In today’s precarious economy, many employers are considering giving relocation loans to employees. Several of these employers may not have provided relocation loans to employees before, but are now looking for ways to increase the opportunity to make such loans available.  .

A relocation loan that is done correctly can be offered to the employee interest-free and without exposure to creating imputed interest to the employee which would be treated by the Internal Revenue Service as compensation income.

The following information concerning below market rate loans is an excerpt from an article published by the Worldwide Employee Relocation Council® (ERC) in its Tax and Legal MasterSource:

A. Types of relocation loans

1. Mortgage loans

A mortgage loan is extended by the employer to the employee with the understanding that the employee will use the proceeds of the loan to purchase a new principal residence. Such loan may be a demand or term loan, and is conditioned on the future performance of substantial services for the employer. The loan may have a market interest rate, a below market interest rate, or no interest at all.

2. Equity bridge loans

A loan may be offered to an employee in order to enable the employee to receive the equity out of an old unsold residence to make the down payment on a new residence. The terms of the loan may require that the proceeds be repaid within a short time after the sale of the former residence. The loan may have a market interest rate, or a below market interest rate, or no interest at all.

B. Imputation of interest on a loan transaction

1. Explanation of imputed interest

When a loan is made at a below market interest rate, or with no interest at all, the Internal Revenue Code may impute interest to the loan even though the lender and borrower never did. If imputed interest rules apply to an employee relocation loan, the amount by which a market rate of interest exceeds the loan’s actual rate of interest is considered income to the employee borrower. (The market rate used is the "applicable federal rate," which is computed by the IRS under a formula in the Internal Revenue Code and periodically adjusted.) This income is considered to be derived from the employer-lender, because the employer-lender is considered to have paid interest on the loan to itself on behalf of the employee-borrower.

2. An example of imputed interest

An example of imputed interest may be helpful in understanding this complex area. Assume that the employer has made an interest-free bridge loan to the employee. The market rate of interest on the loan would be $100 per month if interest were charged by the employer-lender. No interest is paid by the employee-borrower or received by the employer-lender. However, the tax law considers the employee-borrower to have owed $100 of interest, and since the employee’s obligation to pay this $100 was satisfied by the employer-lender, the transaction is treated as though the employer-lender paid $100 per month to the employee-borrower, who then repaid it to the employer-lender. This characterization of the transaction gives rise to $100 per month of compensation income to the employee-borrower.

3. Reporting requirements for imputed interest

The employee-borrower must report imputed income on his/her tax return, even though the employee never received it, but then may be entitled to a corresponding deduction for the interest theoretically paid on the employee’s behalf by the employer-lender.

4. Negative tax consequences of imputed interest

If interest is imputed to loans it has negative tax consequences for the employer-lender and may have for the employee-borrower. The employer-lender must pay payroll taxes (FICA, RRTA, and FUTA) on the amounts imputed as interest income to the employee-borrower. (The employer-lender, however, does not have to withhold federal income taxes on the imputed interest income.) The employee-borrower may or may not be eligible for a deduction of the imputed interest. The interest on a mortgage or bridge loan may be deductible as "qualified residence interest" under the general rules applicable to homeowners. However, there may be situations in which interest income is imputed to the employee, but the employee is unable to take a corresponding interest deduction. For example, there is a $100,000 limit on the amount of home equity debt upon which interest is deductible.

C. Avoidance of imputed interest

1. De minimis exception

If the total principal amount of the employer’s mortgage loan, bridge loan, or both outstanding to the employee does not exceed $10,000 during the year, the loans are ex-empted from the imputed interest rules due to their small size. No interest will be imputed in this situation.

2. Exemption for employee relocation loans under regulation 1.7872-5T

Under a temporary regulation, imputed interest will not apply to compensation-related mortgage or bridge loans if the following requirements are met:

      a. Exemption for mortgage loans

          The loan agreement must require the following provisions:

i. The proceeds of the loan must be used only to purchase the new residence.

ii. Such loans must be secured by a mortgage on the new principal residence acquired in connection with the relocation of the employee to a new principal place of work.

iii. The loan must be a demand or term loan.

iv. The benefits of the interest arrangements must not be transferable.

v. The below market interest rate (or the lack of interest) must be conditioned on the future performance of substantial services by the employee.

vi. The employee must certify to the employer that the employee reasonably expects to itemize deductions for each year the loan is outstanding.

     b. Exemption for bridge loans

The terms of the bridge loan must meet all the requirements for the mortgage loan as stated above except for the security requirement. Note, however, that any interest actually charged on a bridge loan will not be deductible by the transferee unless the loan is secured by either the old or new residence. In addition, the bridge loan agreement must provide that the loan is payable in full within 15 days after the sale of the employee’s immediately former principal residence. The aggregate of the principal amount of all outstanding bridge loans must not be greater than the employer’s reasonable estimate of the equity in the former residence. The former residence must not be converted to business or investment use.

     c. An unresolved issue

One issue that remains unresolved under the temporary regulation is whether the exemption applies in situations where imputed interest would not be deductible under the general rules applicable to home mortgage loan interest deductions. This problem is particularly acute for bridge loans, which are often unsecured by either the old or new residence, and, even if secured by the old residence may be considered home equity loans, and therefore limited to $100,000 of principal on which interest would be deductible. Although the IRS has not spoken to this issue, it is arguable that the 1986 Tax Reform Act, which imposed the current limitations on deductibility of interest, would be held to modify the exemption contained in the temporary regulation. However, in the absence of any IRS statement of position, it should be assumed that the regulation may still be relied upon. The IRS continues to follow the regulation, and has shown no interest in revisiting it.

