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CRE Florida Partners Funds First Mortgage For Boynton Beach Client

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CRE Florida Partners Capital Markets is proud to announce the successful closing and funding of a first mortgage loan collateralized by a  ±42,000-square foot single-tenant/owner-user industrial warehouse property located in Boynton Beach.

The $2.5 million loan was made at a 48% loan-to-value ratio and contained a 10-year term with a 25-year amortization schedule.  The loan was procured and placed by Greg Laskody, CCIM, and was ultimately closed by a local private bank that will portfolio the loan on its balance sheet.

CRE Florida Partners (CRE) is a full-service commercial real estate company based in Boca Raton, Florida.

CRE’s Managing Partner Michael Rauch commented, “Debt placement is becoming a critical component for our clients in this very competitive lending market. Having the ability to source full-service solutions is critical to our clients’ success.”

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Delray Beach Community Redevelopment Agency Green Lights $100M Mixed-Use Project

The Delray Beach Community Redevelopment Agency approved plans for AltaWest, a $100 million mixed-use project on West Atlantic Avenue.

The CRA board OK’d the sale agreement with BH3 Management for 7.4 acres at 600 to 800 West Atlantic Avenue. The developer has 30 days from the date of obtaining a construction permit to close on the land, according to the South Florida Business Journal.

Aventura-based BH3, led by Dan Lebensohn and Greg Freedman, was the winning bidder of six groups for the public-private partnership project. The development will include 43,000 square feet of ground floor retail, 21,600 square feet of professional office space, a 33,000-square-foot grocery store, 165 residential units totaling 272,242 square feet, 744 parking spaces, about 45,000 square feet of public space called “Frog Alley” and up to 30 workforce housing units, the latter of which includes 18 affordable housing units being built on an adjacent site.

The site is in an Opportunity Zone, which means the developer can qualify for a major federal tax incentive for developing the project. The federal program allows developers and property owners to defer and possibly forgo paying some of their capital gains taxes, or taxes resulting from the sale of certain assets.

While BH3 was the only bidder to not offer money in exchange for the land, the company said it plans to spend the most on development.

BH3 has to put $250,000 into escrow. The city commission still needs to grant the project final site plan approval.

 

Source: The Real Deal

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Industrial Buildings In Riviera Beach Opportunity Zone Sell For $11.7M

Interstate Industrial Park

A three-building portfolio of industrial property within an Opportunity Zone in Riviera Beach sold for $11.7 million, or $73 per square foot.

When the sale closed, the buildings were 98 percent leased to tenants including the City of Riviera Beach, Saf-Glas and Palm Beach Laundry. Interstate Industrial Park Holdings, LLC, led by Harry Spitzer, bought the three-building portfolio from The Silverman Group of Palm Beach.

The 160,302-square-foot portfolio includes buildings at 6555 and 6557 Garden Road and 3541 M.L.K. Jr. Boulevard in Riviera Beach. The one-story building at 6555 Garden Road was developed in 1987 on a three-acre site. Two one-story buildings at 6557 Garden Road and 3541 M.L.K. Jr. were developed in 1968 on a two-acre site.

Located equidistant to the Interstate 95 interchanges at 45th Street and West Blue Heron Boulevard, the industrial buildings are within the Census Tract 13.02 Opportunity Zone. Investors in Opportunity Zones can defer payment of federal taxes on capital gains.

“The fact that the assets are located in an Opportunity Zone, potentially affording tax advantages, drove further interest from potential buyers,” Scott O’Donnell of brokerage firm Cushman & Wakefield said in a prepared statement.

Cushman & Wakefield’s Capital Markets Team, along with Robert Smith and Kirk Nelson, negotiated the sale of the three buildings on behalf of The Silverman Group. Adam Robbins of ARC Equities, LLC, represented Interstate Industrial Park Holdings, LLC.

 

Source: The Real Deal

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CEOs Agree Tax Breaks Needed To Lure Businesses To Florida

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The Miami Herald CEO Roundtable, a weekly feature in the Miami Herald Business Monday, ask South Florida CEOs a question each week.

This week’s question is: Should the State of Florida and local governments be offering tax breaks and incentives to lure businesses?

Here are answers from some prominent South Florida CEOs:

  • Dr. Edward Abraham, executive vice president for Health Affairs of the University of Miami and CEO of UHealth – the UM Health System

Because these incentives are offered by other states and local governments, we will need to do so as well. It will be important, however, to ensure that the incentives offered are appropriate and that the true economic benefits of the business being located here are clear and compelling.

  • Jim Angleton, CEO for Aegis FinServ Corp.

Absolutely, and more: Tax Opportunity Zones, Empowerment Zones, CRA, and play up LatAm Hub. We need to focus upon technology, cyber, AI tax incentives, real community services and favorable talent pool.

  • Wael Barsoum, M.D., CEO and president of Cleveland Clinic Florida

Florida is a relatively low tax state, but we tend to have higher local taxes. Tax incentives are one way to help level the playing field.

  • Agostinho Alfonso Macedo, president and CEO of Ocean Bank

Tax incentives to lure new business have become part and parcel of the arsenal that economic development agencies such as the Beacon Council use to attract new businesses. They are needed and should be maintained.

