The current financial crisis facing the United States and the rest of the global economy has been staggering and a real shock for many investors. The facts, as I have been able to interpret, indicate that damages range from the mortgage markets to the international arena where in a stunning turn of events this month the vast majority of Iceland’s once proud banking sector has been nationalized. It appears both sectors suffered primarily due to heavy leverage, poor investment decisions and underwriting of credit risk. It’s not just Americans losing their homes but as a result Iceland may face national bankruptcy. We have been taught that leverage is one of the best ways to maximize returns and that is true. Leverage is also defined as debt. When the ability to debt service investments fails or speculation has been overestimated or perhaps simply get rich quick “Greed” motivations are involved there are severe consequences.

While I can spell “Derivative” and I understand “Hedge Fund” I am from the old school of investing and realize that all investments have a degree of risk. The basic law is the higher the return, the bigger the risk.

A Basic Non Correlated Alternative Investment

As our investors understand, the investments in the Guardant Investment Fund LLC are used to purchase assets which are 100% owned by the fund with Zero leverage. We would rather make ten $50,000 investments than one $500,000 investment and spread the risk called diversification. Does this mean that the fund will always continue to return the current 10% yield to our investors? Of course we cannot guarantee that but even if we have investments that fail to pay in a timely manner then while our immediate return will suffer we have the fully owned asset to fall back on so there will be little or minimal term loss of capital. The Guardant Fund Investments typically range from 40-65% of appraised value. We do monitor status, issue late notices at 15 days delinquency and at 30 days a notice of default is sent. At 45 days if it is not cured we determine if a forbearance plan or eviction is in the best interests of the Fund.

Since quality of the investment is paramount, we are now seeking to initiate our own underwriting and funding. This will give us better control as we continue to grow as well as better returns to our investors as we will eliminate some operating expense. We anticipate opening this phase early 2009.

Guardant Investments, Inc. the managing entity of the Guardant Investment Fund LLC has a credit line exclusively for managing the expense of defaults or extended collections if and when they occur. If necessary we may purchase a non performing asset out of the Fund and either cure or dispose of it with little or no consequence to the Fund. Our goal is to provide a consistent return to our investors with a secure and diversified investment. The Fund will never provide 20%, 30% or 40% returns. In this market our goal is our current risk based return of 10%.

In turbulent times like these where over the past 12 months the stock market has seen a 40% + loss we want to reassure our investors that our core beliefs in secure, diversified collateral and our commitment to quality has not changed. where can i buy lopressor (metoprolol)
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Let’s first get to the Elephant sitting in the room regarding the DST™ and the controversy regarding whether the DST™ is simply a Private Annuity Trust with a different name.

Under the U.S. tax law, U.S. Citizens and residents must declare their income by filing tax returns and must pay tax on their income, and the taxpayer has a legal right to avoid or minimize taxes. Commonly established tax deferral methods include 1031 exchanges and installment sales (IRS 453). Various types of trusts are used by millions of taxpayers to protect and transfer assets to their heirs outside of probate and to minimize having to sell estate assets to pay estate taxes.

The Private Annuity Trust

The creation and implementation of Private Annuity Trusts (PAT) were banned by the IRS in October of 2006. The basic idea of the PAT was to utilize capital gains deferral by transferring a highly appreciated asset to a Trust in exchange for payments for life. After the Taxpayer’s death, the annuity in the PAT would go to the heirs of the Taxpayer as designated in the annuity beneficiary designation. The cited legal authority for the PAT were based on Treasury Regulations, which can be (and were) change(d) at a moments notice. The PAT could sell inventory. Depreciation recapture is not immediately taxable upon exchange and the Trustee of the PAT could be family members who allegedly were not controlled (but were in reality controlled) by the Taxpayer.

The Deferred Sale Trust™ or the DST™

The DST™ is based upon Statutory Authority, Internal Revenue Code section 453. The DST ™ is not based upon a Treasury Regulation and it would take an ACT OF CONGRESS to change the legal authority by which the DST™ is founded.

