Tag Archives: rental units

Landlords can’t ask for ‘last month’s rent’ plus security deposit, thanks to new rent laws

Your security deposit is not supposed to be used as last month’s rent.

It is now illegal in New York state for landlords to require you to pay last month’s rent in addition to a month’s security deposit when you sign a lease. New rent reforms clearly state that in nearly all cases, “no deposit or advance shall exceed the amount of one month’s rent.”

Nor can landlords require renters with bad credit histories or annual salaries less than 40 to 45 times the monthly rent to pay multiple months of rent up front. In the past, they’ve typically asked for anywhere from three to 12 months worth of rent.

The new law lowers financial barriers to renting an apartment in New York City, a good thing for most renters. But it complicates things for renters who don’t meet the landlords’ income requirements (including students and retirees), have a blemish on their credit record or no credit history at all, such as international renters.

 

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Elizabeth Stone, the managing agent at Stone Realty Management, says the protections may backfire. “We are going to require guarantors or just reject the tenants outright. So those that have lower incomes are going to miss out because landlords are not going to take the risk,” she says.

A lease guarantor is someone who lives in the tri-state area and earns an annual salary of around 80 times the monthly rent. Another option is an institutional guarantor like Insurent (a Brick Underground sponsor), which charges renters a fee for the service, usually 70 to 85 percent of one month’s rent for U.S. renters and 90 to 110 percent of one month’s rent for international renters without U.S. credit history for the 12 to 14 month lease.

What’s the difference between a security deposit and last month’s rent anyway?

Your security deposit covers the cost of repairing damages to your apartment, while your last month’s rent is pretty much what it sounds like. The two are not supposed to be interchangeable.

While the security deposit is capped at an amount equal to one month’s rent, it doesn’t change the fact any rent paid in advance and the deposit are different things and a landlord is entitled to deduct money from the deposit for any costs associated with damage to the apartment when a tenant moves out.

Your lease will make clear what the security deposit is for; it’s designed to make sure you leave a clean, undamaged apartment with a working set of keys so the landlord can easily rent the unit to someone else.

In most buildings with more than six units, the landlord is required by law to put the security deposit in escrow, giving the tenant more protections than if the money was in a private account.

The practice of not paying the last month’s rent

Some New Yorkers claim they never pay their last month’s rent, figuring the security deposit can stand in as the rent.

Adam Frisch, managing principal at Lee & Associates Residential NYC, a real estate company representing building owners in Manhattan, says a tenant might tell a landlord, “I’m not going to initiate the final rent payment and you can keep my security and there’s nothing you can do about it.” He says they are right, “there isn’t much we can do about it,” but if there’s damage to the apartment, a landlord would be entitled to sue to recover the costs.

“Tenants have gotten away with this and will continue to do so, but they are not supposed to,” he says. Certainly, in situations where the apartment needs nothing more than a lick of paint, there’s no loss to the landlord.

Getting landlords and tenants in sync

In the past, the security deposit was legally required to be returned in a ‘reasonable’ time frame, a vague term that gave renters no reassurances. Landlords must now pay back the security deposit within 14 days of the end of the tenancy.

This has some landlords furious, saying the timing is too tight to assess and price out any damage or close the escrow account where the security is held. They are also required to do walk-throughs at the beginning and end of a tenancy so any damage can be properly itemized.

If walk-throughs allow renters to work towards correcting any issues and they know they will get their deposit back promptly, it’s possible landlords may find it cuts down on the practice of using the deposit as the last month’s rent.

Stone disagrees, pointing out the kind of tenant who makes a landlord take the security deposit as the final rent payment is the same kind of tenant who doesn’t take care of their rental during their tenancy.

“Limiting how much money [a landlord] can take up front and limiting the security deposit is designed to stop tenants being excluded from some of these apartments but I don’t think in practicality, it will work for them,” she says.

Source: BrickUnderground -DECEMBER 23, 2019  BY EMILY MYERS

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Ontario’s rental vacancy rate is starting 2020 at a near record low

Mississauga Toronto condo prices<img class=”aligncenter size-full wp-image-196480″ src=”https://d3exkutavo4sli.cloudfront.net/wp-content/uploads/2019/10/Mississauga-Toronto-condo-prices.jpg” alt=”Mississauga Toronto condo prices” width=”1024″ height=”683″ />

Photo: James Bombales

New year, no vacancy. Renters in cities across Ontario will spend another year struggling to find rental housing as prices continue to rise in the face of tight market conditions.