  • Bill Diggs, president, The Mourning Family Foundation

Of course we should. It is more a matter of what those incentives should include. One area that we must do a better job with is our film and motion picture industry opportunities. With the attraction of Florida and Miami weather, we should have a more robust film industry.

  • Brett Beveridge, CEO and founder of The Revenue Optimization Companies (T-ROC)

I am a believer in offering reasonable incentives including tax breaks to attract new businesses and/or entice the expansion of current operations in South Florida for several reasons. First, although South Florida does have a thriving small business and start-up community, we don’t have many large corporations that employ thousands upon thousands of people. Second, and as a defensive measure, in order for us to keep the few large businesses we have and those that are growing rapidly and making decisions on where to locate, we need to be competitive. And third, we want to entice and encourage growth of our current businesses that might not have invested otherwise. All three of these constituencies will add employees that will live and work in South Florida. They will pay property and sales taxes, more jobs will be created, and we will be able to improve our long-term infrastructure. That said, we have to negotiate long-term and rock-solid agreements that guarantee those benefits will actually happen in exchange for the incentives that we provide.

  • Chelsea Wilkerson, CEO of Girl Scouts Tropical Florida

Yes, the state of Florida and local governments should be able to offer tax breaks and incentives to lure business when those benefits are thoughtfully and clearly measured. These types of incentives have become a standard recruitment and negotiation tool. If we do not use them, we are less competitive and will miss opportunities. However, tax breaks should be used among a mix of incentives — each with its own return on investment and parameters for use.

  • Dorcas L. Wilcox, CEO of Miami Bridge Youth & Family Services

As a state that is dependent on tourism, Florida should offer all it can to recruit legitimate, profitable businesses that will provide jobs and promote traditional family values.

  • Gregory Adam Haile, president of Broward College

A 2017 report from the Pew Charitable Trust estimates that state and local governments spend at least $45 billion a year on tax breaks and other incentives to lure or keep job-producing businesses and plants in their jurisdictions, but that this does not always yield the necessary returns. Careful evaluation and monitoring are needed to ensure that the incentives are achieving their intended goals. While incentives have their benefits, it takes more to attract businesses. The state must also invest in other necessary resources and services critical not only for business establishment but their competitiveness and profitability. These include ensuring it can offer an educated and diverse pool of labor, affordable housing, and services such as transportation access that will attract residents.

  • Jorge Gonzalez, president and CEO, City National Bank

Yes. We need to drive investment that creates employment in sectors that will solidify our future.

  • Louis Hernandez Jr., CEO, of Black Dragon Capital

Tax breaks and incentives are instrumental for state and local economic developers to lure jobs to a region. The benefits will outweigh spending, but the burden should be on the governments to ensure costly incentives aren’t a waste of taxpayer dollars. Florida’s lack of a personal income tax and a relatively low corporate income tax rate help to create an exceptional business climate.

  • Paul Singerman, co-chair of Berger Singerman

I think that the state of Florida and local governments should be smart about tax breaks and incentives to lure business. To be sure, I do not think that Florida or local governments should adopt a per se rule against tax breaks and incentives to lure business. Florida and local governments should take these opportunities up whenever possible and evaluate each on its own merits. Relevant questions include: Is this business good for our citizens? Is this an industry that enhances our communities? Are there significant environmental issues that would be implicated by the business of a prospective new entrant to our markets? If tax breaks and incentives are offered, is there a sound return on investment thatthe state and local governments could enjoy?

  • James “Jimmy” Tate, co-owner and president of TKA-Evolution Apparel and of Tate Capital; co-founder of Tate Development Corp.

I do believe in incentive programs as long as they are properly monitored and the people responsible for making these determinations follow a strict formula which eliminates biases or the possibility of personal gain. There should be a cost/benefit analysis performed on all such proposals and if the analysis shows the transaction is accretive to the city, county or state, then you do the deal. If it is not accretive, then you walk.

  • Rashad D. Thomas, vice president of business connect and community outreach for the Miami Super Bowl Host Committee

In order to compete with the other leading cities in the nation, it is necessary. Miami-Dade currently offers several tax credits and business incentives to attract new businesses, such as the Urban Jobs Tax Credit. This program provides up to $1,000 tax credit per job for new businesses with a minimum of 20 new jobs and for existing businesses with a minimum of 10 new jobs, which are regular and full-time (36 hours or more per week). The State of Florida has lost several projects because of its inability to create a film tax break. It has been reported that the $296 million allocated in state tax incentives, intended to last until 2016, had been spent by 2014, with “Ballers” and “Bloodline.” They were the last two major projects that received state funds. Two years later, the program was shut down. Florida is now currently the only Southeastern state without a program to attract film and television productions. While neighboring states like Georgia, Louisiana, and Alabama continue to benefit from the expanding industry.

  • Manny Angelo Varas, president and CEO of MV Construction Group

I believe the city should create tax incentives to lure businesses based on employment and taxable revenue generated.