 

Here at SIRVA our clients are increasingly asking how the continuous economic turmoil impacts their company insofar as their relocation program is concerned. Specifically, they want to know how their company can continue to effectively and efficiently hire new employees and relocate existing employees during these difficult times.

So what should companies do in such challenging times insofar as relocation is concerned? In addition to learning how to better leverage relocation policies currently in place, this is the optimal time for companies to look at some of the innovative and time-tested relocation program provisions that are proving highly effective at protecting both your company and your employees. Here are some suggestions:

Best Practices for Home Sale: Making sure your relocation program includes four (4) critical home sale provisions—regardless of what type of home sale program you have—and how to effectively enforce expectations.

Loss On Sale and Negative Equity: An inside look at the innovative new options for the company and the transferee in these two complicated, yet frequently encountered, situations.

Pre-Decision Analysis: Before the formal relocation process is started, companies need to assess whether candidates are able to actually complete the relocation in today’s economic climate.

Read the complete article now

The U.S. housing market is continuing to slow, and most economists and housing professionals predict the housing slump will linger longer than previously forecasted.

A downturn in real estate markets creates several challenges for employers' relocating transferees, the most significant of which is the growing number of homes that end up in inventory. This rise in home inventory leads to higher overall relocation costs and increased property management duties for employers.

Total home sale costs also become less predictable in sluggish real estate markets, and unpredictable home sale costs translate into unpredictable total relocation costs.

Relocation service providers (RSPs) offer several home sale programs, each with varying levels of risk, to help corporate relocation transferees. Employers should consider the advantages and disadvantages of each program to determine the level of risk involved, and those employers who want a predictable and low-risk home sale program should consider a fixed-fee program.

Learn more about the fixed-fee program.

When a borrower owes more on their mortgage loan than a property is worth, the borrower is in what is commonly called “negative equity.”

 

When a seller is in a negative equity position, they are obligated to come up with the negative balance to pay of their loan. The seller is required to do this for two reasons:

 

1. The lien holder (the lender) will not remove the mortgage lien unless it receives full satisfaction of the amount due on the mortgage loan.
2. The prospective purchaser of their property will not purchase the property with the mortgage lien still on the property.

What is a Short Sale?
A short sale is a means by which a seller can satisfy the negative equity. Instead of the seller paying the negative equity, the seller’s lender reduces the mortgage loan value and accepts a lesser amount from the sale of the property—hence, eliminating the negative equity.

 

History of Short Sales

Historically, in situations where the seller was unable to come up with the negative equity, lenders have not allowed a short sale. Lenders were willing to allow a property to proceed to foreclosure because property values were always increasing and could support a resale sufficient to recover the loan balance. Even when a short sale was denied, it was not generally the case that the seller would default on their loan—they would decide not sell their home. Short sales were only permitted in extraordinary situations when default was imminent and the resale value would not support the loan value.

 

Short Sales Today

Due to across the board extraordinary losses in property values, and increases in mortgage loan defaults and foreclosures, lenders are now more inclined, as a matter of policy, to consider a short sale transaction.

 

The lender will still require evidence that the sale price cannot support the current loan value and will look for evidence of potential default. However, lenders are more inclined to entertain a short sale based upon current real estate market conditions and the likelihood that the property value will not support the loan value in the foreseeable future.

 

Lenders have historically required anywhere from 30-60 days to complete a short sale transaction. Although many larger lenders are establishing departments to address short sale transactions, the time frames are not expected to be reduced due to the increase in negative equity situations. 

 

If a borrower waits until an offer is received to ask their lender to consider a short sale transaction, then there is a strong possibility that they will lose the transaction while awaiting their lender’s decision. Although a lender will not approve a short sale until they know the terms of the sales transaction, they can begin to investigate the borrower’s request, set the proper parameters for approval and be prepared to make a quicker decision when an actual offer to purchase is presented. Borrowers should contact their lender as soon as possible if they are in a negative equity or limited estimated equity position on the property. Because there is a significant amount of data and several factors for a lender to consider, the sooner the lender is able to begin evaluating the situation, the more opportunity there is for smooth and successful short sale transaction. 

 

Lender Requirements

Lenders still require ample support indicating that the short sale is the last viable option for the borrower. Therefore, the borrower must be able to demonstrate that they have looked at other alternatives such as credit card advances, family gifts and relocation employer benefits before requesting a short sale. Depending on the borrower’s particular and unique circumstances, the lender may require that the borrower enter into an unsecured consumer loan for the short sale balance.

 

Many lenders also require evidence that all reasonable steps have been taken to minimize the transaction costs. Many lenders will look to reduce broker commissions and other closing charges to maximize the amount of funds available for the loan payoff. It is important to explain to a lender that in a corporate relocation transaction the employee/borrower has no transaction costs and thus a reduction will not provide more funds to the lender (and, in fact, may reduce incentives to sell the property at the best possible price).

 

Lenders vary as to transactional involvement—some will only review the data presented and others will actively engage in the home sale process. SIRVA has experienced lenders that want regular marketing updates and even require that they control the listing process, listing price and any listing price reductions. In order to increase sales opportunities, some lenders have even required special incentives and concessions are included as a party of the marketing strategy, including special financing offers to prospective buyers. All of these possibilities are lender specific and vary significantly based upon the borrower’s position, the facts surrounding the transaction and the transaction terms themselves. This provides an additional reason to contact the lender as soon as possible if there is the possibility of a short sale situation.

