Archives for April 2014

Section 1031 exchanges are for deferral of state and federal taxes on sale of commercial real estate investment or business real estate. Check out this video and get a terrific, concise backgrounder on the history and concepts of 1031 exchanges from tax attorney Louis Rogers, CEO of Capital Square Holdings, who actually brings along his original 1984 research notebooks on the topic.  Great stuff!

While I do take issue with the idea presented that taxes are “gone forever” once paid — find me the commercial property that doesn’t benefit from its access to publicly financed infrastructure, after all — Mr. Rogers is a compelling presenter with a plain command of this topic and this clip is absolutely worth a look.

By: Wayne Grohl (The Source)
Click here to view source article and video.

Fitness centers, education facilities and specialty medical buildings that emerged as alternative net lease assets a few years ago are showing up in more property portfolios as investors hunt for yield in an increasingly crowded conventional net lease market.
Investors may not consider the properties part of the net lease mainstream yet, but the growing momentum suggests that perceptions could soon change: Non-traditional assets are starting to trade with more frequency and, subsequently, capitalization rates have started to compress, say net lease experts.
“Investors are moving away from the meat and potatoes: dollar stores, restaurants, auto parts stores and drugstores,” says Randy Blankstein, president of Northbrook, Ill.–based net lease brokerage Boulder Group. “That’s what happens when the meat and potatoes get thin, as they are now.”
Investors willing to take a bet on gyms, pre-schools, charter schools, medical facilities or other off-the-beaten-path net lease properties over the past few years have acquired properties with cap rates as high as 8.5 percent to 9.5 percent, say experts.
Increasing demand recently knocked those cap rates down 100 basis points or so for some alternative net-lease properties, but the yields are still more attractive when compared with retail net-lease properties. Single-tenant retail properties commanded an average 6.75 percent capitalization rate in the first quarter of 2014, a drop of 10 percentage points from the fourth quarter last year, according to a Boulder Group report.
That was the case even as the supply of net lease properties increased by 17 percent in the first quarter as owners of lesser buildings hoped to cash in on the lack of supply in the market, according to New York–based real estate researcher Real Capital Analytics. Net lease sales volume totaled $44 billion in 2013.
Conventional net lease buyers have had few qualms about aggressive pricing, with many drugstore deals trading at a capitalization rate of around 5 percent in the first quarter. In January, Blankstein represented Shamburg, Ill. –based Crossroads Development Partners in the sale of a Chicago Walgreens to a Massachusetts–based 1031 exchange buyer. The $13 million price tag reflected a capitalization rate of below 4.9 percent.
By comparison, Scottsdale, Ariz.–based Store Capital, a private real estate investment trust (REIT) that focuses on sale-leaseback transactions, recently acquired Wright Career College in Overland Park, Kan., for $13.1 million, according to Christopher Volk, CEO and founder of the three-year-old firm. While he declined to disclose the cap rate, he acknowledged that it was north of the 7.5 percent listed in marketing materials and typical of the cap rates associated with such properties.
Additionally, the Boulder Group first quarter review reported that an LA Fitness in Little Rock, Ark., traded for $11.9 million at a capitalization rate exceeding 7 percent in February.
“Alternative net-lease investments are very attractive right now, and it’s a strictly a yield play,” says Mac McCall, regional managing partner in the Atlanta office of real estate brokerage Franklin Street. “It has propelled the growth of transaction volume in that sector and away from your traditional single tenant retail deal.”
Increasing comfort level
Buying non-traditional net lease properties provides benefits beyond yield. Schools, gyms and medical facilities diversify portfolios and provide growth opportunities given that most operators are expanding, Blankstein says. More importantly, alternatives don’t face the same ecommerce threats that have diminished bookstores, office supply stores, electronics stores and other sellers of commoditized goods, he adds.
“I think people are trying to find investments that are less impacted by the Internet,” Blankstein says. “They still have that experience with box stores disappearing or developing smaller footprints fresh in their minds.”
Yet alternative net lease assets also come with risks. Charter schools, for example, may face challenges from teachers’ unions and political leaders, as illustrated by New York Mayor Bill de Blasio’s recent attempts to scale back the concept.
More broadly, the most significant challenge centers on the specialized character of alternative net lease properties—typically they’re designed for a specific niche. So finding a user could be tough if the existing tenant should go out of business or choose not to renew a lease, experts say.
“If you lose a fitness user, it’s going to be very hard to put another tenant in that space,” says Bradley Feller, a director with Tulsa, Okla.–based net-lease brokerage Stan Johnson Co. “Maybe you can convert it to offices, but you’re going to struggle. It’s the same with a school; there is a limited universe of users that are going to be able to backfill it.”