 

Source: Miami Herald

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So Many Opportunity Zones, So Many Questions For Developers, Investors

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Developers and investors are enamored enough with the federal Opportunity Zones program that they have been raising massive funds in hopes of taking advantage of the big tax incentive, but remain cautious enough over of the program’s many unanswered questions that few have deployed much of the capital raised.

Those dueling realities just played out in Washington, D.C., when the IRS’ first public hearing to solicit questions about the year-old program drew an overflow crowd. About 200 people gathered in a small room, and a couple of dozen speakers aired their concerns, according to three people who attended the hearing. The hearing had been scheduled for January, but was delayed because of the 35-day partial government shutdown.

Steve Glickman, a co-founder of Economic Innovation Group, was one of those in attendance. Glickman is credited with helping craft the Opportunity Zones program, which provides tax deferments and tax breaks for developers who invest in projects in designated low-income neighborhoods across the country. Also at the hearing were Michael Novogradac, a CPA and managing partner at Novogradac & Company; and Jill Homan, an Opportunity Zones adviser and fund manager.

“One of the biggest questions asked was about the amount of time that investment funds have to deploy capital raised for Opportunity Zones projects,” Glickman said. “Existing regulations give funds six months from the time the money is received. But many of the funds say they want to hold the cash for at least a year before deploying it.”

Numerous Opportunity Zone funds targeting hundreds of millions of dollars have been launched in recent months, by firms including Youngwoo & Associates, Somera Road, Fundrise, RXR Realty and EJF Capital. Skybridge Capital is targeting a $1 billion fund. That fund was rolled out in December with EJF as a subadviser, though SkyBridge later dissolved their partnership and found a new subadviser.

In October, the government released its first set of guidelines, but left many topics unaddressed. It did specify that a business will qualify for the program if 70 percent of the company’s property is located within a designated zone.

The Opportunity Zones program pushed forward in President Trump’s 2017 tax overhaul plan gives investors and developers the ability to defer and potentially forgo paying some of their capital gains taxes if they hold the asset for at least 10 years. But real estate investors often buy and sell assets after only a few years.

Given that fact, could an investor sell an Opportunity Zone asset after three years, then reinvest the money into another Opportunity Zone project for seven years? Would the total 10-year hold period still qualify for the program?

Another question: How much capital can an investor or developer take out of a project when refinancing an Opportunity Zone property? And after the refinance, how will the proceeds of the refinancing be distributed to investors?

Asked, but not answered. IRS officials only listened. Investors and developers will be looking for those answers when the government release its second round of rules, which is expected in the next two months.

 

Source: The Real Deal

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Golf Anyone? Anyone? Developers Reimagine South Florida’s Money-Losing Courses

The Carolina Club, an 18-hole championship golf course in Margate, has served as a qualifying site for the PGA Honda Classic and is known for its fast, well-manicured greens and contoured fairways.

But the semi-private club, built in 1971, isn’t making the cut. Miami-based developer 13th Floor Homes plans to acquire the 140-acre facility and completely transform it into a 350-unit residential community, with single family homes and townhouses.

The proposed homes would cost about $300,000 to $400,000 each, meaning the developer stands to make more than $120 million in total sales. The current owner, J&D Golf Properties, would also stand to profit from the sale. It purchased the club in 2002 for $5.3 million.

The Carolina Club conversion is just one of several planned golf course redevelopments in South Florida, as golf operators weigh the rising expense of maintaining fairways and greens against the diminishing revenue. Couple that with the game’s waning popularity nationwide, and owning a golf course is now a risky proposition.

“Less people play golf, and those who do play are playing less rounds,” said Mike Nunziata, president of 13th Floor Homes. “Operators are having to cut rates to attract players. The industry is now in a place where the revenue just isn’t enough to cover the costs to maintain itself.”

His company has developed a niche business statewide for building residential communities on former golf courses. From the 1970s to the 1990s, the game experienced a rise in golf course construction — spiking in Florida — along with some residential communities nestled alongside. Nunziata said that development far exceeded demand.

Despite several closings, Florida still has the highest number of 18-hole golf courses in the country. And just in Miami-Dade, Broward and Palm Beach counties, there are 177 18-hole equivalent golf course facilities, according to the National Golf Foundation. That’s down from 189 in 2007. But many others are barely hanging on, industry pros said.

“The golf courses were purely being built to sell the homes and support neighboring residential communities,” Nunziata said. “It was really more a real estate play and not so much a strategy that was centered around golf.”

In addition to his plans for Carolina Club, the developer is converting an 18-hole course in Delray Beach into Avalon Trails, a 521-unit residential community geared toward people 55 and older. Other projects in the works include a single-family home community over what are now two 18-hole golf courses in Tamarac.

In Hollywood, the Pulte Group is building 645 homes — including townhouses and single-family homes — at the former Hillcrest Golf & Country Club. The area covers 160 acres, and will rise over the 18- and 9-hole courses.

Atlanta-based Pulte is also developing 152 homes on nine of Woodmont Country Club’s 18 holes. It paid $10.2 million for the property in 2016.

