Archives for May 2014

Terrorism Risk Insurance Act Reauthorization
Unless Congress takes action, the “Terrorism Risk Insurance Act of 2002,” (TRIA) expires at the end of 2014. TRIA created a federal reinsurance program following the September 11, 2001 terrorist attacks, allowing private terrorism insurance to be both available and affordable. By providing a “backstop,” TRIA allows more insurers, including smaller companies, to offer terrorism insurance, keeping costs affordable and coverage available. According to the Congressional Budget Office, this comes at no cost to taxpayers.
Terrorism insurance is important to commercial financing: many lenders and investors require it to finance construction of large projects, especially in “high risk” areas. If the program expires, insurers may exclude it from property coverage to manage risk aggregations in concentrated areas. It is also an important structural protection in the Commercial Mortgage-Backed Securities (CMBS) market. Without it, some firms may decline to rate or cap their ratings on CMBS transactions.
Several bills have been introduced in the House to renew TRIA, and the Senate introduced one in early April; the next step will be a bill from the House Financial Services Committee, followed by markup hearings in May and possible passage of a reauthorization measure as early as this summer.
NAR participates in the Coalition to Insure Against Terrorism (CIAT), and has met with many key offices in the House and Senate regarding TRIA reauthorization. NAR has also communicated with both the House Financial Services and the Senate Banking Committees in advance of their hearings on the topic, stressing the importance of TRIA to commercial real estate.
Section 1031 Like-Kind Exchanges
“Like-kind exchanges” under Section 1031 of the Internal Revenue Code allow property owners to defer taxes on gains realized from the sale of “like-kind” real property until a future date. This provision is under threat by the current spate of tax reform proposals – in their discussion drafts, Senator Baucus, former Chairman of the Senate Finance Committee, proposed repealing it, as did Chairman Camp of the House Ways and Means Committee, and the President’s proposal suggests capping it at $1 million.
Like-kind exchanges allow people who otherwise would not sell due to the tax implications to sell, letting development go forward. They not only stimulate real estate transactions, but also encourage U.S. businesses to reinvest in their domestic operations, as domestic and foreign property are not like-kind. It is not a “loophole” – taxes are still paid, whether upon the sale of the replacement property, incrementally through increased taxes from forgone depreciation, or by inclusion in a decedent’s taxable estate. Elimination of Section 1031 therefore would not create a tax on wealth, but a tax on cash flow.
While it is unlikely that tax reform will happen in this Congress, the current proposals may be the blueprints for future proposals, so it is important to pay attention. NAR advocates for responsible tax reform that provides the best opportunities for economic growth and job creation, and views these proposals as significant threats to real estate. NAR, together with other industry groups, sent a letter to the Finance Committee outlining its concerns with the proposals, and sent a letter to the House of Representatives outlining its priorities for tax reform – including deferral of gain on like-kind exchanges. NAR continues to watch the proposals very carefully and meets regularly with key lawmakers to discuss reform efforts.
More Tax Issues NAR is Monitoring
179D Energy Efficient Commercial Buildings Deduction:
The Senate Finance Committee approved a 2-year extender package, the EXPIRE Act, which renews 179D (it expired at the end of 2013). The EXPIRE Act will be debated on the Senate floor; the House Ways and Means Committee held a hearing on business-related tax extenders in April.
Leasehold Improvements:
The EXPIRE Act would also extend for two years the 15-year straight-line cost recovery for qualified leasehold improvements, which expired at the end of 2013.
Depreciation:
Currently non-residential commercial property is depreciated over 39 years, and residential commercial property over 27.5 years. The Senate proposal increases the depreciable life of all commercial real estate to 43 years and is retroactive; the House proposal increases the depreciable life of new properties to 40 years (non-retroactive).
Capital Gains Rate on Recaptured Depreciation
Under current law, the rate is 25%; under both the House and Senate proposals, the rate will increase to that of ordinary income.
Download our Issues & Actions white-paper to view these and other NAR actions on commercial issues at bit.ly/issuesactions
By: Erin Stackley (National Association of REALTORS®)
Click here to view source article.