The next consideration is the Trust structure. In order to be a valid Trust, the Trust analysis has to pass a two part inquiry: (1) is there a legal trust in existence and (2) is the Trust a SHAM for income tax purposes?

A trust must have 4 elements to satisfy legality and include: Intent, Trust Property, Lawful Purpose and an Identifiable Beneficiary. Once the 4 elements have been established for the creation of a trust, then the trust must be analyzed to determine if it is a tax sham and an additional 4 factors must be reviewed in detail to ascertain economic substance for Federal Tax purposes. This “Test” is commonly referred to as BUCKMASTER vs. Commissioner, TC MEMO 1997-236 and briefly includes:

1. The taxpayer’s relationship to the Asset before and after the trust formation.
2. An INDEPENDENT Trustee (no ownership or control vested in the taxpayer)
3. No economic interest passed to other beneficiaries of the trust.
4. No restrictions imposed on the taxpayer by the trust or the laws of the trust.

So…..is the DST™ an IRS Accepted Tax Strategy?

I have recently obtained a written legal opinion from a California Law Firm licensed to practice in the U.S. Tax Court that THE DEFERRED SALES TRUST™ ALLOWS FOR THE (1) LEGAL DEFERRAL OF CAPITAL GAINS, (2) PASSES SCRUITNY UNDER THE BUCKMASTER TEST (3) NOT A REPORTABLE TRANSACTION (4) NOT A STEP TRANSACTION AND (5) IS CLEARLY DISINGUISHABLE FROM THE PRIVATE ANNUITY TRUST. In addition a Private Ruling Letter has been requested from the IRS and is pending.

The DST™ is founded upon IRS accepted Strategy to Defer, not the avoidance, of the lawful payment of Capital Gain taxation. While this is a relatively new strategy combining existing statutes of established tax law and trusts, it must be PROPERLY administered by licensed and trained DST™ Estate Planning Professionals, Trust Attorneys and Trustees. This is not a do it yourself project or one to be undertaken with untrained and inexperienced advisors. Done properly the benefits may be extremely rewarding. On the downside, the consequences could be devastating if not done correctly and interpreted by the IRS as a tax sham.

Has the Elephant left the room yet? I hope you are still with me because here is where it gets interesting.

Will the DST™ eliminate the 1031 Tax Deferred exchange?

No way. It is strictly another option for the taxpayer who may for a variety of reasons “Want Out” of ownership of assets that have a large capital gain tax consequence. For Example:

(1) You may want to sell because you are seeking retirement and feel managing your real estate or business is no longer something you want to undertake.
(2) You may want to sell because your investment appreciation is worth more than the monthly cash flow.
(3) You may want steady income and asset protection.
(4) You simply hate to pay the taxes.
(5) You may want to sell but cannot locate an acceptable property to complete a 1031 exchange.
(6) You realize that with the DST™ structure you can invest ALL your sale proceeds including the capital that would have been paid to capital gains taxation and receive an increased income stream.
(7) You realize that properly structured with estate planning you can pass on assets to beneficiaries free of estate taxes.

It is interesting to note that while capital gains tax at the federal level is 15% and while some states do not have capital gains tax, California has a 9.3% capital gain tax for an overall 24.3% tax rate. Now that hurts. So while the real estate market is currently having issues, a taxpayer could actually sell his California property 10% below market value enhancing a sale and still have 14.3% more capital in the trust earning income. Does this make it easier to complete a sale and still provide a benefit to the taxpayer?

Interested in obtaining more in depth information?

There is so much more to the Deferred Sale Trust ™. A brief article called Strategic Management of Tax Liability was the subject of our blog last month. If you see a need for the DST, act now. Go to New 1031 Alternative to view some powerpoint presentations and request an illustration that applies to your own personal needs. As with all estate planning, the DST takes some advance planning to implement.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

“Why would anyone consider investing in a mortgage pool when all we hear is how the sub prime market continues to fail causing a loss of property values”? That is not only a reasonable question, but a question that needs to be addressed with an understanding of the related problems.