But just as Tiger Woods appears to be on the comeback trail, the game itself has been evolving and companies are adapting to the next generation of fans and players. Topgolf, a Texas-based entertainment and technology-themed firm, has been establishing a presence in major commercial centers around the world, including Miami. At least five Topgolf facilities have either opened or are being planned in Florida. The first opened in Miami Gardens in 2016.

Investors are also considering other uses for all that golf course land. Soccer superstar and entrepreneur David Beckham is considering transforming the Melreese Country Club in Miami into a 25,000-seat Major League Soccer stadium. Beckham and his partners, Marcelo Claure, Jorge and Jose Mas, and Simon Fuller have put the price tag at $200 million.

For Topgolf, facilities are typically three-story entertainment complexes that feature a driving range, restaurant and bar. The golf balls are microchipped so statistics like distance and accuracy can be tracked and translated into points for games.

In some cases, they’re being built on existing courses, as in West Palm Beach. There, a Topgolf facility will rise on the 196-acre West Palm Beach municipal golf course. And while it could be seen as a competitor to 18-hole courses, Topgolf says it works closely with institutions like the Professional Golfers’ Association to help some courses stay open.

Topgolf spokesperson Morgan Schaaf said Florida is a natural place for Topgolf to expand, which the company is doing at a rapid rate. Topgolf is aiming to open seven to 10 locations a year, she said. It’s also going international, with facilities planned for Australia, Canada and Mexico within the next five years. Schaaf added that half its customers are golf novices because the company makes it more accessible than a traditional course.

Despite Topgolf’s popularity, a love for the course is still strong in Florida. Developer Lennar had been under contract to build homes on the 212-acre Ocean Breeze Golf Club in Boca Raton, which shut down in 2016 after having lost money and members for years. But plans skidded into the rough amid opposition from Boca Teeca duffers who were left with no options.

Sunrise-based GL Homes had already acquired the nearby Boca Raton Municipal Golf Course for $65 million. It plans to replace the 27-hole, 194-acre course with a community of 500 homes.

Earlier this month, the city of Boca Raton and its Greater Boca Raton Beach and Park District bought the 27-hole Ocean Breeze course for $24 million. The seller, Wells Fargo, seized the property through foreclosure. The renovated golf course, to be called the Boca Raton National Golf Club, is set to open in late 2019 or early 2020. It is expected to be a costly endeavor, up to $18 million to renovate and about $2.2 million per year to maintain.

“That kind of community effort appears to be an outlier,” said Brent Baker, Pulte’s Southeast Florida division president. “Only two kinds of golf courses will stay open in the future. The first is the one that requires membership fees, and the second is a public golf course that is subsidized by taxpayers, though even those — as seen with the Boca Raton municipal course — have great difficulty staying afloat. The math usually doesn’t add up. To keep a golf courses operating you’re talking hundreds of thousands of dollars, sometimes millions of dollars a year.”

 

Source: The Real Deal

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Fed, Highlighting Asset Bubble Dangers, Red Flags Rising Commercial Real Estate Prices

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A report just released by the Federal Reserve warns that soaring commercial real estate prices across the country could harm financial markets, according to the Wall Street Journal.

The warning came from the Fed’s first-ever financial stability report, which cited “elevated asset prices, historically high debt owed by U.S. businesses and rising issuances of risky debt” as factors posing the biggest problems for the country’s financial system. The report also pointed to asset bubbles, and not inflation, as the impetus for the past two recessions.

Fed Chairman Jerome Powell spoke about the subject  at The Economic Club of New York on November 28th.

 

Source: The Real Deal

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South Florida Developers Dish On How They’re Financing And Building Through The Late Stages Of The Cycle

34309962 - silhouettes of construction and power lines at sunset

At The Real Deal‘s fifth annual Miami Real Estate Showcase & Forum, Editor-in-Chief Stuart Elliott moderated a panel on how South Florida developers are financing and building amid the late stages of a market cycle.

Panelists included Jules Trump (The Trump Group), Moishe Mana (Mana Group), Michael Stern (JDS Development), Louis Birdman (Birdman Real Estate Development) and Kieran Bowers (Swire Properties).

Click here  to read more coverage of the event.

Click here to view an event video.

 

Source: The Real Deal

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Year-End Tax CRE Planning And 2019 Outlook

Commercial real estate investors are among the beneficiaries of sweeping federal tax policy signed into law by President Trump last year.

The tax law generally makes investing in and owning commercial real estate — the largest alternative investment class — more attractive than ever. As we head into the fourth quarter of 2018, it’s a good time to recap the tax changes with implications for investors in income-producing real estate.

Investors would be wise to review these issues with their tax and investment advisors as part of year-end tax planning and investing strategy for 2019.

Individual Tax Rates

The Tax Cut and Jobs Act of 2017 (“TCJA”) includes tax rate cuts across the board, with corporate rates slashed to 21% beginning this year. The individual rate reductions are not as dramatic, but do provide relief especially with the wider tax brackets.

Click Here for Tax Bracket Comparison

Example 1

Married taxpayers filing jointly with $450,000 in taxable income would have a tax liability of $124,383 in 2017 versus $108,879 in 2018.