In 2019, the vacancy rate was 1.6 percent and it will likely drop further through 2020 to a near record low of 1.5 percent, according to Central 1 Credit Union economist Edgard Navarrete. For context, the vacancy rate for Ontario’s rental market averaged 2.6 percent between 1991 and 2018.

In his 2019-2022 housing forecast published at the end of 2019, Navarrete noted that the province has seen a substantial uptick in completed new rental units over the last three years. Through the same 1991 to 2018 period, the average number of new rental units added to the market was 1,500. From 2017 to 2019, the average increased to 7,000 units.

The trouble is that increase still doesn’t satisfy the demand for rentals in some of the province’s most competitive markets, especially Toronto, which is said to have the worst rental supply deficit in Canada.

“Government investments in rental housing will continue to add to the rental universe but expect [the province’s] rental vacancy rate to remain stubbornly lower than the long-term average due to continued strong demand from immigrants settling in Ontario and existing renters opting to remain in rental longer until they have a sufficient down payment to qualify for a mortgage loan,” wrote Navarrete in the Central 1 Housing Forecast.

Unfortunately, the main takeaway here for Ontario renters is monthly rents will continue to climb above inflation as long as this sharp disparity exists between rental supply and persistent demand. Navarrete singles out Toronto, Ottawa-Gatineau, London, Kitchener-Cambridge-Waterloo and Hamilton as markets where rental prices will log especially steep increases and bidding wars will keep intensifying. These cities will feel the strain on their rental markets particularly acutely because they are set to absorb the most new residents to the province.

There is hope for a rental unit supply uptick in the next few years, but for those looking for a new rental this year, it’s unlikely to offer much relief. The provincial government under Premier Doug Ford rolled back the rent control measures introduced by the Wynne Liberal government just a couple years earlier. With more flexibility to price rental units in response to market demand, investors are more likely to see condos as a solid long-term moneymaker and purchase units to add to the rental market.

These investor-owned condos are known as the “secondary rental market” since they are not built for the sole purpose of being added to the rental pool. Purpose-built rental units are known as the primary rental market.

The caveat is that the positive market changes this policy shift from the Ford government intended to inspire won’t be felt for at least a few years.

“If we see a large number of investors entering the market today, with the average completion time of high-density housing such as condo apartments anywhere from two to three years from the time shovels hit the ground, it wouldn’t be until after 2022 when the increased rental market supply will alleviate some of the pressures from the primary rental market,” wrote Navarrete.

Source: Livabl.com –

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The Top 8 Real Estate Calculations Every Investor Should Memorize

investment-portfolio
Despite what many of us math-allergic folk would prefer, real estate does involve some math. Luckily, most of the formulas are simple and straight-forward. In fact, if you can master the calculations below, you should be just fine.

The Top 8 Real Estate Calculations Every Investor Should Memorize

Cap Rate

Net Operating Income / Total Price of Property

Example:

NOI: $25,000

Total Price (Purchase + Rehab): $300,000

$25,000 / $300,000 = 0.083 or an 8.3 Cap Rate

This calculation is mostly used for valuing apartment complexes and larger commercial buildings. It can be used for houses and small multifamily too, but operating expenses are erratic with houses (because you don’t know how often and how bad your turnovers will be).

Related: The Investor’s Complete Guide to Calculating, Understanding & Using Cap Rates

You want to have a cap rate that is at least as good, preferably better, than comparable buildings in the area. I almost always want to be at an 8 cap rate or better, although in some areas, that’s not really possible. And always be sure to use real numbers or your own estimates when calculating this. Do not simply use what’s on the seller-provided pro forma (or as I call them, pro-fake-a).