 

Despite the complications and time involved, short sales must be considered as a viable alternative in dealing with negative equity situations in relocation transactions until the real estate market recovers and values become stable again. 

Accurate and timely accounting of relocation expenses has a far-reaching impact on the overall performance and success of a corporate relocation program, to both the company and the individual transferee.

The company benefits in several ways when a “best in class” expense management process exists, including:

• Efficient use of staff
• Sophisticated processes that track corporate “spend” from initiation to payroll reporting to the “true-up” of expenses (as a result of the tax gross up methodology used)
• Consistent policy interpretation
• Objective and accurate expense reimbursement audits
• Reduction of exceptions requested
• Consistent tracking of exception approvals
• Convenient, accurate, single-source management reports
• Efficient reimbursement via payroll or check processing
• Reduced risk of penalties from IRS tax audits
• Accurate gross-ups, payroll reporting and year-end tax true-up
  

The employee benefits from:

• Timely reimbursement of expense reports, normally within four days
• Information typically available online with easy access to policy, FAQs and electronic expense reporting
• Convenience and speed in answering questions
• Year-end summary report including all expenses paid to or on their behalf
• Year-end reconciliation of relocation expenses, including an itemization of what is and what is not taxable and the tax gross up where applicable

To learn more about managing corporate relocation expenses, please visit our resource library.

 

 

We all know that real estate is local. However—in our current real estate situation—we are seeing more markets continue to see a slip in home sales with only a few who are reporting an increase. The National Association of Realtors (NAR) reports areas such as Colorado Springs, Colo., Sacramento, Calif. and Spartanburg, S.C. are experiencing double-digit pending sales gains compared to a year ago with a significant percentage of these sales attributed to investors who are buying foreclosed properties. So while some markets have seen tremendous growth in home sales compared to last year, others have seen contract signings slashed by as much as 50 percent.

The current real estate market for the typical residential home is still very much a buyer’s market. Attractive interest rates, large inventories of homes for sale and lower-than-average sale prices make it a great time to buy. Sellers aren’t so fortunate. In fact, some areas have seen home values drop so low that typically willing transferees are hesitant to relocate because of loss-on-sale concerns or owing more on their properties than the current market value sales price.

According to a recent survey conducted by the Worldwide ERC®, the number one reason employees are reluctant to relocate is a direct effect of the troubled real estate market. The survey indicated that more than 95 percent of respondents reported "slowed real estate appreciation at the old location," as the reason their employees are averse to moving. This is a stark contrast from last year when only 16 percent cited the real estate market as the reason for their reluctance. Instead, high housing costs, high cost-of-living and family resistance to move, were top concerns.

"Today, it’s an unfortunate fact that those true soldiers that have faithfully relocated every two to three years are cooling to the idea because of the economy and the fear that they will take a considerable home loss-on-sale," says David Barlow, SIRVA’s senior consultant. 

Barlow advises companies that have not done so to consider implementing a loss-on-sale policy to remain competitive and to help their transferees with the reality of falling home values and sale prices. He also advises companies that already have a loss-on-sale policy to re-evaluate the loss-on-sale limit or cap to ensure it is sufficient in today’s difficult real estate market.

"In the past, $25,000 was a typical loss-on-sale cap, but today that figure is increasing and could approach $75,000," he explains.

Negative Equity a Grim Reality
While many companies are struggling with situations where transferees are not willing to relocate because of a significant loss-on-sale, others are dealing with a less common but potentially even more difficult scenario— is trying to relocate employees who have negative equity in their home.

Barlow explains that SIRVA is seeing this problem grow from what used to be a very low percentage of relocation candidates, which is a definite sign of the times.

Negative equity comes into play when a home’s value is less than the amount of all outstanding debts against the home. This can happen if an individual takes out a line of credit, second mortgage or other loan on his or her home, which must be paid before the home can close. It can also happen if the home’s value has decreased below the value of the original mortgage. This can occur with low or no money down loan products that were prevalent in the last 5-10 years.
 
"If a transferee purchased a home for $350,000 two years ago, and in today’s real estate market that home is only worth and sells for $325,000, then the owner is looking at a $25,000 loss on sale," explains Barlow. "This situation would generally be covered in whole or in part by a loss-on-sale policy. However, if the same individual also took out a $50,000 home equity loan (in addition to a $300,00 first mortgage), then he or she is now on the hook for whatever portion the company does not cover in the loss-on-sale benefit.  If the first mortgage and the line of credit is greater than the net proceeds of the sale of the home plus the loss-on-sale benefit then the homeowner is in a negative equity situation or is considered to be ‘upside down’.

"If the homeowner can’t repay this total debt at the home closing, the home can’t be sold. This is a significant issue in corporate relocation because all obligations have to be cleared when closing the sale of the home, and if the individual can’t clear the obligation and sell the home, the relocation can’t proceed."

SIRVA’s Solution
SIRVA works closely with companies to minimize the risks of relocating individuals with negative equity. SIRVA counselors are trained to ask the right questions and uncover negative equity situations in the discovery phase, before the relocation is initiated.

"If we determine a relocation candidate will be in a negative equity situation then we can alert our clients who will then have to make some tough decisions," explains Barlow. "The best course of action may be to select another candidate."

Barlow says the last course of action a company should take is to settle the negative equity obligation for the employee in the form of a lump-sum payment.