Example 2

A Single taxpayer with $150,000 in taxable income would have a tax liability of $34,982 in 2017 versus $30,289 in 2018.

Qualified Business Income Deduction

Arguably the most beneficial and complex provision in the TCJA, and the one that has the largest impact on commercial real estate investors is the Qualified Business Income (“QBI”) deduction under Section 199A of the Internal Revenue Code.

This provision is far-reaching and potentially affects every taxpayer who reports qualifying business income on Schedules C, E or F on their individual tax return, including from passive income sources.

Qualifying business income is generally any trade or business income that is not from a B“specified service” business, which is defined as a business relying on the skills or reputation of the owners or employees. (Architects and engineers are specifically excluded from this definition.) Many of the complexities of this provision fall outside the scope of this article, which focuses on the benefits of the tax policy changes for commercial real estate investors.

The QBI deduction is 20% of qualifying income, but a number of factors determine the actual deduction. The first limitation on the deduction is the greater of: (1) 50% of W-2 wages paid for by the qualified trade or business; or (2) the sum of 25% of W-2 wages paid plus 2.5% of the unadjusted depreciable basis of qualified property held at the end of the year.

Since most commercial real estate investments are held in special purpose entities that do not have employees, the benefit is from the alternative calculation based on depreciable basis. Keep in mind that income on the sale of property that is treated as capital gains is not considered qualifying income for the purpose of this deduction.

Before undertaking the analysis, it is worth noting that these limitations only apply to taxpayers with taxable income in excess of $315,000 for joint filers or $157,500 for single filers. For taxpayers below these thresholds, the deduction is the lesser of 20% of qualifying income or 20% of taxable income. This simplified benefit is phased out at taxable income of $415,000 for joint filers and $207,500 for single filers and subject to the rules discussed below.

It’s also worth noting that rental real estate often generates a tax loss in earlier years of the investment because of depreciation and interest expense. To the extent losses are generated they carry forward and offset qualifying income in subsequent years. This deduction is more likely to benefit those who have investments in more mature commercial properties that have been held for approximately 10 years or have very low amounts of debt.

Example 3

Married taxpayers from Example 1 have a 10% investment in an LLC that owns rental real estate. In 2018, their allocable share of rental real estate income is $50,000 (net of any depreciation taken through a Schedule K-1), $0 of W-2 wages and $500,000 of depreciable property. In this example, their QBI deduction is $10,000, which is the lesser of 20% of qualifying income ($50,000 x 20% = 10,000) or 2.5% of depreciable basis ($500,000 x 2.5% = 12,500) since there are no W-2 wages. If the married taxpayers’ liability was $108,879 before, it is now $105,379 with the QBI deduction.

Example 4

Same as Example 3 except the allocable share of depreciable property is $200,000. In this case, the QBI deduction for the year would be limited to $5,000 ($200,000 x 2.5%) instead of based on qualifying income. The 2018 tax liability is $107,129.

The analysis on the limitation above must be done for each separate qualifying business and then combined to determine the total potential QBI deduction. Dividends from REITs qualify for the 20% deduction to the extent they are not capital gain dividends. Losses from one qualifying business can reduce the overall benefit but excess income cannot increase the benefit.

Example 5

Same as Example 4 except that the couple also fully owns a commercial or multifamily rental property that generates a $40,000 loss with depreciable basis of $1.5MM. In this case, total QBI is $10,000 ($50,000 of rental income from the LLC less the $40,000 loss). Thus, the QBI deduction is limited to $2,000 ($10,000 x 20%). The 2018 tax liability is $108,179.

Example 6

Same as Example 4 except that the couple also fully owns a commercial or multifamily rental property that generates income of $40,000 with depreciable basis of $1.5MM. The QBI deduction from this rental property is $8,000, which is the lesser of qualifying income ($40,000 x 20% = $8,000) or 2.5% of depreciable basis ($1.5MM x 2.5% = $37,500). Combining this deduction with the $5,000 deduction from the LLC results in an overall QBI deduction of $13,000. The excess limitation on the depreciable basis of the wholly owned commercial property would not increase the limitation on the LLC QBI deduction unless it qualified to aggregate the activities. This decreases the 2018 tax liability to $104,329.

After combining qualifying business activities, the result is then subject to a final limitation. The deduction is the lesser of the combined QBI deduction and 20% of taxable income before this deduction, same as for taxpayers with taxable income below the limits discussed above.

Example 7

The married taxpayers from Example 1 have a combined potential QBI deduction of $100,000 and taxable income before the QBI deduction of $450,000. This results in a QBI deduction of $90,000, which is the lesser of $100,000 based on qualifying income and 20% of taxable income (the maximum QBI deduction). The ultimate taxable income would be $360,000 ($450,000 less $90,000 QBI deduction). This reduces the 2018 tax liability to $78,579 compared to $108,879 from Example 1.

Depreciation Deductions

The most significant changes to depreciation that impact commercial real estate revolve around bonus depreciation. Except for a brief hiatus from 2005-2007, bonus depreciation has been in place since 2001 in order to encourage investment in capital assets including real estate.