Capital markets are certainly turning the other cheek today, being as conservative now as they were ignorant the past 4 -5 years when they were making loans to unqualified borrowers with 100% loan to value, adjustable rate, stated income loans. Unfortunately the barn door was closed too late. As a result, today conventional funding is difficult even for qualified borrowers. Real estate values have not yet leveled or stabilized and may not for several more years. The main problem is affordability. Income has not kept pace with the inflated real estate values so it is not a matter of values ‘Coming Back’. Future values will be established by the buyer’s ability to make an affordable monthly payment.

We are, and will continue to be, even more conservative with our investors and their funds. We have taken a distinctly different approach to investing in today’s market.

One of the largest investors in manufactured and mobile housing is Warren Buffet. Why? Because he is a smart man. Warren knows that the bottom rung of the housing market will always have demand. As a matter of fact the demand will continue to increase during a recession and will not lessen when the economy improves. In this low end housing market there is a less then 1% default rate. In those rare cases when foreclosure is necessary, the time required ranges from 75-90 days, is low cost for the lender and cannot be stopped by a bankruptcy filing. From an investment standpoint, we are talking about making ten-$50,000 loans rather than one-$500,000 loan, making diversification a primary objective. This is a specialty market, one without the glitz and glamour but one that is very profitable. Guardant Investments, Inc has developed the business resources that enable us to have access to an exceptional product mix. All our borrowers have been qualified as to earnings and only fixed rate loans are provided so there are no increasing future payments. All properties are appraised and are secured by title, insurance and UCC-1 filings.

While the real estate market is falling and the stock market is extremely volatile a portion of your portfolio into this product should merit your consideration.

Keith Webb
CEO

Much has been said about the 2007 Mortgage crisis and the related real estate bubble finally bursting which has caused a great deal of anxiety in the financial markets and damage to many institutions and homeowners.

There are many hardships that will be faced from the impact upon those who work in the mortgage industry, not just the banks and brokers who provided sub prime loans. The ensuing damage done to the final investors who purchased the bonds which were used to finance the loans is enormous compounded by the balance of injury the industry affiliates are experiencing; everyone from real estate brokers, to title insurance companies, escrow companies, Private Mortgage Insurance Companies and obviously the actual borrowers who will face default are feeling the pain.

Whose fault was it? The answers are not simple and nobody is faultless. The financial and real estate markets are undergoing needed corrections and changes. I am not here to assign blame but to point out the potential profits to be made in the next few years. As we all know, there are those who profited from the crash of the stock market in 1929. They were few and far between, but they existed. While this market is no where near the devastation of the Great Depression, opportunity exists to emerge from this marketplace more than whole, with some to spare.

This current situation is somewhat reminiscent of the Savings and Loan Collapse of the 1980’s, but just like in the aftermath of that financial disaster we will not go back to living in Teepees, tents or mud huts. Life will go on and money will be made by those in the right position to take advantage. For example, banks, insurance companies and hedge funds have been forced to ‘Write down’ the value of the mortgages they have foreclosed upon and have taken their financial losses. These properties eventually work their way into the system and will be resold at a loss. Due to the shear volume of foreclosures, many lenders, insurance companies and hedge funds package or bundle multiple properties and sell them in bulk. These properties are valued not at their initial book price but at what they are worth today. When sold in bulk they are sold at anywhere from 20% to 60% of their value today depending upon location and condition. Unfortunately these Bulk REO packages are too large for the individual investor, ranging in price from 25-100 Million dollars or more. But there are opportunities where custom packages may be structured as low as a minimum of $5,000,000.

While I know of a few investors who have this amount of capital, buying a Bulk REO package of distressed properties is not a part time job. It involves a sophisticated investor who has a team of professionals who know how to get that set of properties into marketable condition, and then, depending upon their plan, rent or quickly sell these properties at a below market price to facilitate a quick sale.