Intel Corp.’s Rio Rancho operation has been passed over again for next-generation nanometer chip technology, but the plant remains an integral part of the company’s global production chain, according to New Mexico site manager Kirby Jefferson.
The plant, which employs about 2,800 people, was in the running for Intel’s forthcoming rounds of investment in 10-nanometer chips. That next-generation technology will follow the 22-nanometer chips now under production in other places and 14-nanometer chips Intel already is investing in at plants in Ireland and Arizona.
But New Mexico is no longer in the running, Jefferson told local business leaders at the Albuquerque Economic Forum on Wednesday morning.
And it’s uncertain if the local plant can compete for future investment in 7-nanometer chips, which will follow the 10-nanometer ones in a few years.
“This site was not selected for the 10-nanometer chips, that’s for certain,” Jefferson said. “They will do it at other facilities. Seven nanometer is the next one, and we still don’t know where that will be.”
This is the third time New Mexico has been passed over for next-generation chip technology. The Rio Rancho site currently produces 32-nanometer chips, following a $2.5 billion investment in 2009 to upgrade the plant from 45-nanometer technology.
Now, being three cycles behind the curve makes it more difficult to compete for next-generation chips.
“The investment would have to be extremely high here, because we’re so far behind,” Jefferson said.
Still, the local plant remains critical to Intel’s global future, because it continues to produce chip technology that is integral to nearly every product the company makes. In fact, the Rio Rancho site is operating at maximum capacity and is projected to continue at that pace for at least two more years.
“Today we’re full, which is great,” Jefferson said. “It’s not leading-edge technology, but it’s still pioneering technology, and we have a full supply – meaning more than capacity – for the next 18 to 24 months.”
In addition, the company expects the local plant to remain relevant for many years to come, Jefferson said, stressing that constant rumors of the Intel NM factory shutting down or being sold off to another company are baseless.
“The New Mexico plant is front and center with what’s going on at Intel,” he said. “Intel is committed to this community. The thinking all the way up the chain is to keep this operation going.”
Intel has been under pressure globally in recent years, because the chipmaker – which has dominated the personal computer industry for decades – was slow to get into mobile computing markets and is now playing catch up.
And with worldwide PC sales on the decline since 2012, company revenue and profits have been under pressure, leading to an announcement early this year that Intel would reduce its global workforce by about 5,000, or roughly 5 percent of the 108,000 it employed as of January.
The company began cutting its employee base at Intel NM last fall by about 400 positions.
Silver lining
Nevertheless, some of the market changes now shaking the computer industry could actually boost Intel’s long-term stability in New Mexico.
For example, the traditional focus on progressively reducing the nanometer size of transistors on chips, which increases processing power, is less important in today’s mobile computing world, where the industry instead needs energy-efficient chips that last longer on a single charge.
That makes the lack of New Mexico upgrades to smaller nanometer technology less important, given that Rio Rancho is heavily involved in designing and producing many products, including chips for mobile computing.
“Nearly 40 percent of Intel’s revenue now is associated with products beyond the PC,” Intel spokeswoman Natasha Martell Jackson told the Journal . “When we’re talking about the capabilities of a site and what can be done there, a wide variety of things are emerging from changes in the market and industry evolution. We have an opportunity to play a role in that wider ecosystem and continue to be relevant here in New Mexico.”
Doug Brown, dean of the University of New Mexico’s Anderson School of Management, said he’s “cautiously optimistic” following Jefferson’s speech.
“You have to appreciate the velocity of changing cycles in high-technology businesses like Intel. It’s remarkable to me how, given its size, Intel remains so nimble and able to respond so quickly and boldly to today’s economic challenges,” Brown said.
“I believe Intel’s top brass recognizes the importance of the plant here, and local executives like Jefferson are taking up the challenge to land new opportunities as the company evolves.”
By: Kevin Robinson-Avila (Albuquerque Journal)
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WASHINGTON – The outlook for all of the major commercial real estate sectors is slightly improving despite disappointing economic growth during the first quarter of 2014, according to the National Association of Realtors® quarterly commercial real estate forecast.