The concept of bonus depreciation allows for a percentage of the cost of a capital asset to be deducted in the year it is placed in service, with the remaining basis deducted over its standard depreciable life. This percentage has ranged from 30% to 100% over that time and had an original use requirement. The TCJA brought back a 100% bonus depreciation deduction through 2022, meaning the cost may be fully expensed in the year placed in service for qualifying property.

Another investor friendly change was the removal of the original use requirement for assets acquired and placed in service after September 27, 2017. As a result, both new acquisitions and new construction of commercial real estate can perform a cost segregation study and take advantage of accelerated depreciation on the personal property assets inherent in the building. (In the process of cost segregation, certain costs are broken out as personal property assets, which have shorter depreciable lives and, thus, accelerates the depreciation deduction.)

Another change that would positively impact commercial real estate is an expanded definition of qualified improvement property that is depreciable over 15 years, making it eligible for bonus depreciation. In the haste of writing the bill, tax-writers inadvertently did not update code Section 168 to reflect their intention. Most prognosticators expect this to be addressed before year-end, with Congress passing a technical correction.

Like-Kind Exchanges

For years there has been speculation that Congress intended to significantly restrict the ability of real estate investors to defer taxes on the sale of assets using like-kind exchanges under Section 1031 of the tax code. Fortunately, the new tax law largely leaves like-kind exchanges of real estate unaffected.

Exchanges of real property for real property are still allowed, with no requirement that assets be exchanged for the same asset type (i.e., an apartment complex can be exchanged for an office property).

The major change in the rules eliminates the ability of personal property to qualify for gain deferral. This may have an impact on commercial real estate investments that have utilized a cost segregation study to accelerate depreciation on a portion of a building. In these situations, the proceeds allocated to these assets will be considered boot that cannot be used to defer the gain, resulting in taxable income even if all of the proceeds are reinvested in a replacement property. (The ability for 100% bonus depreciation until 2022 reduces the tax impact if a cost segregation study is completed on the replacement property.)

Interest Expense Limitation

The TCJA introduces a new limitation that restricts the ability to deduct interest expense in certain situations, but commercial real estate is not impacted in most scenarios.

The deduction for interest expense is limited to 30% of taxable income before interest, depreciation and amortization deductions. This limitation only affects large taxpayers that have average gross receipts in excess of $25MM over the prior three years. This is a significant amount of rent when the industry norm is to use a special purpose entity to hold each commercial and multifamily rental property.

For these larger real estate taxpayers, there is an ability to opt out of this limitation. To do so, a taxpayer must use the alternative depreciation system for its assets, which generally will result in reduced depreciation expense. In most situations this should result in lower taxable income compared to being subject to the limitation. The rules for how this limitation may impact an individual investor in an LLC or other pass-through entity are complex.

Tax-Exempt Filers

Tax-exempt filers that have investments in commercial or multifamily rental real estate may be subject to income taxes if certain requirements are not met. The overall rules relative to when rental property income is subject to unrelated business income tax (“UBIT”) do not change under the new tax law, but there is a change in the reporting of these investments that may have a negative impact on investors.

Previously, tax-exempt investors aggregated their allocable shares of the revenues and expenses subject to UBIT from all activities to determine their tax liability. For tax years starting with 2018, losses from any activity are only allowed to offset income or gains from the same activity. This inability to net current year losses with income from other activities will likely accelerate tax liabilities for tax-exempt investors that have multiple investments generating unrelated business income, and may impact the decision to use an IRA to make additional investments in commercial or multifamily real estate.

 

Source: GlobeSt.

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Banks Get Company on the Commercial Real Estate Lending Front

Developer Graham Cos. wanted to have more time than the typical 10 years to repay a $120 million loan.

Property manager Cardinal Point Management LLC wanted to work with a flexible lender who can provide low interest for a $41 million loan.

And Vutec Corp. wanted a lender willing to issue $3.3 million after the electronics company filed for bankruptcy protection.

They all turned to alternative lenders rather than more heavily regulated banks.

“I think in this market, we are seeing a lot more of developers using alternative financing sources as opposed to going to the traditional banks because generally the alternative financing sources — private equity funds, for example — they don’t have to follow as many of the regulations as traditional banks do,” said Phillip Sosnow, a real estate partner at Bilzin Sumberg in Miami. “They have a little more flexibility in being able to lend.”

While national banks are the main player in South Florida commercial real estate lending, some alternative lenders are gaining ground. Life insurance companies set a record in 2017 when they issued $80 billion in commercial loans nationally, 4 percent more than in 2016, according to a Mortgage Bankers Association report.

In South Florida, borrowers are opting for alternative lenders because of the flexibility they provide, experts said. From offering more competitive interest rates and long repayment schedules to higher loan-to-value ratios, alternative lenders are less restrictive and increasingly becoming the choice for commercial borrowers.

Just ask Stuart Wyllie, head of Miami Lakes-based Graham Cos., which has developed much of the northwest Miami-Dade County town from its pioneer past as a family-owned dairy into an affluent suburb. The company closed June 21 on refinancing for a 29-property commercial portfolio, picking New York-based global insurer American International Group Inc. as the lender.