"Our counsel has always been against paying the negative equity to the employee. Imagine the potential equity issues if an employee were to find out the company settled a colleague’s unique financial obligation. This could create more problems than it solves," he says. "Consider the similar transferee who did not take out an equity line who would—in effect—be penalized for his/her conservative financial management." 

Instead, Barlow advises companies that absolutely have to relocate a high-value employee with negative equity to consider a loan—rather than just cutting a check—for the outstanding debt.

"Companies can give transferees the opportunity to pay the loan back or use it as a retention device, forgiving portions of the loan over time," adds Barlow. "Companies could also consider a temporary domestic assignment or home-retention allowance. Either would allow the company to relocate an individual with negative equity by not selling the home and thus not having to deal with the debt obligations during the relocation process.

Barlow emphasizes how important it is to identify negative equity transferees before relocations are initiated.

"This is one of the ways SIRVA’s consulting services can help companies execute their relocation programs while minimizing the risks of the current real estate market," he continues. "Our obligation is to work with clients to identify every possible course of action in order to make a relocation happen."* It’s no secret that the current real estate market has had a significant impact on the relocation industry. Companies have had to re-evaluate and update their corporate relocation policies to overcome the challenges of the current market.

Barlow doesn’t wager a guess on when the market will turn, but he expects companies will be working through the challenges of the current real estate market for some time to come.

Unquestionably, reimbursement of brokers’ commissions and closing costs, in conjunction with the sale of a relocated employee’s home, creates taxable income. During the mid-1960s corporations created the first home purchase programs in an attempt to eliminate the creation of taxable income resulting from the reimbursement of these costs to the employee thus eliminating the creation of income as well as the cost to gross up that income to keep the employee whole.

In the typical home purchase program the employer, or a supplier retained by the employers (throughout this white paper, utilization of the word employer also refers to a relocation supplier retained by the employer), offers to purchase the employee’s home at “fair market value” as set by an appraisal process. The employer then allows the employee to test the market for a set period usually 30-60 days to see whether they can sell the home for more than the appraised buyout offer. If the employee elects to accept the buyout, then the employer (or relocation supplier) buys the home and closes with the transferee. Closing costs are not charged to the employee, as the employer is simply willing to take a deed for the home without any obligation incurred for such costs. The only exception to this is the first transfer tax (where it is assessed), which is the sole responsibility of the transferee. Further, if the employee lists the home for sale, he or she must have had the real estate broker sign an “exclusion clause,” so that the employee does not incur any obligation for real estate commission if the employee sells the home to the employer. Accordingly, no commission upon the sale from the employee to the employer is due.

If during the offer period the employee does find a buyer willing to pay more than the employer’s offer, the recommended procedure to maximize the tax benefits of using a compliant home sale program would be to use the Amended Value Sale process described below:

• Amended Value Sale: In an amended value sale, the employee informs the employer that a buyer is willing to pay more for the home and the employer (or relocation provider) then amends its fair-market-value offer up to the amount offered by that buyer.

If no buyer is procured by the employee, he or she will accept the offer from the employer. The employer then completes the sale with the employee and conducts a closing where prorations are made up to a certain date (generally the date at which the employee vacates the home). Thereafter, the employer attempts to resell the home and upon such resale all the costs of brokers’ commissions, closing costs and any losses on the resale of the home are incurred by that employer. read more.

To read the rest of the conversation, visit our resource library.

Accurate and timely accounting of relocation expenses has a far-reaching impact on the overall performance and success of a corporate relocation program, to both the company and the individual transferee.

The company benefits in several ways when a “best in class” expense management process exists, including:

• Efficient use of staff
• Sophisticated processes that track corporate “spend” from initiation to payroll reporting to the “true-up” of expenses (as a result of the tax gross up methodology used)
• Consistent policy interpretation
• Objective and accurate expense reimbursement audits
• Reduction of exceptions requested
• Consistent tracking of exception approvals
• Convenient, accurate, single-source management reports
• Efficient reimbursement via payroll or check processing
• Reduced risk of penalties from IRS tax audits
• Accurate gross-ups, payroll reporting and year-end tax true-up

The employee benefits from:

• Timely reimbursement of expense reports, normally within four days
• Information typically available online with easy access to policy, FAQs, and electronic expense reporting
• Convenience and speed in answering questions
• Year-end summary report including all expenses paid to or on their behalf
• Year-end reconciliation of relocation expenses, including an itemization of what is and what is not taxable and the tax gross up where applicable

Here are a few things to remember when instituting a cross-cultural awareness program into your corporate relocation program. For a full account of information regarding this service visit our resource library.

Don't forget the family
Just as spouses should be involved in the assignment selection process, they should be involved in training for global assignments. Some experts estimate that nearly 80 percent of all failed global (international) assignments can be linked to the spouse's inability to adjust to the new environment. Each member of the family faces special issues in the expatriate environment that should be addressed.

Other cultural resources
Organizations should consider utilizing their returning expatriates for help with cultural awareness initiatives. Employees who have already completed similar assignments can act as subject matter experts (SMEs) to help new expatriates learn business customs and how to navigate foreign business circles. SMEs can also prove invaluable in helping new expatriates learn the hierarchy in companies with which they will be dealing. It's important to note, however, that companies should not rely solely on employees to provide guidance to new expatriates. Relying exclusively on veteran expatriates can be problematic if the guidance reinforces cultural stereotypes or results in the new expatriate adopting the predecessor's bad habits. While other international assignees have a role to play in helping newcomers adjust, they should not replace professional consultants/trainers.