Rent/Cost

Monthly Rent / Total Price of Property

Example:

Monthly Rent: $1,000

Total Price of Property (Purchase + Rehab): $75,000

Rent/Cost = $1,000 / $75,000 = 0.0133 or a 1.33% Rent/Cost

This is a great calculation for houses and sometimes small multifamily apartments. That being said, it should only be used when comparing the rental value of like properties. Do not compare the rent/cost of a property in a war zone to that in a gated community. A roof costs the same, square foot for square foot, in both areas. And vacancy and delinquency will be higher in a bad area, so rent/cost won’t tell you what your actual cash flow will be. The the old 2% rule can lead investors astray, and they shouldn’t use it. But when comparing like properties in similar areas, rent/cost is a very helpful tool.

According to Gary Keller in The Millionaire Real Estate Investor, the national average is 0.7%. For cash flow properties, you definitely want to be above 1%. We usually aim for around 1.5%, depending on the area. And yes, I would recommend having a target rent/cost percentage for any given area.

Gross Yield

Annual Rent / Total Price of Property

Example:

Annual Rent: $9,000

Total Price (Purchase + Rehab): $100,000

Gross Yield = $9,000 / $100,000 = .09 or a 9% gross yield

This is basically the same calculation as above but flipped around. It’s used more often when valuing large portfolios from what I’ve seen, but overall, it serves the same purpose as rent/cost.

Debt Service Ratio

Net Operating Income / Debt Service

Example:

NOI: $25,000

Annual Debt Service: $20,000

Debt Service Ratio = $25,000 / $20,000 = 1.25

This is the most important number that banks look at and is critical for getting financing. Generally, a bank will look at both the property’s debt service ratio and your “global” debt service ratio (i.e. the debt service ratio of your entire company or portfolio).

Anything under 1.0 means that you will lose money each month. Banks don’t like that (and you shouldn’t either). Generally, banks will want to see a 1.2 ratio or higher. In that way, you have a little cushion to afford the payments in case things get worse.

Cash on Cash

Cash Flow / Cash In Deal

Example:

Cash Flow (Net Operating Income – Debt Service): $10,000

Cash Into Deal: $40,000

Cash on Cash: $10,000 / $40,000 = .25 or 25%

In the end, this is the most important number. It tells you what kind of return you are getting on your money. In the above example, if you had $40,000 in the deal and made $10,000 that year, you made 25%. This is a critical calculation not only when it comes to valuing a property, but also when it comes to evaluating what kind of debt or equity structure to use when purchasing it.

The 50% Rule

Operating Income X 0.5 = Probable Operating Expenses

Example:

Operating Income: $100,000

Operating Expenses = $100,000 * 0.5 = $50,000

This is a shorthand rule that I judge to be OK. It is for estimating the expenses of a property. Whenever possible, use real numbers (i.e., the operating statement), but this is good for filtering out deals that don’t make sense. Just remember, a nicer building will have a lower ratio of expenses to income than a worse one and other factors, like who pays the utilities come into play. Don’t simply rely on this rule.

Related: Rental Property Numbers so Easy You Can Calculate Them on a Napkin

The 70% Rule

Strike Price = (0.7 X After Repair Value) – Rehab

inbox

After Repair Value: $150,000

Rehab: $25,000

Strike Price = (0.7 X $150,000) – $25,000 = $80,000

This is another rule like the 50% rule, although I think this one is better. This one is for coming up with an offer price. Always crunch the numbers down to the closing costs before actually purchasing a property. But if you offer off the 70% rule, you should be just fine as long as your rehab estimate and ARV (after repair value) estimates are correct.

Comparative Market Analysis

Unfortunately, there’s no real calculation for this. It’s mostly used for houses, and it’s all about finding the most similar properties and then making adjustments so that a homeowner or investor would find each deal identical. The MLS is by far the best for this, but Zillow can work too (just don’t rely on the Zestimate). For a more detailed explanation, go here.

In the end, the math isn’t that bad. No rocket science here luckily. Instead, there are just a few handy calculations and rules to evaluate properties before purchase and analyze their performance afterward. Memorize these, and you should be fine.

What formulas do you use to analyze your deals? Any calculations you’d add to this list?

Let me know with a comment!

Source: BiggerPockets – Andrew Syrios
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The Pros and Cons of Investing in Rent-Controlled Properties

morning-routine
The mention of rent control is enough to make most apartment investors shudder—the notion of artificially capping rents flies smack in the face of American capitalism. But there are several misconceptions about rent-controlled properties. For some, they can be a great addition to their investment portfolios.