“We went with the life insurance company primarily because of the deal we were looking for. This is a 15-year deal. Your normal banks and those kinds of lenders don’t tend to go that long. Some do, but generally speaking they don’t,” Wyllie said. “These life insurance companies have long liabilities, and they look to match these mortgages up with those liabilities.”

Vutec, a video projection screen maker, needed to refinance its industrial owner-occupied building at 11711 W. Sample Road in Coral Springs about two years ago. But the was a year after its Chapter 11 bankruptcy filing, which likely reduced the pool of lenders willing to work with the company.

“A lot of banks won’t lend to companies that are either in bankruptcy or emerging from a bankruptcy,” said Brett Forman, president and CEO of commercial bridge lender Trez Forman Capital Group.

Trez Forman issued a nonrecourse loan with a 65 percent loan-to-value ratio. The 24-month financing allowed for a possible extension and had a 9 percent fixed interest rate.

“They had gone through a reorganization, and we gave them flexible terms so they can deploy more capital into their business,” Forman said. “We didn’t really look at the value of the business. We looked at the value of the real estate, and we made a loan based on the value of the real estate. Kind of a true asset-backed loan.”

Lending Overview

Despite the flexibility of alternative lenders, Federal Deposit Insurance Corp.-insured banks held 40 percent of the total $3.1 trillion outstanding debt, making them the largest single source for commercial and multifamily mortgage loans nationally in 2017, according to the Mortgage Bankers report.

But the report also showed banks had the lowest year-over-year increase at 6 percent in debt holdings in five years. At the same time, life insurance companies grew their portfolios by $40 billion, a 9 percent increase.

“The long-term nature of commercial and multifamily loans matches well with the long-term nature of many of the liabilities of these companies,” the  report said.

The Dodd-Frank Act implemented in 2010 added restrictions on banks, including their commercial real estate lending. The U.S. Senate in March and the House in May voted to relax some of the restrictions on lenders with less than $250 billion in assets.

“The search for alternatives might be a result of the stricter regulations imposed on banks following the 2008 financial crisis,” Sosnow said. “New regulations aside, banks became more cautious. The banks have learned their lesson, and they don’t want to be stuck with a bunch of failed projects. Traditional banks are being a lot more cautious in their lending. Regulations have changed. And so their requirements are definitely a little more stringent than what a private equity lender or some of these alternative sources may be required to do.”

“At the same time, an influx of alternative lenders means they are competing hard for borrowers,” said Brian Gaswirth, HFF director in Miami. “The debt markets in general are super-competitive right now just given the amount of liquidity in the marketplace, and there’s a lot of groups that are looking to put out money. In order for them to win deals, you are seeing more competitive spread. There’s a lot of supply, not as much demand. So when there is a good deal in the marketplace, you get a lot of great options. Some alternative lenders are willing to go as high as 85 percent on loan-to-value ratios and as long as 30 years on loan terms.”

The Projects

Still, brokers and borrowers said it comes down to matching a project to the right lender, bank or otherwise. Cardinal Point, a Tampa investor that paid $47.5 million in July for the 12-story Coastal Tower at 2400 E. Commercial Blvd. in Fort Lauderdale, considered both banks and alternative lenders when looking for a loan.

It picked New York Life Insurance Co. as the issuer of $41 million in financing, including $32.4 million was for acquisition and the rest for renovations of the office building, said Gaswirth, who was part of the HFF team that secured the loan. The decision to go with the third largest life insurance company in the U.S. was based on the type of financing it offered, although Gaswirth declined to disclose the terms.

“There’s also the nonmonetary benefit of being able to start a new relationship with one of the largest life insurance companies in the country,” Gaswirth said.

“The Graham Cos.’ pool of lenders includes banks and alternatives,” Wyllie said. “A lot of its $120 million loan will be used for new construction.”

This includes Graham Cos.’ nearly finished 40,000-square-foot, two-story office building southeast of Main Street and Ludlam Road in Miami Lakes’ Town Center; two nearly finished industrial buildings with a combined 76,000 square feet at Business Park West; and a planned 220-unit senior apartment community also at Business Park West.

“Every deal stands on its own,” Wyllie said. “When we decide to go on the market looking for capital, we will look at all the sources.”

 

Source: DBR

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Delray Beach Raises Building Height Limit To 4 Stories From 3 To Settle A Lawsuit

Delray Beach raised the building height limit for four parcels along Atlantic Avenue from three stories to four to settle a lawsuit filed by the owners.

The land owners, William “Billy” Himmelrich and David Hosokawa, sought at least $6.9 million in damages from the city for alleged violation of the Bert Harris Act, a state law that protects the rights of private land owners.

Delray Beach city commissioners narrowly approved the four-parcel upzoning designation in a 3-2 vote. Commissioner Bill Bathurst, who voted against the measure, told the Palm Beach Post that the  one-story increase in the building height limit for the four parcels will encourage other land owners to seek similar treatment.

Located just east of the city’s Old School Square cultural center, the upzoned property includes two parking lots and two restaurants, Cabana El Ray and Tramonti.

