Q: I have a lease on warehouse space. A realtor tells me the lease has some value because the rent I'm paying is below what others are paying today for similar space. Can you tell me how I can compute the value of my lease?
A: Compare the annual rent you're paying (called contract rent) with the today (called market or economic rent). If the annual rent you're paying is more than market rent, the lease is valueless. From an economic standpoint, it's an unsatifactory lease for you.
If the annual rent you're paying is less than market rent, the lease has some value. Here's an expample: Suppose you negotiated a five-year lease on 10,000 square feet of office space at $9.50 a square foot. Comparable office space rents for $0.50 a square foot today. You compute the value of your lease this way:
Annual market rental $105,000.00
Your annual rental $95,000.00
Your annual rental $10,000.00
Present worth of $1 per year for five years at 12 percent is $3.60.
Value of your lease
10,000 square feet x $3.60=$36,000
Q: Have the tax law changes of 1978 affected the need for tax shelter investments? If I correctly understand the new tax laws, one need not search so hard for investments of dubious quality whose main purpose is to shelter other income.
A: Your understanding is correct. Since these tax law changes in 1978, the best way to acquire and keep wealth, so far as real estate is concerned, is to invest in well-located, income-producing property. One still needs to shelter unearned income. Its tax rate goes as high as 70 percent. But then try for long-term capital gains. The maximum tax rate on them is 28 percent. And in many situations, the rate may be lower. This is because 40 percent of the capital gains is taxed at the taxpayer's top rate. (In the case of earned income, that can't exceed 50 percent.) The result is that the capital gains tax rate for a taxpayer in the 50 percent bracket is 22 percent (55 percent of 40 percent). Thus, most taxpayers may now find it wise to avoid real estate investments of dubious quality as investments but which promise to provide relatively large shelter from tax or other income.
Q: I want to invest in a solar heating system to replace my gas furnace and hot water heating system. Can I save money by doing this?
A: According to everything I've been able to discover, you can't save money unless your present system is on the verge of giving out and will have to be replaced soon in any event. But at the present rate of technological advance and the rising cost of traditional fuels, it won't be long, in my judgment, before new technology will give you a solar heating system producing fuel cost savings that will more than offset the currently expensive installation cost of a solar heating system. So keep your ear to the ground on this one. Make your move when it makes economic sense-but not now.