Alternative views
Although cross-cultural awareness is important, some might argue that its importance is just a hyped up myth. In actuality, on average only 30 percent of American managers sent on international assignment lasting from one to five years receive any cross-cultural training. It can be argued that managing is simply "managing," so where it is done is irrelevant. Another point of view is that any type of short-term cultural training would be ineffective because people can't learn to work and live in a foreign culture after only a few days (or even a few weeks) of training. Others argue that an understanding of a country's culture is something people assimilate over many years based on personal experiences in that specific culture. Others will say that corporate culture takes precedence over country culture. For example, a local employee working for a "bullish" American firm in Thailand might show traits of aggressiveness and conflict, which are not traits normally associated with the Thai culture. These traits, however, may be common in the corporate company culture of the employee's organization, causing the Thai employee to act outside his or her normal cultural dimensions.

Nevertheless, in order to be successful, an expatriate must be comfortable with his or her staff, colleagues, clients and business atmosphere--regardless of location. Cultural specialists also agree that to be successful in dealing with people from other cultures, expatriates need knowledge about the cultural differences (and the similarities) among work locations. The global employee of today's business world can only benefit from gaining cultural awareness, either through direct training or personal experience, which would lead to greater professional effectiveness and company performance. Read more

If you would like more information about cross-cultural education and how it can be added to your international relocation package/program, please contact our corporate relocation consulting team.

The five cultural dimensions (individualism vs. collectivism, power distance, uncertainty avoidance, masculinity vs. femininity, and time orientation) provides valuable insights into the cultural practices of different countries. This is the type of information that global relocation managers need in order to better understand cultural similarities and differences while on an international assignment. The ability to effectively communicate with people from all over the world is also key to a global manager's success. An expatriate will have to interact with all types of people in the assignment location, i.e. employees, customers, shareholders, regulators and vendors. Effective cross-cultural communication requires finding integrated solutions and compromises that allow decisions to be implemented by members of diverse cultures.

Cross-cultural training will provide relocating employees with a starting point for the preparation of working overseas or long distances, addressing cross-cultural communication and cross-cultural conflict resolution. For example, by knowing whether a society is individualistic or collective, an global manager would benefit by knowing what to do in cases of decision making, offering incentives or even scheduling meetings.

Knowing the cultural dimensions of the society he or she is working in, the expatriate will have a point of reference when investigating what to expect with respect to all management practices.

Depending on assignee needs, there are a variety of cross-cultural training programs available. Prices typically start at $1,500 to $3,500 for one to two day programs, and increase as the duration and complexity of the services increase. These costs are miniscule, however, when compared to the overall cost of a global relocation assignment, and could save your organization from absorbing the financial burden of a failed assignment due to the assignee's inability to adjust to his or her new location. Read more.

Employers who reimburse brokers’ commissions and closing costs on the sale of their employees’ homes, as part of a relocation, create taxable income for those employees. Since the Tax Reform Act of 1993, no deductions for such relocation expenses are available to employees, and, therefore, all such payments create fully taxable income. As an example, the average sales commission and closing costs on a $300,000 home are approximately $24,000 or about 8% of the home’s value. Reimbursing these fees creates a tax liability for the transferee of approximately $8,400 in state, local and federal taxes. For transferees in high-income brackets, this tax liability can run as high as $11,400 (slightly under 50% of the estimated closing costs).

Many employers, attempting to relieve the tax liability for their employees, reimburse their employees for these taxes. In the relocation industry, this is commonly referred to as “gross up.” On a $8,400 tax liability, however, the initial reimbursement creates $3,300 in additional taxes for the transferee. Most companies also gross up this amount. If $8,400 is fully grossed up, so that the employee has no net-tax liability, total tax reimbursements come to an average of $16,080 (about 67% of the broker’s commissions and closing costs reimbursed) and can reach over $21,230 (about 88.5% of the reimbursement) for employees in the highest tax bracket.

To eliminate the creation of taxable income these reimbursements create, certain employers have used home purchase programs – also called “buyouts” – designed to utilize the tax effect of the 1972 IRS Revenue Ruling 72-339.  In November of 2005, the IRS finally issued an updated and very detailed new Revenue Ruling (Rev Rul 2005-74) which reaffirmed that home sale programs if constructed in alignment with the examples in the Revenue Ruling would still obtain the tax benefits of Rev. Ruling 72-339. Unfortunately, according to the Employee Relocation Counsel (ERC), historically the cost of buyout programs average almost 17% of the acquisition price of the home. As a result, many corporations have never employed home purchase programs, while others have abandoned buyouts and are looking for other options…read more.

To read the rest of the conversation, visit our resource library.

SIRVA recently released a whitepaper dedicated to outlining our fixed-fee home sale program and how it can improve predictability and reduce real estate risk in a slow housing market. Below is an excerpt from this whitepaper, along with a link to the complete document.

The U.S. housing market is continuing to slow, and most economists and housing professionals predict the housing slump will linger longer than previous forecast. Total home sale costs become less predictable in sluggish real estate markets, and unpredictable home sale costs translate into unpredictable total relocation costs.

Relocation service companies offer several home sale programs, each with varying levels of risk, to help employers relocate transferees. Employers should consider the advantages of each program to determine the level of risk involved, and those employers who want a predictable and low-risk home sale program should consider a fixed-fee program.

For more information about our SIRVA’s fixed-fee program, view the complete whitepaper or contact us.

The question we left off with is when should I buy?

The answer, Now! I know that is the simple, easy answer, but it’s true. We have talked about rates continuing to be historically low and how there are plenty of products available in the mortgage market. So what is holding you back? Market timing? Are you trying to time the bottom of the market?  If so, stop. Like guessing stocks, the bottom of the real estate market will be reported months after it happens.