Himmelrich and Hosokawa had planned to build a four-story hotel before the city imposed a three-story limit on building height along East Atlantic Avenue between Swinton Avenue and the Intracoastal Waterway, an district that encompasses their four parcels.

City attorney Max Lohman said city commissioners effectively carved those four parcels out of the three-story district.

Himmelrich told the Palm Beach Post that he and Hosokawa plan to move forward with a four-story development on their Atlantic Avenue property, possibly as a non-hotel project.

 

Source: The Real Deal

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Seven Ways Generation Z Will Change CRE

Finally, it seems, we have gotten a handle on Millennials — their desires, their habits and ideas of how to live life.

Now with Millennials a known entity we turn our attention to the next generation: a cohort that has been dubbed Generation Z. Born between the mid-1990s to early 2010, many are just starting to enter the workforce. And they will be just as, if not more, a potent force than Millennials as they make up 25% of the population.

To find how Gen Z will affect commercial real estate — both within as brokers and without, as apartment and office occupiers — we turn to Pushpa Gowda, the Miami-based Global Technology Engagement Director for JLL.

“In 2015, Millennials became the largest generation in the American workforce, according to Pew,” Gowda tells GlobeSt.com.

Little surprise, then, that real estate decision makers are tuned into what millennials are looking for given their significant purchasing power.

“But,”Gowda continues, “they now need to turn towards the next generation and understand importance nuances between these cultural cousins. This generation will be influenced, marketed to, and sold differently than past generations, including real estate, where there is a great opportunity for Gen Z to help shape the future of real estate sales, particularly as Gen Z becomes an increasingly important real estate buyer.”

Here, are seven ways this will happen.

Being Brokers

1. They’ll be very good at online cold calling. “Generation Z is the first to have truly grown up completely immersed in social media from birth – which shapes the way Generation Z makes major purchasing decisions. We’ve seen brokers begin to use social media, other than LinkedIn, to generate leads and new business opportunities.” Generation Z won’t know anything else and will likely be very successful in “online cold calling, Pushpa concludes.

2. Technology will be critical for recruiting and retention. Brokers relying on technology for their business is fairly new, Gowda says. Generation Z will expect the latest technology and will expect it to be seamlessly incorporated into business processes. “This will become critical for recruiting and retention.”

Apartment Dwellers versus Home Buyers

Generation Z outnumbers their Millennials peers by large margins, ultimately positioning them as the force driving the home buying and building market soon, Gowda says.

3. A suburbs revival. As Generation Z is just beginning to come of age, they are slowly entering the housing market, Gowda says. Yet while many are currently renters, they aren’t content staying renters for long, in part due skyrocketing rental prices across the country but more so because they are more family-oriented and will be settling down. They will be raising children. “It may not look the same as their elders’ generation, but they will need housing, and they will want to ease their work-life balance,” she says. For that reason, she adds, “the suburbs are not dead, and even though we’ve seen a lot of shift toward downtowns across the country, don’t count the suburbs out just yet.”

This will force companies to reexamine their headquarters when considering long term moves, she adds.

Office Occupier Trends

Workplace environments have changed dramatically, thanks to Millennials who have reshaped the very concept of work. But Generation Z will spur its own workplace revolution, Gowda says. “These new college graduates are not coming from environments where they sit in one place for hours at a time, as universities have adapted the student experience. This will directly translate to their expectations in the workplace.”

Generation Z is bringing with them an entirely new set of expectations that companies and buildings must strive to achieve in order to remain relevant and competitive to attract this next generation of workers, she says.

4. Less amenities, more flexibility. Generation Z is social, collaborative, and less focused on amenities, requiring flexible spaces that can be adapted to collaborative projects or individual work, Gowda says. In fact, 69% of Generation Z would rather have their own workspace than share it with someone else, while at the same time 74% of Generation Z prefer to communicate face-to-face with colleagues, so both private workspaces (or quiet zones) and collaboration spaces are important. “It will be interesting to see this play out at as Millennials become managers of Generation Z, this will likely be a good match with some differences to accommodate.”

5. Flexible roles too. “Expect Gen Z to be focused on more than just flexible spaces, they want flexibles roles too, Gowda says. Seventy-five percent of Generation Z would be interested in a situation in which they could have multiple roles within one place of employment. “Corporations will need to consider how to physically organize departments throughout the physical office to encourage hybrid roles.”

6. It’s the technology, stupid. “Generation Z is in need of corporate workplaces that support the highly interactive and tech-enabled environments they’ve grown up in,” Gowda says. In fact, 40% of Generation Z said that working Wifi was more important to them than working bathrooms. This is in line with Generation Z expecting not only technology basics but also the latest technology. ”Corporations should make certain to provide a variety of workplace sizes and styles accessible 24/7, as choice and individuality are defining characteristics of Generation Z.”

7. Free-flowing environment. But technology is just one element, Gowda says. “Generation Z demands a free-flowing environment that supports all their needs, from workout rooms, workspaces designed for any given day and spaces that build community and collaboration.”

 

Source: GlobeSt.