Unlike buying a stand-alone drugstore or fast food restaurant—when an investor’s due diligence would include an analysis of the location, demographics, tenant’s credit scores and nearby competition—purchasing an alternative net lease property requires a deeper understanding of the user’s industry and business model, adds Feller, who is in Stan Johnson’s Chicago office.
What’s more, users of non-traditional net lease properties typically do not have an investment grade credit rating, Feller and other observers say.
In the past, those risks kept many individuals and smaller investors on the sidelines. But the potential higher returns combined with track records and growing brand awareness among KinderCare, La Petite Academy, LA Fitness, Life Time Fitness and other operators have alleviated misgivings about investing in the assets, observers say.
“A lot of investors thought re-tenanting a more specialized property would be more intensive or complicated than a plain old vanilla deal for a drugstore,” Blankstein says. “That resistance has just disappeared.”
Medical moves
The same is true for medical facilities. Large investors that specialized in medical office buildings historically have been the primary buyers of the product. But with the relatively new advent of stand-alone assets that house single-purpose operators such as dental groups or oncology, outpatient surgery and dialysis providers, smaller net lease investors are pursuing deals.
Aging baby boomers and the growing practice of shifting health care delivery to satellite locations all but ensures that the asset base will expand, experts say.
“Medical uses are moving to a lot of retail-type locations, which essentially makes them retail deals,” McCall says. “It’s definitely a trend we’ve seen over the last few years.”
In February, McCall represented the owner of a 3,200-sq.-ft. Aspen Dental building in suburban Atlanta in a $1.5 million sale to a 1031 exchange buyer. The transaction featured a 10-year double net-lease, in which the tenant pays for taxes and insurance but not maintenance, and a 10 percent rent hike every five years.
However, the controversial rollout of Obamacare last year, along with the litany of unknowns surrounding its ultimate implementation, at best cloud the clarity of health care delivery going forward.
State laws also could have a bearing on the industry and an investor’s willingness to buy: Some states limit the number of medical facilities while others do not, points out Volk of Store Capital, which has amassed a roughly $2 billion portfolio of restaurants, education buildings, health clubs, medical facilities and other properties.
“If there’s one place where there is going to be a lot of change, it’s going to be in the delivery of health care,” Volk says. “So if you’re an investor in health care real estate, you have to have conviction as to what that business will do over the next several years.”
Learning curve
Investing in medical facilities may not pose as dicey a proposition as buying charter schools. Not only do charter school owners face potential political risks that could result in revoked charters, but in some cases they also must deal with lease terms as short as three years and hope that renewals occur, says Volk, whose firm to date has not acquired a charter school.
“I think, in general charter, schools are viewed as doing a good job versus not doing a good job,” he adds. “But it’s still an experiment being flushed out.”
The risks vary from state to state. But for those reasons, a small number of large investors like Kansas City, Mo.-based REIT Entertainment Properties Trust (EPT), which owns movie theaters, recreation real estate and education facilities, have been the primary players in the charter school arena. It’s a niche that continues to grow, however.
Entertainment Properties officials couldn’t be reached. But according to the comments of executives at the company’s most recent earnings call, charter school enrollment increased 13 percent to about 2.5 million students nationwide in 2013, and the number of schools grew by 7 percent to 6,500.
The company’s $538 million education portfolio includes 55 charter schools as well as a pre-school and a handful of private schools under construction, segments it recently added to its strategy. Including build-to-suit projects, Entertainment Properties invested $155 million in education assets in 2013, nearly double the amount in 2012. During the conference call, executives noted that build-to-suit education projects would reflect a cap rate of around 9 percent when completed.
Recently, net lease investments in for-profit post-secondary schools have also become susceptible to political risk, as the Obama Administration, federal lawmakers and some states have accused the industry of deceptive marketing practices. Regulators, state attorneys general and others have sued some colleges for allegedly pressuring students to take out high-interest loans, among other claims.
Store Capital has invested in a number of for-profit colleges, including South University in Columbia, S.C., and the Art Institute of Colorado in Denver, Volk says. In 2012, it acquired five Corinthian Colleges (COCO) campuses in Northern California in a $40 million sale-leaseback.
Volk acknowledges that the industry is under siege and that investing in it carries “headline risk.” But he maintains that demand from students looking for a career fast track and the availability of student loan funding ensure that the concept will continue to exist for the foreseeable future.
“Any college, whether for-profit or nonprofit, is going to rely heavily on student loan funding, and I expect that student loan funding will be around forever since its one of the only ways for people to go to college or get trained,” he said. “And you need trained people if you want to grow the economy.”
By: Joe Gose (NUWire Investor)
Click here to view source article