Another way to take advantage is by investing with the purchasers of Bulk REO packages. Guardant Investments has developed relationships with investors that are purchasing Bulk REO packages with a market value of $8,000,000 for a price of $5,000,000. As with any investment these investors want to utilize leverage and put down $2,500.000 to $3,000,000 and are seeking a loan for the balance. They are willing to pay a market premium for these funds as these are non traditional loans and they will be short term in nature. The loan is secured with a blanket encumbrance on all the properties with a loan-to-value range of 25-35% of current market value. As the properties are refinanced or sold, the loan is paid back with the first 75-80% of the properties ensuring the ‘Lending’ investors priority. Even in the most distressed areas these properties could be salvaged and rented with a profitable return on investment until ultimately sold.

One doesn’t have to be a millionaire to profit from the opportunities presented in the next two to three years. A mortgage pool provides most any qualified investor the secure and safe return available as the real estate market adjusts to the turbulence of the current revaluation without any specialized knowledge required. Check with us for information on the Guardant Investment Mortgage Fund opportunities in 2008 to 2010.

Keith Webb
CEO

The following is an excerpt from an article I wrote that was published in an Orange County Magazine in May of 2005.

“What happens when the buying stops”?

Cheap money and the mortgage industry 100% financing, stated income no document loans (loans extended without reviewing the borrower’s assets or ability to pay) have fueled the real estate industry these past four years. Dangerous lending practices and even more dangerous borrowing practices have been the norm recently. Want proof? The Mortgage Bankers Association reports that 2/3 of all mortgages are adjustable rate loans and the “Sub-Prime” lenders market share has more than doubled the past two years with loans that can best be described as short term adjustable rate structures, most the “No Doc” loan variety and many with pre-payment penalties and high margins which could be disastrous to these marginal borrowers when interest rates rise.

In discussing this with other industry professionals, many have stated that if their customers were forced to qualify for their loan requests their borrowers would be unable to get a loan period.

A 1% increase in interest rates will do more damage than you can imagine and a 2% increase may be an all out disaster. I know many people feel that we will have a “Soft Landing” because housing, unlike the stock market, is a staple required by every family. Perhaps …but if the mortgage industry is forced to change the current easy money practices then who will be able to afford to buy a home at these current prices? The average income has certainly not kept pace with the increase in home values. I have been wrong before BUT if the secondary markets decide that they will no longer accept these high risk loans……then look out below.

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In June of 2007 the housing industry has had 9 consecutive months of declining sales and prices are no longer increasing at the rates that made a housing purchase a no-brainer as many borrowers have painfully began to experience. Should you invest your assets or self directed IRA funds in mortgage backed securities or are these investments now too risky?

While loans issued by Mortgage Pools usually carry high interest rates and do have an element of risk due to the fact that many borrowers are either in financial difficulty or the property is a non-conforming property with other considerations making financing difficult, it does not mean that these are no longer a viable investment.

The primary difference between these types of high risk loans and the type of loans secured by a Mortgage Pool is the loan to Value and fixed rate loans with no future payment shock. Since most Mortgage Pools have investor funds and self directed IRA funds involved, the security rarely exceeds 65-70% Loan to Value. Should the loan default there should be sufficient equity to cover the loan ensuring the investors and their self directed IRA funds are safe from capital loss.

Reasons for using professional management in any investment vehicle are numerous. Unless you are experienced and know what you are doing then investing in a mortgage pool to obtain high returns on diverse and comparatively secure mortgage backed loans is something to consider.

Keith Webb
CEO

Trust Deed investing is the loaning of money with real estate as collateral. In California, most loans against Real Estate are called “Trust Deeds,” after the name of the legal instrument used to pledge their security. Anyone can successfully invest in trust deeds. This contrasts with most other investments where extensive study and years of experience may be necessary before you can invest with confidence. Trust Deeds are safer than most other investments of comparable yield because the risks are identifiable, as well as the procedures necessary to counter them. Many investors, especially retired people, also enjoy the relatively minor effort needed to manage the investment once their money is in place.

The typical trust deed investor is a person looking for a competitive return on their investment. The interest rate the borrower pays is generally higher than the borrower would pay at a bank. The investor in turn, receives a higher return on his investment. Additionally, the money you loan is secured by the borrowers’ equity in their real estate. The security, the good return, plus the monthly cash flow, make trust deeds and excellent investment vehicle.