 

The Cons of Rent Control

Rent control regulations can be difficult to navigate.

Rent control regulations can be regulated at either the city or state level—or both. The state of California, for instance, allows rent control, but the decision is made at the local level as to whether to adopt a rent control policy.

It’s not uncommon for two adjacent communities to have different policies, one with rent control and the other not. The landscape is continuously evolving; investors need to track these regulations closely as there are routinely efforts (like ballot measures) to change policies.

Related: Rental Owners Everywhere Should Be Concerned About California’s Push for Rent Control—Here’s Why

Your ability to increase rents is capped each year.

Depending on the community, it’s possible that the rent control policy will prohibit landlords from raising rent more than 2 percent each year–in other words, rent increases essentially just keep pace with inflation. This may be completely out of line with market averages, particularly in hot-market cities, where rents have experienced double-digit increases over the past several years.

This ceiling can make deals less attractive to investors in search of strong cash flow.

apartment-complex

Rent controlled properties experience lower turnover.

Typically, low turnover is a good thing as far as apartment investors are concerned. However, some rent control policies stipulate that rents are capped each year until an apartment becomes vacant, at which point the landlord can increase the rent to market rate and then the new cap takes place each year thereafter under the existing tenancy.

To bring units to market rate, they must turn over at least every few years–but tenants in rent-controlled units tend to stay longer than average (sometimes 30-plus years!).

There’s less incentive to improve properties.

One unintended consequence of rent control is that, unable to increase rents, there’s no incentive to invest in a property beyond routine repairs and maintenance. Over time, this can lead to a deterioration (and therefore, value) of the property.

If you decide to sell in the future, your pool of buyers may be smaller.

Given the challenges associated with rent-controlled properties, some investors will never even look at these deals. This inherently shrinks the pool of potential buyers when it comes time to sell.

Related: Due Diligence: What Every Asset Requires Prior to Purchase

The Pros of Rent Control

Rent-controlled properties tend to have lower acquisition costs.

Investors typically use the current rent roll as a major factor when determining the value of a property. Rent-controlled properties, particularly if multiple units are below market rates, are therefore valued lower than what the free market would bear.

This results in lower acquisition costs, which may be a good way for an investor to enter a market they’d otherwise be priced out of by investing in a rent-controlled property.

You CAN increase rents.

Contrary to popular belief, landlords CAN raise rents in a rent control environment—they’re just limited as to by how much each year.

For instance, Oregon just passed a statewide rent control ban this past year that caps rent increases at 7 percent plus inflation annually. That’s a total of 10.3 percent this year. Statewide, rent growth has slowed to less than 2 percent a year since 2016, so the new law makes little difference to landlords looking to increase rents.

Man search apartments and houses online with mobile device. Holiday home rental or real estate website or application. Imaginary internet marketplace for vacation lodging or finding new home.

There are usually policies in place to challenge the cap.

No community wants to see their housing stock decline. To prevent this, most rent control regulations contain provisions that allow investors to challenge the cap when making substantial renovations or improvements to the property.

Rent-controlled properties tend to have consistent cash flow.

Because rents are lower, and because tenants tend to stay in place longer, rent controlled properties tend to have consistent cash flow. What’s more, tenants in rent-controlled properties are less likely to move out during a downturn, which helps investors weather the ups and downs that are inevitable over the course of multiple real estate cycles.

Ultimately, the decision as to whether to invest in rent-controlled properties is a personal one. Rent control regulations can vary so widely–from highly restrictive policies in cities like New York and Los Angeles, to the more flexible rent control policy recently adopted in Oregon.

Anyone considering investing in an area with rent control should spend the time needed to understand the nuances of the policy. One misstep in violation with a rent control law could cripple an otherwise promising investment.

 

Would you invest in a rent-controlled property? Why or why not?

 

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How to Buy a Second Home (Hint: It Won’t Be Like Your First)

As a home buyer, you braved the real estate buying circus when you bought your first home, and you have a great place to show for it. You’ve trudged through the open houses, experienced exactly how stressful closing can be, and dealt with legions of moving trucks. And still, a part of you wants something more: an escape in the mountains, a beach cottage, or a pied-à-terre in the city. You want to buy a second home.

