Archives for September 2018

Quality is prevailing over quantity as Western retail investors adapt to the sector’s structural changes. Does “quality” mean the same thing for different metros?

There’s been plenty of disruption in retail real estate: Less big-box, more grocers and small product, say experts from Kidder Mathews, the largest independent commercial real estate firm on the West Coast. GlobeSt.com spoke to several retail brokers from the firm to get their take on the sector’s investment story as the fourth quarter begins.
For Orange County, CA, the market is in a state of transition that’s focused on strength. “The market is slowing down, but quality real estate in core market are still selling for record cap rates,” said  Fouy Ly, SVP in Irvine, CA. He noted that while interest rates are a concern, “the market can maintain an aggressive market cap rate and high pricing due to a scarcity premium.”
Interest rates and cap rates also came up in Phoenix. “Cap rates are increasing, but not as quickly as interest rates,” said Jenette Bennett, VP at the company’s Phoenix region. “Investors who need financing or who are investing from outside of the US will usually prefer deals with higher cap rates. There’s a disconnect between the seller who wants a five percent cap rate and the buyer who is taking out a five and a half percent loan.”
The Phoenix market enjoys strong employment, stout population growth, and a healthy housing sector. However, the good numbers—including decreased retail vacancy and new development—come with a caveat. The compressed cap and rising lease rates mean tenant replacement or resale will be challenging, Bennett asserted. Investors must stay on top of fundamentals, including tenant credit, brand strength, annual sales, personal guarantees and security deposits.
Good things come in small packages, from Sacramento’s retail sector to Seattle’s. Smaller-scale developments are more prevalent in the Emerald City, whether single-tenant build-to-suits or smaller product for two or three expanding retailers.
“Many buyers are avoiding standalone big-box retail with shorter-term leases,” said Jason Rosauer, SVP and partner in Seattle’s Kidder Mathews office. “Those willing to buy want long-term credit tenant leases or smaller, well-located retail.”
The power is also out, so to speak, for one retail property segment in California’s capital city, while daily needs product continues to thrive. “In the high-growth areas of Sacramento, new grocery-anchored centers are being developed while the power center sites have slowed down and in some cases are being rezoned for multifamily, single-family and sometimes office if the demand is there,” said Bryan Wirt, Kidder Mathews’ retail advisor.
And in Southern California, James Auther—SVP and partner in the Irvine office—noted that vacant boxes from such high-profile closings as Toys ‘R’ Us, Sears and K-mart are creating opportunities. “With construction costs continuing to climb, new development is becoming even harder to pencil, which in turn, makes these previously mentioned vacant boxes even more desirable to tenants seeking to expand.”
Colleen Colleary, a Kidder Mathews VP in Portland, echoes the quality over quantity trend. Very few retailers are looking for large spaces such as At Home, Floor & Decor and Hobby Lobby, and landlords must get creative in carving up larger spaces for smaller retailers. This includes looking at non-traditional tenants such as residential, medical and entertainment as backfill prospects.
“Large retailers are using their large footprints to do pop-up stores to start up retailers or successful online retailers. It brings in more traffic and appeals to younger shoppers,” said Colleary, who adds that ‘clicks to bricks’ operations are much more prevalent in smaller spaces under 3,000 square feet.
The only constant is change—store footprints, retail portfolios, rates, and yield expectations, and how companies are recalibrating their delivery channels. So what’s next?
“Volume will decrease, but there will still be an opportunity for thoughtful investors who understand retail nuances and have expert boots on the ground that truly understand their markets,” said Sara Daley, Kidder Mathews associate VP in Portland.
Added Auther: “The savvy landlord or investor needs to dig deeper than just the tenant’s financial statement and to the tenant’s ‘unit economics’ and full operating experience. Otherwise, with just a tiny drop in the economy, they may end up with another vacancy.”
“Location is still the basic fundamental of most real estate. Financial strength of the tenant is important, but for an investor, it is always comforting know that whatever happens to your clients’ business, if they close, the space can it be released and quickly. A solid location will always release, “ said Brian Hatcher, EVP of brokerage for the Pacific Northwest.
By: Brian Lee (GlobeSt)
Click here to view source article.

At the September 2018 LIN Meeting held on September 19, 2018, 9 excellent properties were presented.
Thank you for presenting properties and attending the meeting!
Thank you to Christian File who hosted 116 Industrial Ave NE. Print Flyer
View September 2018 LIN properties here.
View September 2018 Thank Yous here.
View September 2018 LIN PowerPoint Presentation here.
View September 2018 LIN photos here.