There have been major price adjustments that have taken place in most markets. Are we at the bottom, maybe? For many, this is close enough to the bottom and the opportunity to buy smart is now. There are great deals out there. Foreclosures and forced sales have provided wonderful price discounts and incentives in all home value ranges. Incentives include, seller paid closing costs, reduced rate programs, airline miles, paid principal and interest payments, high definition television sets, builder upgrades and even automobiles.

The fact is housing has become more affordable and bargain prices and incentives have given many consumers an opportunity to be smart about buying. I think the time is now. What do you think?

Relocating employees face challenges other buyers don’t. We will explore those issues next.

The decision to relocate an employee or new hire is the result of a great deal of effort and evaluation by a company and then by the prospective transferee. Agreeing to relocate at the request of an organization is not always an easy decision for an individual and his/her family to make. When describing your company’s corporate relocation policy it is important to remember that no matter what the circumstances are, agreeing to relocate will begin a stressful and sometimes life-changing process for most transferees. When crafting the relocation policy it is advisable to look beyond just describing the level of benefits that will be provided. You should also consider if the policy will assist and support the transferee when it is examined at the start of the relocation.

When writing a relocation policy there is a checklist of things to keep in mind when setting the right tone:

Optimistic Empathy
Start your company’s relocation policy with a supportive and positive welcome or introduction. Recognize what your company is asking transferees to do and acknowledge what they may face during the relocation process. Let the transferee know that your company understands the experiences of other transferees that have preceded them. Point out that understanding and following the relocation policy will minimize the disruption to the lives of the employee and their families. Close the introduction with words of appreciation and thanks for accepting the relocation.

Rational Processes and Requirements
When describing a process or requirement in your company’s policy, include the reasons behind the wording. Letting the transferee know the “why” can often increase voluntary policy compliance and reduce the level of enforcement needed. While relocation is a complex process and there are a number of hard rules that need to be followed, the tone of the policy as being one of mutual benefit is critical. The key is to avoid setting a negative and controlling tone that may offend the reader and create a pessimistic view of the relocation process and even perhaps of your organization.

Clarity and Firmness
A policy needs to be both clear in what it says and firm in how it says it. A policy should not give the impression that the components are subject to personal interpretation and/or can be negotiated. Some policies even state up front that the company is ”…please to provided you with a quality relocation program and exceptions are not anticipated.” While the tone needs to be supportive, the policy must still clearly state what benefits will or will not be provided. If the company style/format guidelines permit, write the corporate relocation policy in the second person voice. Using the pronouns “you” and “your” adds a personal tone to the policy. It also assists the employee in understanding what processes and procedures he or she must follow.

There is no such thing as a small relocation, but some companies don't require the large-scale support needed by those relocating hundreds or even thousands of employees annually. For these companies, SIRVA Advantage might be the answer. SIRVA Advantage is a program developed specifically for companies that relocate fewer than 30 employees per year. Currently, 120 companies participate in the program.

Through the program, companies have access to a dedicated service delivery team with specialized experience in small-volume relocations. Users don't have to be experts in relocation because all the details are handled for them. SIRVA can get a relocation program up and running quickly, and because they manage every aspect of the program, companies don't have to worry about the details. Transferees receive the full benefits of having a corporate relocation provider manage their transfer without the large corporate relocation budget.

"Companies that relocate a small number of employees have different needs than those of their large-volume counterparts," said Tim Callahan, senior vice president of sales and marketing SIRVA, Inc. "These companies may not be as familiar with the process or the complexities involved in different domestic or international relocation scenarios because they simply don't relocate employees as often."

Using SIRVA Advantage, companies can choose their services á la carte, which offers them the flexibility to develop a cost-effective custom program to fit their needs. SIRVA Advantage provides companies with guidance and assistance on a range of relocation issues, including:

• Domestic and international support
• Fixed-fee or traditional home sale programs
• Home marketing services
• Home finding and new home purchase services
• Home rental and temporary housing services
• Mortgage services
• Move management
• Tax and legal services
• Vendor contracts
• Online relocation tracking and reporting

One-on-one attention and interactive tools
The Advantage process starts with a consultation between our client and SIRVA Advantage's Business Development Manager, Jane Yanosko, to coordinate services tailored for each transferee - with this program a corporate relocation policy is not needed, SIRVA's abbreviated contract serves as the purchase order for all services authorized by the client. Once services are determined and the transfer process is initiated, the client and the transferee receive dedicated support from relocation counselors and associates focused on serving clients with fewer than 30 relocations annually.

In addition, transferees have access to MoveOurHome.com, a Web portal designed to help them take an active part in their move. MoveOurHome.com has up-to-the-minute relocation information configured on a per-client basis. On the site, transferees can view company-specific policy information and transferee-specific relocation program information.

"Transferees can submit, view and check the status of expense reports, communicate with their relocation counselor, and specify home and area preferences," continues Callahan. "They also have access to an online move organizer and essential destination information such as weather, crime statistics, school reports, population figures and other community information."* SIRVA Advantage was developed based on input from current customers and internal service teams, and is designed to provide a company will a small or no relocation program a high level of service on a more flexible, on-demand basis.

To learn more about SIRVA Advantage, contact Jane Yanosko, SIRVA Advantage business development manager, at 800.531.3840 or jane.yanosko@sirva.com.