With current mortgage rates at a historic low, you might be tempted to jump in. But beware; buying real estate as an investment property or second home won’t be the same as your first-time home-buying experience. Here are some differences and advice to keep in mind.

First things first: Can you afford to buy a second home?

If you scored a sweet deal on a mortgage for your primary residence, don’t expect lenders to give you the same offer twice.

“Second-home loans generally require more down payment and a better credit score than owner-occupied home loans,” says John Lazenby, president of the Orlando Regional Realtor Association.

You may have to pay a higher interest rate on a vacation home mortgage than you would for the mortgage on a home you live in year-round, and lenders may look closely at your debt-to-income ratio. Expect a lender to scrutinize your finances more than when buying a single-family primary residence.

“Lenders look carefully to ensure that second-home buyers are financially capable of paying two mortgages,” Lazenby says.

Make sure to review your budget with a second mortgage payment in mind, and make adjustments if necessary after you know what interest rate you will receive. And make sure you can afford the real estate down payment—a healthy emergency fund and cash reserves are essential if an accident or job loss forces you to float two mortgages at once.

Evaluate your goals

Understand exactly how you plan to use the property before you sign on the dotted line.

“Buyers should consider their stage of life and that of their children to ensure they are going to actually use the home for the amount of time that they’re envisioning,” Lazenby says. “A family with young children may find that their use of a second home declines as the kids grow older and become immersed in sports.”

If you’re certain you’ll get enough use and enjoyment out of your new purchase, go for it—but make sure to carefully consider the market.

For most homeowners, a second home shouldn’t be a fixer-upper. Look for homes in high-value areas that will appreciate over time without having to sacrifice every weekend to laborious renovations on your “vacation home.”

Buying in an unfamiliar area? Take a few weekend trips to make sure it’s the right spot for you. In the long term, you’ll want it to be a good investment property, as well as a place to play. Pay close attention to travel times, amenities, and restaurant and recreation availability, otherwise you might spend more time grousing than skiing and sipping wine. And make sure to choose a knowledgeable local real estate agent who will know the local real estate comps and any area idiosyncrasies.

Understand your taxes

You may be familiar with a bevy of home credits and tax breaks for your first home, but not all of them apply to your second.

For instance: You might be planning on using your new home as a vacation rental when you’re out of the area. If that’s the case, you need to calculate the return on your investment property purchase price that you can expect over the course of a year. How much can you charge per night or per week for your rental property? How many weeks will you rent out the property? And what expenses will you incur?

“Property tax rules and possible deductions for second homes used as rentals are complicated and vary widely, depending on both the number of days per year that the owner occupies the home and the owner’s personal income level,” says Lazenby.

vacation home offers more flexibility to buy based on your potential property tax burden—for instance, if you’re looking to buy in an area of high real estate taxes, consider widening your real estate search to another county, which can save you thousands of dollars. Your real estate agent should be able to help you find property you as a buyer can afford.

Lazenby recommends consulting with a tax professional about tax implications, especially if you’re planning on renting out the house.

A vacation home you use part time and also rent out may be considered rental property for tax purposes, depending on personal-use days as the homeowner, and the number of days you rent it out. If you rent out the vacation property for more than 14 days in a year, you must report the rental income on Schedule E of your individual tax return, and you can deduct the rental portion of expenses such as mortgage interest and property taxes. However, renting out your home as a short-term vacation home for 14 days or less in the year means you cannot deduct rental expenses, but the income from your renters is tax-free.

Jamie Wiebe writes about home design and real estate for realtor.com. She has previously written for House Beautiful, Elle Decor, Real Simple, Veranda, and more.
Source: Realtor.com –  | Aug 28, 2019
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New short-term rental regulations you need to know if you own property in Toronto

New short-term rental regulations you need to know if you own property in Toronto Image

The City of Toronto will be moving forward with the new short-term rental regulations that were proposed and approved back in late 2017.

The Local Planning Appeal Tribunal recently dismissed the appeal of the City council-approved zoning regulations for short-term rentals, so Toronto will soon have a different rental landscape.