Lawrence Yun, NAR chief economist, said the sluggish growth experienced in the first quarter is not indicative of the actual health of the economy. “Gross Domestic Product should expand closer to 3 percent for the remainder of the year. The improved lending for commercial loans and continuing job gains we’ve seen this spring bode well for modest progress in commercial real estate leases and purchases of properties.”
However, Yun cautions that with rising long-term interest rates on the horizon, consistent economic growth is imperative to solid commercial real estate investment in the years ahead.
National vacancy rates in the office market are forecast to decline 0.2 percentage point over the coming year, while international trade gains continue to boost use for industrial space, which forecasts a decline of 0.3 point. The outlook for personal income and consumer spending is favorable for the retail market, likely leading to a vacancy decline of 0.2 percent.
“The multifamily sector continues to be the top-performer in commercial real estate with the lowest vacancy rates. However, tight availability – despite new construction – is causing rents to currently rise near 4 percent annually in many markets,” said Yun. “Many renters who are getting squeezed may begin to view homeownership as a more favorable, long-term option.”
NAR reported earlier this month in its annual Commercial Member Profile that despite subpar economic expansion, Realtors® who practice commercial real estate saw an increase in sales transaction volume and medium gross annual income in 2013.
NAR’s latest Commercial Real Estate Outlook1 offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS Inc., a source of commercial real estate performance information.
Office Markets
Office vacancy rates should decline from an expected 15.8 percent in the second quarter of this year to 15.6 percent in the second quarter of 2015.
Currently, the markets with the lowest office vacancy rates in the second quarter are New York City and Washington, D.C., at 9.4 percent; Little Rock, Ark., 11.5 percent; San Francisco, 12.6 percent; and New Orleans, at 12.8 percent.
Office rents are projected to increase 2.5 percent in 2014 and 3.2 percent next year. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 39.7 million square feet this year and 49.8 million in 2015.
Industrial Markets
Industrial vacancy rates are anticipated to fall from 9.0 percent in the second quarter to 8.7 percent in the second quarter of 2015.
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.5 percent; Los Angeles, 3.9 percent; Miami and Seattle, 6.0 percent, and Palm Beach, Fla., at 6.5 percent.
Annual industrial rents should rise 2.4 percent this year and 2.6 percent in 2015. Net absorption of industrial space nationally is seen at 107.8 million square feet in 2014 and 107.1 million next year.
Retail Markets
Vacancy rates in the retail market are expected to decline from 10.0 percent currently to 9.8 percent in the second quarter of 2015.
Presently, markets with the lowest retail vacancy rates include San Francisco, at 3.2 percent; Fairfield County, Conn., 3.8 percent; and San Jose, Calif., at 4.7 percent. Northern New Jersey; Long Island, N.Y.; and Orange County, Calif., all have a vacancy rate of 5.3 percent.
Average retail rents are forecast to rise 2.0 percent in 2014 and 2.3 percent next year. Net absorption of retail space is likely to total 11.5 million square feet this year and 19.6 million in 2015.
Multifamily Markets
The apartment rental market – multifamily housing – should see vacancy rates edge up from 4.0 percent in the second quarter to 4.1 percent in the second quarter of 2015, with added supply helping to meet growing demand. Vacancy rates below 5 percent are generally considered a landlord’s market, with demand justifying higher rent.
Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.3 percent; Ventura County, Calif., 2.4 percent; and New York City; San Diego; Hartford, Conn.; Oakland-East Bay, Calif., and San Diego, at 2.5 percent each.
Average apartment rents are projected to rise 4.0 this year and in 2015. Multifamily net absorption is expected to total 221,400 units in 2014 and 173,100 next year.
The Commercial Real Estate Outlook is published by the NAR Research Division. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.
The NAR commercial community includes commercial members; commercial real estate boards; commercial committees, subcommittees and forums; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.
Approximately 70,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 283,000 members offer commercial real estate services as a secondary business.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
By: Walter Molony and Adam DeSanctis (National Association of REALTORS®)
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