Companies continue to report that their employees are increasing reluctant to relocate. While the usual factors of family and spousal employment are even more magnified in tough real estate markets, one additional factor may be the home sale program the company offers. When the transferee is provided with a “pure” BVO/BVX home sale program, there is no guaranteed home buyout offer. These BVO/BVX programs have generally worked well in good real estate times; but when so many sellers are chasing even fewer qualified buyers (as is now the case) these relocation programs become less successful.  Even when transferees do all the right things—prepare the property for sale and list it at or near the most probable sale price—they still struggle to find buyers. This creates more pressure for corporations to extend temporary living benefits.

In some cases, it may make sense for companies to consider converting BVO/BVX home sale programs to AVO/AVX programs with required mandatory marketing times (e.g. 90 or 120 days). Here the best of a BVO/BVX program is maintained with ample time to find an outside buyer but also with the added assurance that if a buyer cannot be found then a guaranteed buy-out offer can be generated. This can be thought of as an “emergency parachute,” which can be used to complete the sale of the home and thus the corporate relocation. Also keep in mind, AVO/AVX corporate relocation programs ensure compliance with the recent revenue ruling (2005-74) which approves the use of AVO/AVX programs while not specifically approving BVO/BVX programs.

Have you considered this or have you already switched to an AVO/AVX relocation program? Are your employees more willing to relocate?

The Panel:

Paul Klemme
President
SIRVA Mortgage

Peggy Love
President & CEO
Full Circle International Relocations, Inc.

Kelly Reiss, CRP
Senior Vice President / General Manager,
Eastern Region / Global Supply Chain
SIRVA Relocation

Connie Swenson
Senior Vice President, Relocation and Referral Services
Coldwell Banker Residential Brokerage / Arizona

Joseph K. Taylor, SCRP
Executive Vice President
Valuation Services, LLC

Kelly Reiss moderated today’s panel of mortgage, destination services, household goods shipment, and real estate supplier representatives.  The session gave clients the opportunity to speak directly with SIRVA’s suppliers, gain a better understanding of how the relocation supply chain operates, and hear a discussion of today’s real estate market from the supplier perspective.

 

The discussion began with new trends in the relocation industry.  Multiple suppliers cited declining markets as a significant trend emerging this year.  As Paul Klemme noted, the fourth quarter of 2007 ended with 108 U.S. markets identified as declining markets by Freddie Mac.  During the first quarter of 2008, this number has already risen to 205, and experts predict at least 100 more declining markets in the second quarter.  Additionally, the number of foreclosures on U.S. homes has risen dramatically in recent months.  The panel explained how lenders have reacted to the poor markets by decreasing the amount of overall lending and requiring higher down payments from home buyers.  As a result, the number of potential homebuyers has decreased, and relocating employees are having difficulty selling their homes.

 

While the real estate market lies outside of the suppliers’ control, the panel also discussed issues directly affected by suppliers, such as how they manage the quality of their services.  Several panel members emphasized the important role that employees play in ensuring consistently high quality.  For example, Connie Swenson explained that real estate agents use tactics such as designating certain specialists for SIRVA transferees.  If at any point the specialists lack the appropriate time to dedicate to SIRVA’s clients and transferees, realtors realize the importance of quickly hiring additional employees so quality does not suffer.  Adding to the idea that the quality of a supplier comes from its employees, Paul suggested that a company’s commitment to on-going training and pushing to make people better at what they do forms an essential element of a successful supplier.

 

Further discussions touched on other interesting topics such as overcoming a seller’s denial that they live in a declining market and the importance of securing a loan quickly in today’s economy.  In conclusion, Kelly requested that each supplier share one last piece of information with attendees; panelists final comments centered on the idea that clients, transferees, SIRVA, and every member of the supply chain must work together for a successful relocation.

The Panel:

 

Maura Carey, CRP

Vice President,

Strategic Accounts

SIRVA Relocation

 

Amy Carter

Global Supply Chain Manager

Intel Corp.

 

Peggy Love

President & CEO

Full Circle International

Relocations, Inc.

 

Sandy Palmer, SCRP

Manager, Corporate Relocation

Cargill, Inc.

 

While concrete, logistical items such as household goods shipments or home marketing assistance receive priority treatment in corporate relocation programs, for employees and their families, the “soft” transitional and settling-in services can make the difference between a successful and a failed relocation. As Maura Carey and her panel discussed, the complex process of relocation is hard on the entire family, not just the employee.

 

Relocating employees and their spouses want and arguably need several “touch points” during the relocation process, where they can receive assistance ranging from the concrete (locating daycare for small children) to the less tangible (ideas for helping teenagers adjust to their new surroundings). Companies can incorporate introductions to social and job networks, school assessments and recommendations, and specialty tours of shopping and cultural areas into their relocation programs in order to ease the family’s transition. Not only are such services relevant from a comfort standpoint, but they are also important from a business perspective. Effective destination services should increase transferee acceptance rates as well as provide a tangible, differentiated benefit for recruitment and employee development.

 

In order to illustrate some of the points made during the discussion, Sandy Palmer, manager of corporate relocation for Cargill Inc., reviewed a case study. During the last four months of 2007, Cargill conducted a Transition Support Services pilot program. One key finding was that transferees and their families unequivocally enjoyed and appreciated having someone to walk them through the settling-in process, check-in frequently and assist with the “soft” transition issues early in the assignment. Amy Carter, global supply chain manager for Intel, referred to the family’s first two weeks in the new location as the “Golden Window” of opportunity to make sure that they feel comfortable in the new surroundings. Failure to achieve this comfort can sour the entire assignment or even prevent the employee from accepting a future relocation assignment. Basic “niche” services such as stocking the refrigerator prior to the family’s arrival in the new home or getting the children involved in activities immediately can help the transition, Amy explained.