Official employment numbers for the New Mexico economy are bleak, but the reality, while far from good, may not be quite so bad, according to the Journal’s twice-yearly Economy Watch review of economic conditions.
“We’re not growing rapidly,” said Lee Reynis, director of the University of New Mexico Bureau of Business and Economic Research, which conducts the review. “I’m not even sure we’re growing at 1 percent. But in my opinion, based on everything I look at, we are definitely on the positive side.”
The state Department of Workforce Solutions reported earlier in April that New Mexico lost 1,000 jobs between March 2013 and March 2014, and the March unemployment rate increased to 7 percent from 6.7 percent a month earlier. The Albuquerque metropolitan statistical area added almost 1,400 jobs in the 12-month period, but the unemployment rate was 7.6 percent, according to DWS.
Reynis thinks recently completed, routine statistical adjustments to the nation’s jobs numbers, known as benchmarking, are probably overstating job losses in New Mexico.
“A variety of things is happening that says we have positive but slow growth,” she said.
For example, household surveys show employment grew 0.7 percent in both January and February compared with the same months a year earlier. Trends in the data over the past several months show the gap in job growth between New Mexico and the rest of the country has narrowed, Reynis added.
A sign of strength?

A line of job seekers waits to get into the recent Choice Career Fairs’ Albuquerque Career Fair at Hotel Cascada. Albuquerque and New Mexico employment numbers, while still bleak, are believed to be on the “positive side,” according to UNM economist Lee Reynis. (Albuquerque Journal File)
Rising unemployment rates even can be a sign of strength in the economy, Reynis said. Since only people who say they are looking for work are counted as unemployed, an increase in the unemployment rate absent evidence of economic decline can show that jobless workers have become more confident they can find a job and have begun looking for work again.
The household surveys that generate the unemployment numbers also reveal some disturbing things, Reynis said.
The unemployment rate in New Mexico for 2013 was 7.2 percent. However, if people who want to work but have given up trying to find work – known as marginally attached workers – are counted, the 2013 unemployment rate goes to 8.3 percent.
Add workers who want full-time jobs but can only find part-time jobs and the rate reaches 13.7 percent.
“Those numbers kind of help put things into perspective,” Reynis said. “We have a much larger problem with unemployment than we see in the (usual) numbers. That’s true at the national level. It’s true everywhere.”
Government reliance

Iron workers install rebar on March 24 for the supports of the Paseo del Norte overpass at Jefferson NE, part of the reconstruction of the I-25 and Paseo interchange. (Albuquerque Journal File)
New Mexico’s reliance on government employment goes a long way toward explaining the problem, Reynis said. Counting both workers who receive a government paycheck and those who work for firms that contract with government agencies, 32 percent of the state’s workforce relies on government spending.
“That makes us very vulnerable,” she said.
New Mexico lost 2,800 government jobs between March 2013 and March 2014, but that doesn’t count nongovernment workers whose employers rely on government spending.
“Government wage and salary disbursements growth is close to zero or negative because of what has happened to the federal government” through budget cuts, Reynis said.
The doldrums afflicting New Mexico’s economy show up in two major ways: construction and population growth.
“Our economic booms are coincident with housing booms,” she said. “Housing and construction in general should be a reflection of what’s happening in your economy. When businesses expand they require people, and people require housing.” The housing booms have stopped, Reynis said.
Population growth in 2013 “was very close to zero,” she said, largely because more people are moving out of the state than are moving in. “If you have population growth, you’re going to stimulate demand for housing and all sorts of things.”
Slowing population growth is “one of the things that will hold us down” economically, she said.
Losing educated people

Home construction in the Albuquerque metro is still struggling to recover. (Albuquerque Journal File)
Population data for 2013 are not available yet, but census data show New Mexico is losing people it can’t afford to lose. It appears a disproportionate number of educated people are leaving the state because job prospects are better elsewhere.
Of the total workforce that left New Mexico in 2013, 19 percent were employed in the professional and business services category and 18 percent were employed in the education and health services sector. Construction workers accounted for 4 percent of the workers who left New Mexico.
By: Winthrop Quigley (Albuquerque Journal)
Click here to view source article.