“This is good news for Toronto residents and a step in the right direction when it comes to regulating short-term rentals and keeping our neighbourhoods liveable,” said Mayor John Tory in a release. “When we approved these regulations in 2017, we strived to strike a balance between letting people earn some extra income through Airbnb and others, but we also wanted to ensure that this did not have the effect of withdrawing potential units from the rental market. I have always believed our policy achieves the right balance which in this case falls more on the side of availability of affordable rental housing and the maintenance of reasonable peace and quiet in Toronto neighbourhoods and buildings.”

There are a few new rules that will be implemented soon. Short-term rental will be permitted across the city in all housing types, but only in principal residences (and both homeowners and tenants can participate). If you live in a secondary unit, you can rent out your home short-term, but only if the secondary unit is your primary residence.

You’ll be able to rent up to three bedrooms or your entire residence. If renting your entire home while you are away, you can do so for a maximum of 180 nights a year. If you are renting out any part of your home, you must register with the City and pay a $50 fee.

For companies like Airbnb, they will have to pay a one-time fee of $5,000 to the City, plus $1 for each night booked. This way, the city is benefitting from the success of a company that is leveraging local housing to make a profit.

There will also be a Municipal Accommodation Tax of 4% that you will have to pay on any short-term rentals less than 28 consecutive days. Companies like Airbnb will be able to volunteer to collect and pay the MAT on behalf of their users.

It seems like these changes will mostly impact the condo rental market. Most investors renting their condo units through companies like Airbnb are not renting out their principal residence; it’s usually a secondary residence. Without short-term rental income as an option, we could see a slight drop in investors in the new condo market. Fewer investors means less sales and more supply for end-users. This could result in price moderation or even a price drop in the pre-construction market.

We could also see some condo units hitting the resale market and long-term rental market, as investors look to other options to profit off their properties.

There will be a transition period as investors figure out what to do with their condo units, but in the long-run, this change seems to make sense in that it delivers more supply to the people who are living in the city, as opposed to just visiting.

Source:  Newinhomes on Nov 20, 2019

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Is investing in Canadian real estate still viable?

When a series of tax and mortgage rules was introduced in Canada in 2016 to prevent a housing market bubble, activity slowed down significantly in the years that followed. Given the current circumstances, is it still viable to invest in property?

In a think piece in Macleans, market watcher Romana King said even with fears of a global recession, real estate is still a smart way to invest.

“For investors, the key to making strategically smart decisions is to consider the underlying economic factors that impact your investment,” she said.

King said the housing market could climb out of negative growth forecasts this year. Citing figures from the Canadian Real Estate Association, she said the national sales activity was on target to increase by 5% in 2019 and could expand further by 7.5% in 2020.

“Canada boasts strong population growth, and government budgetary decisions are acting as stimulants for the national housing market, all of which point to a healthy future for Canada’s real estate market,” she said.

Investing in real estate, however, is not without risks. For investors, it is crucial to know some strategies to lessen the potential risks, King said. The first is to be aware of additional debt. Investors must keep an eye on their credit scores and pay bills on time.

“Most investors will require a mortgage to purchase rental real estate. This can alter your debt ratios, which can impact whether or not you get the best mortgage or loan rates. Talk to an advisor before applying for new credit or renewing a current loan,” King said.

Another must-have strategy is budgeting. King said investors need to control how much they spend on maintenance and repairs to ensure that their rental properties are cash-flow positive.

“An investor needs to budget for a contingency fund. If the anticipated monthly rent covers all monthly expenses, including a repair fund, then the property is cash-flow positive, which is fundamental for a good investment,” she said.

Getting insurance could also mitigate the risks of catastrophic events.

“Virtually all insurance policies will cover a catastrophic loss of a building, but as a real estate investor, you must also consider the loss of income due to damage or destruction. A comprehensive rental policy will provide a landlord with income to replace lost rent at fair market value,” she said.

Overall, investors need to treat real estate investing as a business. Citing Edmonton-based investor Jim Yih, King said the key to successful real estate investing is positive cash flow, and not just the purchase price and the potential sale price.

Source; Canadian Real Estate Magazine – by Gerv Tacadena 12 Nov 2019
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