’s using your influence and what you have to help and bless others in a way that could be small for you, but life-changing and big, especially for young kids who love basketball. I grew up playing basketball so that would be like a dream come true for me if I was a kid. Finishing with this last question, how do you stay centered, Jeff, in your values and how do you stay encouraged to charge forward to reach new goals?
It goes back to we’ve been talking about planning. Every morning, I plan out what my day is going to be to make sure that I have time for what’s important, not in working and servicing clients and getting back to people but outside of work with kids, with other social events and things going on in life is planning. Making sure that I have time to get everything done that I need to.
Jeff, I appreciate your time and sharing all your wisdom. I want to thank our audience for reading another episode where we believe having a clear plan for capital gains tax referrals such as preplanning in the future for deferred sales trust and 1031 exchanges is the key to helping you create and preserve more wealth. We encourage you to reach out to Jeff for any real estate needs you have. We look forward to connecting with you in the next episode. Thanks so much.
About Jeff Love
Real Estate and Corporate Attorney. Partner at Gibbs Giden focusing on the areas of Real Estate Law and Business/Corporate Law.
California Super Lawyer–Rising Star 2019.
Gibbs Giden is nationally and locally recognized by U. S. News and Best Lawyers as among the “Best Law Firms” in Construction Law, Construction Litigation and Real Estate Law. Chambers USA Directory of Leading Lawyers has consistently recognized Gibbs Giden as among California’s elite construction law firms. Offices in Century City, Irvine, Westlake Village and Las Vegas.