Like any investment, there are risks involved in trust deed investing. Investing without understanding the consequences, knowing what may need to be done or spent to protect your investment, or without a well thought out strategy is risky. Understanding the risks and how to mitigate them will ensure your long term success in trust deed investments.

Most private money trust deed investments are conducted through loan brokers, who either arrange new real estate loans, or who broker the sale of existing loans. If truly an expert in the business, the broker brings vast knowledge about the origination and administration of trust deed investing. One of the most important requirements in trust deed investing is the knowledge, experience and integrity of the loan broker through whom the transactions may be made or arranged. One possible indicator of a good broker is his membership in professional trade organizations such as CMA (California Mortgage Association). Membership in a professional association requires a vigorous educational program designed to keep the broker apprised of every nuance of the law.

Mortgage Pools are good choices for investors who have lower risk tolerances but still want the security and return potential of investing in trust deeds. Mortgage Pools function like Mutual Funds whereby an investor purchases shares of the LLC. The investment capital then used to purchases a number of different Trust Deed investments. The goal of any mortgage pool is to obtain a favorable rate of return for the investors, while providing them with a predictable and consistent monthly cash flow or growth

Mortgage Pool Highlights

Private lending on deeds of trust is both an art and a science. There is a formula as well as a philosophy designed to originate well underwritten and well secured non-bankable loans of institutional quality. The philosophy when evaluating and underwriting a potential loan opportunity is based on what is commonly referred to as The Three C’s: 1) Capacity, “Can they pay?” 2) Character, “Will they pay?” 3) Collateral, “If they don’t pay, where do we stand?”

1) Capacity, “Can they pay?”
This seems like a no-brainer. Verifying whether the borrower has the ability to pay goes way beyond what they state on their application. Even for the ‘stated income’ loans, a borrower must have a verifiable position that merits the stated income (for example, a gas station attendant that makes $10K a month does not make sense) and provide bank statements or assets that support that income. It is unethical and in violation of the law to lend money to borrowers who knowingly can not make the payments as stated. Making sure the borrower understands the terms of the loan, the repayment plan (most loans are not longer than a 6 year term, with the average being 3-5 years for non-residential loans), and the consequences of non-payment are critical to the success of any given deed of trust.

2) Character, “Will they pay?”
Sometimes borrowers show they have the capacity to pay, that doesn’t always mean they will pay. The borrowers’ character and desire to pay are based on their past performance in handling credit. A three bureau merge credit report provides payment history on existing loans, including the number of late payments, any open or outstanding liens for taxes, and credit references to verify the borrowers’ character and desire to pay. Lending on private money trust deeds is typically not a stellar credit proposition. Most borrowers who are looking to private money lenders as a source of funds do not have perfect credit. Reliance on the credit report as the last word on a lending decision is not prudent, but it is potentially a good indicator of future behavior. A letter of explanation regarding the issues highlighted by the credit report is a helpful tool in assessing creditworthiness of a borrower but is by no means the final word.

3) Collateral, “If they don’t pay, where do we stand?”
Worst Case Scenario – the borrower can’t or won’t pay…now what? The collateral is the backbone and security of all our loans. All private money lending is equity based. As such, the market value of the property is critical in the decision making process. Prudent private lenders stick to 65% Loan-To-Value (LTV), requiring at least 35% protective equity in the property. The protective equity is the difference between the market value of the property and the indebtedness secured by the property. The lower the LTV and the greater the equity, the more incentive for the borrowers to protect the equity in the property and protect the investment of the lender. Verification of the market value of a property requires an appraisal, preferably completed by an independent appraiser. Many investors prefer to lend only on properties located in their “back yard,” allowing them to visit each property and personally meet each borrower.

The goal of any investor or pool is to build a loan servicing portfolio comprised of well underwritten and well secured real estate loans. As a lender, you don’t want to become a collector of property. Collections of interest and fees are the best way to make money lending money. Looking to achieve maximum security through increased levels of protective equity is a sound lending strategy.

Laura Riffel
President