 

Building on the comments of the other panel members, Peggy Love, president and CEO of Full Circle International Relocation, Inc. asserted that destination services must involve two elements, local knowledge and a focus on the adjustment process for the family. Also, she emphasized the importance of customizing the transition program for each family because the success factors vary for each family’s situation.

 

Keeping in mind that Peggy cited family concerns as the biggest reason for an employee turning down an assignment, companies cannot overlook transition services when designing their corporate relocation programs. Even domestic transferees can receive tremendous help from a one to two day orientation in their new area.  When the employee and the family experience a smooth relocation transition, it not only mitigates stress and inconvenience, but it also allows the employee to focus more quickly on the reason for the relocation in the first place: the job.

 

What transition services are your transferees and assignees asking for to support their success in the new location?

Kathryn Cassidy

Vice President/General Manager, Global Assignment Services

SIRVA Relocation

 

Julian Yates

Vice President, Global Client Services

SIRVA Relocation

 

 

As its title illustrates, Julian and Kathryn’s presentation this morning explored the fundamentals of global relocation and the essential elements of a successful relocation.  After discussing the wide-ranging reasons for globalization itself—which range from a push for technology improvements to a desire to add diversity—Julian and Kathryn discussed why companies’ have the need to relocate employees internationally in the first place.  Many drivers of global relocation are similar to those for domestic relocation, such as relocating an employee to mange a special project.  As attendees learned, however, global relocations present new challenges not present in domestic relocations.

 

Relocating an employee and his or her family internationally simply creates more room for problems to arise.  As Julian and Kathryn explained, issues can stem from administrative tasks, such as obtaining visas and work permits, or from the many aspects of situating the transferee’s family in the new location, such as finding schools for the children or employment for the spouse.  Furthermore, relocating an employee globally versus domestically presents more cultural, financial and logistical concerns that the company must consider.  Despite the challenges of relocating employees internationally, Julian and Kathryn provided attendees with best practices that companies can use to ensure successful global relocations for their employees. 

 

Developing and maintaining a strong global relocation policy topped their list as the most important factor for successful global relocations.  In addition to employing a good policy as the foundation for an effective global relocation, Julian and Kathryn explained that careful candidate selection can improve the success of global relocations.  By screening possible candidates and selecting only adaptable, flexible people for global assignments, companies can avoid potential problems from the start.  Using benchmarks, performing cost estimates and analyses, using proven providers, and having a repatriation and reintegration plan were just a few of the additional best practices Julian and Kathryn gave attendees to keep in mind as they explore global relocation within their own companies.

 

What challenges has your company overcome in dealing with global relocations?

David Barlow, SCRP, GMS
Senior Vice President, Client Support Services
SIRVA Relocation

Hank Roth
Senior Counsel
SIRVA Relocation

This morning’s attendees found David Barlow and Hank Roth’s presentation, “Reducing Real Estate Risk in Your Corporate Relocation Program,” extremely relevant to the current real estate environment.  David and Hank presented the discouraging statistics that illustrate the poor condition of the housing market.  For example, at the end of January, housing inventory rose 5.5%, and existing home sales fell 23.4% from January 2007.  Additionally, January’s 233,001 foreclosures were an increase of 57% from the year prior.  January was also the month with the second-highest number of foreclosures on record behind August 2007.  Since June 2006, home prices have declined in all but three of the top 20 U.S. real estate markets, Seattle, Portland, OR, and Charlotte, NC.  Clearly, the “good times” of the housing market are over.

After the housing prices dramatically increased from January 2000 to June 2006, the unfavorable state of the current real estate market leaves the question of what caused the real estate markets to fall.  David and Hank discussed in-depth the reasons for the real estate market landing in its poor position today.  Various factors contributed to the downturn of the real estate market: speculators created artificial demand only to leave the marketplace entirely;  the Federal Reserve tightened credit by raising borrowing rates from 1.25% (June 2004) to 5.25% (June 2006);  owning a home became less affordable as the gap between home prices and income widened; manufacturing jobs in the Midwest took a huge blow; and homeowners were sold loan products that only met short-term wants and needs, which left them unable to sell or refinance due to lack of home appreciation.  Furthermore, investors pulled out of sub-prime mortgage markets after experiencing large losses, which eliminated 20% of the market in a single week during August 2007 due to the product, qualifying and liquidity changes this move caused.

The poor housinge market and the resulting real estate risks present a genuine problem today for companies with relocation policies as they face difficulties in selling the homes of their relocating employees.  In order to minimize this risk, David and Hank presented attendees with the “SIRVA Dozen” consisting of 12 real estate risk controls for companies to implement:

1. Use qualified real estate agents at both departure and destination
2. Require two broker market opinions (BMAs)
3. Delay appraisals to provide opportunity to market home before incurred costs
4. Support a mandatory marketing period (at least 60 days)
5. Establish list-price caps; 105% or less
6. Modify a BVO/BVX to an AVO/AVX
7. Tie benefits to desired behavior
8. Require full property disclosure and educate transferees on ineligible properties
9. Require active transferee marketing participation
10. Evaluate ALL offers
11. Require mandatory home finding assistance
12. Develop home sale programs that fit your company’s risk profile

Which of the SIRVA Dozen has been the most helpful for reducing real estate risk in your company?