The tax reform act has been largely incorporated into the IRS code though some provisions still face interpretation and fine tuning, says Chris Paris, partner, Moss Adams, in this EXCLUSIVE.

The tax reform act, commonly referred to as the Tax Cuts and Jobs Act of December 2017 has been largely incorporated into the Internal Revenue Code though some provisions still face interpretation and fine tuning. This includes the elephant in the room for many investors, carried interest, which has been much discussed but still has key components to be sorted out by the IRS, according to Chris Paris, partner, Moss Adams. So, what are the other changes affecting the real estate industry?
In recent months, states have been rolling out lists of designated opportunity zones under the new federal tax program, and real estate investors and developers are starting to act on them. The significant financial incentives are aimed to boost economic impact where it’s needed most, says Paris. Owners and investors can defer and reduce capital gains from the sale or exchange of property by investing the proceeds into Qualified Opportunity Funds within 180 days. These funds must be invested, directly or indirectly, into property located in designated Qualified Opportunity Zones.
“If you already have material gains from the sale or exchange of property in 2018 or anticipate material gains in the future, investing in Qualified Opportunity Funds may be a strategic tool to lower your overall tax burden,” Paris tells GlobeSt.com. “More details of the program are expected from the IRS.”
Use of leverage in real estate is changing dramatically, with the limit of 30% of adjusted taxable income (generally speaking, NOI) for acquisitions. Whereas interest paid or accrued by a business generally was fully deductible, under the TCJA, affected corporate and non-corporate businesses can’t deduct interest expenses in excess of 30% of adjusted taxable income starting with tax years in 2018, according to Paris. For S corporations, partnerships and LLCs that are treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level.
Commencing in 2022, the NOI will have to be reduced by depreciation and amortization expense in calculating the interest expense limitation. Real estate businesses are able to elect out of this limitation, but with that will come decelerated depreciation expense deductions. This election can be made on an entity-by-entity basis and only affects real property and not personal property, which is still eligible for accelerated depreciation, Paris points out.
Changes for leased property deductions under bonus depreciation and Section 179 are also affecting real estate strategy. Under TCJA, the benefit of Section 179 expensing is somewhat reduced due to the enhanced bonus depreciation provisions; however, the maximum amount a taxpayer can expense under Section 179 is increased to $1 million and the phase-out threshold is increased to $2.5 million. The TCJA eliminates the asset classifications for qualified leasehold improvement, qualified restaurant and qualified retail improvement property, but retains the classification for qualified improvement property/QIP.
“It appears that the intent of Congress was to reduce the QIP recovery period to 15 years from 39 years and have it retain its bonus eligibility,” Paris tells GlobeSt.com. “However, in an apparent drafting error, the statute retains QIP’s 39-year recovery period and eliminates its eligibility for bonus deprecation. However, QIP is now eligible for Section 179 expensing.”
Paris says tax treatment of asset management fees can be significant and relies on essential questions: What is the applicable definition of an operating business? Will asset management fees qualify for the 20% deduction under the new Section 199A on Qualified Business Income/QBI?
The new TCJA deduction under Section 199A reduces tax liabilities for certain partnerships, S corporations and sole proprietorships allowing a deduction equal to 20% of the QBI. In some cases, it’s a significant decrease in taxes. For example, if the TCJA’s top individual income tax rate of 37% otherwise applies, the QBI deduction lowers the individual’s effective tax rate on his or her QBI to 29.6%. However, computing the deduction under the new rules can be complex, says Paris. The five-step analysis involves determining whether the entity qualifies, calculating the QBI scenarios including that of taxpayers with multiple businesses, applying the W-2 and qualified property limitations, determining the QBI amount and applying the taxable income limitation.
As noted, carried interest is the elephant in the room for many investors. The TCJA added a holding period requirement of three years for gains on carried interest (section 1061) in investment or development of specified assets, and it is motivating many investors to establish holding periods post-haste, or at least be ready as more IRS guidance is issued.
“A related, notable question involves application to Section 1231 gains if the carried interest is obtained through an allocation of such gains,” Paris tells GlobeSt.com. “Many real estate firms are moving cautiously.”
Qualified owners and investors are changing real estate strategies based on the TCJA tax laws, particularly those who face tax-year deadlines, sale/acquisition strategies or other business considerations. For provisions still awaiting further IRS guidance, it’s important to monitor potential changes in order to best benefit, concludes Paris.
By: Lisa Brown (GlobeSt)
Click here to view source article.